Title

Presentation

Operator: Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Herc Holdings’ Fourth Quarter and Full Year 2022 Earnings Conference. All lines have been placed on mute to prevent any background noise. After today’s speakers’ remarks, there will be a question-and-answer session. Thank you. Leslie Hunziker, Senior Vice President of IR Communications, you may begin your conference

Leslie Hunziker: Thank you, operator, and good morning everyone. Welcome to Herc Rentals’ fourth quarter 2022 earnings conference call and webcast. Earlier today, our press release, presentation slides, and 10-K were filed with the SEC and are all posted to the Events page of our IR website at ir.hercrentals.com. Today we’re reviewing our fourth quarter and full year 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 your Safe Harbor and GAAP reconciliation 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 the Form 10-K for the year-ended December 31st, 2022. 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. And a replay of this call can be accessed via dial-in or through 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. We’ll be participating in the Barclays’ Industrial Conference in Miami on February 23rd, J.P. Morgan’s High Yield Conference on March 6th also in Miami, and Bank of America’s Industrial Conference in London on March 22nd. With that, let me introduce you to our speakers. 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. I’ll now turn the call over to Larry.

Larry Silber: Thank you, Leslie, and good morning, everyone. Let’s start on slide number four. There’s no question that 2022 was another exceptional year for Herc. We delivered record level financial performance across the board. Equipment rental revenue growth was 34% on top of 24% growth in 2021. In support of the rising demand, we invested $1 billion in net fleet purchases, while improving fleet productivity as evidenced by an annual increase in dollar utilization year-over-year. We also invested in expanding our branch network by completing 18 strategic acquisitions and opening 21 greenfield locations in key markets in 2022. And focusing on rate growth and operating efficiencies, we’ve more than offset inflationary pressures as we delivered 160 basis points of adjusted EBITDA margin, improvement and 120 basis points of higher ROIC.

We’re operating from a much stronger position today than at any time in our history with better systems and processes, more diverse end markets, a broader portfolio of products, a growing branch network, economies of scale and a solid balance sheet. As one of the largest equipment rental providers with a national reach, our size, resources and operational excellence are giving us a significant advantage in the marketplace. Moving on to slide five. From a macro standpoint, the North American equipment rental market generated 11% growth in 2022 on robust infrastructure, industrial, and other non-residential construction spending. Tailwinds came from a ramp-up in domestic manufacturing after years of inadequate investment, the beginnings of allocation of federal funding for construction projects, and the ongoing shift that is now taking place in specialty categories from equipment ownership to equipment rental.

Contractors understand better than ever the economic, environmental, and logistical benefits of running equipment across categories. In 2022, Herc grew three times faster than the industry and gained a full point of share by leveraging our increased scale, network, and capabilities to ensure that we continue to meet the needs of existing and new customers and deliver on our commitments. While demand has been strong, supply constraints are ongoing. We managed to secure the fleet necessary by leveraging our purchasing power, placing orders early in the buying cycle, utilizing our solid balance sheet and capitalizing on our preferential position as a Tier 1 national equipment rental company. On slide six, you can see 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 of aerial, material handling, and earthmoving equipment last year by investing in fleet and optimizing our branch network. Revenue from our high-margin ProSolutions business also grew in 2022 compared to 2021, incrementally benefiting from new products, new locations, and cross-selling synergies. And our innovative customer-facing digital capabilities were the catalyst to several new project wins late last year, especially at the national account level. You’ll hear more about that from Aaron in a minute. At the same time, we’re committed to responsible ESG operating practices built on a strong cultural foundation, a safety-first protocol, and a pledge to continue to work hard to do more to protect the environment, often in partnership with our customers and suppliers.

Finally, between fleet investments, strategic M&A, dividend growth, and opportunistic share repurchases, I’m confident that Herc is allocating capital in the right areas and at the right time. We entered 2023 from a position of strength with a commitment to our growth plan. The strategy is driving it and the incredible people who executed at such a high level. On slide number seven, in addition to continued strength in data centers, healthcare facilities, petrochem, and other key end markets, onshoring and fiscal stimulus trends have only accelerated despite concerns about a potential slowdown in the market. These mega projects represent the beginning of a multiyear flow of dollars into the industrial space. Every time you hear sustainability, climate change, and resiliency, you’re hearing about growth opportunities for our company.

