Herc Holdings Inc. (HRI) Q1 2022 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the Herc Holdings' First Quarter 2022 Conference Call. All participants will be in a listen-only mode. [Operators Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please also note today's event is being recorded. At this time, I would like to turn the conference call over to Elizabeth Higashi, Vice President of Investor Relations and Sustainability. Please go ahead.

Thank you, Jamie. And thank you all for joining us this morning. Earlier today, our press release, presentation slides, and 10-Q were filed with the SEC and all of them are posted on the Events page of our IR Web site 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 our first quarter, with comments on operations and our financials, including our view of the industry and our strategic outlook. The prepared remarks will be followed by an open Q&A. Before we begin our formal remarks, I'd like to remind you to review our Safe Harbor statement, on slide three. Today's call will include forward-looking statements. These statements are based on the environment as we see it today, and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from the forward-looking statements made on this call. You should also refer to the Risk Factors section of our Annual Report on Form 10-K for the year-ended December 31, 2021. 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 materials. Finally, a replay of this call can be accessed via dial-in or through a webcast on our Web site. 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, and good morning, everyone. Please turn to slide number four, I'm pleased to report that we achieved new records in the first quarter of 2022 in total revenues, rental revenue, net income, dollar utilization, adjusted EBITDA, and adjusted EBITDA margin. Volume and rates contributed to the 32% increase in rental revenue over the prior year. Dollar utilization increased 280 basis points to 41.4%. Outstanding performance by our sales, operations, and field support teams was enhanced by steady demand and a positive operating environment. In addition, we completed the acquisition of three smaller companies with three locations, and opened five new greenfield locations in the quarter. We are pleased that, earlier this week, we closed on the acquisition of Cloverdale Equipment Company, a full-service general equipment rental company with 120 employees, serving construction and industrial customers with core operations in the metropolitan areas of Detroit and Grand Rapids, Michigan, Cleveland, Ohio, and Pittsburgh, Pennsylvania. I'd like to welcome all of the employees of our latest acquisitions to the Herc family, and thank our acquisition and immigration teams for their work in closing and integrating the new operations and new employees into our systems and team. I'd also like to extend our appreciation to the entire Herc team for executing and delivering a record quarter as we start the New Year. Based on the strength of the first quarter performance and our outlook for the rest of the year, we've raised our 2022 guidance for adjusted EBITDA again, and Mark Irion will discuss that in detail later this morning. Please turn to slide number five, which shows the first quarter results over the last five years. Our first quarter results continue to demonstrate outstanding operational execution. Equipment rental revenue was $526.8 million in the first quarter, an increase of 32% or $126.4 million compared to the prior year. This increase was driven by solid performance in our core business and growing market share from our specialty businesses. Total revenue grew 25% to $567.3 million despite lower sales of rental equipment, a decision we made to continue to meet requirements of our customers in light of tight supply of new equipment related to supply chain issues from our original equipment manufacturers. We reported an increase of 78% in net income to $58.5 million or $1.92 per diluted share in the first quarter, compared with $32.9 million or $1.09 per diluted share last year. Adjusted EBITDA grew 28% over prior year to $236.8 million. Our enhanced scale and focus on operating leverage improved year-over-year adjusted EBITDA margin 100 basis points to 41.7% in the first quarter of 2022, another record. This is an exciting time for team Herc, and our first quarter reflects the professionalism and tenacity of our team. Our team is committed to providing excellent customer service and expanding our rental solutions to a broad array of customers and industries to achieve even greater success. The growth goals we presented at our Investor Day, last fall, were based on the foundations for growth we'd built over the last several years. We do know how to grow. Please turn to slide number six. With over 56 years of history in the equipment rental industry, our 5,700 team members work hard to ensure our customers achieve optimal performance safely, efficiently, and effectively every day. Everything we do is built on our promise and commitment to help our customers and communities build a brighter future. At the end of the quarter, we operated 320 locations across the United States and Canada, in 40 states and five Canadian provinces. This week, we added four more locations with Cloverdale acquisition, and so far this quarter, we've opened an additional one greenfield location. The addressable North American market size is now estimated to be $57 billion, and growing by about 10% in 2022 according to the American Rental Association. We expect to continue our momentum by addressing the opportunities in the market and to continue to outperform the overall industry as we growth through organic growth, supplemented by select acquisitions. Now, please turn to slide number seven. As you can see from this slide that we introduced at our Investor Day, our major strategic pillars are focused on growing our core business, expanding specialty, elevating technology, integrating ESG, and maximizing our allocation of capital. We are executing these strategic initiatives, and Aaron Birnbaum, our Chief Operating Officer, will now update you on our progress in operations. Aaron?

