Herc Holdings Inc. (HRI) Q4 2021 Earnings Call Transcript

Herc Holdings Inc. (HRI -1.15%)
Q4 2021 Earnings Call
Feb 10, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Herc Holdings fourth quarter 2021 earnings conference call. [Operator instructions] Please note that this event is being recorded. I would now like to turn the conference over to Elizabeth Higashi. Please go ahead.

Elizabeth Higashi -- Vice President Investor Relations

Thank you, Jason, and thank you all for joining us this morning. Welcome, everyone, to our fourth quarter and full year 2021 earnings conference call. Earlier today, our press release, presentation slides and 10-K 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 our fourth quarter and full year results with comments on operations and our financials, including our view of the industry and our strategic outlook. The prepared remarks will be followed by an open Q&A. Before we begin our formal remarks, I'd like to remind you to review 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 presenting non-GAAP information that we believe is useful in evaluating the company's operating performance.

Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials. Finally, a replay of this call can be accessed via dial-in or through a webcast on our 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.

Larry Silber -- President and Chief Executive Officer

Thank you, Elizabeth, and good morning, everyone. Please turn to Slide No. 4. 2021 turned out to be a pivotal time for the equipment rental industry and an outstanding year for Herc Rentals.

The excellent performance of our operations and field support teams, combined with tight supplies of equipment and steady demand have created an optimal environment for us. Our strong fourth quarter contributed to a record year. We increased dollar utilization year over year by 400 basis points to 44.6% in the fourth quarter, reflecting improved volume, mix and rate. In the fourth quarter, we added another seven acquisitions.

Since December 30, 2020, we have completed 12 acquisitions for a cumulative total net cash outlay of approximately $477 million. Yesterday, we were also pleased to announce a 15% increase in our quarterly dividend to $0.575 per share, which was initiated in the fourth quarter of 2021. Our strong 2021 performance is clearly providing the momentum and growth that we expect going forward into 2022. And we raised the 2022 guidance for adjusted EBITDA from what we presented at our investor day last September.

Please turn to Slide No. 5. Our fourth quarter results continue to demonstrate outstanding operational execution and reflect new records in many of our financial metrics. Slide 5 shows the fourth quarter results over the last three years.

Given the unusual performance in 2020 due to the impact of COVID-19, we share a comparison not only with 2020, but 2019 as well. As you can see, our performance in 2021 clearly accelerated our growth trajectory. Equipment rental revenue was $542.4 million in the fourth quarter, an increase of 26.9% or $115.1 million compared to the prior year and 18.7% over 2019. This increase was driven by solid performance in our core business and growing market share from our specialty businesses both of which continue to outpace our pre-pandemic performance in 2019.

Adjusted EBITDA grew by 31.1% over prior year and 19.6% over 2019. Our focus on operating leverage improved year-over-year adjusted EBITDA margin 680 basis points to 44.4% in the fourth quarter of '21, another record. We reported net income of $71.8 million or $2.36 per diluted share in the fourth quarter compared with $35.5 million or $1.19 per diluted share last year. Our industry-leading rate management delivered strong results in a favorable operating environment, which benefited from tight equipment supply and steady rental demand.

This is an exciting time for team Herc, as you likely infer from the growth goals we presented at our investor day last fall. Our team is committed to providing excellent customer service and expanding our rental solutions to a broad array of customers and industries to achieve even greater success. Now on Slide 6. With these 56 years of history in the equipment rental industry, our 5,600 team members work hard to ensure our customers achieve optimal performance safely, efficiently and effectively every day.

We welcome all of the employees that joined us from locations acquired since December 2020. Everything we do is built on our promise and commitment to help our customers and communities build a brighter future. As of today, we are now operating 312 locations across the United States and Canada in 40 states and five Canadian provinces. The addressable North American market size is estimated to be $57 billion in 2022, a year-over-year increase of about 10% according to the American Rental Association.

We expect to continue our momentum by addressing the opportunities in the market and continuing to outperform the overall industry as we grow both organically and through M&A. Now please turn to Slide No. 7. We intend to capitalize on opportunities we have in an expanding addressable equipment rental market and a truly fragmented industry.

Our team has experienced and have, what I call, fire in the belly to take advantage of an exceptional opportunity before us. As you can see from this slide that we introduced at our investor day, our major strategic pillars are focused on growing the core business, expanding our specialty business, elevating technology, integrating ESG and maximizing our allocation of capital. Before I hand off to Aaron, let me share with you just how our strategy has been delivering results. On Slide No.

8, you'll see that 2021 proved just how well we can pivot from a tough 2020. Our dollar utilization reached a record 43% for the year. Adjusted EBITDA margin jumped to an all-time high of 43% even as we reach for a higher goal. And net leverage has dropped from 4.1 times in 2016 to 2.1 times at the end of '21.

Now for more about the details of our operations in the quarter and our outlook, here's Aaron Birnbaum, our chief operating officer. 

Aaron Birnbaum -- Senior Vice President and Chief Operating Officer

Thank you, Larry, and good morning, everyone. What a year. The fourth quarter and year-to-date results reflect the outstanding commitment and operational execution of our sales and field management and field support teams. Despite a challenging environment, our team demonstrated their commitment and conviction in serving our customers every single day, no matter what the circumstances.

I'm so proud of how we overcame challenges from the pandemic and continue to serve our customers in our local markets. Whether we were supporting the response to COVID on the front lines are serving our local and national customers, we were able to grow our customer base and our business overall. I want to thank our branch teams and the team to support them here at our field support center for their commitment in 2021. It was a memorable year.