In 2021, we outlined our three-year strategic plan to grow and strengthen our core business, diversify our products and services, and operate more efficiently as we drive higher, more durable returns. Today, we’re tracking ahead of that plan as industry demand surpasses forecasts and we continue to follow the Herc playbook for superior performance. With that, I’ll turn it over to Aaron Birnbaum to take you through the fourth quarter details and provide some high level operational drivers for the year. And then Mark Irion, is going to walk you through the fourth quarter financial metrics and share our targets for2023. Aaron?

Aaron Birnbaum: Thanks Larry and good morning everyone. Our record fourth quarter results for revenue and profitability served as a great conclusion to a year marked by strong execution, geographic expansion, and new account wins. I’m really proud of the way our team continues to focus on delivering superior products and services for our customers, while executing well against our strategic growth initiatives. Execution starts with safety. And of course, safety is always at the core of everything we do. As you know, from slide nine, our major internal safety program focuses on perfect days, that are 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 fourth quarter on our branch-by-branch measurement, all of our branch operations achieved at least 98% of days as perfect. Equally notable, our TRIR improved to 0.52, a best-in-class result. On slide 10, our fourth quarter results reflect the market opportunity we seized by accelerating our investment in equipment with average OEC fleet up 31% over last year’s comparable period. Equipment rental revenue also increased 31% compared with the prior year fourth quarter. Our regional leaders and their teams are doing an excellent job placing our expanded fleet offering into new locations and with larger projects to incrementally drive the topline. Our core business benefited from the continued strong demand for equipment across all of our regions and our ProSolutions business delivered double-digit growth year-over-year again in the fourth quarter.

As you know, ProSolutions includes our specialty categories of mobile power and distribution, climate control, remediation, and pump equipment to see a fast-growing high-margin segment of the market. We are capturing shares here by capitalizing on cross-selling opportunities with new and existing core business customers and leveraging the increasing density of our branch network for faster response. On slide 11, you can see our fleet composition at OEC on the left side of the page. Total fleet is now a record $5.6 billion as of December 31st, 2022, 29% higher than OEC fleet at the end of 2021. You’ll note that higher-margin specialty fleet represents about 24% of the total, and there’s room to grow. Our fleet expenditures at OEC totaled $327 million in the recent fourth quarter.

At the end of 2022, we continue to accept new fleet deliveries despite seasonal demand slowdown as we prepare for additional growth in 2023. We disposed of $140 million of fleet at OEC in the recent quarter, $80 million more than last year’s similar period. We effectively balance the need to refresh some older fleet, while continuing to be prudent in managing our equipment level to meet strong customer demand and address the ongoing supply chain constraints. Proceeds from fourth quarter disposals were 44% of OEC and benefited from continued strong pricing of used equipment as evidenced by our 510 basis point margin improvement on these sales. The average age of our disposals was 94 months in the fourth quarter with average fleet age at about 48 months.

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 across all business sectors in North America with a wide variety of equipment needs. National Account business is benefiting from traditional end-market demand and the increasing number of new multiyear reshoring and infrastructure projects being rolled out. In the fourth quarter, local accounts represented 57% of rental revenue. Our goal is to have our annual split of local and national customer revenue to be about 60/40, respectively. Our acquisition and greenfield strategy supports greater local account penetration. Slide 13 is a quick snapshot of the acquisitions we made in 2022.

In the fourth quarter, we completed the purchase of two additional businesses with five locations, which brings last year’s total of 18 companies in 29 locations as Larry mentioned. As you know, we are focused on opportunities in high-growth markets that complement our current branch network and fit our strategic, financial, and cultural filters. Moreover, many of the mega industrial projects being announced in the geographies where we have focused our acquisitions and greenfield additions such as Texas, California, Ohio, and Arizona in the cities of Phoenix, Houston, Toronto, Detroit, and Chicago. We spent $515 million in net cash last year with an average multiple of approximately 5.5 times. We see compelling revenue synergies in most every company we acquire.

And over time, we can earn the fleet and operations more efficiently, generating synergized multiples of approximately 3.5 times to 4.5 times. Our acquisition process is now a core competency having successfully integrated nearly 30 businesses with 62 locations into the Herc network over the last two years. We have efficiently assimilated these companies, teams, equipment, operations, and customer accounts to rapidly add value to our operations in line with our urban market strategy. And we had a very knowledgeable, experienced and skilled team internally made up of region operators and M&A specialists who know our markets well and can leverage relationships. This gives us confidence as we explore and evaluate new opportunities. As we look forward on slide 14, M&A is only one of our building blocks for future growth.