Thank you, Larry, and good morning, everyone. What a great start to the year. The first quarter results reflect the strong operating environment and our increasing scale and enhanced operating leverage. Our team has done an excellent job executing our strategy in what is typically the lightest quarter of the year. Clearly, there is more to come. Now, please turn to slide number nine. Our Q1 results reflect the opportunity we seized by accelerating investment in fleet, with average OEC fleet up 23% over the last year's comparable period. Equipment rental revenue in the quarter rose to $526.8 million, up 32% compared with 2021. Our core business continues to benefit from solid operating performance in all of our regional operations. Our ProSolutions business also continued to contribute double-digit growth year-over-year in the first quarter of 2022 as we continue to expand our market share in the rental of power generation, climate control, remediation, and pump equipment. The integration of the 16 acquisitions we have announced, to date, is on track, and we continue to focus on additional locations in targeted markets through organic growth and acquisitions. We will continue to capitalize on our fleet expansion, and we are investing $900 million to $1.12 billion in net fleet capital expenditures this year. Now, please turn to slide number 10. Our fleet expenditures at OEC totaled $253 million in the first quarter of 2022. Given current equipment rental demand and our strategic management of fleet in this equipment-constrained environment, we reduced the level of disposals substantially in the first quarter compared with last year. We disposed $64 million of fleet at OEC in the first quarter, which was nearly $50 million less than last year's first quarter. At this point in time, we expect OEC disposals for the year to be about the same as last year. Our fleet composition at OEC is on the left-hand side of this slide. Total fleet is now $4.6 billion at of March 31, 2022, about 27% higher than OEC fleet at the end of Q1 last year. We continue to invest in our specialty fleet which includes ProSolutions and ProContractor, and accounted for about 24% of our total fleet as of the end of Q1, 2022. Dollar utilization improved 280 basis points compared to Q1 2021, a first quarter record of 41.4%. This reflects well for the rest of the year since Q1 is typically the lowest dollar utilization quarter in the year due to seasonality. As we said in our fourth quarter call, we had most of our 2022 equipment orders in early last year, so the inflationary impact to our 2022 orders should be modest, in the mid single-digit level As shortages, inflation, and labor costs impact the industry, we do anticipate that industry fleet costs will continue to rise in 2022, and next year. Stronger pricing of used equipment and an improvement in our sales channel mix contributed to an increase in equipment sale proceeds as a percentage of OEC, which rose to 45% in the quarter, compared with 40% last year. The average age of our disposals was 90 months in the first quarter, and fleet age is now about 48 months, the same as it was a year ago at this time. Please turn to slide number 11. Our diverse customer mix, a base of large national customers operating in essential business sectors and our expanded specialty business continue to drive our sales strategy and provide additional growth opportunities. We are expanding through the opening of greenfield locations and targeted acquisitions in fast-growing urban markets to drive top line growth. Addition to core and specialty fleet are expected to continue to be growth drivers as we can offer a broader array of premium fleet while the market remains constrained due to supply chain issues. We'll continue to focus on the expanding addressable markets of climate control, remediation, pump, and entertainment, as well as other major vertical in industrial customers in utilities and energy, healthcare, warehousing and manufacturing, and commercial construction. Our diversification strategy over the last several years targeted new industry verticals to drive healthy and stable growth. As you can see by the strong growth we produced, we are successfully growing across multiple industry verticals and across all regions. New customer growth continues to be a major opportunity. In the first quarter, local rental revenue represented 57% of total rental revenue, in line with fourth quarter of 2021, and up from 54% in the first quarter of 2021. This growth reflects the impact of additional new local customers added through our recent acquisitions. Please turn to slide number 12. Safety is at the core of everything we do, and we continue to focus on striving for 100% Perfect Days throughout the organization. Our major internal safety program focuses on Perfect Days, that is days with no OSHA reportable incidents, no at-fault motor vehicle accidents, and no DOT violations. In the first quarter, on a branch-by-branch measurement, all of our branch operations achieved at least 98% of days as perfect. As we further integrate ESG into our operations, we recognize that most of the reduction in Scope 1 and Scope 2 greenhouse gas emissions will come from fuel-efficient fleet. We continue to expand our investment in the electric or alternative energy powered fleet, including aerial equipment, forklifts, select vehicles, traffic and safety, [light towers] [Ph] and welders. More and more of our customers are interested in how we can support their goals to reduce their carbon footprint, and we are looking for innovative solutions to assist them. Before I pass the call on to Mark, I'd also like to point out how our purpose statement, we equip our customers and communities to build a brighter future, describes our commitment to our local communities. At our recent Pro Expo meeting, with 800 of our team members, we honored excellence in sales, operations, and safety performance, and also individuals who most promoted our purpose statement, with community activities in Atlanta, to collect food and clothing for the needy. Our Women in Action Employee Resource Group also recently launched a corporate-wide initiative to support women-built projects through Habitat for Humanity local chapters in North America. And I should point out that since tomorrow is Earth Day, we are also encouraging our team members to become involved in local projects supporting the theme, invest in our planet. I'd like to thank team Herc for their devotion to operational excellence as well as all that they do to enhance the communities we serve. Now, I'll pass the call on to Mark.

