HRI - NYSE

Ladies and gentlemen, good morning. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the Herc Holdings, Inc. First Quarter 2023 Earnings Conference Call. Today’s conference is being recorded. [Operator Instructions] Thank you. And I will now turn the conference over to Leslie Hunziker, Senior Vice President of Investor Relations. You may begin.

Thank you, operator and good morning everyone. Welcome to Herc Rentals’ first quarter 2023 earnings conference call and webcast. Earlier today, our press release, presentation slides and 10-Q were filed with the SEC and all are posted to the Events page of our IR website at ir.hercrentals.com. This morning, I am joined by Larry Silber, President and Chief Executive Officer; Aaron Birnbaum, Senior Vice President and Chief Operating Officer; and Mark Humphrey, Senior Vice President and Chief Financial Officer. Today, we are reviewing our first quarter 2023 results 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. Now, let’s move on to our Safe Harbor and GAAP reconciliation on Slide 3. 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 in our annual report on Form 10-K for the year ended December 31, 2022 and our quarterly report on Form 10-Q for the period end March 31, 2023. 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. A replay of this call can be accessed via dial-in and through the 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. Finally, please mark your calendars to join our meetings and presentations at three conferences this quarter: the Goldman Sachs Industrial Conference in New York City on May 9, KeyBank’s Industrial Conference on June 1 in Boston, and Wells Fargo’s Industrial Conference in Chicago on June 14. I will now turn the call over to Larry Silber.

Thank you, Leslie and good morning everyone. Before I begin, I want to take a moment to introduce Mark Humphrey. Mark was promoted to Chief Financial Officer in late March with the departure of Mark Irion, who, as you may know, left to take the CEO role of privately held TNT Crane & Rigging. Mark Humphrey has been a member of our executive team since joining Herc nearly 7 years ago and we are excited to have him lead this role and drive our long-term financial strategy. He is a highly knowledgeable, proven financial leader who has already demonstrated his capabilities as our Chief Accounting Officer. Additionally, Mark brings 30 years of financial experience, including having previously served as CFO for Alico, Inc., a NASDAQ traded company. I look forward to all of you getting to know him. Now, let’s get started on Slide #4. We are off to a solid start in 2023. Revenue and adjusted EBITDA were at all-time first quarter record highs, driven by continued double-digit volume growth and 7% higher rental rate growth year-over-year. Our flexible business model, diverse customer base and broad equipment portfolio allowed us to capture top line growth in Q1 across both core and specialty categories and our capital allocation strategy focused on profitable growth investments hitting the mark, as evidenced by our record first quarter return on invested capital of 10.6%, an 80 basis point increase over last year. On Slide #5, you can clearly see that we are significantly outperforming the equipment rental industry. ARA estimates that the industry grew 6% in the first quarter compared with our rental revenue growth of 24%. Revenue from national and mega projects as well as local infrastructure work remains robust. The largest rental companies with fleet capacity and the strongest branch networks are winning an outsized portion of the construction starts. In addition to record rental revenue, we more than doubled fleet sales on an OEC basis in the first quarter versus prior year, generating 52% proceeds as a percent of OEC compared with 45% last year. The increase was due to our favorable sales channel mix shift as well as the ongoing strength of the used equipment market. We are in a great position for continued growth through the balance of the year. Team Herc has been advancing the key initiatives of our strategic plan, while at the same time continuing to execute well, remaining flexible to react to seasonal market conditions and be able to pivot quickly to capitalize on areas of growth. If you turn to Slide 6, in addition to leveraging our scale as a market leader, the successful execution of our growth strategies also contributed to our outsized performance relative to the overall industry. We increased revenue in our core categories through fleet investments as well as acquisitions and new Greenfield facilities that support branch network optimization. Revenue from our high-margin ProSolutions specialty business grew double-digit in the first quarter, incrementally benefiting from new products, new locations and cross-selling synergies. And our innovative customer-facing digital capability called ProControl Next Gen continues as a catalyst to new project wins, especially at the national account level. At the same time, we are committed to responsible ESG operating practices built on a strong cultural foundation, a safety-first protocol and a pledge to continue to work hard to do more for our employees, customers and suppliers. In the first quarter, we were recognized among Great Places to Work in Canada. Finally, between fleet investments strategic M&A, dividend growth and opportunistic share repurchases, I am confident that Herc is allocating capital in the right areas and at the right time. With that, I will turn it over to Aaron to take you through the high level operational drivers in the first quarter and then Mark is going to walk you through the first quarter financial metrics. Aaron?

