Herc Holdings Inc (HRI) 2022 Q2 法說會逐字稿

Good morning, and welcome to the Herc Holdings Second Quarter 2022 Earnings Conference. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Elizabeth Higashi. Please go ahead.

Thank you, MJ, and thank you all for joining us this morning. Welcome to our Second Quarter 2022 Earnings Conference Call. Earlier today, our press release presentation slides and 10-Q were filed with the SEC and are all posted on the newly redesigned 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 our second quarter 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. Before we begin our formal remarks, I'd like to remind you to review our safe harbor statement on Slide 3.

Today's call will include forward-looking statements. These statements are based on the environment as we see it today and therefore, involve risks and uncertainties. I would caution you that our actual results could differ materially from the forward-looking statements made on this call. You should also refer to the Risk Factors section of our annual report on the Form 10-K for the year ended December 31, 2021.

In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures for the closest GAAP equivalent can be found in the conference call materials. Finally, a replay of this call can be accessed via dial-in or through a webcast on our website. Replay instructions were included in our earnings release this morning. We have not given permission for any other recording of this call, and we do not approve or sanction any transcribing of the call.

I'll now turn the call over to Larry.

Thank you, Elizabeth, and good morning, everyone. Please turn to Slide #4. I'm pleased to report that we achieved strong results in the second quarter, reflecting a positive operating environment and robust demand. We continue to achieve new records in the second quarter of 2022 in total revenue, rental revenue, net income, dollar utilization, adjusted EBITDA and adjusted EBITDA margin. Volume and rates contributed to the 35% increase in rental revenue in the second quarter over the prior year. Dollar utilization increased 40 basis points to 42.5% and adjusted EBITDA increased 37%.

We completed the acquisition of 6 additional companies with a total of 9 locations in the second quarter, including the previously announced acquisition of Cloverdale Equipment Company in April. Year-to-date, we've spent $317 million in net cash expenditures on our acquisition strategy. On July 5, we announced the amendment and extension of our senior secured asset-based revolving credit facility, doubling the capacity to $3.5 billion and extending the maturity to 2027.

The additional capacity is expected to provide the company with ample liquidity for several years to come. We announced today that we plan to repurchase our common shares under the 2014 stock repurchase program, subject to market conditions. The program was established in March of 2014 and has a remaining authorization of $395.9 million. We believe that given our operating performance and long-term growth prospects, but the year-to-date downturn in our stock price implies a discounted valuation of our real work. We intend to take advantage of this pricing balance and continue to enhance our returns to shareholders longer term. keeping in mind that we intend to maintain debt levels within a targeted range of 2x to 3x net leverage.

And finally, based on the second quarter results and our outlook for the rest of the year, we are updating our 2022 guidance range for adjusted EBITDA to $1.195 billion to $1.245 billion, which implies a 34% to 39% increase over our 2021 results. We are also maintaining guidance of our net fleet capital spending to $900 million to $1.12 billion.

And now let's move on to our financial highlights. Please turn to Slide #5, which shows the second quarter results over the last 5 years. Our second quarter results shown here on a 5-year basis demonstrate the acceleration of our growth as part of our shift into high gear strategy. Equipment rental revenue was $605.4 million in the second quarter, an increase of 35% or $157.4 million compared to the prior year.

This increase was driven by solid performance in our core business and growing market share from our specialty businesses. Total revenue grew 30% to $640.4 million impacted by lower sales of used rental equipment, a decision we made to continue to meet customer requirements in light of a tight supply of new equipment related to supply chain issues from original equipment manufacturers. We reported an increase of 53% in net income to $72.2 million or $2.38 per diluted share in the second quarter compared with $47.1 million or $1.55 per diluted share last year.

Adjusted EBITDA grew 37% over prior year to $284.2 million. Our enhanced scale and focus on operating leverage improved year-over-year adjusted EBITDA margin 210 basis points to 44.4% in the second quarter of 2022. This is an exciting time for Team Herc, and we are extremely pleased with the performance and tenacity of our team. We are committed to providing excellent customer service and expanding our rental solutions to a broad array of customers and industries to achieve even greater success.

Now please turn to Slide #6. With 57 years of history in the equipment rental industry, our 6,100 team members work hard to ensure our customers achieve optimal performance safely, efficiently and effectively every day. Everything we do is built on our promise and commitment to help our customers and communities build a brighter future. As of the end of the second quarter, we operated 333 locations across the United States and Canada in 42 states and 5 Canadian provinces. As we add additional locations and employees to Herc Rentals, we are committed to ensuring that we focus on safety, training and other programs to assist the new team members in their integration into our Herc culture.

The addressable North American market size is now estimated to be $60 billion and growing by about 15% in 2022 according to the American Rental Association. Every day, new mega infrastructure and other industrial and commercial projects are announced throughout North America. We intend to get our fair share of this new activity. We expect to continue our momentum by addressing the opportunities in the market and outperforming the overall industry as we grow through organic growth supplemented by select acquisitions.