Thanks, Aaron, and good morning, everyone. The Herc team is clearly in high gear and performing at a high level as we delivered record first quarter performance in all of our key metrics. The strength and momentum we achieved in the first quarter also bodes well for rest of the year as we focus on fast, profitable growth, and continue investing and improving the key metrics that create long-term value. Strong demand in most of our key end markets and the ongoing supply chain challenges of equipment manufacturers continue to provide a strong operating environment for the leading rental companies. As Aaron mentioned, we ordered early, so our new fleet is arriving steadily, and we expect fleet growth to drive revenue growth throughout the year. Our operations team has done a great job with delivering record time and dollar utilization, while integrating new team members, customers, and fleet into the Herc model. This consistent execution has led to excellent performance and strong momentum that will continue throughout 2022, and beyond. Slide 14 shows the summary of our first quarter results compared with 2021. Equipment rental revenue increased by a very impressive 32% to $526.8 million from $400.4 million in 2021, primarily due to continued volume and pricing momentum. We are successfully executing the growth strategy we outlined at our Investor Day, and are clearly running in high gear when you look at our Q1 results. We are pushing hard on both our organic growth and acquisition strategies and enjoying a lot of success. Breaking down the 32% growth in rental revenue for the first quarter, we are pleased with the fact that about 3/4 came from organic growth. This validates our ability to grow our core business. Our organic growth is outpacing the market growth, and we believe we continue to expand our market share. Acquisitions contributed about 1/4 of the 32% overall growth in rental revenue, which provides a nice boost from another growth lever and allows us to quickly bring on key rental talents, and to penetrate key markets. We have a solid pipeline for M&A and have our integration team working hard to welcome our new team members and customers into the Herc family. Our revenue growth is not only fast and impressive, but profitable. We are delivering excellent results for our investors and creating long-term value. Adjusted net income in the first quarter of 2022 increased 78% to $59.2 million or $1.95 per diluted share compared with adjusted net income of $33.3 million or $1.10 per diluted share in the first quarter of 2021. Adjusted EBITDA increased 28% in comparison to Q1 2021. Adjusted EBITDA margins were also a record for the first quarter, improving 100 basis points to 41.7% in 2022 from 40.7% in 2021. All in all, an excellent quarter; we're in fast, sustainable growth mode, and growing profitably. As Q1 is the seasonally weakest quarter to start the year, and we were carrying cost increases forward from growth in the business during 2021, it is typical for flow-through and margins to be at the lowest level for the year. With the added job to some cost lines late in the current quarter, we, along with the rest of the world, got a little bit more cost inflation in some line items than expected. Not a big deal. We have an inflation resistant model that we'll adjust, and move on. The cost per gallon of fuel, for example, was up 45% year-over-year, which impacts both our external and internal delivery costs. We have a model that adjusts for inflation and allows us to recover a significant proportion of these cost increases by way of fuel surcharges and delivery fees. However, late in Q1, these costs moved faster than expected, and our cost recovery mechanisms didn't quite keep up. March over February fuel costs were up 20%, which didn't leave a lot of reaction time. Adjustments have been made to fuel charges and delivery fees. We expect to see better cost mitigation through the balance of 2022. We are growing at a fast pace and incurring volume-related cost increases as would be expected. Operating at high utilization, and growing the fleet by over 20% in the quarter, also puts pressure on our maintenance team and maintenance experiences. We're building a platform for growth, and have added 1,000 new team members this last year, about half to existing locations and about half through acquisitions. All part of our growth strategy, but we will get more leverage on this investment in future quarters than we have in the current quarter. REBITDA flow-through at 38% is expected to be at the low point for the year. And as we dig into the details for this quarter, we see a clear path back to around 50% to 60% flow-through in 2022, and this is baked into our updated guidance. We're lucky to have a solid inflation-resistant model, and have grown fast and held margins in a historically challenging quarter for inflation. All of this is manageable for Herc within the context of 30%-plus growth in rental revenues. And as is clear with our performance, we can invest in our business and in our people, and continue to improve our adjusted EBITDA margins and investor returns. On slide 15, we highlight the momentum in our pricing and utilization trends by quarter. The graph on the upper left illustrates our success of managing price over the last couple of years, and our ability to consistently drive rate growth. The latest quarter reflects average rates up 430 basis points compared to last year. The current market environment of tight equipment supply and steady demand continues to support our focus on rate, and we also benefit from our excellent pricing tools and the discipline and professionalism of our sales team. In addition, the industry seems to have gotten price momentum back, and we intend to continue leading the industry on price. Our track record of executing on price in all sorts of operating environment is clear. The momentum and our rate is clear, and we expect to increase rates year-over-year and sequentially each quarter for the remainder of 2022. Our OEC fleet size closed the quarter at about $4.6 billion with a combination of early ordering and savvy purchasing has contributed to the steady delivery of fleet in 2022, which is also supplemented by fleet integrated in conjunction with acquisition activity. Our average fleet on rent at OEC in Q1 was up by 29% in comparison to average fleet growth of 23%, which represents excellent execution and a solid operating environment. Dollar utilization continues to improve, up by a very impressive 280 basis points in Q1 compared to the same quarter last year. Improved dollar reflects our ability to mitigate inflation and fleet costs through rate growth. This positive momentum in dollar utilization is a long-term value driver going forward, and has a powerful and positive impact on our return on assets. On slide 16, we can see that with no near-term maturities, we have ample liquidity to fund the growth goals for 2022 and into the future as we commit capital to invest in our business and drive fleet growth into the new cycle. Net capital expenditures exceeded cash flow from operations in the first quarter, and we reported negative free cash flow of $131 million before acquisitions. We took a lot more fleet into Q4 of last year and in the current quarter than we would in a typical winter, which is a driver of our 23% fleet growth year-over-year. In the current environment, we are taking as much fleet as we can get our hands on, and our volume growth of 29% shows that we are putting it out on rent as soon as it hits yard. We have ample liquidity to fund our growth plans, and our leverage at 2.3 times is at the lower end of our target range of two to three times. We also paid out a quarterly dividend at the end of March at $0.575, a rate, which implies an annual payout of $2.30 per share. On slide 17, we show the latest industry forecasts. ARA is forecasting an increase of rental industry growth of 10% to $57 billion in 2022, and our 32% rental revenue growth is eclipsing the broader industry growth rate. We clearly have much more momentum than the industry in general, and are taking market share. This is consistent with past experience where 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 Herc is a company of scale with a large, well-diversified mix of customers. We are in the early stages of the next construction up cycle with steady demand even before we get into any potential benefits from the proposed future boost to infrastructure spending. Equipment supplies are tight, and our OEMs are challenged to manufacture and deliver new equipment due to worldwide supply chain bottlenecks. This is a very favorable environment to own $4.6 billion of rental fleet as our customers really appreciate our fleet availability, the breadth of our fleet offerings and our commitment to service. It should remain a favorable environment for increasing rates as everyone is facing cost inflation to a certain extent. Also, the majority of our business is not directly connected to nonresidential construction. Our specialty ProSolutions business is a real strategic benefit, and we will continue to look to gain share and grow that business. There is pent-up demand for maintenance and turnarounds in a lot of our industrial plants, and this segment should also rebound in 2022. There is plenty of demand in most of our end markets to support growth in 2022, and we have the balance sheet and liquidity to be able to fuel that growth by investing in our fleet and our market share, and that is what we intend to do. On the back of a strong first quarter with excellent top and bottom line results and with growing confidence in the momentum we currently have in our business, we are raising our adjusted EBITDA guidance for 2022. We've raised the low end of the adjusted EBITDA range to $1.75 billion and the high end to $1.245 billion of adjusted EBITDA for the full year. That translates to an increase in EBITDA of around 31% to 39% over 2021. We also raised the bottom end of our net fleet capital expenditures guidance to $900 million to $1.12 billion. We are in the early stages of an exciting industry upcycle and are excited to be delivering excellent performance and growing confidence as we look the continue to execute on our high-growth strategy. With that, I'll turn the call back to Larry.