Starting with our foundational core business, fleet CapEx, and continued investments in greenfield locations provide a launching pad for incremental growth initiatives. Our ProSolutions business also has a lot of runway. It saw growth through seven acquisitions last year in addition to a larger fleet, cross-selling benefits and product line expansions. When it comes to winning new projects by raising the bar on customer experience, our investments in digital technology are making a difference. Our ProControl next-gen digital platform provides customers with more control and risk data to improve efficiency and lower costs on their job sites. As Larry mentioned, we launched our advanced fleet management system last summer and we’ll continue rolling it out to our broad customer base this year.

Another area of growth stems from our capabilities of providing customers with logistical expertise and full service on-site support. As an experienced manager of on-site solutions, we are well-positioned to take the primary fleet management role on large projects as well as to secure recurring revenue from long-term contract contracts for day-to-day rental fleet oversight, cost control, and maintenance at industrial customers ‘existing facilities. National accounts, as I mentioned, are also important to Herc’s growth as they are a legacy strength for us. As large manufacturing and infrastructure projects continue to ramp up, we are leveraging our reputation and relationships to win more than our fair share of these projects from battery and EV plants to renewable and ship facilities.

Among our 2022 national account customers, the average tenure with Herc was more than 28 years. We have earned their loyalty. National accounts, as you know, are characterized by high volume and longer duration with less seasonality and cycle risk. Together, these initiatives represent the foundation of building blocks for substantial long-term growth opportunities for Herc and our regional operations are primed and ready to advance our progress. I’d like to thank Team Herc for their commitment to growth, operational excellence, and safety. Their professionalism shows up in the execution of our services to our customers every single day. Now, I’ll pass the call on to Mark.

Mark Irion: Thanks Aaron and good morning everyone. The steady execution of our growth strategies that we just heard about from Larry and Aaron provided strengthen momentum in our results throughout 2022 and into 2023. Slide 16 summarizes some of the excellent results we achieved in 2022. Fourth quarter equipment rental revenue increased to a record $713 million from $542 million in the fourth quarter of 2021, a 31% increase, primarily due to continued volume and pricing momentum. As you’ve heard, we’re pushing hard on both our organic growth and acquisition strategies with great success. Taking a closer look at the 31% rental revenue growth for the fourth quarter, about two-thirds of the growth was organic, and a third came from acquisitions.

This validates our ability to continue to grow our established core business organically, and our organic growth is approximately two times that of the overall rental market. Our smart acquisition strategy provides a nice growth supplement by allowing us to quickly bring on key rental talent, fleet, and customers to bolster our position in the strategic market. And our ongoing focus on operating leverage, continues to drive improved profitability and expanding margins. Adjusted net income in the fourth quarter of 2022 increased 37% to $103 million or $3.44 per diluted share compared with adjusted net income of $75 million or $2.46 per diluted share in the fourth quarter of 2021. Adjusted EBITDA increased 41% year-over-year to a record fourth quarter $361 million and our adjusted — and we expanded our adjusted EBITDA margin by 160 basis points to 46% in Q4 2022.

All-in-all, an excellent quarter and an excellent year. You can see we made progress across every metric on this slide and are especially pleased with our margin expansion and EBITDA flow-through of 54%. Our business model drives fast growth and expanding margins, allowing us to continue to invest in our equipment, locations, and our people in addition to creating value for our shareholders, which is clear by the 120 basis point improvement in ROIC in 2022 to 10.8%. On slide 17, the graph on the upper left illustrates our success in consistently driving rate growth. This is always an important metric to manage and it’s especially important in the current environment with inflation creating cost pressure. In the fourth quarter, rate was up 6.6% year-over-year, with clear momentum as rate growth has increased in every quarter over the last two years.

We will continue to focus on rate in 2023 and we’ll push hard to mid-single-digit rate growth, utilizing our proven and effective pricing tools, the discipline and professionalism of our sales team, and the rollover benefits from national account contract rate increases secured last year. The backdrop for rate remains favorable as demand continues to outpace supply and the industry appears to remain disciplined given the inflationary fleet environment. Our fleet size in OEC closed the quarter at about $5.6 billion. Continued excellence of our purchasing team has contributed to the steady delivery of fleet in 2022, which was also supplemented by fleet integrated in conjunction with acquisition activity. Our average fleet on rent at OEC in Q4 was up 29% compared with average fleet growth of 31%.

Dollar utilization dipped slightly in Q4 year-over-year to 43.5%, primarily due to a return to more normal seasonality, That combined with our taking more fleet into the winter off season than we normally would put pressure on utilization. In a normal supply environment, we placed orders in Q4 and scheduled 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. This will impact time utilization in the seasonal first quarter of 2023 as well. But by taking the new fleet now, we ensure we’ll be able to respond to our customers’ demand this spring. For the year, we improved our utilization of 43.3% and continue to move closer to our target range of mid-40% based on our currency mix.