Before I pass the call over to Aaron Birnbaum, our Chief Operating Officer, I want to thank the entire Herc team for their outstanding contribution and their focus on delivering outstanding customer service. I'd also like to welcome all of the employees of our latest acquisitions to the Herc family. We hope you are as proud to be a part of Herc Rentals as we are to have you join us. And now Aaron will update you on our operational programs.

Thank you, Larry, and good morning, everyone. We continue to see steady demand in our markets and attractive opportunities to grow our business given our investments in additional fleet and our expansion through acquisitions and greenfield locations. As you can see from our results, we are increasing our scale and operating leverage in our key urban markets. Our team has done an excellent job executing our strategy as we enter the third quarter, which is typically the seasonally strongest quarter we still see no reason for slowing up our momentum. Clearly, there is more to come.

Now please turn to Slide #8. Our Q2 results reflect the opportunity we seized by accelerating investment in fleet with average OEC fleet up 32% over last year's comparable period. Equipment rental revenue in the quarter rose to $605.4 million, up 35% compared with 2021. Our core business continued to benefit from solid operating performance in all of our regional operations. Strong rate growth helped to offset inflationary pressures and our team successfully passed on rising fuel costs through increased revenue recovery and equipment delivery and equipment refueling charges. Our Pro Solutions business also continued to contribute strong double-digit growth year-over-year in the second quarter of 2022 as we continue to expand our market share in the rental of power generation, climate control, remediation and pump equipment.

The integration of the acquisitions we've announced to date is on track, and we continue to focus on additional locations in targeted markets through organic growth and acquisitions. We will continue to capitalize on our fleet expansion and are investing $900 million to $1.2 billion in net fleet capital expenditures this year.

Now please turn to Slide #9. Our fleet expenditures at OEC totaled $327 million in the second quarter of 2022. Given current equipment rental demand and our strategic management of fleet in this equipment constrained environment, we disposed off $64 million of fleet at OEC in the second quarter, about $7 million less than last year's second quarter when we began to hold fleet due to healthy customer demand. At this point in time, we expect OEC disposals for the full year to be about the same as last year. As we said on our Q1 call, we had most of our 2022 equipment orders in early last year and continue to receive as much fleet as we can get our hands on. However, the overall inflationary impact to our 2022 orders will likely end up in the mid-single-digit level.

As shortages, inflation and labor costs impact the industry, we do anticipate that industry fleet costs will continue to rise in 2023. We have recently been visiting our largest OEMs and are confident that we will get the fleet we've ordered in 2022 and 2023. Stronger pricing of used equipment and an improvement in our sales channel mix contributed to an increase in equipment sales proceeds as a percentage of OEC. We were pleased to record proceeds of 47% in the quarter compared with 41% last year. The average age of our disposals was 86 months in the second quarter, and fleet age is now about 49 months about the same as it was a year ago at this time.

Our fleet composition at OEC is on the left-hand side of this slide. Total fleet is now a record $5.1 billion as of June 30, 2022, about 35% higher than OEC fleet at the end of Q2 2021. Dollar utilization improved 40 basis points compared to Q2 2021, a new second quarter record of 42.5%. This reflects well for the rest of the year since Q3 is typically the best dollar utilization quarter in the year due to seasonality.

Slide 10 puts into perspective just how much we have expanded specialty over the last several years to serve the growing addressable market. In 2016, specialty, including ProSolutions and ProContractor accounted for just 18% of OEC. Today, we're at 24%, closing in our goal of 25% to 30% of total OEC.

Our specialty fleet is comprised of climate control, power and distribution, pumps and ProContractor tools. Specialty typically averages 14% to 16% higher dollar utilization than core. We've been growing our specialty branch network to enable rapid response to customer demand. Our North American ProSolutions resources can respond to an urgent request by mobilizing equipment for the affected market from a broad network of equipment and major competitive advantage over local suppliers. The cross-selling opportunities are significant, particularly as a new offering in our newly acquired locations.

Please turn to Slide 11. Our diverse customer mix and base of large national customers operating in essential business sectors drives our sales strategy and provides additional growth opportunities. Our diversification strategy over the last several years also targeted new industry verticals to drive healthy and stable growth. As you can see by the strong growth we produced, we are successfully growing across multiple industry verticals and across all regions. New account revenue continues to contribute to our growth story as we have focused on our sales force and we are bolting on new acquisitions. This will continue to be a major opportunity going forward. In the second quarter, local rental revenue represented 58% of total rental revenue, up from 56% in the second quarter of last year. This is nearing our goal of 60% local and 40% in national accounts.

Please turn to Slide 12. Safety is always at the core of everything we do, and we continue to focus on striving for 100% perfect days throughout the organization. Our major internal safety program focuses on perfect days. That is days with no OSHA reportable incidents, no at fault motor vehicle accidents and no DOT violations.

In the second quarter, on a branch-by-branch measurement, all of our branch operations achieved at least 98% of days as perfect. I'd like to thank our team Hert for their commitment to operational excellence and safety. Their professionalism shows up in the execution of our services to our customers every day.