Now please turn to Slide No. 10. Our Q4 results showed exceptional performance compared to 2020 and compared to a strong fourth quarter in 2019. Equipment rental revenue in the quarter was $542.4 million and rose 27% compared with 2020 and 19% higher than the comparable period in 2019.

Business activity continued to be solid, and all of our end markets are showing positive momentum. The typical seasonal decline in the fourth quarter was more mild in 2021. And our core business continued to benefit from solid operating performance in all of our regional operations. Our ProSolutions business also continued to contribute double-digit growth year over year in the fourth quarter of 2021 and as we continue to expand our market share in the rental power generation, climate control, and remediation equipment.

Our entertainment and services business also reported strong improvement in rental revenue growth primarily related to the continued robust production calendars for content providers. The strategic investments we made to diversify our customer base and industry verticals provide a solid foundation for growth as we successfully build upon our urban market strategy and deepen and broaden our markets throughout North America. The integration of the acquisitions we made to date is on track, and we are actively pursuing other acquisitions in targeted markets. Our Herc operating model continues to drive operational performance in fleet efficiencies and margin improvement, offsetting increases in year-over-year personnel-related costs in the quarter.

Our scale and leverage will support further margin improvement over the next few years as our revenue growth remains robust. Now please turn to Slide 11. One of the key ingredients behind our excellent performance in 2021 was fleet growth. Our fleet expenditures at OEC totaled $725 million in 2021, with expenditures of $210 million in the fourth quarter.

Given current equipment rental demand and our strategic management of fleet in this equipment constrained environment, we reduced the level of disposals substantially in the fourth quarter of 2021. We disposed $60 million of fleet at OEC in the fourth quarter and $286 million for the full year. Our fleet composition at OEC is on the left-hand side of this slide. The fleet is now $4.4 billion as of the end of the fourth quarter, about 22% higher than OEC fleet at the end of Q4 2020.

We continue to invest in our specialty fleet, which includes ProSolutions and ProContractor and accounted for about 24% of our total fleet as of the end of Q4 2021. We also continue to improve dollar utilization each quarter in 2021 and achieved a record 44.6% in the fourth quarter. Our fleet department did a great job getting in front of a tight market for new equipment purchases from the OEMs. We ordered early for 2021.

And while we have experienced delays of certain equipment, we have largely received the fleet from our initial orders. Our equipment cost increases were not material in 2021. But as shortages, inflation and labor costs impact the industry, we anticipate that industry fleet costs will continue to rise in 2022 and 2023. Fortunately, we had most of our '22 orders in early last year, so the inflationary impact to our 2022 orders will be modest in the mid-single-digit level.

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, which rose to 42% in the quarter compared with 36% last year. The average age of our disposals was 84 months in the fourth quarter, and fleet age is now about 49 months. Please turn to Slide No. 12.

Our diverse customer mix with our base of large national customers operating in essential business sectors and our expanded specialty business continues to drive our sales strategy. We are expanding through acquisitions in greenfield in fast-growing urban markets to drive top line growth. Additions to core and specialty fleet are expected to continue to be growth drivers as we can offer a broader array of premium fleet while the market remains constrained due to supply chain issues. We'll continue to focus on the expanding addressable markets of climate control, remediation, pulp and entertainment as well as other major verticals in industrial customers and utilities and energy, healthcare, warehousing and manufacturing and general construction.

Our diversification strategy over the last several years targeted new industry verticals to drive healthy and stable growth. As you can see by the strong growth we produced, we have successfully grown across multiple industry verticals. As an example, the contribution from oil and gas was up double digits in 2021, it still represents only about 9% of our total rental revenue. The economy is gearing up and will just support strong equipment roll growth in 2022 and beyond.

In the fourth quarter, our local rental revenue increased 27% year over year, representing 57% of our total rental revenue. New customer counts continue to be a solid source of growth in the fourth quarter and full year and will continue to be a major focus of our sales organization in 2022. We are targeting high-growth segments of the economy, and our end markets are showing the momentum to continue a strong recovery in 2022. Now please turn to Slide 13.

2021 was a busy year for our M&A and integration teams. Besides improving our revenue synergies, we also -- we are also pleased with the talented workforce and local customer relationships we have acquired. Through acquisitions, we've been able to increase density and cross-selling. We invested $477 million in net total cash outlay for the 12 acquisitions we made since December 30, 2020.

We welcome all of our new team members from the 37 different locations that we have now integrated into the Herc Rental organization. We are thrilled to have these field and experienced professionals join our team. You can see on the slide the names and dates of the companies we required along with assumed EBITDA and the implied multiples we paid. Our M&A pipeline remains robust, and we continue to seek additional targeted locations in the top MSAs to help enhance our urban density and improve our operating leverage and scale.

Please turn to Slide No. 14. We have been spending a fair amount of time here at Herc discussing sustainability and the programs we need to consider to meet the goals that we set for 2030. ESG goals were a part of last year's objectives established by our board of directors and will continue to be a priority going forward.

In 2021, we began to identify the areas that will help us reduce our Scope 1 and 2 greenhouse gas emissions intensity. We are in the process of moving all of our branches to LED, evaluating how we can expand our solar initiatives to reduce our electricity usage, and focusing on other longer-term initiatives we plan to incorporate -- to improve fuel efficiency and reduce greenhouse gas emissions of our fleet. We have said repeatedly that we intend to be the employer of choice in the industry. And we have made it a priority to offer competitive salaries and benefits to enhance retention and attract talent to team Herc.

Our recent annual employee survey showed that we improved on all of the major metrics, including employee participation, which rose to nearly 90% of our 5,600 employee base. Our employee Net Promoter Score doubled over the prior year and job satisfaction improved despite the challenges of COVID to our operations and health of our team members. We've been busy integrating over 500 new team Herc members and helping them understand our culture, purpose, mission, vision, and values. We are also spending time to assist new and current team members and understanding their future at Herc through training, through development and job opportunities.