For 2023, we’re targeting incremental improvement in annual dollar utilization as we continue to focus on rate and as we return to normal seasonal demand patterns. On slide 18, you can see we have no near-term debt maturities and eventful liquidity to fund our growth goals. Net capital expenditures exceeded cash flow from operations in 2022, with cash outflows of $250 million before acquisitions. We’ll continue to deploy capital to invest in our business and drive fleet growth in this strong multiyear demand environment. Our current leverage ratio at 2.4 times is well within our two times to three times target range. In addition, we repurchased in excess of 0.5 million shares of our common stock in the fourth quarter at an average price of about $110 per share and have announced a 10% increase in our quarterly dividend for 2023 to $0.6325 or $2.53 per share for the year.

We remain confident in our business model and are committed to creating shareholder value. The rental market chart on the upper left side of slide 19 shows the continued strength in our key end markets. The ARA estimate for 2022 North American rental industry revenue is $60 billion. As Larry mentioned, that’s 11% growth over 2021. There’s another 5% growth forecasted for 2023. So, the remains strength in the outlook and the current growth cycle should remain intact. As we’ve discussed, Herc’s rental revenue growth is eclipsing the broader industry growth rate by a factor of two times to three times whether you focus on 2022’s total topline increase of 34% or our organic growth rate of over 20%. We expect this outperformance to continue. In this environment, the advantages of scale are magnified and the big rental companies that have diversified end markets and the ability to surface the current strength in industrial mega projects will continue to get bigger faster.

Two of our key end markets are industrial and on-residential construction and both had robust growth in 2022 and are projecting solid outlooks for 2023. Combined, these end markets reflect about two-thirds of our customer base and both are likely to outperform other more consumer-driven end markets this year. Taking a look at the industrial spending forecast on the top right chart, IRR projecting 13% growth in 2023 on top of 11% growth in 2022. Clearly, the industrial economy is strong and we’ll continue to provide rental opportunities. These forecasts continue to move up for 2022 and 2023, which happened in the third quarter as well. When actual activity continues to exceed the forecast each quarter, we are in a very robust environment. The non-residential construction starts also keep getting stronger, driven by an unprecedented amount of new mega projects that seem to be announced every day as the onshoring of US manufacturing capacity continues to gather steam.

Starts in 2022 are now estimated at $427 billion or eye-popping growth of 42% year-over-year, the highest level ever. The chart in our third quarter presentation hit gross projected 19%. So as I said, the forecast they have in trouble keeping up with actual activity. We should emphasize that these are also just starts of new projects and are being driven by multiyear construction builds that will continue into 2023 and 2024. All these starts drove new non-residential construction put in place activity in the next year. And construction put in place activity is typically two times higher than the prior year’s starts. Additionally, there’s another $293 billion in non-residential non-buildings or infrastructure projects later to 2023. That’s a 17% increase over 2022.

There is growth all across the non-residential construction spectrum and it is looking increasingly clear that our equipment will be in high demand in 2023. That is why we are leaning into the cycle, and we’ll be deploying capital to continue double-digit volume expansion to keep us cruising along an high PF. Therefore, as we move to slide 20, our guidance highlights our plans for outsized growth again in 2023. Our plans 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. With the expectations for stronger operating leverage as we roll over some of the 2022 inflationary challenges, we estimate adjusted EBITDA will be in the range of $1.45 billion to $1.55 billion, representing another year of profitable growth ranging from 18% to 26%.

This guidance is organic, but when it comes to M&A opportunities, we have a robust pipeline that should enable us to invest another $500 million or so in acquisitions again this year, driving incremental growth to our guidance. Interest expense will continue to increase in 2023, reflecting the accumulation of the Fed rate increases and our continued M&A funding. We are experiencing all of the trends consistent with an industry in an up cycle and intend to continue to drive excellent performance as our growth strategy remains in high gear. With that, I’ll turn the call back to Larry.

Larry Silber: Thanks Mark. And everyone, please turn to slide 21. 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 and we’re in this together. We take responsibility, we achieve results, and we prove ourselves every day. So, now operator, please open the lines for questions.

Operator: Your first question comes from the line of Jerry Revich from Goldman Sachs. Your line is open.

Jerry Revich: Yes hi. Good morning everyone.

Larry Silber: Hey Jerry.

Mark Irion: Good morning Jerry.