Thanks, Larry and good morning, everyone. The excellent performance of our operations and field support teams, combined with tight supply and equipment and steady demand, have created a favorable environment for us. Our record first quarter results for revenue and profitability served as a continuation of last year as we outperformed the market due to geographic expansion, new account wins and fleet investments. Turning to Slide 8, our day starts with safety, which is at the core of everything we do. As you know, our major internal safety program focuses on perfect days, that is days with no OSHA reportable incidents, no at-fault motor vehicle accidents and no DOT violations and we strive for 100% perfect days throughout the organization. In the first quarter, on a branch-by-branch measurement, all of our branch operations achieved at least 97% of days as perfect. Equally notable, our TRIR improved to 0.45, our best first quarter performance ever. On Slide 9, let me shift to a progress update on our growth strategies. One of the key initiatives of our urban market growth strategy is expansion through greenfield locations and acquisitions. In the first quarter, we added 9 locations to our network, 3 greenfield locations and 6 locations from three new acquisitions. As you know, we focus on acquisition opportunities in high-growth markets that complement our current branch network and fit our strategic, financial and cultural filters. Moreover, many of the mega projects being announced are in the geographies, where we have focused our acquisitions in greenfield additions, such as Phoenix, Houston and Austin, Texas and Detroit. We spent $138 million in net cash in the quarter on acquisitions. Multiples remained steady as we pay a little less for general rental companies and a little more for specialty rental companies. One of our acquisitions in the quarter was a trench business in Texas. This was our fourth trench acquisition since 2021. Trench sowing is a growing category for us that is synergistic with our other products like earthmoving equipment and pump solutions. Of the other acquisitions, one was in Miami, a top 10 market and one was in St. Louis, a top 35 market. These acquisitions support our strategic goal of increased density in urban markets. Our acquisition process is now a core competency for us. We are quickly integrating these new bolt-on businesses and are excited to welcome their teams to Herc are creating value for our people and our customers. We have budgeted $500 million of acquisitions again this year. And with the strong pipeline we are seeing, we are confident we can get it done. In addition to acquisitions, as Larry said, growing our core and specialty fleet through new equipment investments is a key strategy. On Slide 10, our first quarter results reflect an increase in average OEC fleet of 29% over last year’s comparable period. Equipment rental revenue increased 24% compared with the prior year first quarter. As we mentioned on the last call, we expected seasonality to return in Q1, which is typically the lowest demand quarter of the year. In the prior 2 years, there was no significant seasonality due to the pent-up demand coming out of the COVID period. With supply constraints still very much real for fleets, we brought in equipment during the first quarter that was delayed from 2022 to repair for the customer requests we are getting for midyear 2023. April to date, we are beginning to see improvement in -seasonal demand, as you would expect. On Slide 11, you can see our fleet composition at OEC on the left side of the page. Total fleet is now $5.9 billion as of March 31, 2023. We have maintained higher margin specialty fleet at about 24% of the total. Of course, there is room to grow there, but we are also growing the core fleet as mega projects, infrastructure and manufacturing projects are heavily weighted toward classic equipment. Our fleet expenditures at OEC totaled $348 million in the first quarter. As I have just mentioned, we continue to accept new fleet deliveries as we prepare for incremental growth in 2023. We disposed of $144 million of fleet at OEC in the recent quarter, $80 million more than last year’s similar period. In the first quarter, we capitalized on the strong used equipment market while shifting disposals to higher return wholesale and retail channels, which is a new focused disposition strategy for us. Our sales teams are now digitally equipped with comprehensive information on our used fleet inventory and are incentivized to focus on the higher return sales channels. This paid off in the first quarter as proceeds from disposals were 52% of OEC compared with 45% last year and selling margin improved by 300 basis points in the latest quarter. The average age of our disposals was 90 months in the first quarter, with an average fleet age at about 47 months. After 2 years of reducing fleet sales to compensate for supply chain deficiencies, we are working to get back to a more normal sales cadence this year. We are planning for a roughly similar level of sales as the first quarter in the each of the remaining quarters. In addition to a best-in-class fleet you can see on Slide 12 that we have a diverse well-balanced customer mix made up of large national accounts and local contractors operating in North America with a wide range of equipment needs across a variety of end markets. Our national account business is benefiting from tailwinds from federal and privately funded mega projects, large infrastructure jobs and manufacturing of EV, semiconductor, petrochem and LNG facilities, to name a few. In addition, there is continued maintenance work in every market in North America, especially when it comes to repairing and upgrading roads, water and sewer systems as well as transportation-related facilities. Furthermore, general facility and warehouse maintenance occurs year round in any economic environment. Local accounts, which represent 55% of rental revenue in the first quarter, are growing due to Herc’s penetration through our acquisition and greenfield strategy as well as regional growth in infrastructure, education, data centers and local utilities. Additionally, we have a robust sales program in place to acquire new local accounts. I recently had a channel check with our regional vice presidents. And based on reservations and indications from our sales teams, demand is building at a strong pace consistent with seasonal expectations. We aren’t seeing any cancellations, postponements or delays out of the ordinary. Onshoring and fiscal stimulus trends have accelerated and these mega projects represent the beginning of a multiyear flow of dollars into the industrial space. Based on everything we are hearing, I’d say we are very optimistic about the upcoming construction season. As one of the largest players in the rental industry, our fleet capacity, digital capabilities, onsite management expertise and broad location network sets us up to win substantially more than our fair share of the market’s growth. I want to thank Team Herc for their commitment to operational excellence and safety. Their professionalism shows up in the execution of our services to our customers every single day. It’s a valuable differentiator for Herc. Now, I will pass the call on to Mark.

