Herc Holdings Inc. (HRI) Q1 2021 Earnings Report, Transcript and Summary

Good morning. Welcome to Herc Holdings First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Elizabeth Higashi. Please go ahead.

Thank you, Kate, and good morning, everyone. Thanks for joining us. Welcome to our first quarter 2021 earnings conference call. Earlier today, our press release, presentation slides and 10-Q were filed with the SEC and are all posted on the Events page of our IR website at ir.hercrentals.com. This morning, I’m joined by Larry Silber, President and Chief Executive Officer; Aaron Birnbaum, Senior Vice President and Chief Operating Officer; and Mark Irion , Senior Vice President and Chief Financial Officer. We’ll review the first quarter, our view of the industry and our strategic outlook. The prepared remarks will be followed by an open Q&A. Before I turn the call over to Larry, there are a few items I’d like to cover. First, today’s conference call will include forward-looking statements. These statements are based on the environment as we see it today and, therefore, involve risks and uncertainties. I would caution you that our actual results could differ materially from the forward-looking statements made on this call. Please refer to slide 3 of the presentation for a complete safe harbor statement as well as the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2020. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the Company’s operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call material. Finally, a replay of this call can be accessed via dial-in or through a webcast on our website. Replay instructions were included in our earnings release this morning. We have not given permission for any other recording of this call and do not approve or sanction any transcribing of the call. I’ll now turn the call over to Larry.

Thank you, Elizabeth. Please turn to slide number 4. We’re off to a great start in 2021. What a difference 12 months makes. Just a year ago, when we reported our first quarter, like other companies, we pulled our guidance due to the uncertainty of the potential impact of the COVID-19 pandemic. Now, a year later, we’ve continued to execute and grow the business and have the confidence to increase the full year guidance we provided just a few months ago. Our outstanding team of professionals represents a company with a history of over 56 years in the equipment rental industry. The purpose that drives our 4,800 employees is to help our customers and communities to build a brighter future. They do this every day by staying focused on serving our customers safely, efficiently and effectively. During the first quarter, we added three new greenfield locations in Pittsburgh, Pennsylvania; Santa Fe Springs, a suburb of Los Angeles, California; and Houston, Texas. In April, we acquired two independent locations in the San Francisco Bay Area, increasing our location count to 15 in that major metropolitan area. As of today, we are operating 282 locations across the United States and Canada in 39 states and 5 Canadian provinces. Now, please turn to slide number 5. We entered the year with our fleet well positioned to meet anticipated demand and saw the normal seasonal improvement in volume on rent during the quarter. As expected, our volume did not quite return to prior year levels and rates were still down slightly, but we did generate rental revenue growth as a result of strong contributions from our specialty and entertainment businesses. With the return to positive rental revenue growth, we continue to excel in our strategic focus on operating leverage and delivered excellent bottom line improvement. With over 200% flow-through, we drove more than 25% year-over-year growth in adjusted EBITDA. This significant beat not only exceeds our Q1 2020 results, which were mostly pre-pandemic but also Q1 ‘19, which puts us on track for a record year. Our strong first quarter performance, along with the steady demand we are seeing in our end markets, have us confident in our ability to significantly increase our full year adjusted EBITDA guidance from a range of $730 million to $760 million to a new range of $800 million to $840 million. We are looking for a record year in 2021 that substantially beats our previous record in 2019. Now, please turn to slide number 6 for a brief overview of our first quarter financial results. Equipment rental revenue was $400.4 million in the first quarter, an increase of 3.6% or $13.9 million compared to the prior year. This increase was driven by positive mix as our ProSolutions business continues to take market share and our entertainment business became a strong tailwind. Adjusted EBITDA grew by 25% on prior year, which was a record first quarter for the Company, and our focus on operating leverage improved adjusted EBITDA margin by 680 basis points. We reported net income of $32.9 million or $1.09 per diluted share in the first quarter compared with a loss of $3.7 million or $0.13 per diluted share last year. As you can see from our results, we are indeed off to a strong start in 2021. This is an exciting time for team Herc, and we look forward to breaking more records as the year progresses. Now, for more about the details of our operations in the quarter, here is our Chief Operating Officer, Aaron Birnbaum.