Thanks, Mark. Now, please turn to slide number 19. We frequently talk about our vision, mission, and values. But as you could see from our pyramid, safety is at the center of everything we do. And we continue to serve our customers and communities while also striving for 100% Perfect Days. We do what's right, we're in this together, we take responsibility, we achieve results, we improve ourselves every day, and we are committed to investing in our communities. So now, operator, let's please open the lines for questions. Thank you.

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] And our first question today comes from Jerry Revich from Goldman Sachs. Please go ahead with your question.

Good morning, Jerry.

Hey, guys, good morning, everyone.

Good morning.

And hi, Larry, Mark, Aaron, Liz, good morning. I'm wondering if you could just talk about the pricing cadence over the course of the quarter, if you don't mind. Based on the year-over-year number it looks like maybe you've picked up a point of price sequentially in the quarter. Is that right, Mark? And can you talk about the cadence, if you don't mind?

Yes, I mean it's probably easier just to look at the cadence through the year and into Q1. So, pretty steady improvements in pricing year-over-year. We look forward to continuing to execute on that going through the year, so we should have pretty steady improvements in pricing throughout the year. So, very favorable environment for price, industry disciplined reacting to the sort of cost pressures that were around there, and as good a pricing environment as I've seen in 20 years.

And just to piggyback on that last point, Mark, in prior cycles, the industry has pushed pricing in the high single-digit range, 6%-7%. Based on the comment that you just made a moment ago, is there a potential that year-over-year pricing can hit those level of increases this year, is that feasible from an exit rate standpoint heading into '23?

Yes, no, that's possible. That previous number did come off a much lower dip, so that sort of 6% to 7% range in the -- and the coming out of the last cycle was on the back of negative 10s. So, the year-over-year comp there is a little bit different than what we've got here. But there's momentum in pricing and we'll continue to push it as high as we reasonably can.