Thanks, Aaron and good morning everyone. I am happy to be here today and pleased to be in a position to lead the company’s financial strategy as its CFO. As Larry mentioned earlier, I’ve been supporting Herc for almost 7 years, since just after the spin and I believe the company has never been better positioned to capitalize on the market opportunities before us. We have invested in a best-in-class fleet, we are growing our national footprint, we are developing leading-edge, customer-facing technologies and we have a strong balance sheet that offers plenty of flexibility. I am excited to take on this new role and look forward to meeting all of you. With that, let’s get into the first quarter financial results. Slide 14 summarizes our key metrics for the first quarter. You can see the record rental revenues that reflect continued market share growth. Strong pricing and volume on rent fueled the 24% rental revenue growth for the first quarter. About 75% of the growth was organic in the quarter came from acquisitions. We continue to grow our established core business organically and our organic growth was almost 3x that of the rental market in the quarter. While both core and specialty rental revenue were up double-digit in the period, our studio entertainment business was under pressure from production slowdowns coming out of the post-COVID period of overproduction and now the potential rider strike. Excluding the impact of the studio entertainment business, equipment rental revenue growth would have been several hundred basis points stronger. For total revenues, the benefits of the still strong used equipment market and our sales channel shift to wholesale and retail delivered incremental growth. Adjusted net income in the first quarter of 2023 increased 17%. Adjusted EBITDA increased 30% over the prior year to a record first quarter of $308 million. And our adjusted EBITDA margin remained flat at 41.6% in Q1 2023. The used equipment sales activity had some impact on adjusted EBITDA margin growth year-over-year as we more than doubled dispositions at OEC compared with first quarter 2022. Used equipment sales margin however increased 300 basis points year-over-year to approximately 35% on higher proceeds. REBITDA margin for the quarter was up 10 basis points to 42.4%. Excluding the impact of the studio entertainment business, REBITDA margin would have been 43.3% in the quarter, a 50 basis point improvement year-over-year. REBITDA flow-through in the first quarter also was impacted by the slowdown in the studio entertainment business. If we exclude that business from the calculation in both years, REBITDA flow-through would have been 45.4%, a 530 basis point improvement compared with last year’s first quarter. We are off to a great start with margin improvement and flow-through expansion in our base businesses. As a reminder, Q1 is the seasonally weakest quarter and therefore we expect this to be the low watermark for the year with REBITDA flow-through moving back to the mid-50s for the full year 2023. Additionally, we believe the strong demand we are experiencing across the manufacturing, industrial and infrastructure markets will make up for the impact of any shortfall of studio entertainment on our original EBITDA guidance. Finally, our effective business model allows us to continue to invest in our equipment, locations and our people in addition to creating value for our shareholders. ROIC was our first quarter record, increasing 80 basis points to 10.6%. On Slide 15, the graph on the upper left illustrates our success in consistently driving rate growth. This is always an important metric to manage, especially when faced with cost pressures due to inflation. In the first quarter, rate was up 7% year-over-year continuing the quarterly momentum of the last several years. We are still targeting mid single-digit rate growth for 2023, utilizing our proven and effective pricing tools, the discipline and professionalism of our sales team and the rollover benefits from the contract rate increases we began securing last year. In the first quarter, we saw stable low double-digit rate increases in the spot market, while contracts continued to be favorably renegotiated. This year’s plan for a mid single-digit rate increase is expected to be more front half loaded as the spot market will encounter a significantly tougher comp in the back half of the year. As mentioned, our average fleet on rent at OEC in the first quarter was lower than our average fleet growth of 29%. In a normal supply environment, we place orders in Q4 and schedule deliveries for the spring in time for the construction season. But in the current environment, we are placing orders almost a year out and taking receipt as soon as our vendors can deliver the equipment. As we cautioned in the fourth quarter, this impacted time utilization in the seasonal first quarter of 2023, but taking the new fleet now ensures we will be able to respond to our customers’ increasing equipment needs this summer. This impact, combined with the decline in studio entertainment revenue, also impacted dollar utilization in the first quarter. For 2023, we’re continuing to target incremental improvement in annual dollar utilization on our base