Thank you, Larry. Before I start my discussion of our results, I would like to take this opportunity to both congratulate and thank all of our team members. After an incredibly challenging 12 months, our team continues to perform effectively and professionally. This -- first quarter results speak for themselves. We greatly appreciate the contributions of each and every one of our team members. Congratulations team Herc. Now, please turn to slide 8. The strategic investments we continue to make to diversify our customer base and industry verticals really paid off this quarter. Our ProSolutions business continued its growth trajectory and took market share in the first quarter of 2021 with the growth driven by successful focus on providing specialty heat solutions as well as supporting the remediation from weather-related events, such as the winter storm that hit Texas and the surrounding states. Our ProSolutions revenues have increased by double digits for the last four years and generated another excellent quarter in Q1, up by over 30%. Our entertainment business has turned from a headwind to a tailwind. We remain focused on our customers and opportunities during the pandemic shutdowns, and entertainment has now exceeded pre-pandemic highs and will be a growth driver for years to come. Our core business experienced a normal demand and seasonally impacted first quarter, and we benefited from solid operating performance in our regional operations. We saw early strengthening specifically in our Northeast, Carolina and Southeast markets, and our South Central region successfully integrated our December acquisition of Champion Rentals. We will continue to leverage our operational capabilities to execute our strategy and take advantage of opportunities in our end markets. Now, please turn to slide 9. As a provider of essential services, our most important commitment is focused on health and safety. We will continue to enhance the well-being of our team by investing in training and operating a safe environment for our employees, customers and communities. We continue to adhere to the CDC guidelines in all of our operations and in business travel. And we are encouraging our team members to be vaccinated. We’re also in the process of implementing a new health and safety management system this year, which will help us record, track and review our health and safety performance even more efficiently and effectively. As you’ve heard us talk about various safety initiatives, one of our major internal safety programs focuses on perfect days. That is with no OSHA recordable incidents, no at-fault motor vehicle accidents and no DOT violations. In Q1 2021 on a branch-by-branch measurement, our branch operations achieved 96% of days as perfect. We’re always striving for 100% perfect days, and our commitment to safety means continuous focus through communications and training. It also means supplying the team with the equipment that will help them perform efficiently and safely, particularly in their daily driving activities. Please turn to slide 10. Our fleet composition at OEC is on the left-hand side of this slide. Total fleet was $3.63 billion as of the end of the first quarter, about 4.6% lower than the end of Q1 2020. We continue to invest in our specialty fleet, which includes ProSolutions and ProContractor, and now accounts for $841 million of OEC fleet, about 23% of our total fleet as of the end of Q1 2021. ProSolutions and entertainment were important growth contributors for us this quarter. This fleet drives a more profitable return and contributed to a dollar utilization improvement of 290 basis points to 38.6%, a record for the first quarter. On the right-hand chart, you can see OEC fleet expenditures in Q1 2021 were at $117 million, a slight increase from our first quarter in 2020. Fleet disposals were $111 million in the first quarter compared to $110 million of OEC sold last year’s comparable period. Our fleet department has done a great job getting in front of what looks to be a tight supply market for new equipment from the OEMs. We have all of our 2021 purchase orders placed and deliveries scheduled to arrive over the next several months. We have not experienced any material increases in equipment costs over prior years. The average age of our disposals was 84 months in the first quarter. The equipment sale proceeds as a percentage of OEC returned to pre-pandemic levels at 40% with strong demand for used equipment and our refocus on retail and wholesale channels at disposals. Please turn to slide 11. Our diverse customer mix with a broad national account and local customer base is core to our strategy. The specialty business drove growth in Q1. Our entertainment business drove growth in Q1. Our other segments in major industrial customers in utilities and energy, health care, warehousing, manufacturing and general construction are gearing up and look to support growth in upcoming quarters where we experienced strong seasonal demand. We are focused on high growth segments of the economy, and our end markets are showing the momentum to generate a strong recovery in 2021. And now, I’ll pass the call on to Mark.