Okay, super. And lastly, from a time utilization standpoint, you folks have done a lot of work to improve logistics and fleet availability. I'm wondering, as you're operating heading into peak season here this year, is there more room for fleet absorption heading into '23, or do you think you're getting the full benefits of fleet absorption over the course of this year based on the cadence in the plan?

So, time utilization on the shoulders, there's room to improve. You sort of see that in Q1, where we had a record year last year, and it's even better this year. It's volume growth as you sort of get into peak utilization into the middle of Q3. And then going into 2023, there's room for movement, again, on the shoulders just based on seasonality and strength in demand, there's room in Q1 and Q4 for utilization and improvement in absorption.

Okay. I appreciate the discussion. Thanks.

Thanks, Jerry.

Thanks, Jerry.

And our next question comes from Seth Weber from Wells Fargo. Please go ahead with your question.

Hey, guys, good morning, and thanks for taking the question. I guess maybe for Mark, I just -- it sounds like you pulled in your REBITDA incremental target for the year a little bit. I just want to make sure that that's really a function of just the operating expense environment, and it doesn't reflect any change in how you're thinking about rates, given the drop-through on rate is so high. I just want to make sure that you're not getting any more cautious on your rate outlook for the year relative to where you were three months ago?

No, I mean I think I -- we couldn't be clearer on rate -- momentum and rate, sort of, expectations for the balance of the year. So, I've said it twice already today, we expect it to continue growing. And we expect it to grow quarter-over-quarter each quarter this year. So, the rate momentum is solid. The rate environment is as good as it's been in 20 years. And we will continue executing on rate. So, that's as bullish as anyone can get on rate, I think, so we're there. Costs as the sort of driver, we are talking down -- that we are sort of looking at less flow-through in 2022 than we initially anticipated. And there's a lot of cost pressure. We've got mostly volume growth, and the cost increases if you sort of break them down, but there is cost pressure and inflation in lines like fuel, and maintenance, and wages that are impacting the expected flow-through for '22, still above 50% but less than our sort of long-range sort of target range of the sort of 60% to 70% range.

Right, understood, okay, thanks. And then just on the CapEx, the spending cadence, is there any help or any way we should be thinking about just the spending is -- are second and third quarters about the same or do you think it'll be more front-end loaded towards the second quarter or the -- or is supply constraint still going to keep it more balanced 2Q, 3Q, and then I assume fourth quarter is the lowest quarter of the year?

Yes, good question. We basically put our -- majority of our fleet orders out in 2021 to our vendors with the distinct commitment with them, that as soon as they have it ready we'll take it, right. We're not sort of saying, "Look, let's sort of pace this through the year." We're taking it as soon as it's ready. Obviously, we normally get a bigger bulk in Q2 and Q3. But if they have it available, we'll take it sooner. And like last year, like 2021, we didn't slow down in Q4. And our expectation is that our Q4 will continue in a similar fashion to Q4 of 2021, as we prepared for continued growth in 2023.

Okay. Have you gotten any indication from the OEMs that production is getting better, that this -- that they're able to improve deliveries relative to what you got in the first quarter?

Seth, this is Aaron. For the most part, our vendor suppliers are delivering the product that we expected to get, although, as we've said before often, it's already 69 days late. Some OEMs have trouble delivering what was expected more than others, but we're able to fill that gap kind of being nimble and finding out other opportunities. So, we continue to have quite a bit of fleet coming in through this first quarter, and Q2 should be a bigger quarter than Q1.

Okay, guys, thank you. I appreciate it.

Thanks, Seth.

Our next question comes from Ross Gilardi from Bank of America. Please go ahead with your question.

Thanks. Good morning, guys.

Morning, Ross.

Hey, Ross.

Just the mechanics of the net CapEx guide, I mean went up by about $40 million at the midpoint. I mean, is that in the gross number or are you cutting back on disposals relative to your initial expectations? And then how much of that $40 million do you think is just due to cost inflation versus units?

So, it's mostly due -- or it's really just sort of taking, I guess, a little bit of the hedge out of the expectations for delivery. So, it's coming from the top, the gross line. Sales are in line with our expectations. I mean we went into the year planning to sell minimal amount of fleet and just maximize the size of the rental fleet. And they -- haven't really been any changes to the cost of the equipment from our expectation. So, most of the lift coming from just taking hedge out of the gross line with no real impact from inflation over our expectations.

Okay, got it. And then, can you just talk a little bit more about our strategy on CapEx [in advance of] [Ph] infrastructure next year? And do you expect this -- $40 million, it's a big number, but it's a small number, I guess, in the grand scheme of things. But, in any event, do you expect it -- that that additional equipment to arrive earlier enough to influence fiscal '22 or is it more about frontloading 2023 in advance of U.S. infrastructure stimulus starting to scale up at the end of the year?

Yes, I think it's more about us continuing the pattern we've had for the last several years, ordering early, and staging that equipment in '23, and making sure that we give plenty of visibility to our OEMs so that we're at the front of the line, so to say, by committing, locking those orders down, securing production slots, and making sure that equipment is flowing, as it has been flowing for '21 and'22.