business, excluding Studio Entertainment, as we move into stronger seasonal periods and continuing to capture rate. On Slide 16, you can see we have no near-term maturities and ample liquidity to fund our growth goals for 2023 and into the future as we allocate capital to invest in our business and drive fleet growth into this cycle. We remain confident in our business model and are committed to increasing shareholder value. In the first quarter, we announced a 10% increase in our quarterly dividend for 2023 to $0.6325 or $2.53 per share for the year and we repurchased nearly 0.5 million shares of our common stock at an average price of $111 per share. Net capital expenditures exceeded cash flow from operations in the first quarter, with cash outflows of $78 million before acquisitions. We took a lot more fleet in the fourth quarter of 2022 and in the first quarter of 2023 than we typically would in the winter months, which is a primary driver of our 29% fleet growth year-over-year. Our current leverage ratio of 2.5x is well within our 2x to 3x target range and in line with our expectations as we invest in growth. We typically move to the lower end of the range in weaker economic environments, where we would adjust new fleet purchase orders and ramp up sales of older equipment to align supply and demand and protect cash. This is a playbook we’ve executed on before. Our flexibility with suppliers, the resilience of used equipment buyers in the fungibility of our fleet gives us the levers we need to adjust to any market moves. However, as Aaron mentioned, there is no indication of a slowdown in any of our key growth areas today. Moving on to Slide 17. In the upper left, you can see the continued strength in our primary end markets. The ARA estimate for 2023 North American rental industry revenue was $63 billion. That’s approximately 4% growth over 2022. As we’ve discussed, our rental revenue growth is substantially eclipsing the broader industry growth rate. We expect this outperformance to continue. In this environment, the advantages of scale are magnified in the big rental companies that are focused on diversified end markets and have the ability to surface through the strength in mega projects, will continue to get bigger faster. Two of our end markets are industrial and nonresidential construction. Both have solid outlooks projected for 2023. Combined, these end markets reflect about two-thirds of our customer base, and both are likely to outperform other consumer-driven markets this year. Taking a look at the industrial spending forecast in the top right chart. Industrial Info Resources is projecting $397 billion of incremental spending in 2023, the highest level on record. Dodge’s forecast for nonresidential construction starts is being driven by an unprecedented amount of new mega project construction in chip, EV, battery and LNG plants as the onshoring of U.S. manufacturing capacity continues to gather steam. Starts in 2023 are estimated to be $412 billion on top of last year’s record $427 billion. We should emphasize that these are just starts of new projects and are being driven by multiyear construction builds that will continue into ‘24 and ‘25. The dotted line on both of these charts reflect growth over the pre-pandemic levels. You can see that last year and the next 4 years are projected to be the strongest periods of activity that this industry has ever seen. Additionally, there is another $293 billion in non-residential non-building or infrastructure projects slated for 2023. That’s a 17% increase over 2022. These projects are supported by federal funds approved in the infrastructure package, the Chips and Sciences Act and the Inflation Reduction Act. The current strength in mega projects and infrastructure activity is not particularly sensitive to short-term interest rates and clearly has a structural tailwind. These large projects benefit bigger rental companies of scale with more larger, more diverse rental fleets. And as one of the leading North American rental company, Herc stands to benefit more favorably from this trend. Therefore, along with another year of pricing power, we are reiterating our plan for outsized growth again in 2023. This is on Slide 18. With expectations for stronger operating leverage as we roll over some of the 2022 inflationary challenges, we continue to forecast adjusted EBITDA will be in the range of $1.45 billion to $1.55 billion, which represents growth of 18% to 26%. Our plan for net fleet CapEx of $1 billion to $1.2 billion allows us to maintain double-digit growth in fleet on rent. We should also see an increase in our used equipment sales in 2023 as we return to a more normal level of fleet replacement, as Aaron previously mentioned. Interest expense, which was up roughly 109% in the first quarter year-over-year, will continue to increase in 2023, reflecting the accumulation of Fed rate increases and our continued M&A funding. Of course, we expect our leverage ratio to remain in our 2 to 3x target range. We are experiencing all the trends consistent with an industry in an up cycle and intend to continue to address the needs of our customers as we execute on our growth strategy. With that, I’ll turn the call back to Larry.