Thanks, Aaron, and good morning, everyone. Our first quarter results continued to demonstrate that we have a business of scale and a successful strategy that is capable of performing in all environments, and it is clearly performing exceptionally well in the current environment. We are really pleased with our performance in Q1. Our results exceeded our own expectations. And based on current performance and the trends we are seeing, we’ve adjusted our outlook for the rest of the year and raised our guidance. Our results speak for themselves. We’re rapidly expanding our margins and are executing on our strategy to provide excellent customer service and premium equipment to our customers throughout North America for both large and small projects. Our focus on margin improvement over the last couple of years continues to pay off. As the economy recovers, we have the capital available to accelerate growth and have a track record of utilizing operating leverage to accelerate profitability. Slide 13 shows a summary of our first quarter results. Equipment rental revenue increased 3.6% from $386.5 million to $400.4 million in the first quarter of 2021, primarily due to improved mix and flattish pricing. We will discuss these drivers on the next slide. We continue to deliver solid profitability with adjusted net income in the first quarter of 2021 of $33.3 million or $1.10 per diluted share compared with adjusted net income of $1.1 million or $0.04 per diluted share. We continue to execute on our operating leverage model, driving an increase in adjusted EBITDA of 25% from revenue growth of only 4%. This drove an increase in adjusted EBITDA margin of 680 basis points to 40.7% in the first quarter, a historic high. REBITDA was $176.9 million with flow-through of over 200%. REBITDA margin increased by 570 basis points to 43.8% in the first quarter. REBITDA margin for the quarter was also the highest in our history. On slide 14, we highlight pricing and utilization trends by quarter. The graph on the upper left illustrates our year-over-year pricing with the latest quarter reflecting average rates down by only 30 basis points compared to last year. Looking back, we are quite pleased with the nominal decline in rates that we managed through the challenges of the last four quarters. And thanks to flattish pricing in 2020, we will swing to positive rates this year. We continue to benefit from our industry-leading pricing tools and the discipline and professionalism of our sales team. The fleet adjustments made by the industry as a whole and the estimates we are now seeing on lead times for fleet orders suggest that we’re in an environment that is likely to support positive pricing in 2021. Our rates turned positive year-over-year in March, and we expect rates to remain positive for the rest of the year. Dollar utilization was 38.6% in the first quarter, a dramatic improvement of 290 basis points from prior year. A big part of this improvement came from the change in mix of our business with strong growth in the ProSolutions and entertainment businesses during Q1. Q1 is seasonally the strongest quarter -- the toughest quarter for dollar utilization. So, this is a big move up for us and sets us up for a record year in terms of fleet utilization and returns going forward. The mix impact is also apparent with rental revenues continuing to climb the steps but still down by 1.7% year-over-year. So, rental revenues grew by 3.6% in the quarter, and the drivers of these results were rates down by 30 basis points and volume down by 1.7% offset by a positive contribution from mix of 5.6%. The significant contribution to revenue growth from mix may decrease slightly going forward but will remain positive. And with the seasonal lift from rate and volume, we are looking to accelerating growth in rental revenues. Couple this with our operating leverage focus and our profitability also continues to lift. On slide 15, we see adjusted EBITDA for the first quarter was $184.6 million, an increase of 25% or $36.9 million compared to $147.7 million in 2020. A keen focus on operating leverage and improved profits on the sale of rental equipment contributed to the strong improvement. DOE decreased $6.2 million compared with the first quarter of 2020. Savings and personnel-related expenses, re-rent and maintenance costs were the primary contributors. We reduced SGA expenses by $4.3 million, primarily through lower bad debt and travel expenses. Adjusted EBITDA margin in the first quarter was 40.7%, an increase of 680 basis points year-over-year, primarily due to continued focus on operating leverage with revenue growth on top of cost control. We also generated some gain on the sale of equipment this quarter with a focus on the retail and wholesale channels improving our proceeds contribution as a percentage of OEC. REBITDA margin improved 570 basis points to 43.8%, and flow-through was 201% in the first quarter, which highlights our execution on operating leverage. This chart highlights an impressive change in our margin profile over the last few years and especially in the last quarter. We have been focused on margin improvement for a long time and learned more lessons in 2020 in terms of our operating leverage. Going forward, we will see cost increases connected with increases in rental volumes and revenue but expect our costs to run at similar or slightly smaller percentage of rental revenues. We start to roll over some unusual base effects in Q2 and Q3 that had some unnatural COVID shutdown impacts in 2020. This will affect our short-term flow-through somewhat. We are focused on operating leverage. Once we get past these COVID quarters, we’ll continue to flow through at least 60% of our rental revenue growth to REBITDA each year and look to continue to expand our margins. On slide 16, we generated $73 million of free cash flow after net rental CapEx of $51 million in the first quarter. We are guiding to $400 million to $450 million of net fleet CapEx for the full year. So, the first quarter is not fully reflective of the cash expenditures that we will incur in the second and third quarters. Strong results from operations also contributed to the reduction in net leverage, which decreased to 2.2 times as of March 31 compared with 2.7 times a year ago. We are now into the lower end of our guided range of 2 times to 3 times net leverage. Total debt was $1.6 billion as of March 31st, a reduction of about $67 million from December 31, 2020. We had total liquidity of over $1.4 million as of March 31st, comprised primarily of availability on our ABL credit facility and cash and cash equivalents of $32.9 million. With no near-term maturities, we have ample liquidity for 2021 and into the future and ample capital to grow our fleet to support rental revenue growth into the new cycle. We remain conservative in our capital allocation and will apply free cash flow to pay down debt after making strategic investments in fleet growth in new locations and in strategic M&A. Our continued focus on a strong balance sheet and our consistent improvement in operating margins also resulted in upgrades in our debt ratings. Earlier this year, S&P and Moody’s raised their ratings on our corporate debt, which is now related to solid BB minus and B plus. On slide 17, we show the latest industry forecast. It’s a bit difficult this quarter to square what look to be quite tepid in markets with the strength of our results. Looking at the chart on the top left, the ARA is forecasting industry rental revenues to grow at around 2% in 2021. We are close to double that growth rate in Q1, but this is not inconsistent with past experience. Rental companies of scale with broad rental fleets and a well-diversified customer base have consistently grown faster than the rental industry in general. And as we have seen in Q1, Herc is a company of scale with a well-diversified mix of customers. I also suspect that the ARA forecast will end up a bit light for 2021, as it’s typical for the growth rate in Q1 to accelerate into the rest of the year when favorable seasonality kicks in. We’re also looking to be in the early stages of a refleeting cycle, and tight supplies of construction equipment also tend to benefit the rental industry. In terms of end markets, nonresidential starts were up slightly. That does feel as though this level of activity will be supportive in 2021. Our equipment is fungible, and we’ll rent to wherever the activity is. So, the level of activity tends to drive rental demand and rental demand is not necessarily impacted by struggles in 1 or 2 pockets of nonresidential spend. Nonresidential spending is only about 40% of our business. So, the diversification of our revenue base over the last couple of years is also a big benefit in the current environment. As a result, the majority of our business is not directly connected to nonresidential construction. Our specialty business is a real strategic benefit, and we look to continue to gain share and grow that business. Entertainment also looks to be a growth engine for the next couple of years with our investments in supporting content production paying dividends, and the live event business is also likely to rebound later this year. Industrial is still a bit soft in pockets, but there is pent-up demand for maintenance and turnarounds in a lot of plants, and this segment should also rebound in 2021. It may not be fully showing up in the macro stats yet, but having enough grade here to survive the last three cycles, it sure feels to me like we may be in the beginning of the next up cycle. No matter where the economy has put us in the current cycle, the Herc team certainly executed well in Q1 and took advantage of all the opportunities that came our way. When we put together our 2021 plan and formulated our initial guidance that we rolled out this February, we were looking at Q1 2020 as our toughest comp, being pre-pandemic for the most part. Not only did we meet our own expectations in a big way, but the way we beat our expectations meant we had to sit down and sharpen our pencils to rethink our expectations for the year. Q1 is our seasonally weakest quarter. It’s typically less than 20% of our annual results. So, our performance in Q1 translates to a big beat in our annual projections for the year. We improved dollar utilization by 290 basis points. Dollar utilization doesn’t go backwards as we move into seasonal strength. So, we needed to reforecast rental revenue for 2021. It now looks like we will generate record rental revenue with less fleet than we utilized in 2019. We generated 680 basis points of EBITDA improvement in Q1, taking margins to 40.7%. Margins also don’t go backwards as we head into the seasonally strong quarters of 2021. So, it looks like we’re on track for a record year of EBITDA margins. The magnitude and makeup of the Q1 beat has us forecasting a really good year, and we are now taking our guidance up to $800 million to $840 million. Net rental equipment CapEx guidance is unchanged at $400 million to $450 million. We’re very pleased with the performance we have reported for the quarter, and we’re very excited for the performance we anticipate over the next few years as we get into a hot start with what looks to be a new industry up cycle. With that, I’ll turn the call back to Larry.

