Herc Holdings Inc Q1 FY2021 Earnings Call

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

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

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

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

Thanks, Aaron, and good morning, everyone. Our first quarter results have shown that we have a scalable business and a successful strategy that can thrive in any environment, and we are performing exceptionally well right now. We are very pleased with our performance in Q1, as our results surpassed our expectations. Due to our current performance and the trends we are observing, we've updated our outlook for the remainder of the year and increased our guidance. Our results are impressive, as we are significantly expanding our margins while executing our strategy to provide outstanding customer service and premium equipment throughout North America for both large and small projects. Our focus on margin enhancement over the past couple of years is continuing to pay off. As the economy recovers, we have the capital to accelerate our growth and a proven record of using operating leverage to boost profitability. In the first quarter of 2021, equipment rental revenue rose by 3.6% from $386.5 million to $400.4 million, mainly due to an improved mix and stable pricing. We will cover these factors in more detail in the next slide. We maintained solid profitability, with adjusted net income in the first quarter of 2021 at $33.3 million or $1.10 per diluted share, compared to adjusted net income of $1.1 million or $0.04 per diluted share last year. We are effectively leveraging our operations, resulting in a 25% rise in adjusted EBITDA from just 4% revenue growth. This led to an increase in adjusted EBITDA margin of 680 basis points to 40.7% in the first quarter, a historic high. REBITDA amounted to $176.9 million with a flow-through exceeding 200%. The REBITDA margin increased by 570 basis points to 43.8% in the first quarter, also the highest in our history. In slide 14, we display the pricing and utilization trends by quarter. The graph on the upper left shows our year-over-year pricing, indicating that the latest quarter's average rates decreased by just 30 basis points compared to last year. We are pleased with the minimal decline in rates we managed amidst the challenges over the past four quarters. Thanks to flat pricing in 2020, we expect to see positive rates this year. Our industry-leading pricing tools and the professionalism of our sales team continue to work in our favor. The adjustments made to the fleet by the industry and current estimates on fleet order lead times indicate a favorable environment for positive pricing in 2021. Our rates turned positive year-over-year in March, and we anticipate they will remain positive throughout the year. Dollar utilization was 38.6% in the first quarter, reflecting a significant improvement of 290 basis points from the previous year. A major part of this improvement was driven by a change in our business mix, with strong growth in our ProSolutions and entertainment segments during Q1. Q1 is usually the toughest quarter for dollar utilization, making this improvement significant and paving the way for a record year in fleet utilization and returns ahead. The impact of mix is evident as rental revenues continue to rise but remain down by 1.7% year-over-year. Rental revenues grew by 3.6% in the quarter, with the results driven by rates decreasing by 30 basis points and volume declining by 1.7%, offset by a positive mix contribution of 5.6%. While the substantial revenue growth from mix may moderate slightly in the coming period, it will still be positive. Coupled with seasonal growth from rates and volume, we foresee an acceleration in rental revenue growth. Alongside our focus on operating leverage, our profitability is also continuing to improve. In slide 15, we see that adjusted EBITDA for the first quarter was $184.6 million, a 25% increase or $36.9 million compared to $147.7 million in 2020. A strong emphasis on operating leverage and improved profits from the sale of rental equipment have significantly contributed to this improvement. Our direct operating expenses decreased by $6.2 million compared to the first quarter of 2020, primarily due to savings in personnel-related costs, re-rent, and maintenance expenses. We also cut SGA expenses by $4.3 million, mainly through reduced bad debt and travel expenses. The adjusted EBITDA margin in the first quarter was 40.7%, increasing by 680 basis points year-over-year, largely due to our continued focus on operating leverage alongside revenue growth and cost control. We benefited from gains on equipment sales this quarter, with improvements in our retail and wholesale channels boosting our proceeds relative to OEC. The REBITDA margin improved by 570 basis points to 43.8%, with flow-through at 201% in the first quarter, showcasing our effective execution on operating leverage. This chart illustrates the remarkable changes in our margin profile over recent years, especially in the last quarter. We have long prioritized margin improvement and gained valuable insights on operating leverage from 2020. Going forward, we expect some cost increases tied to higher rental volumes and revenue, but we anticipate our costs will remain at similar or slightly lower percentages of rental revenues. As we move past these extraordinary COVID-impacted quarters, we plan to maintain at least 60% flow-through of our rental revenue growth to REBITDA each year while working to expand our margins. On slide 16, we reported generating $73 million in free cash flow after net rental CapEx of $51 million in the first quarter. We expect $400 million to $450 million in net fleet CapEx for the full year, so the first quarter does not fully represent our cash expenditures for the second and third quarters. Strong operational results also helped us reduce our net leverage, which decreased to 2.2 times as of March 31 compared to 2.7 times a year earlier. We are now at the lower end of our guided range of 2 to 3 times net leverage. Total debt was $1.6 billion as of March 31, a reduction of about $67 million from December 31, 2020. Our total liquidity stood at over $1.4 billion as of March 31, primarily consisting of availability on our ABL credit facility and cash and cash equivalents of $32.9 million. With no near-term maturities, we have ample liquidity for 2021 and beyond, along with sufficient capital to grow our fleet and support rental revenue growth in the new cycle. We remain cautious in our capital allocation, planning to use free cash flow to reduce debt after making strategic investments in fleet growth, new locations, and strategic M&A. Our continued focus on maintaining a strong balance sheet and consistently improving operating margins has resulted in upgrades to our debt ratings. Earlier this year, S&P and Moody’s raised their ratings on our corporate debt, which is now rated solid BB minus and B plus.