Thanks Mark. And now please turn to Slide 19. Everything we do starts with our vision, mission and values and a purpose statement that focuses on equipping our customers and communities to build a brighter future. We do what’s right. We’re in this together. We take responsibility. We achieve results. And we prove ourselves every day. And now operator, please open the lines for questions.

Thank you. [Operator Instructions] We will take our first question from Jerry Revich with Goldman Sachs. Your line is open.

Good morning, Jerry.

Yes. Hi. Good morning, everyone and Mark, congratulations again.

Thank you.

I’m wondering if we – I am wondering if we could just talk about the cadence dollar utilization so the entertainment business has been rolling off for four quarters now. And so now that it’s stabilizing, I’m wondering if you’re thinking about dollar utilization as back to flat to up year-over-year potentially heading into the second quarter since the entertainment comps get a lot easier. Can you just talk about how you anticipate the cadence?

Yes. I mean I think when you think about dollar utilization, we will see it growing throughout Q2 as we roll into the seasonal – roll out of the seasonal adjusted first quarter into second quarter. And then I think you will see it stabilize or maybe even outpace 2022s-dollar utilization as we roll into Q3.

Super. And then can we just talk about fleet growth specifically? So obviously, you get stronger deliveries than you normally would in the winter of year for the past few quarters. Now that we’ve entered the construction season, can you talk about whether fleet on rent growth has caught up with overall fleet size growth in April based on what you’re seeing so far?

Yes. We’re beginning to – Jerry, this is Larry. We’re beginning to see our normally adjusted revenue growth and fleet growth coming out of the seasonal first quarter into Q2. We will continue to take fleet. We took, as you mentioned, we took an outsized portion of our fleet in Q1 as well as in Q4. And we will continue to take fleet. I think we took about 25% of our ordered fleet in Q1. We expect to continue to take that fleet throughout the year, and we will adjust if need be. But we’re seeing fleet sort of equalizing with our utilization as we go into the height of the construction season.

Thanks, Larry. And Aaron, can I ask you just one more to expand on your M&A comments. So you mentioned valuations are becoming more attractive in general rental. I’m wondering if you could just talk about how the pipeline looks and the magnitude of the valuation improvement that you are seeing. Is that a function of companies maybe having issues refinancing or refinancing at higher rates given the rate move for the smaller companies?

Sure, Jerry. Our pipeline is good. So there is a full pipeline. We think we can fulfill our goals for the year. But the valuations are really stable versus where they been over the lat year. What I was trying to allude in my comments was that you pay a little bit more on a multiple for a specialty business versus a general rental business. They are very stable from where they were over the prior 2 years with all the other transactions we’ve done.

Okay, got it. Thank you.

Thank you.

And we will take our next question from Rob Wertheimer with Melius Research. Your line is open.

Hi, thanks. Just looking for a little bit more deeper on the end market. You mentioned RFPs are solid. I wonder if you could talk to us about – I don’t know whether an RFP is typically done for a $20 million building or a $100 million building or what. And then how those RFPs compare with prior years?

Sure. This is – on the RFP front, we did comment that it’s stable. So there is still a strong activity of a request for proposals coming into us for work. Typically, those are for industrial plants that either we currently do work with or new opportunities. You use a number of about $20 million. Typically, you don’t see RFPs for those sized jobs. But the larger jobs, say, $300 million and up, or a mega project, you definitely would see an RFP come in for that.

Perfect. Okay. And so this would be a relatively – I mean maybe last year was strong, the megaprojects has already kicked off? Or maybe just contextualize how RFPs are today versus last year and the last several years.

Yes, they are stable. Activity is strong and/or increasing. We’re actually seeing probably RFPs from end markets and customers that we wouldn’t have seen the prior year. I think that’s indicative of the health of the demand for rental fleet.

And I think Jerry, maybe just one other. I think the reason we may be seeing more of them as well is the recognition that we are one of the top rental companies with a broader reach in terms of geographic reach and a broader fleet and more fleet to be able to support that. So we’re receiving that recognition and receiving a larger number of those inquiries than we have in the past.

Okay. I will stop there. Thank you.

Thank you.

We will take our next question from Sherif El-Sabbahy with Bank of America. Your line is open.

Hi, good morning.

Good morning, Sherif.

One question I had is just that given that you’re still placing orders well in advance and given the runway you see on projects and the pickup in CapEx this year, how are you thinking about those orders as you’re placing them?

Yes. No, great questions, Sherif. We’ve placed about 85% of our CapEx plan in hard orders with our vendors, and we have slots available to us in the rest if we need them and we’re monitoring and measuring that. I would tell you that, in the core fleet lead times are still extended in that 12 to 18-month period, but we are seeing some improvement and we are getting greater visibility as to when that fleet is available so that we can properly place it in the markets that have that demand. So we have a lot of flexibility in our procurement still, and we’re really prudently managing how we execute the deliveries of that fleet.

Thank you. And then just on rate, it’s continued to accelerate sequentially. You’ve continued to guide to sort of a mid-single-digit range. And how should we think about that throughout the year, the cadence of it?

Yes. I mean I think – Sherif, this is Mark. When you think about it, right, so we kind of built a 7 number in Q1. And as you roll that forward into Q2, sequentially throughout the months, right, probably a slight increase as we tipped into March and into April. And so I think that 7-ish range in the first half of the year is doable. I think where you run into the challenge is on the back half of the year where the comps on the non-contract or the spot rate becomes a really big hurdle. And so that’s the reason we continue to sort of guide into this mid-single-digit range. We will see how the back half of the year behaves, but right now, the only thing we know is there are tough comps sitting there in the back half of the year.

Understood. Thank you.

We will take our next question from Neil Tyler with Redburn. Your line is open.