Jerry Revich: Hi. I’m wondering if you folks can expand on the M&A pipeline this year, Mark, is there an opportunity for that to be over $500 million as we look at the impact of higher rates on a lot of the smaller players that are ABL funded. To what extent could this be an outsized year of M&A relative to the $500 million target?

Mark Irion: I mean I’m not sure. I mean, I think we’re comfortable with the pipeline and yes, sort of guided. Our goal is that sort of $500 million range. If something opportunistic was to come up bigger than the kind of deals that we’ve been doing, we certainly look at that. But that’s the sort of level that we’re comfortable with and that’s the level that we’re sort of looking to achieve this year.

Jerry Revich: Okay. And then I’m wondering if you could just expand on the time utilization discussion. So, you mentioned just the timing of year deliveries means lower time utilization in the first quarter. Are you expecting an outsized pickup in time utilization versus normal seasonality in 2Q to where we can return to time utilization we saw during the construction season in 2022? Or is that just running time new hot, that’s not optimal for the business?

Mark Irion: I think — I mean, we — the construction season typically gets you into that sort of peak time utilization zone. So, we do expect to get back into sort of 2022 levels in Q2 and Q3. It’s Q4 and Q1 that we’re highlighting with the sort of return to a more normal seasonal slowdown plus just taking a lot more fleet than we typically would have had some impacts over the winter.

Jerry Revich: Got it. And lastly, on the rate outlook, just considering the carryover effect at the start of the year, it sounds like you’re going to be exiting with rate up in the, call it, maybe 3% range, but considering costs are slowing as well? Are you expecting year-over-year margin expansion in the back half of the year at that lower comp-driven rate number market?

Mark Irion: I think you can see we’ve got a bit of traction in the flow-through in the back half of 2022. So, we’re continuing that momentum through into 2023, and we look to sort of see that range moved from low 50s into that sort of mid-50 to 60 range, typically picks up in the back half of the year, similar to what you saw this year just as you roll over the previous year’s costs and headcount increases.

Jerry Revich: Super. Thank you.

Mark Irion: Thanks Jerry.

Larry Silber: Thanks Jerry.

Operator: Your next question comes from the line of Rob Wertheimer from Melius Research. Your line is open.

Larry Silber: Good morning Rob.’

Rob Wertheimer: Good morning everybody. Hey. So, I had a question on acquisitions also. You guys have obviously had a lot of margin increase over the last two years, but including this year. And I’m wondering if your targets are becoming talker or having similar margin gain and less willing to sell. If you have any commentary on how the industry feels and whether people are still willing to come to the table with you?

Larry Silber: Well, look, yes, I think the pipeline that we already have for 2023 is pretty robust. We still see that there is ample opportunity for some further consolidation in the industry. And we think we’re in an excellent position to continue what we’ve been doing. So, we really don’t see much of a change from last year or the year before.

Mark Irion: There’s a big opportunity out there, Rob, in the smaller deals, which we kind of feel that there’s a bit more of an advantage for us. We are adding to a district where we need scale and being new to the M&A sort of gain. So, we feel that we’ve got a sort of advantage on these smaller type deals and that’s where the volume of the opportunities are in the current market.

Rob Wertheimer: Yes, the multiples have been great on that. And then just a small question, but I know you’re trying to handle all the growth that’s out there and all that you can. But if you had the opportunity, would you rather be doing a bit more replacement CapEx? Do you have a catch-up to do if growth ever slows? Or do you feel kind of comfortable with where fleet age is despite the COVID back and forth? And I’ll stop there. Thanks.

Aaron Birnbaum: We started to, Rob, in the fourth quarter, obviously selling more fleet for replacement CapEx. And we believe as we go through 2023 as long as the supply chain cooperates, we’ll get back to a more normal cadence. But we feel good about where we are right now. We’re glad we started firing it back up in the fourth quarter and feel good about the flow of new and replacement in 2023.

Larry Silber: That said, we’re still concerned about supply constraints in the year. While we’ve managed to develop a fairly normal cadence, there’s still supply constraints from the OEM level that we’re concerned about.

Rob Wertheimer: Yes, thank you.

Operator: Your next question comes from the line of Neil Tyler from Redburn. Your line is open.

Neil Tyler: Hey good morning everyone. Thanks. Larry, your answer to the previous question actually sort of brings us neatly to the topic I wanted to ask about, which was in terms of that supply and the growth CapEx number, I guess, if we see a similar pattern to the demand side of things, as we’ve seen over the last 12 months, namely the initial forecasts end up being raised during the year, and that translates into greater demand. Is there scope for you at this stage to add much more to your gross CapEx number? Or do you see that demand manifesting either in terms of you matching it with accelerated M&A or through rate? And which order do you think those things are likely to stack up in a better demand environment? Thank you.