Thanks, Mark. And now, please turn to slide number 19. This slide shows how far we’ve come over the last five years in closing the gap with our industry peers. Our first quarter adjusted EBITDA margin has increased from a low of 25.1% in 2017 to 40.7% in 2021. REBITDA margins are even better and a cleaner comparison with 2021 REBITDA margins of 43.8%, an improvement of 570 basis points over the prior year. As you can see, we’ve improved our net leverage substantially since we went public in 2016, reducing net leverage from 4.1 times to 2.2 times. As we build into what appears to be a new industry up cycle, we intend to focus on top line growth and operating leverage. Our strong free cash flow provides liquidity for new growth initiatives. Our leadership team is comprised of seasoned industry veterans, and we intend to take advantage of our scale and customer service capabilities to continue to expand our footprint and penetrate our larger markets. The rental equipment market is huge and continues to be fragmented. There are plenty of rental activity for Herc to target. We are committed to growing our market share and closing the gap with our larger peers. So, thank you. And now, operator, please open the lines for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Ross Gilardi from Bank of America. Go ahead.

I just wanted just to run some quick math by to see if my logic is correct. I mean, your fleet on OEC is down 5%, but fleet on rent is down only 1.7%. Does that imply your time U is actually up like 330 basis points year-on-year, or are there other factors, like mix that are moving that number around? And if that’s the case, could we see rates up greater than, probably, I would think most investors are assuming up 1% to 2% or something this year? But, it seems like the tightness in the market is paving the way for rates to perhaps outperform expectations. And I just wanted to get your take on what I just said.

Yes. Good question. Well, we normally don’t comment on time U, but certainly, directionally, what you’re saying is accurate. Mark, you may want to comment on the margin?

Yes. No. You’re right. There’s a mix component in there, but time U is directionally up. In terms of rate, yes, no, we’ve swung positive in March. We had a slight decrease in 2020. So it’s not likely to be a big increase in 2021, also early in the year, but positive trends and yet to be seen what the tightness in fleet is likely to do to rate as we go through the year. Also, early in the year, we see a sort of tightness in fleet. So, the indications are out there, but it is a seasonally impacted quarter. And as we get into the seasonality in the back end of the year, then that should show up.

Okay. And then, maybe a little bit more color on the decision not to raise the CapEx outlook, unless the gross versus net formula is moving around a little bit. Just given the strength in your business, and just curious, could you get more fleet in time for the season if you wanted it, or are the lead times just too extended and just equipment is not available?