On slide 17, we show the latest industry forecast. It’s a bit difficult this quarter to square what look to be quite tepid markets with the strength of our results. Looking at the chart on the top left, the ARA is forecasting industry rental revenues to grow at around 2% in 2021. We are close to double that growth rate in Q1, but this is not inconsistent with past experience. Rental companies of scale with broad rental fleets and a well-diversified customer base have consistently grown faster than the rental industry in general. And as we have seen in Q1, Herc is a company of scale with a well-diversified mix of customers. I also suspect that the ARA forecast will end up a bit light for 2021, as it’s typical for the growth rate in Q1 to accelerate into the rest of the year when favorable seasonality kicks in. We’re also looking to be in the early stages of a refleeting cycle, and tight supplies of construction equipment also tend to benefit the rental industry. In terms of end markets, nonresidential starts were up slightly. That does feel as though this level of activity will be supportive in 2021. Our equipment is fungible, and we’ll rent to wherever the activity is. So, the level of activity tends to drive rental demand, and rental demand is not necessarily impacted by struggles in one or two pockets of nonresidential spend. Nonresidential spending is only about 40% of our business. So, the diversification of our revenue base over the last couple of years is also a big benefit in the current environment. As a result, the majority of our business is not directly connected to nonresidential construction. Our specialty business is a real strategic benefit, and we look to continue to gain share and grow that business. Entertainment also looks to be a growth engine for the next couple of years with our investments in supporting content production paying dividends, and the live event business is also likely to rebound later this year. Industrial is still a bit soft in pockets, but there is pent-up demand for maintenance and turnarounds in a lot of plants, and this segment should also rebound in 2021. It may not be fully showing up in the macro stats yet, but having enough grade here to survive the last three cycles, it sure feels to me like we may be in the beginning of the next up cycle. No matter where the economy has put us in the current cycle, the Herc team certainly executed well in Q1 and took advantage of all the opportunities that came our way. When we put together our 2021 plan and formulated our initial guidance that we rolled out this February, we were looking at Q1 2020 as our toughest comp, being pre-pandemic for the most part. Not only did we meet our own expectations in a big way, but the way we beat our expectations meant we had to sit down and sharpen our pencils to rethink our expectations for the year. Q1 is our seasonally weakest quarter. It’s typically less than 20% of our annual results. So, our performance in Q1 translates to a big beat in our annual projections for the year. We improved dollar utilization by 290 basis points. Dollar utilization doesn’t go backwards as we move into seasonal strength. So, we needed to reforecast rental revenue for 2021. It now looks like we will generate record rental revenue with less fleet than we utilized in 2019. We generated 680 basis points of EBITDA improvement in Q1, taking margins to 40.7%. Margins also don’t go backwards as we head into the seasonally strong quarters of 2021. So, it looks like we’re on track for a record year of EBITDA margins. The magnitude and makeup of the Q1 beat has us forecasting a really good year, and we are now taking our guidance up to $800 million to $840 million. Net rental equipment CapEx guidance is unchanged at $400 million to $450 million. We’re very pleased with the performance we have reported for the quarter, and we’re very excited for the performance we anticipate over the next few years as we get into a hot start with what looks to be a new industry up cycle. With that, I’ll turn the call back to Larry. Thanks, Mark. And now, please turn to slide number 19. This slide shows how far we’ve come over the last five years in closing the gap with our industry peers. Our first quarter adjusted EBITDA margin has increased from a low of 25.1% in 2017 to 40.7% in 2021. REBITDA margins are even better and a cleaner comparison with 2021 REBITDA margins of 43.8%, an improvement of 570 basis points over the prior year. As you can see, we’ve improved our net leverage substantially since we went public in 2016, reducing net leverage from 4.1 times to 2.2 times. As we build into what appears to be a new industry up cycle, we intend to focus on top-line growth and operating leverage. Our strong free cash flow provides liquidity for new growth initiatives. Our leadership team is comprised of seasoned industry veterans, and we intend to take advantage of our scale and customer service capabilities to continue to expand our footprint and penetrate our larger markets. The rental equipment market is huge and continues to be fragmented. There are plenty of rental activity for Herc to target. We are committed to growing our market share and closing the gap with our larger peers. So, thank you. And now, operator, please open the lines for questions.