Our employee resource groups, women in action and the veterans' employees resource group, also continue to be active in offering career-related programs, networking opportunities, and support. As always, safety is at the foundation of everything we do, and we start every day across our branches with a safety huddle and stretch. We continue to maintain our total recordable incident rate, or TRIR, under 1.0 in 2021. We remain committed to improve our safety stores with a TRIR goal of 0.49 or less by 2030.

As you've heard us talk in the past about various safety initiatives, one of our major internal safety programs focuses on perfect days, that is days with no OSHA reportable incidents, no at-fault motor vehicle accidents and no DOT violations. In the fourth quarter and full year on our branch-by-branch measurement, all of our branch operations achieved at least 98% 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 a team with equipment that will help them perform efficiently and safely, particularly in their driving and daily equipment servicing and maintenance activities at all of our branches.

Our rental days are best when they are done safely, seven days a week. Now I'll pass the call on to Mark. 

Mark Irion -- Senior Vice President and Chief Financial Officer

Thanks, Aaron, and good morning, everyone. The Herc team has clearly shifted into a higher gear in 2021 and delivered record rental revenue, EBITDA and dollar utilization, all key metrics that will drive long-term value creation. It's a great environment for the rental industry with strong demand for most of our end markets and construction equipment hard to come by as our manufacturers are dealing with ongoing supply chain constraints. Our fleet team has done a great job with getting our orders in early so that our new fleet arrives steadily throughout the year and likely ahead of our smaller competitors.

Our operations team have also done a great job with delivering record time and dollar utilization, getting the fleet to the right customers and the right jobs, managing peak demands for storm response, and by integrating new team members and customers and fleet into the Herc model. This consistent execution has led to excellent fourth quarter performance and strong momentum that will continue into 2022. Slide 16 shows the summary of our fourth quarter and full year results compared with 2020 and 2019. Equipment rental revenue increased 26.9% from $427.3 million in 2020 to $542.4 million in the fourth quarter of 2021, primarily due to improved volume and continued momentum in pricing.

Compared with our previous peak year in 2019, equipment rental revenue increased 18.7%. We have shifted into high gear and are executing well on our growth strategy that we outlined at our investor day last September. We continue to deliver solid profitability with adjusted net income in the fourth quarter of 2021 of $74.9 million or $2.46 per diluted share compared with adjusted net income of $40.2 million or $1.35 per diluted share in Q4 2020. Adjusted EBITDA increased 31.1% in comparison to Q4 2020 and was up by 19.6% compared to Q4 2019.

Adjusted EBITDA margins were also a record for the fourth quarter at 44.4% in 2021, improving from 37.6% in 2020 and by 470 basis points from 39.7% in 2019. As expected, rolling over the low base effect on the cost side of the business and the COVID-impacted quarters of 2020 was likely to impact our ability to maintain our historic flow-through. REBITDA margins for Q4 2021 remained strong at 45.2%, down slight 2020. For the full year, we were successful in expanding REBITDA margins with a 60 basis point increase over 2020 to a record result of 44.8%.

Adjusted REBITDA flow-through of 43.4% was in line with our expectations and should return to our targeted range of 60% to 70% in 2022. On the cost side, we have some operating expenses coming back into the business, along with a record rental revenues we incurred higher delivery, rerent, payroll, and commissions in order to provide superior customer service to delight our customers. As part of striving to be the employer of choice in the industry, we are committed to providing competitive compensation and benefits, and we have been adjusting our operating team's compensation to strategically stay ahead of wage inflation and to build and invest in the team that will become our platform for growth. All of this is manageable within the context of double-digit growth in rental revenues as is evidenced in our 2021 results we can invest in our business and in our people and continue to improve our margins and investor returns.

On Slide 17, 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 is a testimony to our ability to consistently drive rate growth. The latest quarter reflects average rates of up 350 basis points compared to last year. Q4 2020 highlights how well we manage rates in the COVID downturn, down only 80 basis points, despite all of the challenges we faced in 2020.

Our track record of executing on price and all sorts of operating environments is clear. And our rates are up by 6.2% over the last three years. The rate momentum we are building in 2021 is also clear, and we will maintain this momentum into 2022. The current market environment of tight equipment supplies and steady demand continues to support our focus on rate.

And we continue to benefit from our excellent pricing tools and the discipline and professionalism of our sales team. In addition, the industry seems to have gotten price momentum back, and we intend to continue leading the industry on price. Our OEC fleet size closed the year at about $4.4 billion. Average fleet grew by approximately 15% in Q4 compared to Q4 in 2020, which is an exciting transition.

A combination of early ordering and savvy purchasing saw us receiving most of our fleet orders during the year. And we supplemented those orders with some fleet integrated in conjunction with acquisition activity. Our average fleet on rent at OEC in Q4 was up by 21% in comparison to fleet growth of 15%, which represents excellent execution and a solid operating environment with record time utilization and efficiency. Rate growth, record time utilization, and continued momentum in our specialty businesses drove another quarter of record dollar utilization.

At 44.6% in Q4, we continue to track toward our goal of industry-leading dollar utilization in the mid-40s as a full year average. This positive momentum is a long-term value driver going forward and has a powerful and positive impact on our return on assets. On Slide 18, we can see that with no near-term maturities, we have ample liquidity to fund the growth goals we laid out at our recent investor day for 2022 and into the future as we commit capital to invest in our business to drive fleet growth into the new cycle. We generated $213.7 million of free cash flow before acquisitions during 2021.