Yes. Look, I think, we are well positioned, and we placed our CapEx early last year, and we’re well positioned to receive that. I think, we’re at a point where we want -- we still have some room to drive up our utilization. So, we’d like to continue to drive utilization. And you’re correct. I think, anything going forward now, you’re probably looking at late in the year and receiving gear, and there’s no sense in receiving gear in December when that’s a seasonal time when gear comes off rent. Aaron, you may want to further comment on the fleet?

No. Thanks, Larry. I would just echo what you said mostly. We did get our orders in early, as we communicated, as we feel pretty comfortable as we go through the mid part of the year and feel like we’re well positioned for this year specifically.

Additionally, we’ve sort of changed our focus on used equipment, Ross, and we’re sort of shying away from the auction channel, focusing more on retail and wholesale. And that will naturally slow down the disposal cycle a bit.

Okay. And then, just lastly, guys, I wanted to ask you about this entertainment business because you seem really excited about it. It sounds like it’s amped up quite a bit. Can you give us a little more color about that? I don’t think you’re talking specifically about the live events business specifically. But yes, a little more color there. And did you say your ProSolutions business was up 30% year-on-year in the first quarter? And I’m not sure if I heard that correctly.

Yes. This is Aaron again. Yes, the ProSolutions business for the quarter was up 30% year-on-year. And the entertainment business, as you recall from last year, it really went to zero during the pandemic, and it’s come back very, very strong. The team did an amazing job during the pandemic phase to build the relationships, and we came out really strong in the first quarter with the entertainment business. So, as we said, we are -- that those revenue levels are higher than they were a year ago, before the pandemic manifested. So, we’re excited about what the team has done in our entertainment division, and we expect a lot more of that. As you -- as we all know, the content, there’s a content craze out there. A lot of people want new content. So, we’re benefiting from that. One last thing, we continue to invest in that segment as well to kind of fuel the growth.

Okay. So, it’s more like more filmed entertainment as opposed to just live events, which are coming back, but it still seem like they’re a long way from where they were, at least here in the Northeast?

At the moment -- yes. At the moment, live events are not back. May be later in the year, there’s talk about that. But what we’re specifically talking about in Q1 is TV, film and commercials.

Our next question is from Rob Wertheimer from Melius Research. Go ahead.

So, I’m not sure my questions are all that different from those of Ross. A little bit of a crystal ball or your experience versus past years. How does this year shape up on starting on fleet tightness on utilization? One of those time U -- close, I understand. But are we starting out average tightness a little bit more? And then, is availability of equipment less than in prior years. In other words, do we set up for at least a potential for a tighter summer than sometimes the case? Thank you.

Yes. Look, I would say, for sure, we’re starting out a little tighter than maybe we have in past years. We used the end of the year last year to dispose of a fair amount of fleet to purposely tighten up the fleet going into this year, knowing that we had a fairly sizable gross CapEx spend coming in beginning the end of Q1 into Q2 and Q3. So, it was tighter and that was purposely done. We had some room to tighten up. And then, coupled with the -- we did have a surprisingly strong start in Q1 with our ProSolutions business, aided by the Texas freeze in the Texas area in the surrounding states and then the entertainment business that Aaron just discussed sort of picking up a little quicker. As far as fleet being tight, I think, the industry fleet is tight because of availability and supply chain start-up, but that benefits the rental industry in terms of -- we have $3.6 billion of fleet on hand, and we have it available, and that gives us the opportunity to address those areas where supply might be limited from the manufacturing standpoint. We are not in a position where our company will not experience a shortage of gear. We’re in good position to receive all of the gear we have on order and utilize our gear. But yes, there is -- we are hearing it and from all of the OEMs that there is a supply chain tightness.

Our next question is from Jerry Revich from Goldman Sachs. Go ahead.

I’m wondering if you could just talk about the sequential cadence of pricing. Nice to hear that pricing was up year-over-year, Mark, in March. I think to get that pricing would have to be moving up 50 to 100 basis points in March versus February. Is that the cadence that you’re seeing? And how is that cadence into April?

Without getting into sort of too much monthly sort of granularity, you can kind of see it on the chart on page 14. We’ve been picking up a few basis points a quarter going forward. And it’s typical for pricing to sequentially improve into March off of here anyway as you move through Q1. So, it’s not dramatic. It’s still work out there. I think, we are probably continuing to lead the industry in terms of pricing and rate, and we’ll look to sort of continue that going forward. So, we’re looking -- it was slightly down in 2020. It looks like it’s going to be slightly up in 2021, and we’ll continue to take opportunities wherever we can.

Well, the reason for the question is normal seasonality is about 150 basis points per quarter in an up cycle in 2Q and 3Q. And so, a few folks wind up running at that normal seasonal rate, given the way the comps look, you’d be exiting with pricing up 5%-plus in the fourth quarter. So, I just want to make sure I understand how that -- how you see that cadence playing out versus normal seasonality. Because given the comps, the exit rate would be pretty attractive, I think.