Larry Silber: Yes. Look, great question and a number of things to sort of unpack there. But we’re pretty much have on order of the fleet that we expect and hope to be able to get in with a fairly normal cadence over the course of the year. Remember, our fleet is fungible, right? So, certain markets might have some softness, and we’ll be able to move fleet to those high demand areas where those projects materialize and where we can capitalize on that business. We still have some room in our CapEx. If we choose to go after it, but the constraint there is the availability and ability to get it from the OEMs and their sort of limited capacity as we go through the year. Certainly, they’ve improved, but not to the level where we have assurances of what we’re going to get every month.

We’re still sort of — we’re still expecting certain amounts of material, but there’s still a fair amount of delays and rollover going on today. So, I think supply is more of the constraint rather than demand. But fortunately, as I said, our gear is fungible and we can move it.

Neil Tyler: Okay. Thank you. And is there any constraint on your sort of things? I mean, landing $1.5 billion of fleet into your business is obviously very different to the situation a year or even a year ago or two years ago, certainly, and how are the branches sort of able to cope with that and deploy it?

Aaron Birnbaum: Neil, it’s Aaron again. The branches are doing a great job absorbing the fleet. We’ve really spent a lot of time in the past 18 months developing our teams, expanding our teams. The network is bigger through greenfields and acquisitions. And our sales force has been really developed very nicely to take that fleet, find new customers. And then over the top of that, you’ve got our national account team, which really has done a great job developing and nurturing the relationships we have on some of the larger projects in North America. So, we feel like all of our branches can continue to take fleet without any absorption issues in 2023.

Neil Tyler: Got it. Okay, thank you very much.

Larry Silber: Thanks Neil

Operator: Your next question comes from the line of Ken Newman from KeyBanc Capital Markets. Your line is open.

Ken Newman: Hey good morning guys.

Larry Silber: Good morning.

Mark Irion: Hi Ken.

Ken Newman: So, obviously, it sounds like demand visibility is very strong for 2023, it’s driven by these large mega projects that we’ve all been talking about. I’m curious Larry or Mark, is there any way that you can kind of help us quantify just how much of that visibility can be framed by the new guidance? What’s the guide kind of implying in terms of incremental infrastructure activity or opportunities versus reshoring activity?

Mark Irion: I mean, I think it’s — our visibility and our revenue mix is in that really specific. So, we’re just factoring in continued strong demand. These projects do take up big chunks of fleet when you get on them. So, there’s a certain amount of visibility around that. But overall, there’s quite a bit of variability to the revenues and where they’re coming from, and we’re not specifically targeting growth in specific end markets. But you sort of look at that pie, there’s growth all across those end markets. So, we’ll be targeting that and we’ll be looking to get our unfair share.

Larry Silber: Yes, I think, Ken, we sort of — or I look at the mega projects as sort of like the icing on the cake. The overall general markets that we cover are all very strong, and the mega projects are just sort of additive to what we’re doing. So, I don’t view that as necessarily driving this improved demand. I think the base level of demand is very strong.

Ken Newman: Right. I guess, maybe to clarify then. I mean just given how large these projects are still a huge competitive advantage. Is it fair to assume that you’re going to punch well above your weight relative to your market share for these larger projects?

Aaron Birnbaum: Yes, I think that’s accurate, Ken. There’s certain things that these large projects want, right? They want a lot of fleet. They want a high level of service almost always an on-site type operation. They want technology solutions to manage the fleet and account management. And there’s really only so many national large players in the rental space, they can provide all that. So, we do think we will, as others that are similar to us or big national players will be able to get outsized success on those big projects.

Ken Newman: Yes. And then just for my follow-up question here. it seems like you are tracking much closer to that 5%market share target that you put out in your Analyst Day, I think, back in 2021. Obviously, the fleet still feels pretty tight from an industry perspective. Do you have any updated views on what you think market share gain capture could be relative to 2022? Or how do you think about longer term market share?

Mark Irion: Yes, I mean we’re really happy to be moving that needle. Finally, that’s been a long process for the company, and there’s a lot of pride for us to be picking up another point in 2022. So, we’ll continue along. We’re obviously committing fleet and capital to growing as fast as we can and that should lead to market share gains, and we’re happy — very happy about that.

Operator: Your next question comes from the line of Sherif El-Sabbahy from Bank of America. Your line is open.