After funding $431 million of acquisitions, our net debt increased approximately $260 million to $1.9 billion as of December 31. We have ample liquidity to fund our growth plans and our leverage of 2.1 times is at the lower end of our target range of two to three times. Yesterday, we also announced a 15% increase to our quarterly dividend to $0.575 a share, a rate which implies an annual payout of $2.30 per share. On Slide 19, we share the latest industry forecasts.

ARA forecasted an increase for industry growth of 4% in 2021 and our 24% rental revenue growth in 2021 was almost five times the growth rate of the broader industry. We clearly have much more momentum than the industry in general and are taking market share. 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 as we have seen in 2021, Herc is a company of scale with a large, well-diversified mix of customers. ARA currently projects a 10% increase in North American rental revenues to $57 billion in 2022. We are clearly in the early stages of the next construction up cycle with steady demand even before we get into any potential benefits from the proposed boost to infrastructure spending. Equipment supplies are tight, and our OEMs are challenged to manufacture and deliver new equipment due to worldwide supply chain bottlenecks.

This is a very favorable environment to own $4.4 billion of rental fleet as our customers really appreciate our fleet availability, the breadth of our fleet offerings, and our commitment to service. It should remain a favorable environment for increasing rates as everyone is facing cost inflation to a certain extent. Also, the majority of our business is not directly connected to nonresidential construction. Our Specialty ProSolutions business is a real strategic benefit, and we will look to continue to gain share and grow that business.

There is pent-up demand for maintenance and turnarounds in a lot of industrial plants, and this segment should also rebound in 2022. There is plenty of demand in most of our end markets to support growth in 2022. 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. Looking at the left side of 2020, you can see the momentum in our results through 2021 and our expectation is to maintain double-digit top line growth momentum for 2022 through 2024.

We raised 2021 guidance three times last year and are raising our 2022 guidance from what we provided at our investor day last September. We are focused not only on top line growth but profitable top line growth and have improved our adjusted EBITDA margins in 2021 to 43.2% and intend to continue to improve our margins with the goal of EBITDA margins in the high 40% range by 2024. On Slide 21, we're very excited with the growth momentum we currently have in our business and are raising our adjusted EBITDA guidance for 2022 to a range of $1.075 billion to $1.175 billion and maintaining our net capital expenditures guidance of $820 million to $1.12 billion. On Slide 22, we also wanted to highlight the longer-term growth goals we laid out last September.

We are a leader in an industry that is beginning to grow into a new up cycle and that continues to benefit from a secular shift from ownership to rental. Rental industry leaders can grow at two to three times the growth rate of the broader industry. And we see our organic rental revenue CAGR at 12% to 15% through 2024 and our adjusted EBITDA CAGR at 17% to 20%. We are focused on profitable growth, and our goal for adjusted EBITDA margins to improve to the high 40% range by 2024.

We are clearly in the early stages of an exciting industry up cycle and are excited about the performance we anticipate over the next couple of years as we look to take advantage of strong momentum and excellent results that will likely result in a hot start in 2022. With that, I'll turn the call back to Larry.

Larry Silber -- President and Chief Executive Officer

Thanks, Mark. Now please turn to Slide 23. Before we move on to Q&A, I wanted to point out our purpose, vision, mission, and values we developed when we became a public company nearly six years ago. We frequently talk about our vision and mission.

But today, I want to also focus on the values we hold here, particularly given the commitment we are making to investors about our growth goals over the next several years. We want you to know we manage our business by these values. We do what's right. We're in this together.

We take responsibility. We achieved results. We prove ourselves every day, and we are committed to investing in our communities. And now operator, please open the line for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Neil Tyler from Redburn. Please go ahead.

Neil Tyler -- Redburn -- Analyst

Yeah. Good morning, everyone. I'll start with a couple, please. Firstly, on your slides where you talk about the acquisitions.

The multiples imply roughly, I think, a 35% uplift in profits from synergies. And I wonder if you could help me understand over what time period you anticipate you can hit that goal? And then if you just share a little bit more insight into the deals you've closed. What and where those are during December? That's the sort of first question, parts A and B. And second question, more specifically, can you talk about the practicalities, the daily practicalities are taking delivery of such a huge quantity of equipment over the coming months? And for the most part, do you already have mechanics and drivers and the like that you'll need to be able to offer that equipment to customers? Thank you.

Mark Irion -- Senior Vice President and Chief Financial Officer

Yeah. Neil, on the M&A synergy slide. Most of those synergies are coming from revenue enhancements. So we see an ability to increase the utilization of that fleet and get a bit of return from what the previous owners had.

They typically take place over the first two years with the weighting probably in the first year. The acquisitions that we did in Q4 were sort of Northeast. So around Philadelphia, New Hampshire, Toronto, so New Jersey. And I think Aaron will take the fleet load question. 

Aaron Birnbaum -- Senior Vice President and Chief Operating Officer

Yes. Neil, you had a question about the practicality of absorbing the fleet. We call it how well can we absorb the fleet coming in. And you asked about our staff, the drivers, mechanics.

We really have no concerns of the fleet coming in. It is a bigger purchase a fleet this year than last year, but we're well prepared with more locations. We've been aggressively, although it's a tight labor market, and we've been increasing the wages of our existing staff. We do have more drivers and mechanics staff on board than we did a year ago.

So we've been aggressively recruiting, hiring, putting people in place for this growth curve that we are putting in our plan and that we're achieving in actuality. 

Mark Irion -- Senior Vice President and Chief Financial Officer

If you look at the slide on Page 19, Neil, with average fleet growing up by 15% in the quarter and average fleet on rent going up by 21% in the quarter, it's pretty clear. We're absorbing that fleet as fast as it comes in and a little bit more.