Now please turn to Slide #13. We see continued growth opportunities through 2023 and 2024 as the pent-up demand in all of our end markets, coupled with the opportunities to support the many infrastructure projects being announced as part of the $550 billion infrastructure funding provides an outstanding road map for future growth.

Many of the industrial projects being announced are in the geographies where we have focused our acquisitions and greenfield additions such as Texas, Arizona, Toronto, Detroit and Chicago. The Southeast also has strong prospects. New manufacturing facilities for semiconductors, electric vehicles and batteries, LNG plants, renewables in the power grid are being announced consistently. And we have the scale and operations to support the new projects they announced throughout all of our regions.

One recent report showed industrial projects announced from November 2021 through April of this year totaled an estimated $180 billion and more are being announced every week. We are closely monitoring these project announcements in the field. The projects provide solid visibility for upcoming construction starts and support our view of the long-term growth opportunities in our markets. Our regional operations are primed and prepared to continue our growth strategy.

Now I'll pass the call on to Mark.

Thanks, Aaron, and good morning, everyone. The HERC team continues to perform at a high level as we continue to deliver record performance on all our key metrics in the second quarter of 2022. The strength and momentum we are achieving bodes well for the rest of the year and into 2023 as we focus on fast, profitable growth and a continued improving the key metrics that create long-term value for our stakeholders. Strong demand in our end markets and the ongoing supply challenges of equipment manufacturers continue to provide a strong operating environment with the leading rental companies.

As Aaron mentioned, we ordered early, so our new fleet is arriving steadily. We expect the new additional fleet growth to drive revenue growth. Our operations team has done a great job with delivering record time and dollar utilization while integrating new team members, customers and fleet into the Herc model. This consistent execution has led to excellent performance and strong momentum that will continue throughout 2022 and beyond.

Slide 15 shows the summary of our second quarter results compared with 2021. Equipment rental revenue increased by a very impressive 35% to $605.4 million from $448 million in 2021, primarily due to continued volume and pricing momentum. As we said last quarter, the seasonal trends build sequentially throughout the year. We are successfully executing on our growth strategy and are clearly running in high gear when you view our Q2 results.

We're pushing hard on both our organic growth and acquisition strategy and enjoying a lot of success. Taking a closer look at the 35% rental revenue growth in the second quarter about 2/3 of the growth was organic and 1/3 from acquisitions. This validates our ability to grow our core business. Our organic growth is outpacing the market growth and we believe we continue to expand our market share. Our successful acquisition strategy provides a nice supplement to our organic growth story and allows us to quickly bring on key rental talents and to penetrate key markets.

Our revenue growth is not only fast and impressive but profitable. We are delivering excellent results for our investors and creating long-term value. Adjusted net income in the second quarter of 2022 increased 57% to $74.8 million or $2.47 per diluted share compared with adjusted net income of $47.6 million or $1.57 per diluted share in the second quarter of 2021.

Adjusted EBITDA increased 37% in comparison to Q2 2021. Adjusted EBITDA margins were also a record for the second quarter, improving 210 basis points to 44.4% in 2022 from 42.3% in 2021. All in all, an excellent quarter. We achieved most of what we set out to achieve, and we're very happy with our margin expansion and increasing flow through. We are lucky to have a solid inflation resistant model and have grown fast and held margins in a challenging inflationary environment. All of this is manageable for Herc within the context of 35% growth in rental revenues. And as is clear with our performance, we can invest in our business and in our people and continue to improve our adjusted EBITDA margins and investor returns.

On Slide 16, we highlight the momentum in our pricing and utilization trends by quarter. The graph on the upper left illustrates our success in managing price over the last couple of years and our ability to consistently drive rate growth. This is always an important metric to manage and is especially important when faced with cost pressures in an inflationary environment. We are especially proud to manage year-over-year rate, up by 5.5% in the current quarter.

The current market environment of tight equipment supply and steady demand continues to support our focus on rate, and we also benefit from our excellent pricing tools and the discipline and professionalism of our sales team. The industry seems to be enjoying price momentum, and we are achieving success in the spot market with our pricing tools as well as with our larger national contract negotiations. Our track record on executing on price and all sorts of operating environments is clear. The momentum in our rates is clear, and we expect to increase quarterly rates year-over-year and sequentially for the remainder of 2022, which sets us up well for 2023.

Our OEC fleet size closed the quarter at about $5.1 billion. A combination of early ordering and savvy purchasing has contributed to the steady delivery of fleet in 2022, which is also supplemented by fleet integrated in conjunction with acquisition activity. Our average age -- our average fleet on rent at OEC in Q2 was up by 35% in comparison to average fleet growth of 32%, which represents record time utilization and excellent execution and a solid operating environment. Dollar utilization continues to improve, up by 40 basis points in Q2 and improved value utilization reflects our ability to mitigate inflation and fleet costs through rate growth. Positive momentum and dollar utilization is also a long-term value driver going forward and has a powerful and positive impact on our return on assets.

Slide 17 summarizes the acquisitions we've made so far in 2022. We focused our acquisitions on high-growth markets that complement our current location network. So far through the first 6 months of 2022, we've acquired 9 companies in 12 locations in 8 states in 2 provinces. We spent $317 million in net cash with an average multiple of approximately 5.5x. We see significant revenue synergies in most of the companies we acquired and over time, we can run the fleet and operations more efficiently, generating synergized multiples of approximately 4 to 4.5x.