Okay, thanks, Larry. And then just a couple of more equipment, if I could squeeze in, so, how much of the EBITDA guidance is from -- the guide increase is from acquisition and how much of it is from either increased fleet on rent or rate relative to your initial expectations? And then just wanted to verify where you think fleet on OEC is by year-end '22? Right now, I think it's around $5.5 billion, but wanted to run that number by you, based on your latest CapEx forecast? And where should we be on depreciation for the full-year? Thanks.

So, if you sort of break down the list and guide, just if you, say, go midpoint to midpoint, then it's equal organic growth in terms of additional volume on rent and M&A. And also, there's a bit of messiness to it just in terms of whether sort of the contraction of the range and lifting the range up over the bottom end, so sort of equal parts. I guess, confidence in the outlook, organic growth expectations bigger than what we went into the year with, and M&A. Then there's a whole bunch of other questions. Do you want to hit me with them sort of one at a time?

Yes, Mark, what's the exit rate on fleet on OEC at the end of the year? Is it around $5.5 billion based on your latest CapEx forecast? And where should we be on depreciation for the full-year?

Okay. Yes, good, sorry about that. Yes. No, that's about right in terms of the rate on OEC at the end of the year, and sort of 10% to 11% of average OEC is a good sort of marker for depreciation.

Perfect, thank you.

Thanks, Ross.

Our next question comes from Rob Wertheimer from Melius. Please go ahead with your question.

Morning, Rob.

Well, thanks. Good morning, everybody. Hey. So, Mark, thanks for the cost comments. I mean, obviously, you guys have a lot going on with investing for growth with incorporating acquisitions, some inflation in the business, et cetera, and I guess even all the repairs, your whole fleet. You mentioned the fuel cost. Are you able to say just kind of, on a clean basis, is your cost structure pure inflation above or below your current pricing, just stripping out the -- I don't know if it can, stripping out the other costs?

No. Well, I mean, the volume is probably the biggest driver, right, if you sort of look at it in the context of 32% rental revenue growth. So, volume is the biggest driver. And in fuel -- and but I guess talking to fuel directly, it's probably 50-50 in terms of volume and unit costs. So, the inflation impact and fuel is the most of the line items. It's not as significant in wages and maintenance expenses. It's significant at fuel, but it's like 50% volume and 50% unit costs.

Okay. Maybe that answers. Maybe I didn't ask it cleanly, but wage inflation and all the other pure inflation is maybe less than the 4-ish percent rental rate running right now?

No. So, wages overall are running mid-single digits, and maintenance expenses are mostly volume. So, you sort of -- that they are the big sort of drivers of DOE. So, wages, mid-single digit, is the biggest line item in there, delivery and fuels the next that's got sort of 50% volume, 50% unit costs, and maintenance expenses are mostly volume.

Okay, perfect. Two more, one minor one; when you do -- I guess it's a fuel surcharge or whatever, does that come through as rental rate or is it separate? And then just if you have any comment on what pricing looks like from the regionals in the industry, whether the industry is kind of all following price increases. And I'll stop there. Thank you.

So, fuel surcharges don't come through a rental rate. They do come through in the retail revenues if you look at in the P&L, but is not factored into our rate growth. And yes, it looks like there's pricing discipline across the board. There's an overall lift across the country, across the board in terms of size, everybody seems to be focused on pricing.

Perfect. Thank you.

Sure.

And our next question comes from Steven Ramsey from Thompson Research. Please go ahead with your question.

Hey, good morning. Wanted to dig in on raising the low end of CapEx, I just wanted to make sure, is that Q1 delivery being better or is that better delivery times in Q2 and Q3?

Well, Q1, deliveries in Q1 were within expectations, maybe even a little bit better than what we expected. That said, as Aaron mentioned just a few minutes ago, we continue to see some delays, like 30 or 60-day delays. But now, we've been experiencing that since the back end of '20, and into '21. So it's becoming more of a normal flow, even though the delivery days are being extended a little bit. We're just carrying over the past, and we're getting the volume that we expected in the quarter. So, the volume of deliveries is on target, maybe a little better. And we expect that, as we roll through the year, it will improve. And we should see, obviously, higher deliveries in Q2 and Q3.

Okay, helpful. And then within the fleet, specialty equipment is nearing the low end of kind of that target range, 25% to 30% of OEC, currently. Do you expect to break into that optimal range in FY '22? Or is that beyond?

I think over the next 12 to 18 months, we'll break into the median part of that optimal range. We continue to invest heavily in it, and perform very well.

Okay, helpful. And then last thing for me, contractors are pressured, obviously, with the lack of labor and materials challenges in getting their projects done. Is this changing how long your fleet is staying on a job site, and therefore helping utilization? Or is there some visibility into that dynamic potentially playing out into the busy season?