Neil Tyler -- Redburn -- Analyst

Got it. Thank you. That's very helpful. 

Operator

The next question comes from Ross Gilardi from Bank of America. Please go ahead.

Larry Silber -- President and Chief Executive Officer

Good morning, Ross. 

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Hey. Good morning, Larry. I just had a question on rates. They continue to accelerate.

You get 3.5% this quarter. Headline CPI is now running above 7%. And just generally speaking, based on your historical experience, I mean, is there any reason why rental rates wouldn't continue to accelerate to just inflation rates of the broader economy? And just with that, does your EBITDA guidance this year assume ongoing rate acceleration for the several quarters? Thanks.

Mark Irion -- Senior Vice President and Chief Financial Officer

So I mean our P&L is slightly different than the CPI index, I think. So we don't necessarily see that direct impact. We are seeing an increase in our costs, though, I mean that's clear and our wages. But you sort of look at the rental revenue line, maybe our wages are 25% to 30% for our all-in employee costs of 25% to 30% of our revenues.

So the ability to raise rates by three with momentum, which we continue to see into 2022 and do expect to continue. We feel pretty comfortable that we can continue to grow our margins in this environment. You sort of look back to the rental industry over previous inflationary environments. You've got to go back away into the early 2000s, and inflation tends to benefit the rental industry.

So it's not necessarily a challenge as a cyclical business, a little bit of inflation is a positive to the industry in general.

Larry Silber -- President and Chief Executive Officer

Yes. And coupling that with tight supply, Ross, and continuing secular shift, and the prospect at some point of seeing incremental opportunities with the infrastructure bill certainly puts a great opportunity in our hands to channel that gear to the types of markets and customers where we can command the improvement in rate.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Got it. Thanks, guys. And then just a follow-up. Just on acquisitions in general since Herc's obviously gotten much more active over the last months.

Just in general, like what's your elevator pitch to the targets? And are you encountering a lot of competition from your two bigger competitors? And just what's the No. 1 reason that you're finding that these players are selling right now?

Larry Silber -- President and Chief Executive Officer

Yes. Look, I think there's a mixture of reasons that we're seeing. And some of them we go after and quite frankly, some of them come to us because they've heard about how we treat employees and how we integrate and what we do. We're a little different perhaps maybe than some others and that we're still growing.

So we want to keep all of the talent and the people that are part of these companies that we acquire and we need that talent in order to continue to grow. So I think how we approach that is what we do upon integration and how we handle those businesses. And look, we're focused on specific markets, primarily in high-growth urban markets, and that's where we see the opportunities. What's motivating the owners obviously is, look, some are aging out and don't have firm succession plans in their business.

And the market is obviously at a point where the multiples are improved from perhaps where they were a few years ago, and they see it as an opportunity. There's always this obvious looming concern about will there be a tax change relative to capital gains tax, and that certainly is motivating several.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Just one thing I want to ask you, just on your equipment rental revenue was up 27% in the fourth quarter and 24% for all of '21. What was the acquisition revenue contribution to those growth rates? And are you able to say how much EBITDA M&A contributed to 2021? Thanks.

Mark Irion -- Senior Vice President and Chief Financial Officer

Yes. No, we haven't really broken that out in terms of communication. So I mean, I think the way to look at it is -- I mean, you can back into the EBITDA from the guidance that we've given or from the slide that we put down there. It does -- it's sort of a build.

That's an annual run rate number to work with. They come later in the quarter than you would probably expect in the build of EBITDA contribution in the first couple of months. It takes a while to get sort of ramped up. So there's a ramping benefit, I would say, to our EBITDA and the sort of multiples and the total dollar of purchase price that you're looking at on Slide 13 is a you can get a run rate impact to 2022 from that more than a 2021 impact.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

OK. Thanks, guys. I'll turn it over. 

Operator

The next question comes from Brian Sponheimer from Gabelli Funds. Please go ahead. 

Brian Sponheimer -- Gabelli Funds -- Analyst

Morning, everyone. Just a couple of questions about how your visibility and outlook. Obviously, very positive from a real broad perspective. What are you looking for from your customer base when you're thinking about your ability to plan fleet vis-a-vis economy growing versus the potential for any sort of contraction as we move toward the latter half of the year into 2023? if that's even on the radar?

Aaron Birnbaum -- Senior Vice President and Chief Operating Officer

Hey, Brian, it's Aaron. I'll take that one. As far as the momentum, we believe it's very, very strong as we went through Q4, as we're starting Q1 in '22, we see strong momentum. The normal seasonal kind of slowdown really wasn't -- is very mild compared to historical years.

So lots of momentum, lots of demand for fleets. I think that has a lot to do with just the supply and demand economics of new fleet coming into the market and who has the fleet these days. But from a point of view from our customers, still very, very healthy demand from our customers. We see large projects continuing to start.

We manage our business in different verticals. And we're seeing all the verticals we operate in have very healthy demand from our customers, very bullish environment overall, I would say.

Brian Sponheimer -- Gabelli Funds -- Analyst

OK. Going back to Ross' question about acquisitions. I'm curious as to maybe if you could book in the size of acquisition that you would look at either on the small side or how big an acquisition would you consider given your leverage is now at 2.1 times?

Aaron Birnbaum -- Senior Vice President and Chief Operating Officer

Well, look, on the top end, I think that's limited to like what's available, right? There's just not a lot of big rental companies left out there that are either available or making themselves available to the market. So I think we did a deal last year, which was outlined in our K, it was about $175 million. So that was sort of the biggest deal we've done to date. And I'd say we've done several deals that are under $20 million.