On Slide 18, you can see we have no near-term maturities. We recently amended our revolving credit facility and have doubled the capacity to $3.5 billion, extending the maturity to 2027. This clearly provides ample liquidity to fund our growth goals into the future as we commit capital to invest in our business and drive fleet growth into the new cycle.

Net capital expenditures exceeded cash flow from operations in the second quarter, and we reported negative free cash flow of $197 million before acquisitions. We are continuing to take deliveries and are taking as much fee as we can get our hands on. Our volume growth of 35% shows that we are putting it out on rent as soon as it heads the yard. Our leverage remains conservative, and our current leverage at 2.4x is in the middle of our target range of 2 to 3x. We also paid out a quarterly dividend in June at $0.575, a rate, which implies an annual payout of $2.30 per share.

Our capital allocation plans are focused on investing in organic growth, strategic M&A and the implementation of a dividend. For those of you who have been following us, you know that we discussed holding off on share buyback for a year or 2 while we focused on the first 3 initiatives on this slide. We've adjusted our capital allocation plans given the recent downturn in our stock price. We strongly believe that our long-term growth expectations indicate that HRI is currently trading at a discount to its real value.

Therefore, subject to market conditions, we intend to start purchasing our shares under the previously approved 2014 share repurchase program, which has a remaining authorization of $395.9 million. Our conservative leverage and ample liquidity provide sufficient resources to initiate a stock back and to remain within our target of 2 to 3x net leverage. While we continue to invest in fleet new locations through greenfields or acquisitions, dividend payouts and share repurchase over the next few years.

On Slide 20, we share the latest industry forecasts. ARA recently increased their 2022 industry revenue forecast for $60 billion from $57 billion, reflecting the strength of the growth cycle we are currently in with 15% growth now forecast for 2022 and 6% for 2023. Clearly, there is some strength to the current cycle despite all the negative sentiment around recession risks. Our job is to take advantage of the current environment for the benefit of our stakeholders, and that is what we intend to do. We remain cognizant of all the recession to and know how to run the recession playbook. However, right now, we are in a robust operating environment, and we intend to make [12%] (inaudible).

Our 35% rental revenue growth is clearly eclipsing the broader industry growth rate, whether you focus on the top line for our organic growth rate that is over 20%. We look to have much more momentum than the industry in general and are taking market share with our estimates of about 4% share of the North American market. This is consistent 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 HERC is a company of scale with a large, well-diversified mix of customers.

This is a very favorable environment to own $5.1 billion of rental fleet as our customers really appreciate our fleet availability, the breadth of our fleet offerings and our commitment to service. It should remain a favorable environment for increasing rates as everyone is facing cost inflation to a certain extent. It's also important to realize that the majority of our business is not directly connected to nonresidential construction. Our Specialty ProSolutions business is a real strategic benefit and we will look to continue to gain share and grow that business. There is pent-up demand for maintenance and turnarounds in a lot of our industrial plants, and this segment should also remain strong in 2022.

There is plenty of demand in our end markets to support growth in 2022 and 2023, and we have the balance sheet and liquidity to be able to fuel that growth by investing in our fleet and our market share, and that is what we intend to do.

On Slide 21, we've raised the lower end of our guidance range to $1.95 billion as we grow more confident with the strength of our business and see the lower end as an unlikely outcome. Our guidance for adjusted EBITDA is now $1.95 billion to $1.245 billion, which translates to an increase in adjusted EBITDA of 34% to 39% over our 2021 results.

We are also maintaining our net fleet capital expenditures guidance to $900 million to $1.2 billion. We believe we are in the early stages of an exciting industry up cycle and intend to deliver excellent performance as we look to continue to execute on our high-growth strategy. With that, I'll turn the call back to Larry.

Thanks, Mark. Please turn to Slide #22. This summary demonstrates the acceleration in growth we are achieving with our investments in fleet and M&A. As you can see, we have truly shifted this into high gear. We've come a long way in the 6 years since we went public, and I'm proud of the tremendous strides that we've made. We are demonstrating that we can accelerate top line growth and show an improvement in adjusted EBITDA margin. I think we provide a unique opportunity for all of our stakeholders, but most important of all, I'd like to thank our Herc team members for their diligence, professionalism and commitment to customer service. We are proud of our Team Herc.

Please turn to Slide #23. Many companies are now focusing more on purpose. We began with our vision, mission and values and committed to a purpose statement to equip our customers and communities for a brighter future. We do what's right. We're in this together. We take responsibility, we achieve results, and we prove ourselves every day. So now operator, we'd like to open the lines for questions.

(Operator Instructions)

We will begin today with Rob Wertheimer of Melius Research.

So, impressive EBITDA margin improvement. And then I had a question kind of on the potential. So you focused on dollar utilization for many years in our conversations, I guess, is the right metric for improving price and time at the same time, I suppose. I'm a little bit curious how much more room there still is on time utilization to get to best in class. I'm a little bit curious as you acquire companies, if you're seeing your operational ability to raise up their time utilization as well as other metrics? And just what the glide path is from here?