Yes. I mean, like I said, we’re sort of looking at it being slightly up for 2021. I think you’re -- I think, 150 basis points might be some point far back in time. It certainly was in 2019 or maybe 2018 for us. The industry, in general, has not been putting up those sort of price trends for quite some time.

Okay. And then, conceptually, how are you thinking about the magnitude of price increases that you’re willing to push through to customers? Obviously, you’re in a good position with lead times for new equipment winding out, used equipment inventories for the industry down significantly. Conceptually, how are you thinking about your willingness to push pricing as annual renewals come due? Can you just talk about the philosophy and heading into the up cycle here?

I think it’s -- I mean, I think it’s still a little bit too early. I mean, Q1 is still seasonally challenged in terms of demand, and there is still -- our specialty businesses have been outperforming, but there’s still a certain amount of pressure in the classic business. So, we’ll -- we’ve got to focus on rate. We’ve got a track record on rate. We will take opportunities where we can. So, I mean that’s our ongoing philosophy. We will look for increases on renewals. But there’s still -- we’re still shaking our way out of the impacts from last year, and it’s not as though we’re really in the sort of end of milk and honey already. So, it’s moving into the seasonal part of the year. The indications are out there that it’s going to be tight, but we’re not really living there at the moment, and we’ll continue to sort of keep our eyes open and execute where we can.

Okay. And lastly, for rental gross margins, normal seasonality is -- your full year gross margins are 400 or so basis points above first quarter levels, which is obviously seasonally impacted, as you point out. So, what should we think about seasonality, like this year versus what a typical year might look like or any of your direct cost of rent and operating expenses, artificially low in the quarter that will be ramping up beyond the point you made about volume, Mark, or anything we should keep in mind versus normal seasonality?

Yes. No, this quarter’s margin improvement was real and really impressive. There were no adjustments or unusual sort of credits through the quarter that drove that. So, it is a new baseline for us. So, you would expect to see margins improve as we get into the seasonally strong Q2 and Q3. The sort of guidance, I think, that I sort of worked into the transcript was if you just sort of run DOE and SG&A as a percentage of rental revenues and trend that down slightly with operating leverage, then that should sort of get you there. But the margin is real and will improve as we get into the seasonally strong quarters with more revenues.

Our next question is from Brian Sponheimer from Gabelli Funds. Go ahead.

Just to kind of piggyback on what Jerry was speaking to and maybe what you’ve learned over the past year or so, things like travel and entertainment, and maybe some other fixed costs, anything that -- from a cost-out standpoint that you think is a little more permanent than you would have otherwise thought before COVID happened?

Well, look, I think we obviously learned some new things over the course of the last 12, 13 months or so since we went into sort of pandemic mode. And it’s helped us from a standpoint, whether it’s SG&A or DOE, on how we deliver material, how we man our branches, how we service customers, how we engage with customers. And I think some -- a lot of that learning will sustain. Now as Mark said, look, we -- as we seasonally go into the year and have higher volume, those costs will go up in absolute volume, but as a percent of revenue, they ought to be flattish along the way.

Yes. Okay. That’s more on the cost side. I want to talk about leverage. The 2.2 is trailing. By year end, you’ll be below 2, given $820 million or so in EBITDA against $1.5 billion -- $1.6 billion in net debt. You’ve made one acquisition of note. What’s the environment out there like for your ability to pick up incremental yards? And what are you looking for primarily when you’re going to put that capital to work?

Yes. Look, we did an additional two acquisitions in early April that we closed on up in the San Francisco Bay Area, further increasing our footprint count and our density, and that major metropolitan market now have 15 locations in and around the San Francisco Bay Area. And we continue to look at M&A and greenfield activity as a focus going forward. Our preference would be greenfield activity, if we can find the locations and reasonably put them in place in those large markets. And we’ll look at M&A as an alternative, whereas what’s the buy versus make scenario. So, we’re actively engaged and continue to scout out opportunities, both for greenfields and M&A.

Anything that might be out of what is your core fairway of both ProSolutions, ProContractor and Gen Ren? I guess I refer, obviously, to some of the acquisitions that your eyes made that kind of gone outside their, what I would say, their core rental business was?

Yes. I don’t think you’ll see us go outside of our core or very near adjacencies to our core. I don’t -- you won’t see us do anything sort of that will put us into something completely new or completely afield from our current business or current geographies.

Our next question is from Neil Tyler from Redburn. Go ahead.

Three from me, please. Firstly, on the ProSolutions business, I’ve slightly lost track of whether you think the weather, the events in Texas were a meaningful net contributor to that growth or whether actually the opposing effects netted that off. Secondly, back to the entertainment, the growth in entertainment that you referred to in there. Have you been able to cross sell yet to any of those customers with whom your team has built relationships, or is that something that you still anticipate is further opportunity? And then, if you could just -- if we’re able to -- give me a slice there on what proportion of the revenue base, the entertainment business currently contributes? Thank you.