Sherif El-Sabbahy: Hi, good morning.

Larry Silber: Good morning.

Sherif El-Sabbahy: So, I just wanted to ask, 2023 will be another year of large CapEx spend. Do you be able — do you expect to be able to draw and inflect free cash flow positively? And if not, what’s the pathway to get there?

Mark Irion: Right. Yes. No, we’re looking at neutral free cash flow, I guess, at this level of fleet growth with our current level of EBITDA expectations before M&A. While we’re growing fleet in the high 20s that is a commitment of capital to growth and that does put a challenge on free cash flow. So, the trade-off is really how fast do you want to grow the fleet versus free cash flow. So, we are bidding on fleet growth and market share growth, and we’re doing that with improved margins and improved utilization and creating shareholder value at this stage and that’s the way we’re executing on the strategy. But it should be free cash flow neutral in 2023 before M&A.

Sherif El-Sabbahy: thank you.

Operator: Your next question comes from the line of Steven Ramsey from Thompson Research Group. Your line is open.

Steven Ramsey: Hey, good morning. I wanted to think about these mega projects some more. Are you able to cross-sell better just by the nature of these projects combined with your own internal improvements? Or do you have any initiatives there that maybe step up your — what you’re already doing?

Aaron Birnbaum: These big mega projects, they pop-up in different types of markets, sometimes they’re a little bit more rural than urban. But with our footprint that we have nationally, we’re able to support them, and they typically always want a full suite of types of products. So, the core fleet, which we’re investing heavily in. And then as they build those up, they do need a lot of climate and especially solutions because a lot of their — often they don’t have short power or permanent power inside the plant until it’s further down the road of being developed. And they also — depending on what they’re their operation is what they’re doing inside the plant, they often need a lot of climate key to our air conditioning de-munification until they get their permanent equipment installed. So, it’s a great project for the whole suite of services that we offer.

Steven Ramsey: Great. And then do these mega projects support greater growth in your national accounts versus local? And then to capture more of this mega project opportunity, do you feel like you could invest more in branches greenfield or acquisitions closer to where these projects are happening?

Aaron Birnbaum: The first question is, yes. Usually, it’s the big national type mechanically, electrical general contractors to go in to do these projects. But there’s always an element of local contractors that are supporting the project as well. So, it’s a great opportunity when you’re on those projects to work with that — all that customer base. And you often see the local customers get much, much larger and get more projects in the general area. These — as far as us — I believe your second part of your question, Steve, was are we focused on new locations in some of these metropolitan area where these big projects are? And I would say the answer to that is definitely yes. We invested — we did a lot of greenfield, a lot of acquisition activity in Texas, where we see a lot of this activity going on for one. So, we continue to strategically look at those opportunities for our footprint as it maps out with reshoring or big projects coming online.

Larry Silber: Yes. And also Steve, if a project is out in a rural market, we wouldn’t necessarily look to open a branch or do an acquisition in a rural market. What we would do is an on-site which would be for the duration of the project during its construction phase and operate from that type of a perspective. So, we’re not going to chase flagpoles and chase customers to open facilities that would be permanent overhead. We would look to have temporary overhead in those locations.

Steven Ramsey: Makes sense. Thanks guys.

Larry Silber: Thank you.

Operator: Your next question comes from the line of Seth Weber from Wells Fargo. Your line is open.

Larry Stavitski: Hi guys, this is Larry Stavitski on for Seth this morning. Thanks for taking my question. I just wanted to ask about quarter-over-quarter, any evidence of cancellations or pushouts related to rising interest rates or macro concerns? You guys talked a lot about increased activity from infrastructure and construction and some of these mega projects. So, just wondering if any evidence of project cancellations that you’ve been seeing?

Aaron Birnbaum: Larry, this is Aaron. By the nature of my job, I’m out in the field, at least 15 — or the half the month every single month to envision the branches, customers, and our sales team. And my ears are open to see if I hear any anecdotal concerns along those lines. And I have yet to hear that every market I go to in North America, a very robust activity, no cancellations, no postponements, no cancellation due to interest rates. Most of these jobs are big planned investment jobs, strategic, reshoring, some public funding, and these projects are ploughing through as scheduled.

Larry Stavitski: Okay. Thank you. I’ll leave it there. Thanks guys.

Aaron Birnbaum: Thank you.

Larry Silber: Thank you.

Operator: Your next question comes from the line of Mig Dobre from Baird. Your line is open.