Yes. Great question, Rob. Look, there's always opportunity to speak a little more out in different areas of our fleet. And certainly, in acquisitions, we have a combination, some we have opportunities to improve time utilization, some we have an opportunity to improve dollar utilization and others, we have an opportunity to cross-sell for products that they don't carry, which will sort of "Rising tide raises all ships", helps us utilize some of our specialty gear that traditionally operates with lower time utilization than the general rental fleet. So we'll be able to expand into that. But certainly, always opportunities in all of those areas. Is it tremendous? No, but there is a pathway.

Okay. Perfect. And if I may, just your thoughts on SG&A this quarter. How much is pure inflation? How much is sort of strategic investment for growth? And how much more of that do you have to do? And I will stop there.

I mean most of it is investment for growth pure inflation as mid-single digits on the SG&A lines. We're obviously growing headcount and the operations faster to our too. So most of it is connected with that.

Our next call is from Sherif Shaba of Bank of America.

Looking at the large infrastructure spend ahead, we've had a lot of these larger mega projects announced. And to date, how have those aligned with the footprint that you have that's focused more on dense urban locations?

We feel we're really positioned well for all the infrastructure spend. We are in most of the urban markets in North America, we've been investing with greenfields and acquisitions in those markets that's our core strategies. So we feel very well positioned to capitalize on those opportunities. And as we mentioned previously, with our 2022 fleet investments. We've really focused on getting our core of our business larger. So that's the type of fleet, whether it's earth moving or aerial that really you see showing up on those big infrastructure projects.

Understood. And looking ahead, what do you anticipate your fleet cost look like next year? And can you outpace that? And how should we think of that dynamic off a very strong '22?

In '22, as I mentioned, we're in the mid-singles. We believe that next year will be higher than that in '23.

We don't -- yes, we don't have to outpace that in year 1, right, that fleet coming in for 8 years. So you can see that our current 5.5% rate increases outpacing the current impact of completion of our fleet as we pick up improve dollar utilization.

Our next question is from Jerry Revich of Goldman Sachs.

As we look at the business today, obviously, very different from the profile business you folks inherited some 6 years ago. Given where the business stands today with the operating improvement, pricing improvements, in the scenario where we do go into a downturn, can you just talk about what level of operating leverage you folks would expect in the business? And Mark, you alluded to having playbook ready and levers that you folks would pull. Can you just expand on that part of the conversation? I appreciate it's not the base case, but can we just step through what that scenario might look like for Herc?

Yes. I mean it all depends on the size and the shape of the downturn, obviously, going into a downturn with this amount of momentum impacts the sort of strength of the business on the way through. But typically, in a downturn, the operating leverage works against you on a fixed cost business. So you lose -- you sort of head into negative leverage to a certain extent of your revenues are actually decreasing, and your costs are staying relatively fixed. But getting from 35% fleet growth -- 35% revenue growth to negative revenue growth, that's quite a big drop. So I would suspect the momentum we've got going on in the likely -- the likely severity of any upcoming downturn being pretty mild that we'll be able to sort of manage our way through that pretty favorably in terms of operating leverage.

And over the course of COVID you folks flex the cost structure really well. I'm wondering to what extent you might be able to do that in the next downturn whenever that might be to mitigate the margin pressures and the fixed cost pressures that you're alluding to, Mark, based on lessons learned over that challenging period in time?

Yes. Although every recession has its different sort of shape and impact. So the COVID one was specifically very dramatic on the cost side with everything shut down. So I don't think we'd be able to adjust the cost side or once we adjust the cost side as dramatically as we did in that particular downturn.

Okay. Super. And in the quarter, just on Slide 16, you folks looks like utilization increased year-over-year, pricing was up 5.5%, but dollar utilization was up just 2.5% year-over-year, which suggests a I think a meaningful mix headwind. Can you talk about that? Is that mix away from entertainment or what's driving that? And what's the mix outlook into the back half of the year?

Yes. No, great question. Mix has been a bit of a challenge this year. That's mostly due just to relative growth rates, and you sort of touched on it with the entertainment business. So that was obviously growing incredibly rapidly last year as it was bouncing back from a really low number in 2020. So that growth is not as dramatic this year and that is having an impact on mix. There's also a bit of an impact on the bulk business with the health care rentals that we're at, still some of them out last year with the COVID rentals, they've sort of gone away in that bulk business. is having an impact on mix.

Also, the specialty business was growing much faster than the core business historically, and that was having a positive impact on mix, and that's not the same as we're growing the sort of core and especially at the moment at a similar growth rate. So good question, a bit of a complicated answer. Mix was a big impact in Q2 should be less going through Q3 and Q4.

Our next question comes from Ken Newman of KeyBanc.