Neil, this is Aaron. Yes, we do a tremendous amount of cross-selling with our entertainment business, such as our rolling equipment such as forklifts and aerial booms, our ProSolutions business that supplies climate and our lighting products that we rent. So yes, we’re -- we absolutely cross sell there with products and with the sales teams.

And in terms of the size, it’s 5% to 6% of our revenue. So it’s not a huge portion of the business, but it’s having an unusual impact just given the fact that it swung from almost zero last year to strong growth this year. So, the tail effect is considerable.

Yes. And your first question about the Texas weather event, it was like any other weather event that we normally experience, and not unusual and not sort of overly meaningful, different than a normal weather event.

Okay. Thank you. I wonder if you give chance of a follow-up as well. Larry, I think it was the last call where we discussed the Biden administration infrastructure plan, and you referred to that as it’s not in the forecast and still gravy. As that gravy makes its journey to the table, so to speak, where -- I mean, whereabouts on the journey do you see it? And do you have enough line of sight on those projects -- would you have enough line of sight on those projects to be able to equip them, given the tightness you’ve described in the OEM supply chain?

Well, I guess, the news is a little different in the UK than it is here. I don’t think the journey is far enough along to really give it credence yet, whether it had any impact. And to me, it’s still somewhat in the future. And then, when and if it ever really develops, it will be 18 months ahead down the road until there are several ready projects so for that to get prepared. So, there is no visibility today. Certainly, every state has wish lists, and we’re aware of those wish lists. But until they get funded and then get the plans, the engineering plans behind them, it’s a long way off. Look, I think -- I do think it’s having a positive mental impact on the business where people are genuinely excited and hopeful as we would be. But I don’t think there’s any gravy yet.

Our next question is from Steven Ramsey from Thompson Research. Go ahead.

I wanted to dig in a little bit, too, on the national and local accounts. It appears the national accounts are still outperforming the local accounts. Maybe what does this tell you about the market? Do you expect this dynamic to continue through the rest of this year? And is that a pricing headwind?

Yes. I’m not sure, Stephen. I think -- I mean, if you go back to 2020, national accounts were less volatile, right? So, there was a stronger sort of -- or less drop in that business than there was in the local accounts. That should swing around this year. I don’t think there’s any real dramatic differences in terms of relative strength there. So, I think we’re sort of heading into a slightly positive environment for both. And we should look to generate slightly positive rate improvement out of both. So, the mix is good. It’s a balance that we like at that sort of 60-40 mix, I guess, would be our sort of ideal. We’re around there. It sort of fluctuates from quarter-to-quarter based on certain activity in certain accounts, but there’s no real dramatic trend change taking place here this year.

Okay, great. And then, something to clarify on entertainment. Do you mean that volumes are also at pre-COVID highs, or is that total revenue? And then also on the pricing side, I believe in the past, you’ve discussed that entertainment has some sort of pricing premium relative to other verticals. Is the pricing on the entertainment -- for entertainment customers, is that back to pre-COVID levels, or do you see it getting back there in the near term?

Yes on all of the above. Volume, revenue, it’s premium price and it’s going well.

Great. And then last question. On your strategy to densify highly populated areas, is this a strategy that you’re pursuing more in the way of densifying current areas of strings, or do you intend to plant new flags with greenfields and M&A this year?

Yes. Look, I think, ever since we got here in 2015, we have said that our strategy is going to be around major metropolitan markets with populations of 1 million people or more, and that’s been the focus. I think, our focus primarily has been to densify markets where we already have a footprint and improve that footprint. So, we have a base of business that we just like to continue to grow, better be able to service, add density, add gear into that market and then better service that market. That said, as we look at opportunities, we’ll also consider some markets that we may not be as densely populated in to look to get a greater foothold, and that could come either by way of greenfield or M&A.

Our next question is from Ken Newman from KeyBanc Capital.

So, my first question, I’m curious, could you just talk a little bit about your ability to gain market share as the industry rebounds? Specifically, I’m wondering if you have a sense on whether your smaller competitors are already feeling the impacts from the tighter supply chain. And just where do you think -- how tight can the industry fleet utilization go before you start to see any real impacts to market share gains?

Well, we feel -- this is Aaron, Ken. We feel very confident that we got our fleet orders for this year and early in the year. So, we think that’s going to put us in a really strong position as the seasonality of the business picks up through the course of the year. Not exactly sure how to answer the small competitors. I think, if they didn’t get their orders in early and they’re starting now, they’ll probably have trouble getting equipment this year. As we went into the end of last year, we weren’t exactly sure what kind of year this would be, but we felt like we wanted to get our orders in so that we were ready. And did I -- I think I captured your questions there, unless I missed something.

No, that’s good color. I just -- that’s helpful here. And then, my final one here is, can you just give us a sense or help us think about what’s embedded in the guidance from a used equipment sales perspective? I know you talked a little bit about more shifting towards retail versus auction. But obviously, used prices have been elevated and increasing over the last couple of months here. Is there a new range in terms of fleet sales that you’d be able to give us today?