I mean it's hard to tell. There's big projects out there. They're able to find their labor to get those jobs started. I think there's some sectors, maybe oil and gas, if it fires back up, it's going to be hard for them to get that labor to kind of get the rigs going again. So that might be a problem there if they try to expand that vertical of business. But we really haven't noticed it. It's -- business is active. And projects that are coming online, they're coming online.

Helpful. Thank you.

And our next question comes from Ken Newman from KeyBanc. Please go ahead with your question.

Hey, good morning, guys. Thanks for taking the question.

Hey, Ken.

Just wanted to put a finer point on the SG&A leverage into the second quarter and the rest of the year, I understand you expect it to improve versus the first quarter, but I'm curious if you think that the SG&A leverage could return to prior year levels, barring another spike in fuel costs.

So, there's not a lot of fuel in SG&A. So, that's not really a driver there. I mean, I think you'll see the same cadence -- well, you will see the same cadence going through the quarters where SG&A as a percentage of rental revenues is the highest in Q1, as it is in any quarter of the year, it will reduce as a percentage of rental rates going through the year, just with -- as the revenues increase and you get more leverage off of that. In terms of flow-through, we're sort of taking down our expectation. We're being conservative on our expectation with flow-through. Most of that's in DOE though. That's not really an SG&A driver. So, I think to answer that simply, we will get more leverage on SG&A going through the year in 2022.

Understood. And then for my follow-up, I just -- you've spoken pretty positively, obviously, about the rate environment, about improving volumes going through the year. Can you help us kind of think about how you're thinking about dollar utilization? It sounds like you expect the first quarter to be the low watermark for the year. But is it reasonable to think that dollar utilization is up year-over-year every quarter for the rest of the remaining three quarters?

Yes. Yes, no, I mean if you think about cost inflation going in, it impacts one year of your fleet. We're holding that fleet for seven years. So, we've really got seven years to recover the -- any increase of cost of the fleet with rate. So that's not a real challenge, and that's really kind of the key thing to focus on in terms of having an inflation-resistant model. So, I think that's the way to approach it, and the sort of seven years to get back this quarter's cost inflation in the fleet, and we've got a very good shot at doing that.

Understood. Thanks.

You got it.

And our next question comes from Mig Dobre from Baird.

Thank you. Good morning, everyone. I think that I'd just start with a quick clarification on your earlier comment, Mark. When you were talking about rental rate improving sequentially, just to make sure we're clear, are you meaning that the year-over-year growth in rental rates will continue to accelerate sequentially as the year progresses? Is that how we are to interpret that?

Yes. I think we are looking to trend increasing year-over-year growth from -- increasing from the 4.3% that we've got in Q1 each quarter going forward through 2022. And that implies sequential rate increases.

Okay, I see. And again, given the base effects that you commented on, I'm sort of curious as to what gives you the comfort or the confidence that these trends can be sustained on more difficult comps as the year progresses? And then maybe to an earlier question, is it fair to assume that the exit rate on rental rates then into '23 could be somewhere north of 5%?

So, when you just look at our history, we haven't had any commentary on base effect with rates, right. We've got an ability to raise rate each quarter sort of year-over-year in this type of environment. And we're looking forward to doing so in a more favorable environment than what we've done it in historically. We're at 4.3%, if we're saying it's going up each quarter then that's heading up towards 5%. So yes, I think we're looking at certainly something higher than 4.3% by the end of the year, and we'll continue sort of pushing it as far as we reasonably can. There's not really a desire to run that up into a 7% or 8% or go sort of -- and just put it all out there in one quarter, we'd rather have a steady improvement. Some of this is coming from our national accounts where we need to sort of work in a competitive environment and just manage this in a modest way and manage the relationship with our customers. So we're not looking to take advantage and gouge rates, but we need to recover the cost in our business. And we'll look to do that sort of steadily and modestly through the course of the year.

No, sounds very fair, thanks for that clarification. And then a question on the flow-through on our EBITDA, you were pretty clear as to your full-year expectations. But obviously, we started pretty slow, at 37% and change. So I'm kind of curious as to how we should be thinking about the cadence of this flow-through. Do you fully catch up to that 50-plus range in the second quarter? Or is this more of a back-half-loaded type of situation?

Yes, I think -- I mean, you're right. It's back-half loaded, so there's a leverage. A portion of it is just lumps that we've got in Q1 that we don't see recurring in Q2. But a portion of it is just leveraging this investment in fixed costs that we've made, with higher revenues as we build through. So as you get into your higher revenue quarters, which are Q3 and Q4, you get more leverage on that and improve the flow-through. But, obviously, to get to 50% -- 50% to 60% for the year, it will have to be higher than 50% in the back-half to make up for the 38% sprint in Q1.

Okay. But sequentially, we shouldn't be thinking considerable improvement just given everything that's happening with cost, it's more of a Q3 and -- than Q4. That's what you're saying?

Yes. That's -- steadily improvement each quarter through the year.