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

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

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

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

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

Yes, I believe we are in a strong position, having made our capital expenditures early last year, which puts us in a good spot to benefit from it. We still have some capacity to improve our utilization, and we aim to focus on that. You're right, looking ahead, we are likely to see equipment coming in late this year, but it doesn't make sense to receive equipment in December since that is a time when rentals typically decline. Aaron, would you like to add anything regarding the fleet?

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

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

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

Yes, this is Aaron again. The ProSolutions business for the quarter increased by 30% year-on-year. The entertainment business, which you may remember fell to zero during the pandemic, has rebounded strongly. The team did an incredible job during the pandemic to build relationships, and we emerged very strong in the first quarter with the entertainment business. As mentioned, those revenue levels are higher than they were a year ago, prior to the pandemic. We are excited about the achievements of our entertainment division and anticipate more growth. As we know, there is a strong demand for new content, and we are benefiting from that. Additionally, we continue to invest in that segment to support its growth.

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

Currently, live events have not returned. There might be discussions about them later in the year. However, during Q1, we are focusing on TV, film, and commercials.

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

I'm not sure my questions are very different from Ross's. Based on your experience and the past few years, how does this year look in terms of starting fleet tightness and utilization? I understand that utilization is close, but are we starting with average tightness or a bit more? Also, is the availability of equipment less than in previous years? In other words, do we anticipate the potential for a tighter summer than usual? Thank you.

We are starting out the year with a tighter fleet than in previous years. At the end of last year, we made a conscious decision to reduce our fleet size in preparation for a significant capital expenditure starting at the end of the first quarter and continuing through the second and third quarters. This decision was intentional, as we saw an opportunity to tighten our fleet. Additionally, we had a strong start in the first quarter with our ProSolutions business, driven in part by the impact of the Texas freeze, along with an uptick in our entertainment segment. The overall industry fleet is tight due to supply chain challenges, but this situation works in favor of the rental industry since we have $3.6 billion worth of fleet readily available. This positions us well to meet demand, especially in areas where production may be limited. We do not foresee a shortage of equipment for our company and expect to receive all the gear we have ordered. However, we acknowledge the tightness in the supply chain communicated by all the OEMs.

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

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

Without delving into too much monthly detail, you can observe this on the chart on page 14. We have been gradually increasing a few basis points each quarter moving forward. Typically, pricing tends to improve sequentially into March at this point as we progress through Q1. So, while it’s not a significant change, there’s still work to be done. I believe we are likely leading the industry in terms of pricing and rates, and we aim to maintain that momentum. It was slightly down in 2020, but it appears to be on the rise in 2021, and we will continue to seize opportunities as they arise.

The reason for the question is that normal seasonality typically accounts for about 150 basis points per quarter during a growth phase in the second and third quarters. Therefore, some companies might operate at that standard seasonal rate. Given the performance comparisons, you would likely see pricing increase by over 5% in the fourth quarter. I just want to ensure I understand how you anticipate that trend will develop compared to normal seasonality. Considering the comparisons, the exit rate appears to be quite appealing.

Yes. As I mentioned, we expect a slight increase for 2021. I believe that 150 basis points might be an outdated reference, likely from 2019 or possibly 2018 for us. The industry as a whole has not maintained those kinds of price trends for quite a while.

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

I think it’s still a little too early. Q1 is still seasonally challenging in terms of demand, and while our specialty businesses have been performing well, there is still some pressure in the classic business. We need to focus on rates, as we have a good track record in that area. We will take opportunities to pursue increases on renewals where possible. However, we are still emerging from the impacts of last year, and we are not yet at a point of abundant success. As we transition into the seasonal part of the year, indicators suggest it will be tight, but we are not currently in that situation. We will continue to stay vigilant and execute where we can.

Okay. Lastly, regarding rental gross margins, your full year gross margins are around 400 basis points higher than first quarter levels, which is seasonally affected, as you mentioned. How should we consider seasonality this year compared to a typical year, and are there any of your direct costs of rent and operating expenses that are unusually low this quarter, which may increase beyond the volume point you mentioned, or anything else we should consider in relation to normal seasonality?