Good morning. Thank you. A couple, please. Guys, you called out the RMO market as being particularly resilient. Can you remind me pretty much please pretty much how much that represents of your end markets of your business as best you can define it? And then second one, on the channel check, Aaron, that you referred to, can you just perhaps expand a little bit on the questions that are being asked and really what you’re asking those regional managers to look for? And then a question on the broader market data, on the American Rental Association data, obviously, the rental market is growing at a significantly lower pace than would be normally assumed given the rate of non-resi put in place activity is – and particularly, if you back the current sort of rate cadence out of that. Is that equipment constraint that’s limiting the broader market growth or is there something else at play there that you can help us understand? Thank you.

I’ll take the first one. The MRO mark is really activity on the roof. So there is a lot of different end markets that have maintenance operations. Could be airports, it could be hangars in airports, it could be warehouses, all of those type of different end markets that you get your industrial petrochem environment, support for the industrial petrochem markets where they are manufacturing parts and shipping goods, those all have continued maintenance from electrical, mechanical contractors on a regular basis. So we don’t really measure the size of that, we just know it’s a big market that a lot of our diverse customer mix plays in. The other comp question you had was about our channel check. So what we tend to find in our discussions with our regional vice presidents, and this is also a lot of time in the field. We, myself and others, we’re visiting branches, we’re visiting with customers. The general tools that we use to measure that is how do our reservations look? What’s the expected reservation cadence for our OEC growth? And what markets are showing the most promise? And then secondly, on the mega project side, there is a lot of data we’re tracking on the mega projects as they come out of the ground. These RFPs come to us as they start breaking dirt out there. On the EV car manufacturing and battery front, right, some of these buildings are already built up and they are ordering fleet for the transformation that they are doing on the electrical front. So these are all different data points that we’re looking at to see if all the positive numbers we’re seeing on the graphs is translating into actually equipment being reserved and going out on rent and Q2 is really what we’re focused on right now.

Thank you.

And then you had one more question about the size of the rental market.

The rate it’s growing at, yes.

Yes, Neil, this is Mark. I think it’s a really good question. And I think from my perspective, right, we had sort of a 12% to 13% growth rate in 2022 in the ARA. And right now, we are kind of staring at this 4% to 4.5%, yet all of the other data would indicate that it’s probably something bigger than that. The only thing I can tell you is that there could be revisions to that data, might be revisions to that data up. But at this point, who knows.

Yes. Okay. I guess the sort of the perspective I was hoping you might share is to what extent you are still over-indexing in terms of fleet delivery relative to the broader market? Can – how far down the list you have to go before you reach the point where the supply constraints are limiting the ability to take delivery of fleet at the moment?

I am not seeing that. I mean I think in the prepared remarks, right, we are sort of if the numbers 4, 4.5, I mean we are outpacing that organically at 3x right now. And the fleet that we have sort of allows us to hit the demand that we have projected throughout the construction year of 2023.

Okay. Thanks very much. That’s helpful.

And we will take our next question from Seth Weber with Wells Fargo. Your line is open.

Hi guys. Good morning. This is Larry Stavitski on for Seth this morning.

Hi Larry.

Hi. I just had a question on – if you have a view on the percentage of your projects that are financed locally versus big money center banks and what you are hearing from customers in terms of that, in terms of the banking situation and lending?

No real color on that. So, I will tell you that the big projects, as we do our channel checks, there was no postponements or delays due to financing.

Okay. Got it. And then just switching gears, your free cash flow, are you still expecting that neutral for the year, or how should we think about that going for ‘23?

Hey Larry. Yes. This is Mark. I think yes, that’s a reasonable expectation, free cash flow neutral for 2023.

Yes. Okay. Alright. That’s all I have. Thanks guys.

Thank you.

We will take our next question from Ken Newman with KeyBanc. Your line is open.

Hey, good morning guys. Mark, congrats on the new position.

Good morning.

Thank you.

First question for me, I just wanted to clarify on the acquisitions you made in the quarter. I think at 5.5x, if my math is right, it implies around $25 million of EBITDA before synergies. I am curious is, one, is that in the right ballpark? And is that contemplated in the maintained guide, or how do we think about the timing of the contribution from those acquisitions through the year?

Yes. Ken, again, this is Mark. Yes, your numbers are pretty close to right in terms of the overall impact of the acquisitions at 5.5x. The largest of those three acquisitions was literally done on the second day prior to the quarter end, and so that impact really was negligible to us in Q1. And so all of that would be baked in as we roll forward into the remainder of the year.

Okay. And when I think about that in the context of the maintained guide, is that just modestly offset by some of the moving pieces in entertainment or mix, or just any color there.

Yes. I mean I think, right, so if you have, what, $20-plus million of acquired EBITDA, right, you have three quarters of that, that would potentially impact the year. And yes, I mean I think when we think about sort of the combination of the acquisitions that are in the door, plus all of the other opportunities that Aaron has spoke about, we believe that, that should more than offset any of the softness that we potentially will experience here in Q2 around this rider strike.

