Herc Holdings Inc. (HRI) Q1 2022 Earnings Call Transcript

Herc Holdings Inc. (HRI 3.44%)
Q1 2022 Earnings Call
Apr 21, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning everyone, and welcome to the Herc Holdings first quarter 2022 conference call. [Operator instructions] Also, note today's event is being recorded. At this time, I'd like to turn the conference call over to Elizabeth Higashi, vice president of investor relations and sustainability. Please go ahead. 

Elizabeth Higashi -- Vice President of Investor Relations

Thank you, Jamie, and thank you all for joining us this morning. Earlier today, our press releases presentation slides and 10-Q were filed with the SEC and are all posted on the events page of our IR website at ir.hercrentals.com. This morning, I'm joined by Larry Silber, president and chief executive officer; Aaron Birnbaum, senior vice president and chief operating officer; and Mark Irion, senior vice president and chief financial officer. We'll review our first 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 three. Today's call will include forward-looking statements. These statements are based on the environment as we see it today, and therefore involve risks and uncertainties.

I would caution you that our actual results could differ materially from the forward-looking statements made on this call. You should also refer to the Risk Factors section of our annual report on 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 of these non-GAAP measures to the closest GAAP equivalent can be found at 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. And 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 number four. I'm pleased to report that we achieved new records in the first quarter of 2022 and total revenues, rental revenue, net income, dollar utilization, adjusted EBITDA, and adjusted EBITDA margin. Volume and rates contributed to the 32% increase in rental revenue over the prior year.

Dollar utilization increased 280 basis points to 41.4%. Outstanding performance by ourselves operations and field support teams was enhanced by steady demand and a positive operating environment. In addition, we completed the acquisition of three smaller companies with three locations and opened five new greenfield locations in the quarter. We are pleased that earlier this week we closed on the acquisition of Cloverdale Equipment Company, a full-service general equipment rental company with 120 employees serving construction and industrial customers with core operations in the metropolitan areas of Detroit and Grand Rapids Michigan, Cleveland Ohio, and Pittsburgh Pennsylvania.

I'd like to welcome all of the employees of our latest acquisitions to the Herc family, and thank our acquisition and integration teams for their work in closing and integrating the new operations and new employees into our systems and team. I'd also like to extend our appreciation to the entire Herc team for executing and delivering a record quarter as we start the new year. Based on the strength of our first quarter performance and our outlook for the rest of the year, we've raised our 2022 guidance for adjusted EBITDA again, and Mark Irion will discuss that in detail later this morning. Please turn to slide number five, which shows the first quarter results over the last five years.

Our first quarter results continued to demonstrate outstanding operational execution. Equipment rental revenue was $526.8 million in the first quarter, an increase of 32% or $126.4 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 25% to $567.3 million, despite lower sales of rental equipment, a decision we made to continue to meet requirements of our customers in light of tight supply of new equipment related to supply chain issues from our original equipment manufacturers.

We reported an increase of 78% in net income to $58.5 million or a $1.92 per diluted share in the first quarter, compared with $32.9 million or a $1.9 per diluted share last year. Adjusted EBITDA grew 28% over prior year to $236.8 million. Our enhanced scale and focus on operating leverage improve year-over-year adjusted EBITDA margin 100 basis points to 41.7% in the first quarter of 2022, another record. This is an exciting time for team Herc, and our first quarter reflects the professionalism and tenacity of our team.

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. The growth goals we presented at our Investor Day last fall, were based on the foundations for growth we built over the last several years. We do know how to grow. Please turn to slide number six.

With over 56 years of history in the equipment rental industry, our 5,700 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. At the end of the quarter, we operated 320 locations across the United States and Canada, in 40 states and five Canadian provinces. This week, we added four more locations with the Cloverdale acquisition, and so far this quarter we've opened an additional one greenfield location.

The addressable North American market size is now estimated to be $57 billion, and growing by about 10% in 2022, according to the American Rail Association. We expect to continue our momentum, by addressing the opportunities in the market and to continue to outperform the overall industry as we grow through organic growth, supplemented by select acquisitions. Now please turn to slide number seven. As you can see from this slide, we introduced at our Investor Day, our major strategic pillars are focused on growing our core business, expanding specialty, elevating technology, integrating ESG, and maximizing our allocation of capital.

We are executing these strategic initiatives, and Aaron Birnbaum, our chief operating officer, will now update you on our progress in operations. Aaron.