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

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

Can you share your thoughts on any costs, such as travel and entertainment, that may have become more permanent since COVID, especially in relation to what Jerry mentioned?

We have clearly learned quite a bit over the past 12 to 13 months since entering pandemic mode. This knowledge has improved various aspects of our operations, including SG&A and DOE, particularly in how we deliver materials, manage our branches, service our customers, and engage with them. I believe much of this learning will be long-lasting. As Mark mentioned, as we move into the year with increased seasonal volume, those costs will rise in absolute terms, but they should remain stable as a percentage of revenue.

Yes, that refers to costs. I want to discuss leverage. The current ratio of 2.2 is trailing. By the end of the year, it will be below 2, with an estimated $820 million in EBITDA against $1.5 billion to $1.6 billion in net debt. You have completed one notable acquisition. What is the market like for your ability to acquire additional companies? What are your primary considerations for investing that capital?

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

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

I don't think we will expand beyond our core areas or very close adjacent markets. You won’t see us engage in anything that would put us into completely new territory or far from our current business or geographical presence.

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

I have three questions. First, regarding the ProSolutions business, have you determined whether the weather and events in Texas were a significant contributor to the growth, or did they cancel each other out? Second, concerning the growth in entertainment that you mentioned, have you had a chance to cross-sell to any of the customers your team has built relationships with, or is that still a future opportunity? Lastly, could you provide some insight into what percentage of the overall revenue the entertainment business currently accounts for? Thank you.

Yes, we do a significant amount of cross-selling within our entertainment business, including our rolling equipment like forklifts and aerial booms, along with our ProSolutions business that provides climate control and lighting products for rent. We definitely cross-sell both products and among our sales teams.

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

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

Thank you. I would like to ask for a follow-up. Larry, during the last call, we talked about the Biden administration's infrastructure plan, which you mentioned was not in the forecast and still considered additional. As that additional support progresses, where do you see it in its journey? Do you have enough visibility on those projects to manage them, considering the tightness you've mentioned in the OEM supply chain?

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

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

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

Yes. I'm not entirely sure, Stephen. If you look back to 2020, national accounts were less volatile. There was a stronger performance in that area compared to local accounts, which experienced a greater decline. This year, we expect that to change. I don’t see any significant differences in their relative strengths. We are entering a slightly positive environment for both, and we should aim for a small rate improvement in each. The mix is favorable; we aim for an ideal balance around 60-40, and we’re currently close to that. It may vary from quarter to quarter due to specific account activities, but there isn’t a significant trend shift happening this year.

Could you clarify whether the volumes in entertainment are at pre-COVID highs, or is it the total revenue? Additionally, regarding pricing, I recall you mentioning that entertainment tends to have a pricing premium compared to other areas. Has the pricing for entertainment customers returned to pre-COVID levels, or do you expect it to reach that point soon?

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

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

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

Our next question is from Ken Newman from KeyBanc Capital.

My first question is about your ability to gain market share as the industry rebounds. Specifically, do you have an idea of whether your smaller competitors are already experiencing effects from the tighter supply chain? Also, how tight can the industry's fleet utilization become before it starts to significantly affect your market share gains?

We are very confident that we secured our fleet orders early this year, which puts us in a strong position as the business seasonality picks up. I'm not sure how to address the situation with smaller competitors, but if they didn’t place their orders early and are starting now, they may struggle to obtain equipment this year. At the end of last year, we were uncertain about what the upcoming year would hold, but we decided to place our orders to ensure we were prepared. I believe I have addressed your questions, unless I missed something.

No, that's good information. I appreciate it. My final question is if you could provide some insight into what is included in the guidance regarding used equipment sales. I know you mentioned a shift towards retail instead of auction. However, used prices have been high and rising in recent months. Can you share any new range regarding fleet sales that you can disclose today?

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

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

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

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

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

Yes, I believe you are correct. The increase in the first quarter was significant. The first quarter is typically a challenging period for dollar utilization, so we consider it a reset for us. We do not anticipate a decline as we enter the seasonally stronger part of the year. Therefore, we expect dollar utilization to improve as the year progresses. We are definitely looking at a record year in terms of dollar utilization compared to 2019 and 2020.

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

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

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

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

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

Similar to what we did last year.

I believe we are the third largest customer for many of these companies. We maintain a constant relationship with ongoing discussions. Our fleet team has excelled in anticipating the decline in demand in 2020 and the tightening of demand in 2021, and we will continue to perform well as we approach 2022. It involves daily communication, and we will refine our forecasts for 2022 accordingly.

I think we have time for one last question.

Actually, there’s no more questions.

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

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