For my first question, I was just curious if you could talk a little bit about the cadence of business trends that you saw as we progress through the quarter. Obviously, I think your very optimistic about the momentum kind of holding up into what's typically your strongest quarter seasonally next quarter. It does seem like the forward sentiment for construction spend seems pretty resilient here even with all the bearish sentiments in the market. But just any color that you've seen from your customers in terms of behavior as we've progressed through the second quarter and here into July?

Yes, Ken, this is Aaron. I'll answer that. Q2 was very strong and build up through the end of June, our time ut is very, very strong, and we're able to do the acquisitions and bolt on and work on synergies and really, it was accretive to what we accomplished in the second quarter. As far as the sentiment just in the -- on the ground, we see a tremendous amount of projects starting and activity. I've been in a lot of major urban markets during Q2. There is just a lot of construction going on. So we see a lot of activity right now. We get the tea leaves about the activity coming along the rest of the year and into next year. We listen really closely to -- the street to see what's going on with our customers' comments. And it's all very, very positive. We don't hear any negative activity or concerns going forward.

Got it. And then for my follow-up, obviously, you've been very active on the M&A front here in 2Q included -- you gave some good color on the revenue contribution. But I'm curious if you could maybe help us kind of frame what the impact to margins were from the acquisitions this quarter and maybe the expectation for margin cadence as those deals are integrated later on into the back half?

So the acquisitions are kind of margin neutral, I would say. They come in -- they come in pretty close to our sort of corporate margin, and then we've got the opportunity to expand that sort of up to our benchmark, branch margin through synergies over sort of 18 months to 2 years is sort of the guide there. So they are neutral, I would say, overall to margin.

Our next question is from Neil Tyler of Redburn.

I've got a couple left, please. First, on your share repurchase scheme, you've been fairly clear that that's predominantly in response to the change in the share price. But does the decision in any way to restart that buyback reflect either rising valuations or reducing availability of assets to sale? And maybe give us a little bit of an update on how you see the M&A pipeline?

The second question -- you mentioned, I think, Aaron, that you'd visited all the major suppliers recently and we're confident on receiving fleet that you needed for this year and for next. But from those meetings, can you perhaps share any latest insight on the broader sort of comments from those customers on the supply chain issues that they're facing and how that has progressed over recent months?

Sure. I'll let Mark take the first question on the share repurchase.

Yes. So I mean the acquisition pipeline is still robust. We're still closing deals and looking at deals. We sort of guided to a rough cadence of, say, $500 million a year, and you can sort of see that we've made a good (inaudible) through the first half. So there's no real change in our appetite or our ability to execute. It's mostly a response to the share price, as you mentioned, and we can -- we can put that on top of our acquisition activity and our fleet growth plans.

And Neil, on the OEM visits, yes, we mentioned on the narrative that we did -- we have been visiting and did visit several in Q2 of our big OEMs, just to visit with them about strategic look forward over the next couple of years. And I think it's well known. The supply chain has been challenging for everybody. And some OEMs are able to kind of handle the supply of product to us a little more rapidly than others, but they're all working very hard. And when we see down the road, we think we're going to continue to have challenges through the end of this year and the first half of next year, but we believe that by the end of '23, it will get to more normalcy. It's really had to deal with the components that the OEMs need to finish their products.

So we have been receiving the products, the equipment that we expected to get so far this year, and we got a line of sight to what's coming in the rest of the year. But it's not easy. The -- it used to be that you could buy equipment on the spot market for a deal and get it in a week. You can't do anything like that anymore. And the used equipment market is very, very tight as well. So I think everybody is improving their fulfillment of equipment, and we're very positive on where we're going through next year.

Great. Just to follow up there, what does that mean in terms of sort of lead time to which you're committed on equipment purchases in terms of number of months, for example?

We've placed about 40% or 50%, roughly 50% of our 2023 orders in already. So we -- in a normal environment, you don't have to get your orders in that much in advance. But in this environment, you do -- and we're still, as I said, receiving our product this year, but it tends to be where if it used to be 2 or 3 months delayed, now it's more like 2 months or 1.5 or 2 months delayed. So we are seeing product showing up every single day in all of our branches all the way through Q2 and in July.

Our next question comes from Seth Weber of Wells Fargo.

This is Larry Savision for Seth. Just a couple of questions. Going back to the kind of the environment where you talked about not seeing any kind of negative signs or project cancellations. Just to reiterate, nothing on interest rates or recession concerns that you're hearing on the ground or anecdotally from customers?

The only thing I would mention is just labor, the ability to ramp up some of the big jobs need 3,000, 4,000, 5,000 employees to conduct the project. That's where they're having some challenges, but nothing on project cancellations, anything of that nature. And as I mentioned, our -- the demand for equipment, our time utilization is super strong.

Okay. And does that include energy market activity? What are you guys seeing in terms of that?

Yes. We provide energy into upstream, midstream, downstream. They've all picked up, of course, since a year ago. And so we're seeing it all along the oil and gas and chemical segment of Industrial.

Okay. Okay. Great. And then just if I could squeeze in a last one. Your rate outlook for the rest of the year. You did mention you still expect sequential acceleration. Any kind of color on what we should expect the exit rate for '22 for pricing?