Got it. And then for my follow-up here, I just wanted to switch over to SG&A margin. This is one of the higher quarters for SG&A margins you have had in a while. And I understand there is again the moving pieces on the fleet and entertainment mix. But any help you can kind of help us think about the cadence of SG&A margin as we progress through the year? And how do you think about that relative to 2022?

Yes. No, good question. Actually, I mean my math has about 70 basis point improvement Q1 2023 SG&A margin over 2022. And I think we are still projecting, if you think about this from a REBITDA margin perspective, we are still shooting for that 100 basis points to 200 basis point REBITDA margin expansion year-over-year as we publicly stated. And so you will continue to gain leverage in that line and the DOE line as we walk through 2023.

That’s helpful. Thanks.

Absolutely.

And we will take our next question from Mig Dobre with Baird. Your line is open.

Thank you and good morning everyone. Just a clarification for me if I may on the CapEx commentary. So, the way I have heard it is that you are expecting similar disposals as you had in Q1 for the rest of the year. And I think Larry mentioned that in Q1 you received about a quarter of the fleet that you are sort of planning on for the year. So, if I sort of look at, and I kind of put those two together, it would imply to me that net CapEx is coming in somewhere around $800 million as opposed to the $1 billion to $1.2 billion that you have guided. So, can you talk a little bit to that, I mean am I missing something here?

Yes. I am not – it was 25% of the net CapEx is what we received in the first quarter. So, if I misled you, I apologize. But 25% of the net CapEx that we expected, we received. And as Aaron said, yes, our disposals will be similar. Obviously, minor movements quarter-to-quarter, but similar to what we experienced in the first quarter throughout the remaining three quarters.

Yes. I am sorry to press you on this because that still puts us at $800 million and...

No, our guidance is still in that $1 million to $1.1 million range of net CapEx for the year.

Yes. I guess maybe what I am really trying to get at here is, have you changed your gross CapEx expectations for the year at all relative to the prior commentary you provided last year?

No. I mean, Mig, this is Mark. I mean we are still staring squarely at that $1 billion to $1.2 billion range for net fleet CapEx spend in 2023.

Okay. As you think about the rest of the year, considering the fact that you are obviously going to have more fleet coming in, how comfortable are you with the ability to ramp up utilization? And I obviously do understand that there is some seasonality in the business, but you are also going to have, frankly, more fleet, and we have seen some softness in Q1. So, how do you think about that?

Yes. Mig, so last year, we feel good about the fleet that’s coming in and our ability to get the time used we need and get the growth we need and take care of our customers in ‘23. Some of the core categories of fleet like reach forklifts, aerial were very, very hot last year to the point where we were actually losing opportunities with customers because we couldn’t provide the fleet. So, strategically we have been focused on investing in our core fleet. So, some of those categories ran really unreasonably hot last year on time utilization. We don’t expect to get some of those back to that same level in ‘23. We really don’t want to, because we want to capture more customer opportunity, which in essence will drive more revenue and have less sold-out situations. But we feel confident about where we are sitting right now and as our volume we see in April building our utilizations following.

Maybe my final question here and I guess the thing that I am struggling with a little bit is your flow-through margin guidance, which obviously implies a pretty significant acceleration, but at the same time, we are looking at maybe more modest pricing gains in the back half than what we have currently seen. And then to your point, the year-over-year comparison in terms of utilization is very difficult in certain categories. So, at least in my thinking, that should pressure flow-through on our EBITDA. So, again, as you think about this acceleration in incremental margins, how do we get there from where we currently are? Thank you.

Yes. I mean Mig, this is Mark. I mean I think there is really – there is two areas, right. We will have – should expect to have margin expansion in 2023. And then I think the piece of it that you didn’t mention there is really as we continue to cross over the inflationary pressures of 2022 into 2023, certainly allows for additional flow-through opportunity, and that’s where that guide to the mid-50s is coming from.

Understood. Thank you.

Absolutely.

And we will take our next question from Steven Fisher with UBS. Your line is open.

Thanks. Good morning. I wanted to just follow-up on the impact of the bank failures and situation. I think you said is that we are seeing that there is no impact expected on larger projects. But what do you think the broader impact of credit tightening will be on your markets? And I guess to just establish a baseline, what are you seeing in the residential and commercial construction twice of your business? What’s that running year-over-year in Q1 and kind of what are you planning for in terms of magnitude of changes for the rest of the year? Thank you.