So we're prepared to do that range. And look, if there's anything bigger that becomes available, we certainly have the ability. We have the balance sheet and the capability to do it. I just don't see much out there that's much bigger than that, quite frankly.

Brian Sponheimer -- Gabelli Funds -- Analyst

Understood. Well, another another great quarter, another great year. Congratulations to you and your team. Thank you very much.

Aaron Birnbaum -- Senior Vice President and Chief Operating Officer

Thanks, Brian. 

Operator

The next question comes from Jerry Revich from Goldman Sachs. Please go ahead.

Jatin Khanna -- Goldman Sachs -- Analyst

Good morning, everyone. This is Jatin Khanna on behalf of Jerry Revich. Can you talk about the pricing cadence over the course of the quarter on your transactional business? And with new equipment prices for the industry up significantly, has transactional pricing momentum accelerated into January?

Mark Irion -- Senior Vice President and Chief Financial Officer

So pricing was pretty consistent through Q4. There's clear momentum. I mean looking at the slide that our year-over-year pricing has continue to increase quarter after quarter, and we expect that to continue into 2022. You get into seasonality at the end of Q4 and into Q1.

So the sort of read you get from pricing gets a little bit murky just given the sort of slowdown in demand with the winter season. We've done a really good job on our pricing and getting orders in early in 2021. So we're looking at a sort of mid-single-digit increase in the inflation in the equipment going into 2022. That obviously doesn't impact the whole fleet.

And we've got eight years to sort of get that back. So we're real comfortable with hitting toward mid-single-digit rate increases. And as you can see from our results, we're able to manage inflation grow our rental revenues really, really strong and improve our margins.

Jatin Khanna -- Goldman Sachs -- Analyst

And just as a follow-up, could you please talk about the M&A pipeline as it stands now? And how much fleet do you anticipate you can add this year based on the pipeline today?

Larry Silber -- President and Chief Executive Officer

Look, the pipeline remains fairly robust and active, and we continue to evaluate new opportunities as they present themselves. From a standpoint of fleet, that will all depend upon the size and the type of acquisition that comes our way, whether it's a specialty business or a ProContractor tool business or a cooling business or assuring business, more general rental. All of those come with different sort of fleet makeup and different sized fleets. But I would equate it not too dissimilar to what we did in 2021.

Jatin Khanna -- Goldman Sachs -- Analyst

Got it. Thank you very much. 

Operator

The next question comes from Steven Ramsey from Thompson Research Group. Please go ahead.

Steven Ramsey -- Thompson Research Group -- Analyst

Good morning. To start with a few questions on the entertainment vertical. This being a premium rate category. Can you talk to that in Q4? I may have missed that.

And then how you see that shaping up in 2022? And lastly there, can you share roughly what percentage of rental revenue this vertical is for on a normalized basis right now?

Aaron Birnbaum -- Senior Vice President and Chief Operating Officer

I can comment on the dynamics of the business, it's still robust. Q4 was strong. There was still a pretty significant slingshot back from when they were shut down from COVID. In the winter, typically there's a hiatus like late December, January, where they kind of slowed down and take a break, get ready for new content.

We saw that. But as we see ourselves getting through the last part of February into March, that hiatus concludes and we see a growing momentum in entertainment in '22 versus '21.

Steven Ramsey -- Thompson Research Group -- Analyst

OK. And is there a rough percentage of rental revenue that you could share on that vertical?

Mark Irion -- Senior Vice President and Chief Financial Officer

We haven't broken that out, Steve. It's that's buried in the other portion of the slide on Page 12, but we don't break it out.

Steven Ramsey -- Thompson Research Group -- Analyst

OK. OK. Sounds good. And then curious on the acquisitions that you've done recently in the capex being unchanged for 2022.

I guess maybe can you talk to the fleet situation are you loading in those new branches with some of this capex? Or is the fleet fine at those branches?

Larry Silber -- President and Chief Executive Officer

Yes. Look, we acquired a significant amount of fleet, obviously. But when we were planning our 2022 fleet capex, certainly, all of these companies were on our radar screen, and we incorporated that into our capex planning. So yes, they will get a portion of the incoming fleet that will help them refresh and build those branch fleets as well.

Steven Ramsey -- Thompson Research Group -- Analyst

OK. Great. And then last quick one for me. Operating cash flow conversion of EBITDA has been in that mid- to high 80% range the past three years.

Is there any factors that would change that in FY '22?

Mark Irion -- Senior Vice President and Chief Financial Officer

No. I don't think so that should continue to expand along with our margins.

Steven Ramsey -- Thompson Research Group -- Analyst

Excellent. Thank you. 

Operator

Thank you. [Operator instructions] Our next question comes from Ken Newman from KeyBanc Capital Markets. Please go ahead.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Good morning, guys. I'm curious if you could just talk a little bit about the opex trends relative to the first quarter. Mark, I think you mentioned higher personnel costs from wage increases. And I'm hoping you could provide a little more color on how you view SG&A leverage into the first half of the year, just in context with higher fleet growth and absorption. 

Mark Irion -- Senior Vice President and Chief Financial Officer

Right. So it's the typical season, there's a seasonality to the business and the way those expenses sort of roll through. So in terms of nominal dollars, you'll see a decrease into Q1 and Q2 off of the sort of Q4 numbers as a percentage of rental revenues is probably the easiest way to look at it, that continues to decrease as a percentage of rental revenues each quarter as we sort of focus on operating leverage. There should be more in the back end than there is in the first half.

But we challenge ourselves to drop those metrics as a percentage of rental revenues year over year each quarter just to sort of focus on flow-through and operating leverage.