Yes. So maybe a little bit of nuance on that secular message, so secular increase. I don't know that we're expecting secular acceleration but we should see increases quarter-over-quarter and year-over-year going through the rest of the year. No guidance on the exit rate. We're happy with the sort of mid-5% zone, and we'll be happy to sort of increase that modestly as we go through the year.

Our next question is from Matt Brooklier of Gamco.

I just had one for you. As you think about the next, let's say, 12 to 24 months, all of the kind of big infrastructure projects that have been announced and are starting to gain momentum. Could you talk to maybe which equipment types you feel most bullish on, which equipment types you think are going to benefit the most from these particular projects?

Pretty much all of them, Matt, are project where it's a new build. So you got to tear up the ground. We call that the civil part. So that's a lot of earth moving wheel loaders, excavators, compaction. And then they move into concrete, tilt-up work, they closed the building. And then you get a lot of material handling, aerial inside and some of these projects are so big that they don't connect to the grid in a quick fashion. So they need temporary power, temporary cooling until they can connect to the local energy provider, the grid in the market.

And these projects are typically -- they're, I would say, at the low end 2-year build and some keep going for 5 years, depending on what type of big project it is. And then on the road and bridges, you see those in the freeway. Those are long-term projects. They seem like they never end. So again, those are a lot of excavators, wheel loaders, compaction and aerial to do all the -- get the man up in the air to connect all the concrete hurters and so on and so forth.

Our next question is from Mig Dobre of Baird.

I want to go back to your comments vis-a-vis your interaction with your suppliers, your OEM suppliers. So -- it sounds like the pricing for 2023 equipment is going to be higher than mid-single digits. I'm wondering if you can put a finer point on that. And when you sort of look at the sort of pricing you're going to have to pay in '23, how does that compare historically? I mean I realize that, that it's higher than what we've seen maybe in the last few years, but I'm wondering if it's very much out of the norm for what the company has seen in its history.

And related to this, I guess I'm wondering how you're approaching it, right, because OEMs are asking for pretty significant price increases. That's pretty clear yet input costs, raw materials and so on are coming down. So from your standpoint, as a customer, how are you approaching that in your negotiation and the timing of your CapEx?

Yes. Well, let me sort of take the first part. Yes, we said we'll exit this year with fleet that's probably up mid-single digits over prior year. And we expect that '23 fleet will be higher than that, probably mid- to high single digits, but we haven't, quite frankly, finalized all of that pricing with a lot of our key OEMs. So it would be hard for us to really comment on what our true expectations are until we finalize those negotiations with our suppliers.

We're more concerned now immediately with securing slots production slots and availability slots, and that's where most of our work has taken place with our key OEMs, while they're still trying to understand what their component supply might be going into next year and what the relative improvements that they can make over this year relative to both acquisition and cost of those components. So it would be hard for us to predict, although we do believe it will be higher than what it was this year going into next year.

Right. But going back to the answer to my question, the price increases that you're seeing here for 2023, does that impact at all the way you're thinking about dispersing CapEx? I mean, one could argue that you could sort of weight it out a bit until lower input costs are actually starting to flow through to (inaudible)

Well, no, it's not going to impact our decision on what we're going to acquire. We're going to try to get as much fleet as fast as we can and put it into the market, while we have a robust operating environment and customers demanding fleet for their projects. So remember, the cost only is over a 7- or 8-year period. And some of the fleet that we're acquiring, some of that has useful life up to 25 years. So the input cost is not that dramatic when it comes to the benefits that we can have of getting gear and putting it on rent. So no, it's not impacting our decision to acquire gear in the short term.

Understood. Then my last question is on the way you're managing inflation and higher costs within your own business and kind of how you expect that to trend going forward, the flow-through margins on our EBITDA a little bit lower than the 50% to 60% that you targeted. So I'm sort of curious here as to how -- what is the time line here for getting back to that more normalized flow through margin? Can that happen in '22 or is this more of a '23 sort of time line?

Yes. I think we -- I mean, we discussed in Q1 that those flow-through margins would be improving sequentially throughout the year, and they did improve in Q2 to over 51%, which was better than we did in Q1. So we expect that flow-through to be better in Q3 and in Q4 as we get more revenue, more operating leverage on the cost base. So that's the impact for this year, and we don't anticipate an acceleration of the inflationary environment going into 2023. So that should allow us to continue to improve their flow through going forward.

So being able to improve our EBITDA margins in Q2 by 200 basis points with these inflation pressures that you like to point out is a pretty good outcome, and we're very happy with that.

Our next question is from Steven Ramsey of Thompson Research Group.

Maybe to start with markets generally tied on supply versus demand. Is there a way to think about kind of order of magnitude, percentage of markets that are not in this tight supply-demand equation? And are you moving fleet out of those areas to better markets or maybe just generally, is there any outsized activity of fleet movement that is higher or lower than normal?

Steve, really all of our end markets are very strong across all of our regions. In prior years, periods, yes, we would move fleet from one geography or another to get better utilization. But at the moment, all of our North American operations and markets have a big appetite for fleet. And we want to continue to get our hands on as much as we can to really feed our needs in our business and what our sales force is creating.