Aaron Birnbaum -- Senior Vice President and Chief Operating Officer

Thank you, Larry, and good morning, everyone. What a great start to the year. The first quarter results reflect the strong operating environment, and our increasing scale, and enhanced operating leverage. Our team has done an excellent job executing our strategy in what is typically the lightest quarter of the year.

Clearly, there is more to come. Now please turn to slide number nine. Our Q1 results reflect the opportunity we seed by accelerating investment in fleet, with average OEC fleet up 23% over last year's comparable period. Equipment rental revenue in the quarter rose to $526.8 million, up 32% compared with 2021.

Our core business continue 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 first 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 16 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 we are investing $900 million to $1.12 billion in net fleet capital expenditures this year.

Please turn to slide number ten. Our fleet expenditures at OEC totaled $253 million in the first quarter of 2022. Given current equipment rental demand and our strategic management of fleet in this equipment-constrained environment, we reduced the level of disposal substantially in the first quarter compared with last year. We disposed $64 million of fleet at OEC in the first quarter, which was nearly $50 million less than last year's first quarter.

At this point in time, we expect OEC disposals for the year to be about the same as last year. Our fleet composition at OEC is on the left hand side of the slide. Total fleet is now $4.6 billion as of March 31st, 2022, about 27% higher than OEC fleet at the end of Q1 last year. 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 Q1 2022.

Dollar utilization improved 280 basis points compared to Q1 2021, a first quarter record of 41.4%. This reflects well for the rest of the year since Q1 is typically the lowest dollar utilization quarter in the year due to seasonality. As we said in our fourth quarter call, we had most of our 2022 equipment orders in early last year. So the inflationary impact to our 2022 orders should be modest 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 2022 and next year. Stronger pricing of used equipment and an improvement in our sales channel mix contributed to an increase in equipment sale proceeds as a percentage of OEC, which rose to 45% in the quarter, compared with 40% last year. The average age of our disposals was 90 months in the first quarter, and fleet age is now about 48 months, the same as it was a year ago at this time. Please turn to slide number 11.

Our diverse customer mix, a base of large national customers operating in essential business sectors, and our expanded specialty business continues to drive our sales strategy, and provide additional growth opportunities. We are expanding through the opening of greenfield locations, and targeted acquisitions 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 issue pools and industrial customers and utilities and energy, healthcare warehousing, and manufacturing, and commercial 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 are successfully growing across multiple industry verticals and across all regions. New customer growth continues to be a major opportunity. In the first quarter, local rental revenue represented 57% of total rental revenue, in line with the fourth quarter of 2021, and up from 54% in the first quarter of 2021. This growth reflects the impact of additional new local customers added through our recent acquisitions.

Please turn to slide number 12. Safety is 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 OHSA reportable incidents, no at-fault motor vehicle accidents, and no DOT violations.

In the first quarter, on a branch by branch measurement, all of our branch operations achieved at least 98% of days as perfect. As we further integrate ESG into our operations, we recognize that most of the reduction in Scope 1 and Scope 2 greenhouse gas emissions will come from fuel-efficient fleet. We continue to expand our investment in electric or alternative energy powered fleet, including aerial equipment, forklifts, select vehicles, traffic, and safety, like towers and Walters. More and more of our customers are interested in how we can support their goals to reduce our carbon footprint.

We're looking for innovative solutions to assist them. Before I pass the call on to Mark, I'd also like to point out how our purpose statement, we equip our customers and communities to build a brighter future, describes our commitment to our local communities. At our recent Pro Expo meeting with 800 of our team members, we honored excellence in sales operations and safety performance, and also an individual who most promoted our purpose statement with community activities in Atlanta to collect food and clothing for the needy. Our Women in Action Employee Resource Group, also recently launched a corporatewide initiative to support women build projects through Habitat for Humanity local chapters in North America.

And I should point out that since tomorrow's Earth Day, we are also encouraging our team members to become involved in local projects supporting the theme Invest in Our Planet. I'd like to thank team Herc for their devotion to operational excellence, as well as all that they do to enhance the communities we serve. 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 is clearly in high gear, and performing at a high level as we delivered record first quarter performance and all of our key metrics. The strength and momentum we achieved in the first quarter also bodes well for the rest of the year, as we focus on fast profitable growth, and continue investing, improving the key metrics that create long-term value. Strong demand, and most of our key in markets, and the ongoing supply chain challenges of equipment manufacturers continue to provide a strong operating environment for the leading rental companies.