Ken Newman -- KeyBanc Capital Markets -- Analyst

OK. And to clarify, obviously, you're up against some pretty difficult comps in the operating leverage for EBITDA flow-through. But does the guide today still kind of imply that REBITDA flow-through of the 60% to 70% just given the absorption benefits?

Mark Irion -- Senior Vice President and Chief Financial Officer

Yes. No. We -- that's our ongoing target, obviously, listing that in 2021, just given the sort of COVID impact and it's going to take us a while to work our way back into that. But we are focused on getting into that direction, and that's our target for the 2022 year.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Understand. And then just for my follow-up, it does seem like supply and production schedules are expected to open up a bit here into the back half. I understand you're taking delivery of equipment a little bit earlier than some of your competitors. But just can you talk a little bit about how you view equipment availability into the second half of this year? And where you think that impacts industry rental rates or utilization?

Aaron Birnbaum -- Senior Vice President and Chief Operating Officer

Well, we believe -- Ken, this is Aaron. We are getting fleet every single day. We did plan for it to come in early so that we had it for the second quarter, and it's happening. We do believe that there'll probably be some solutions to it later in the second half.

But we really don't think that things will get back to normal until after into next year as far as a normal supply delivery schedule. And what was your second part of the question?

Ken Newman -- KeyBanc Capital Markets -- Analyst

No. I'm just curious if you have a view on the impact for rates as availability starts to open up?

Aaron Birnbaum -- Senior Vice President and Chief Operating Officer

I mean I think we anticipate fleet is going to be tight all the way through 2022. There's no real indication that that's freeing up. But -- and I don't think there's going to be a flood of equipment that's going to create some overnight supply and demand sort of rerate. So I think the rate environment is going to continue to be good.

We've got inflation pressure from more than just fleet. And I think the industry sort of really got focused on rates. So I expect that continues through the year, and that remains a sort of favorable rate environment.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Yes. I'll ask one more, if you don't mind. I just want to ask about how we should think about baseline dollar utilization in '22? You've got a record dollar ute in the fourth quarter. Just thinking about the absorption benefits and the structure of the company today, is it kind of fair to assume that 40% is the minimum for any given quarter in '22? Or are there puts and takes from seasonality?

Aaron Birnbaum -- Senior Vice President and Chief Operating Officer

There are puts and takes from seasonality. But the way our business is improving and the returns on our fleet are improving, we've been pretty steadily improving those sequentially quarter-over-quarter for the last couple of years. So we continue to see that happening. We've sort of hit a mid-40s for a quarter in Q4.

And now our goal is to get that to sort of mid-40s for the full year average, and that's our target on the fleet.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Understood. Thank you very much. 

Operator

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

Rob Wertheimer -- Melius Research -- Analyst

Good morning. My question was also on dollar route, which obviously looked really good and has trended very, very well. And I just wonder, it's more of a big picture one. Just if you could talk about what went right in the quarter? I know you talked about some outside trucking and stuff, which obviously happens when you have strong growth.

But what went right, what levers do you have left to pull there? Is it mostly pricing from here? Or do you continue to sort of see operational pathways? Obviously, you'll improve acquisitions. I understand that to you deploy the capital when you get it. But what sort of pathways do you have left to improve dollar ute and what's going well? Thank you. 

Larry Silber -- President and Chief Executive Officer

Yes. So I'll take part of it and then maybe Mark can finish off. But look, pricing certainly is one of the levers. And as you've seen over the past several years, we've played the pricing card pretty well.

And we have great pricing tools that enable us to price well and continue to look for opportunities in all of our organization. Our sales force is certainly motivated and have the tools in their hands to improve pricing and dollar utilization. But additionally, as we continue to grow our specialty business, that is a pretty important part of improving our dollar ute. Our specialty businesses tend to drive a higher dollar ute.

And we continue to focus on those, grow, add fleet to those, and do a fair amount of cross-selling on that, certainly with our new acquisitions, which enables improved dollar utilization there as well.

Rob Wertheimer -- Melius Research -- Analyst

OK. Thanks. And then just on fleet acquisition, you touched on this, you've seen coverage for the year with inflation. I think you said at mid-singles.

And obviously, just given the way your business is structured, you don't absorb all the inflation in any one year across the fleet age is more the way. But you seem to hint it could be higher in the future. Any sense as to -- was that meant to imply at high singles in the '23 based on what you're hearing from your vendors? And I'll stop there. Thanks. 

Aaron Birnbaum -- Senior Vice President and Chief Operating Officer

This is Aaron. We believe that in '22, it will be a mid-single, and we think it's very likely in '23, it will be that again. So over a couple of year period, we expect about 10 points.

Rob Wertheimer -- Melius Research -- Analyst

Got it. Thanks. 

Operator

Our next question comes from Mig Dobre from Baird. Please go ahead.

Mig Dobre -- Baird -- Analyst

Good morning, everyone. Thanks for squeezing me in. A lot of good questions have been asked already. I guess one that I would ask is surrounding your guidance, your updated guidance.

Initially, you provided this outlook back in September, and it feels like a whole lot has happened since you provided this outlook, you bumped it $25 million today. I'm kind of curious, as you look at the way your operating plan has evolved for 2022, can you sort of share some of the moving pieces here in terms of sort of what got better, what got more challenging sort of how you ended up getting to these new set of numbers?

Mark Irion -- Senior Vice President and Chief Financial Officer

So I mean, I think, Mig, we were out in September with the investor day. So we had a pretty good -- we've put a lot of thought into 2022 at that stage and coming out with guidance much earlier than what we had and actually sort of giving thoughts out to 2024. One of the -- so that the M&A might have changed a bit since the end there was something like $280 million of M&A in September, and we did an additional $200 million in the back end of 2021. A lot of that was sort of in the pipeline, but we didn't really know what was going to close and what wasn't going to close.