I mean, I think you’ve sort of got in Q1, a transition to gains from losses in 2020 with improvement in the OEC, our recovery as a percentage of original cost. That’s likely to consider -- to continue through the year. In terms of volume, flat to down. If equipment is tight, then it’s not a great environment for us to be ramping up equipment sales. So, we’ll look to probably maximize opportunity in terms of price and limit opportunity in terms of volume.

Understood. And then, just one last one from me, if you don’t mind. You’ve given some good color on just your ability to go after some more M&A. As you kind of think about just where we are in the cycle, obviously, your leverage is in a really good position today. Any color on how you think about the size of opportunities that are out there, especially as you kind of weigh the opportunities for improving organically or green starts versus actually going out there and buying competitors?

Well, all of that depends on what’s available for sale and who might want to engage in that activity. As you probably know, there are not a lot of large businesses left out there to consolidate. So, most of the activity is around smaller branch count type companies that are out there. So, nothing sort of really big is on the horizon that is in with our mainstream as one of the questions was before, mainstream of where our focus would be. So, I think that might sort of answer the question.

Our next question is from Mig Dobre from Baird. Go ahead.

Well, we covered a lot here, but I just conceptually want to make sure that I understand this properly. You talked about record rental revenue on lower fleet than you had in 2019. Your guidance seems to assume low-single-digit type rental rates for the full year. I guess, the implication for me out of all of this is that, from a utilization perspective, after utilization perspective, you’re implying here that you’re at record, going to be back at record or pretty close to it. Do I have that right, or am I missing something?

Yes. No, I think you’ve got it right. I mean, the step-up in Q1 was huge. Q1 is a tough year -- Q1 is a tough quarter to sort of move dollar utilization, so that’s a reset for us. We don’t see that going backwards, as you get into the seasonally stronger part of the year. So dollar utilization improves as the year goes ahead. So, we’re certainly looking at a record year in terms of dollar utilization over ‘19 and ‘20.

Okay. And on that utilization concept, right, and especially as we think about the growth algorithm in 2022, right, what sort of do we need to see here for the business in order to be able to grow in 2022? I’m presuming that rental rates are going to be part of that equation. But, I’m sort of wondering can you see further expansion and utilization of these record levels that you’re assuming in your forecast for ‘21, or is this going to become truly primarily a factor of fleet growth and rental rates, hopefully, as the driver of ‘22 top line and earnings?

Yes. So, as you sort of move through the rebound in the cycle to the sort of strength of the cycle, it would be typical to be investing in fleet and driving revenue growth with fleet growth there. We’ll be looking to do that. And we’ve got the platform. We’ve got the operations set up. We’re executing. So, all our growth levers are here. But no, certainly, volume becomes more important as you start moving through the cycle.

Understood. And where I’m going to all this questioning is here. You talked about the OEMs experiencing tightness and their ability to supply equipment to the market. And I understand that your CapEx for ‘21 is sort of set in place and you’re going to get your equipment allocation. But I’m sort of wondering where your thinking is on 2022 because, right, your business is going to need that incremental equipment, especially as the market is recovering, yet, I think we’re far from certain that the OEMs are going to be able to ramp production, maybe to the extent that equipment demand is going to be needed. So, I guess I’m curious, what are you hearing from your partners in this regard? And how are you approaching your ordering in your negotiations for 2022 equipment this year, right, in 2021, maybe relative to what you have done in the past?

Yes. I would say, look, it’s still a bit early in the game for us to be focused on 2022 at the moment. And we’ll sort of pick that up as we get well into the second quarter and approaching the third quarter where we’ll look at what our fleet looks like, what our utilization looks like and what the future holds. But having spent 30 years on the manufacturing side of the table, I think this year, from a demand standpoint, is a bit of an aberration because they’re coming out of a time where they slam the doors closed last March and April and turned off all their supply lines, and ramping them back up is what’s happening and causing the shortages here in 2021. I think by 2022, most of the major manufacturers will have their supply lines up and running and have ample capacity to deal with volumes that might be prevalent in 2022.

Understood. But just to clarify something here. When you’re talking about looking at this dynamic in Q2 and Q3, I’m just trying to understand how that would compare relative to what you normally do in your planning process. Is it fair to assume that you’re earlier, or are you similar?

Similar to what we did last year.

I think, we’re the third biggest customer for a lot of these guys. We’ve got an ongoing relationship where there’s constant dialogue taking place. Our fleet team has done an excellent job in terms of anticipating -- getting ahead of the contraction in demand in 2020 and getting ahead of the tightening of demand in 2021, and we’ll continue to do a great job as we roll into 2022. It’s a daily dialogue, and we’ll sort of work that through as we harden up our forecasts for 2022.

I think, we have time for one last question.

Actually, there’s no more questions.

Great. Well, thank you all for joining us on the call today. And if you have any further questions, as always, please don’t hesitate to call me. And we really do look forward to seeing you soon. Take care, and thanks for participating today.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.