Mig Dobre: Good morning. Thanks for taking my question. I want to follow up on that last comment about really not seeing any cancellation and momentum remains strong. What do you make of the ABI index being below 50? I mean obviously, you have that as a key indicator for your business. And I recognize that the mega projects are there, but what about the sort of regular mom-and-pop for lack of a better term of construction business?

Mark Irion: Yes, I mean, you can see on the chart that it’s been below 50 since October. I mean it’s obviously coming off extraordinarily high readings before that. It’s maybe an indication of activity 12 months to 18 months out. And we’re focused on the activity that’s in front of us. So, there’s strong demand now. There’s going to be strong demand in the next couple of quarters, and that’s what we’re focusing on. And we’ll adjust this as necessary to what the ABI might not be telling us for the 2024.

Mig Dobre: Understood. And then a clarification. I don’t know if I missed this. How are you thinking about gross CapEx? And maybe can you help us understand in your current outlook, what the planned fleet disposals might look like in 2023?

Mark Irion: Right. So, yes, we’re definitely going to return to a normalized level of fleet disposals. So, that will sort of pickup into that 2019-ish sort of range. We’ve been running maybe in the $200 million to $300 million zone of OEC for the last couple of years, and that will sort of pick up to the $500 million to the $600 million zone we expect. And the CapEx, the gross CapEx is rolling in faster than it was at the beginning of the year. And we expect to sort of see improvements throughout this year, but we’re getting a steady supply. It’s not as predictable as it is in a normal environment, but the supply is coming in and we expect to be able to get enough fleet to execute on the plan.

Mig Dobre: Understood. And then maybe the last question. This is kind of going back to the answer that you provided to my first question that I understand that you guys are focused on the opportunity at hand here. But if conditions do change, right, if the ABI is actually telling us something valuable here, what are the things that you’re looking for in your day-to-day business to make adjustments to either your CapEx or your cost structure as 2023 progresses?

Larry Silber: Yes. Look, I think we monitor on a daily basis, our dollar utilization across our districts and regions. We monitor our time utilization by category. We look at what the seasonality is to make sure that the planned seasonality movement is happening as we expect, whether it’s going into the spring construction season, we’ll monitor that closely. And then as we proceed into the hot weather to make sure we’re seeing that seasonality adjustments happen with our specialty businesses and then rolling into the fall and winter. We have an adjustment there again in terms of seasonality. So, we monitor that and we monitor the things I just mentioned on a daily basis, not only at our level here, but our region executives also monitor that closely down to our branches and districts. So, we’re very close to what’s happening in activity on a daily basis, Mig, and we make adjustments accordingly.

Mig Dobre: Very helpful. Thank you so much.

Larry Silber: Thanks Mig.

Operator: Your next question comes from the line of Brian Sponheimer from GAMCO. Your line is open.

Brian Sponheimer: Hey, good morning everyone.

Larry Silber: Hey Brian.

Brian Sponheimer: Just very curious about the entertainment business. You touched on pretty much everything I wanted to talk about, but this was an exciting vertical for you. I think it’s gotten a little bit softer. Anything you can add there as far as whether organic or organic growth is something you might be looking at?

Mark Irion: Yes. I mean it’s obviously an important piece of the business for us. It’s sort of been through some real cycles in the last couple of years. So, a real big driver of growth and mix in 2021 and less of a contributor in 2022, just as some of that — the growth rate slowed down. But we’ll remain committed, and we’re excited to the various parts of that business, both the sort of studio space and the entertainment space and it’s an important part of our mix that we’ll remain focused on.

Brian Sponheimer: All right. And if we were to think about your current level of revenue and what may be a normalized CapEx, steady-state growth would look like for the business of this size. What do you think that would be somewhere in the — what do you think that would be?

Mark Irion: Well, I mean, I think we’re in a — we’re certainly looking to catch up in terms of market share and grow faster than the overall market. It’s an opportunity for us as the strategy that we outlined in 2021 just to get in front of the cycle and really take advantage of the early growth opportunities. That’s worked out even better than we could have imagined. Growing at 30% is not sustainable over the whole lifecycle of this company if it was to sort of slow down to maybe 10% sort of 15% at the end of the cycle, that would probably be more normalized level and that would create a lot more free cash flow than what we’re currently throwing off.

Brian Sponheimer: All right. Terrific. Well, congratulations on another great year. I look forward to seeing what the 2023 hold.

Larry Silber: Thanks Brian.

Operator: And there are no further questions at this time. Ms. Leslie Hunziker, I’ll turn the call back over to you for some final closing comments.

Leslie Hunziker: Great. Thank you everyone 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.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.