And then lastly, sort of a longer term question, you provided CapEx targets at our Analyst Day, if my memory serves it, $2.5 billion to $3 billion over the 2021-2024 timeframe, and few months have gone by here and obviously the demand environment is pretty good, we have more clarity on infrastructure. I guess I'm kind of curious if you are thinking on this CapEx through this, in intermediate term has changed at all in terms of either the low-end or the high-end, and also it's the cadence in terms of how you are looking at deploying this capital through the period, might have shifted at all? Thank you.

So, that guidance was pretty much organic guidance, right. So, as the M&A stacks up, that M&A -- those branches and those acquisitions take a little bit more capital, so that increases that number. We are in line with our 2022 expectations, but probably getting more bullish into 2023. So, I think to the extent that we are confident in the end markets and confident in the cycle we will be looking to spend over and above that capital guidance that we put out last year.

Very helpful, thank you, guys.

Thanks, Mig.

Our next question comes from John Healy from Northcoast. Please go ahead with your question.

Thanks. Just two quick questions for me, was just hoping to understand on the acquisition side of things; how do we think about the revenue contribution for acquisitions for the year. I know you said it was about 25% of the growth in Q1. Is that a good proximity for the rest of the year, or is the contribution from those lying differently? And then just a clarification question, the 4% rate this quarter and then, you know, kind of optimism that it could potentially get better from here, is that what is based into the guidance, this plus 4% price, is that the number that's in the guide or is there a different number there?

So, you undercover, Don Wiley, from Northcoast…

Yes, I'm undercover.

All right, John.

You are on a pseudonym.

We are wondering, John.

So, John, I think, so acquisition if you think it for the -- almost 500 we did last year, the full impact of that is running into Q1 into the guidance, as expected, right. So, that's not part of the rate. We did -- the larger acquisition Cloverdale which we just closed yesterday, that has the most impact on the listed guidance, and they're expected to rise. And then, the -- what was the other part of your question?

Pricing.

Rate?

Pricing, yes, so we got 4.3% rate in Q1. We're saying we are going to grow that every quarter this year, so we do have more than 4.3% pricing affected into our guidance.

Okay. And then, just on the M&A side of things, how would you characterize the pipeline there, obviously you guys are talking about wanting to get more fleets, should we interpret that same level of optimism and enthusiasm on the M&A side. So, maybe there is more properties like you are closing the quarter on the horizon for the rest of the year, or you are going to take some time and kind of sort of level things out of it?

No, John, we have a fairly robust pipeline of both smaller and larger acquisitions, and are strategically located in markets and in product lines that focus on what we want to do in our top 50 MSAs. So, it's a robust funnel, and we hope to continue along the same path that we demonstrated in Q1 and early Q2.

Great, look forward to it. Thanks, guys.

Thanks, John.

I think we have time for one more question.

And our final question today comes from Steven Fisher from UBS. Please go ahead with your question.

Great, thanks for taking the questions. I think you mentioned to Ross earlier that you don't expect any change in the inflation to your fleet purchases, just curious, is that because there are no further surcharge requests or increases in that pricing this year from your major suppliers after sort of the agreements last year, or is that you are just able to say, "Hey, you know, no thanks, we already have our agreements for this year?"

Well, we have had some very few, less than a handful of requests from some suppliers for some consideration around surcharges based on incremental costs. We've been able to, you know, for the most part avoid that, or diminish that. And as Mark mentioned earlier, if we did see anything that would be minimal and would happen, you know, we have seven years to recover those costs. But the vast majority, I would say, 99% of our suppliers have not requested any surcharge, and like I said, less than one handful of suppliers has. So, it's a very small factor, and those that have been requested have been minimal.

The comment I made was that the cost, the fleet that we received in Q1 was in line with the pricing, the inflation was in line with what we expected. We do expect cost inflation going forward. So, there will be additional cost inflation on that fleet going into '23 over what we've been paying in the first quarter of '22.

Okay, that's helpful. And then, just you mentioned the ability to catch up on pricing through fuel costs in Q2, actually I think March step up, is that going to end up just being sort of a dollar for dollar going forward, where you are less than dollar for dollar offset in, say, February and March, or can you actually get that pricing ahead of what the fuel cost increases, and sort of generate a margin on that?

So, we don't charge or we don't on charge -- the customers are unusual about fuel burn, if you like, so that's recovered in the fuel charge, with the marginal comeback in Q2. So, the surcharge went in after the cost increase really late in the quarter, and we will get the benefit from that going into Q2, which will impact our flow through, but no, we don't really -- we don't get a dollar for dollar of every unit of fuel that we burn in terms of charge base.

Thank you very much.

Thank you.

And ladies and gentlemen, at this time we have reached the end of today's question-and-answer session. I would like to turn the conference call back over to Elizabeth Higashi for any closing remarks.

Thank you, Jamie, and thank you everyone for joining us on the call today. As always, if you have any further questions please don't hesitate to give me a call. And we look forward to seeing you all soon. Thank you.

Ladies and gentlemen, with that, we will conclude today's conference call. We do thank you for joining us this morning. You may now disconnect your lines.