So it's part of it, but that happened later in the year. So that is not a significant driver of the guidance range. I think the main impact was a real strong Q4, and we didn't see the sort of normal seasonality in the later end of Q4 that we normally do business maintain really strong write-up until the holidays. And that momentum and that pricing momentum rolls into sort of Q1 and sort of gives us the confidence for the raise on 2022.

So a real sort of strong finish and a hot start to 2022, I think, are the main sort of drivers there. 

Mig Dobre -- Baird -- Analyst

Yes. And to be clear, Mark, I was referring to your 2022 outlook, right? So you mentioned the incremental M&A, which obviously all of it carries into 2022 as far as EBITDA contributions. But I'm sort of, again, curious as you say, for instance, rental rate outlook got better. Are you thinking differently in terms of time utilization? You talked about dollar utilization, but I'm also curious, time utilization.

And do you sort of have a -- maybe on the negative side, maybe you have a different outlook on inflation and labor cost for instance as well? That's what I was trying to angle for in terms of the moving pieces here, if that makes sense.

Mark Irion -- Senior Vice President and Chief Financial Officer

Yes. No, no. I get it, and maybe I wasn't articulate enough. But we had actual results through September.

Our Q4 results were better than what we anticipated. Net momentum rolls into Q1, which sort of leads us to feel that Q1 is going to be better than we anticipated. So a strong start to the year, 99% of the time that ends up with a really good year, and that's sort of what we're seeing. So time utilization very strong to close Q4 and to open Q1 and also rate momentum, very strong close in Q4 and into Q1.

So the momentum in the business out of Q4 into 2022 is stronger than we anticipated. And that makes us feel pretty confident that we can hit our '22 numbers and raise the guidance as we have.

Mig Dobre -- Baird -- Analyst

Sure. Understood. Then last question here. Maybe a comment from you on how you're thinking about sales of rental and equipment.

I obviously understand as to why you pulled back on that in the back half '21? Are you thinking any different for '22? Thank you. 

Mark Irion -- Senior Vice President and Chief Financial Officer

Maybe it opens up in Q4. I mean, the demand for equipment is so strong and time utilization is so strong. We've completely choked off the sale of our equipment just to maximize the size of our rental fleet and the ability to rent that. There's much more economic value to renting than there is to selling.

So maybe by Q4 of 2022 that opens up a little bit. But certainly, the first couple of quarters of 2022, we'll be sitting pretty tight on that and just maximizing our rental fleet and our volume of rental equipment on rent.

Mig Dobre -- Baird -- Analyst

Thanks. 

Operator

Our last question is from David Raso from Evercore ISI. Please go ahead.

David Raso -- Evercore ISI -- Analyst

Hi. Thank you. I'll be quick. I appreciate fitting me in.

The EBITDA margins on the acquisitions that you made in '21, how do they compare to the 43% adjusted margins you had for the full year?

Mark Irion -- Senior Vice President and Chief Financial Officer

The EBITDA margins of 21% compared to the full year of '21?

Elizabeth Higashi -- Vice President Investor Relations

Acquisitions.

David Raso -- Evercore ISI -- Analyst

Of the companies you acquired relative to your 43% or if you can just give the direct EBITDA margin of what you acquired?

Mark Irion -- Senior Vice President and Chief Financial Officer

So there's a mix. It really depends, as Larry was mentioning on the type of business you're acquiring. So specialty businesses tend to have a higher EBITDA margin than the general rents business. I would say just in general, the businesses we're acquiring around lower dollar utilization than we run ourselves and lower margins than we run ourselves.

So the synergies that we sort of outlined on that slide is not really coming from expense savings. It's mostly coming from improving the performance of the fleet and improving the margins of those businesses as they come in.

David Raso -- Evercore ISI -- Analyst

OK. And we're just trying to back into if the margins were, say, 37% of what you acquired, that means you acquired about $225 million of revenue. But then the acquisitions were late in the year. So maybe acquired sales helped the quarter $25 million, $30 million, something like that.

We're just trying to get a sense of the organic growth versus the acquired so we can better understand your comments about market share gain.

Mark Irion -- Senior Vice President and Chief Financial Officer

Yes. I'd say, I mean, the acquisitions come in -- the impact this year has been immaterial. The impact is going to be more into 2022. Tariff, not that far off, I'd say it's 75% organic growth and maybe a 25% acquisition growth by the fourth quarter, that's sort of building through the year.

David Raso -- Evercore ISI -- Analyst

OK. That's that. That's similar to the numbers you're running. OK.

Really appreciate it. Thank you so much for putting me in. 

Operator

Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Elizabeth Higashi for any closing remarks.

Elizabeth Higashi -- Vice President Investor Relations

Thank you all for joining us on the call today, and we look forward to talking with you. If you have any other questions, please feel free to contact us. Thank you. Thanks, Jason.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Elizabeth Higashi -- Vice President Investor Relations

Larry Silber -- President and Chief Executive Officer

Aaron Birnbaum -- Senior Vice President and Chief Operating Officer

Mark Irion -- Senior Vice President and Chief Financial Officer

Neil Tyler -- Redburn -- Analyst

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Brian Sponheimer -- Gabelli Funds -- Analyst

Jatin Khanna -- Goldman Sachs -- Analyst

Steven Ramsey -- Thompson Research Group -- Analyst

Ken Newman -- KeyBanc Capital Markets -- Analyst

Rob Wertheimer -- Melius Research -- Analyst

Mig Dobre -- Baird -- Analyst

David Raso -- Evercore ISI -- Analyst

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