Helpful. And then one on rates. Can you talk to the strength of spot market -- spot pricing on the market in this good market versus prior positive cycles and can you talk to if this spot pricing versus non-spot pricing, is there a larger delta than normal going on there?

So the spot pricing, obviously, is a little bit more volatile and easier to move. So that is very strong currently. Hard to compare that to prior cycles, both very strong and stronger than the national account pricing, as you'd expect, you're dealing with a quicker turn of that equipment and smaller customers and shorter-term demand as opposed to longer-term negotiations on contracts with bigger customers, but we do have momentum in both. So we've got success going in that national account negotiation. Those rates are going up, and the spot pricing continues to be very strong (inaudible).

Our next question is from David Raso of Evercore ISI.

Your suppliers don't usually book an order properly pricing asset. So your comment about 40% to 50% of your '23, let's call it, indications of interest in the equipment you want, do any of those have set pricing yet or is it still just sort of an indication of interest trying to hold the slot?

Some does, and some is holding the slot.

Okay. And then you said, again, you felt more comfortable after meeting with your supply base thinking about late this year into '23, but you did make a comment that still a challenge through the first half of '23. And I know it's early macro can change your thought can change. But when you think of your fleet growth potential next year from what the suppliers are telling you, is there a level of comfort they're providing that they could give you 10% more or 15% more? I'm just trying to get a sense of what they're communicating and trying to think about a peak into '23 fleet growth potential for you?

I think they're more in line with providing what they provided in '22 because they need to get more visibility for the whole year of '23 first. So we're optimistic that as they progress through '23, we can probably get more if the markets are still very strong.

And lastly, the carryover pricing, if you could answer it maybe just from what we have already today on the books or how we think about the rest of the year, if there was no further price gains after this year, just again, a peak into growth for '23. Is there a carryover of 3%, 4%? Just trying to get a sense of how we start the analysis for '23?

In terms of our rates, yes, if we got no rate growth from here, right? And that held through 2023, you'd be talking about mid-2% to 3% sort of rate growth booked in for next year.

Our next question is from Steven Fisher of UBS.

I wonder if you could just touch upon how used prices trended over the course of the quarter and how that has affected your decision-making in terms of used sales and overall fleet management. We've heard of some softening in various categories in the market. Just curious what you saw and how that's affecting your actions?

Steve, we made the strategic decision through Q2, just like you want to not sell as much fleet as we typically would during the quarter because the rental opportunity was so strong and so we chose to hold on to our fleet. The used market is very strong, and that's benefiting us in the fact that the fleet that we are selling, we're able to get the market rates in the retail. So and we're selling more of our fleet in Q1 -- in Q2 through retail and wholesale than we typically made in the auction market. So that really drove up the -- our proceeds because we're able to push the fleet through those channels as limited as it was.

Yes. But just to follow on that. The fact that the market is strong, has not really sort of caused us to look to sell more gear because we can -- we can do far better as long as that gear is acceptable to our customers, operational and doesn't have big repair and maintenance costs associated with it. It's far better for us to keep that in the fleet and rent it.

Okay. But just to clarify, you are not seeing anything in the underlying market conditions of softening or anything like that?

In the in the rental market or is the used market.

Used Market.

I think the used market ran up pretty strong and somewhat leveling off right now. It's not running up like it was previously. So it's kind of an elevated status right now.

Our next question is from Ken Newman of KeyBanc.

For a quick follow-up. I just wanted to follow up on a prior question about moderating material costs. Just maybe could you put that into the context of whether or not there's been more progress on negotiations with your biggest suppliers about pass-through pricing? I know that's been a bigger topic in recent months and over the past 12 months here. I'd imagine if that were to go through, would that be potentially a benefit to you if costs were to continue to decline here?

Yes, Ken, I mean, I think that you might be following markets that are moving on a daily basis and the suppliers are dealing with costs that move on 6-monthly, maybe annual basis. So steel has rolled over, copper has rolled over, but way to recently, I think, to have any impact on their ability to adjust pricing. So I don't think we're going to move to deflationary environment on our equipment costs because some of these commodity prices have rolled over, it is positive that they have. I'm sure that does take a lot of pressure off of our manufacturers, but it's way too early, I think, for that to start factoring into our negotiations in terms of pricing of equipment.

Understood. I guess the essence of the question is more so about whether or not there's been more progress in negotiations with the suppliers regarding they want to be more -- more on parity with material costs and whether or not that's kind of moved forward versus the last 2 or 3 quarters?

We don't really talk to them directly about their individual input costs either. So I think they are still faced with cost pressures. There's still year-over-year pressure on NIM that they're dealing with. So the conversations with the suppliers are around prices heading up as the direction of travel.

Thank you all. I hope you all -- we took a little bit longer to finish out to get everybody's questions in. So thank you all for joining us today. But before we close, just like to point out that if you haven't already reviewed our 2022 Corporate Citizenship Report, it's on our newly redesigned website at ir.hercrental.com. And as always, if you have any questions, please don't hesitate to reach out to me, and we look forward to seeing you all soon. Thanks a lot.

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