Yes. So Steve, this is Larry. As we have said in the past, the residential market really isn’t a slice of our business. We don’t participate in it. If we do any business, it’s by accident and not by intent. And as far as the – what I would call the low end or light commercial, I have sort of went away with COVID and really hasn’t returned. So, it really will have no impact, whether that’s impacted by the local banking issues or not. I don’t feel that local banking is going to have, at least at this point, any impact on us because most of our work locally is around infrastructure state and local government type of activity which is funded through tax rolls and tax dollars, not necessarily through banking. Also, we are a believer that the local markets can have an awful lot of resiliency to support some of these mega projects and larger projects. As the spillover as there is a lot of fleet going to the larger mega projects, there will be a fair amount of work and fleet available to the local activity and those local contractors will be picking up that local activity. So, we are not expecting to see any of it. It might have an impact, quite frankly, on the smaller wrinkle companies, the mom-and-pop rental companies. They will either can’t get that credit to fund new fleet acquisitions or maybe resistant or fearful that they don’t want to sort of extend themselves and take on that extra debt to build their fleet. So, for the moment, we don’t feel it, we don’t see it, and we don’t think it will have an impact to us.

Thank you.

We will take our next question from Brian Sponheimer with Gabelli Funds. Your line is open.

Good morning everyone.

Good morning Brian.

Hey Brian.

I am just curious about capital allocation and how you weigh growing the business through M&A. You mentioned 5.5x EBITDA versus, obviously, you did some repo in the quarter, buying your own stock at four and change for basically an acquisition of yourself, so just curious as to the thought process there.

Yes. Look, I think both are opportunistic, Brian. M&A is opportunistic as well as we have taken on a share repurchase on an opportunistic basis. And we will continue to look at both of those opportunistically on a go forward. And of course, when we meet with our Board, we will talk about our capital allocation strategy going forward. As you know, we still have $200-plus million that we can do on share repurchase. And we said we are still going to target that $500 million worth of spend on acquisitions. But again, they are both opportunistic from our standpoint.

Alright. Terrific. And Mark, congratulations again and before talking…

Thanks Brian.

We will take our next question from David Raso with Evercore ISI. Your line is open.

Hi. Thank you. I think as people think about rates beyond ‘23, contract pricing versus spot, I mean the generalization is going to be that mega projects are going to drive the business, right, contract will probably drive the pricing. Can you give us a little sense right now to the mix of your business that is contract pricing versus spot? And maybe a little more color. I think you gave a little kind of qualitative color, but a better sense of the contract pricing that you are looking at when you discuss these multiyear projects.

Yes. Hey David, this is Mark. I mean I think when we think about it, it’s probably 60-40, 65-35 split. And then I think when you look forward into 2024, right, the flywheel effect of the contracts continue to rain down on us. And so that’s the piece of this flywheel that we have been building from the back half of 2022 into 2023 and will continue to benefit us into 2024.

And again, can you clarify which is 65 and which is 35, just so we get that straight, the split?

65 contract, 35.

Okay. And when it comes to the – again, I know you don’t want to quantify on the call exactly what you are getting from contractors, but the trend for, let’s say, the second half of the year, it sounds like the total company rental rate, you are guiding sort of 2% to 3% to get the average back down to mid-single for the year. Is contract pricing higher than spot pricing towards the end of the year? I am just trying to get a sense of that great momentum into ‘24. Is contract pricing expected to be higher than spot pricing as we exit ‘23?

I would say, as you exit, it’s probably more at the level of even exiting 2023 into 2024.

Prefect. Okay. I appreciate it. Thank you.

Absolutely.

And we will take our final question from Steven Ramsey with Thompson Research Group. Your line is open.

Hi. Good morning. On national accounts growth, can you maybe parse out to some degree the strength there? It’s doing better than local, how much of that is mega projects? And how much of national account growth is not mega projects?

Yes. Our national account growth, which is a basket of identified accounts that we call national accounts, that’s growing faster than the core business. And those type of customers are going to get an outsized piece of the mega project work. So, our portfolio of national accounts is expanding with our strategic in market vision and the way we kind of vertically run our sales organization. So, we are in a really good spot to capture opportunities in the mega project world.

Okay. Helpful. And then maybe can you talk to national accounts making up a greater percentage of revenue in the first quarter than what you ran at last year? Do you expect, as you get more into mega projects ramping up, that national accounts and local accounts will be split fairly evenly in – by the end of this year or early next year?

In the different quarters of the year, you have different penetration of where the revenue is coming from, local or national account. In the winter, typically the local business kind of is a little bit lower than the national business. But then the local business kind of ramps up through the peak season Q2, Q3 first part of Q4. Now, with the amount of work that is planned and discussed in this mega environment, we can see that shifts kind of going heavier towards the national side. So, it might look more like it did in the first quarter through other parts of this year.

Okay. That does it for me. Thank you.

Thanks.

And I will now turn the call back to Leslie Hunziker for any closing remarks.

Great. Thank you for joining us on the call today. We look forward to updating you on our progress in the quarters to come. Of course, if you have any further questions, please don’t hesitate to reach out to us. Have a great day everyone.