[Inaudible] and we ordered early, so our new fleet is arriving steadily, and we expect fleet growth to drive revenue growth throughout the year. Our operations team has done a great job with delivering record time and utilization while integrating new team members, customers, and fleet into the Herc model. This consistent execution is excellent performance and strong momentum that will continue throughout 2022 and beyond. 514 shows the summary of our first quarter results compared with 2021.

Equipment rental revenue increased by a very impressive 32% to $526.8 million, from $400.4 million in 2021, primarily due to continued volume and pricing momentum. We are successfully executing the growth strategy we outlined at our Investor Day, and are clearly running in high gear when you look at our Q1 results. We are pushing hard on both our organic growth, and acquisition strategies, and enjoying a lot of success. Breaking down the 32% growth in rental revenue for the first quarter, we are pleased with the fact that about three quarters came from organic growth.

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. Acquisitions contributed about a quarter of the 32% overall growth in rental revenue, which provides a nice boost from another growth level and allows us to quickly bring on key rental talent, and to penetrate key markets. We have a solid pipeline for [inaudible], we have our integration team working hard to welcome our new team members and customers into the Herc family.

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 first quarter of 2022 increased 78% to $59.2 million or $1.95 per diluted share, compared with adjusted net income of $33.3 million or $1.10 per diluted share in the first quarter of 2021. Adjusted EBITDA increased 28% in comparison to Q1 2021.

Adjusted EBITDA margins were also a record for the first quarter, improving 100 basis points to 41.7% in 2022, from 40.7% in 2021. All in all, an excellent quarter. We're in fast, sustainable growth mode, and growing profitably. As Q1 is the seasonally weakest quarter to start the year, and we were carrying cost increases forward from growth in the business during 2021.

That is typical for flow-through and margins to be at the lowest level for the year. With the added jolt to some coastlines late in the current quarter, we, along with the rest of the world, got a little bit more cost inflation in some line items than expected. Not a big deal, we have an inflation-resistant model that will adjust and move on. The cost per gallon of fuel, for example, was up 45% year-over-year, which impacts both our external and internal delivery costs.

We have a model that adjust for inflation and allows us to recover a significant proportion of these cost increases by way of fuel surcharges and delivery fees. However, late in Q1, these costs moved faster than expected, and our cost recovery mechanisms didn't quite keep up. Much over February, fuel costs were up 20%, which didn't leave a lot of reaction time. Adjustments have been made to fuel charges and delivery fees.

We expect to see better cost mitigation through the balance of 2022. We are growing at a fast pace, and incurring volume-related cost increases, as would be expected. Operating at higher utilization and growing the fleet by over 20% in the quarter also puts pressure on our maintenance team and maintenance business. We're building a platform for growth and have added a thousand new team members this last year, about half to existing locations, and about half through acquisitions.

All part of our growth strategy, but we will get more leverage on this investment in future quarters than we have in the current quarter. REBITDA YoY Flow-Through at 38% is expected to be at the low point for the year. And as we dig into the details for this quarter, we see a clear path back to around 50% to 60% flow through in 2022, and this is based into our updated guidance. We are lucky to have a solid inflation-resistant model and have grown fast and held margins in a historically challenging quarter for inflation.

All of this is manageable for Herc within the context of 30% plus 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 15, 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. The latest quarter reflects average rates up 430 basis points compared to last year.

The current market environment of tight equipment supply and steady demand continues to support our focus on right. And we also 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 track record of executing on price in all sorts of operating environments is clear.

The momentum in our rights is clear, and we expect to increase rates year-over-year, and sequentially each quarter for the remainder of 2022. Our OEC fleet close the quarter at about $4.6 billion, with 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 active acquisition activity. Our average fleet on [inaudible] in Q1 was up by 29% in comparison to average fleet growth of 23%, which represents excellent execution and a solid operating environment. Dollar utilization continues to improve up by a very impressive 280 basis points in Q1, compared to the same quarter last year.

Improved Dollar UT reflects our ability to mitigate inflation and fleet costs through rate growth. This positive momentum [inaudible] as a long-term value driver going forward and has a powerful and positive impact on our turn on assets. On Slide 16, we can see that with no near-term maturities, we have ample liquidity to fund the growth goals for 2022 and 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 first quarter, and we reported negative free cash flow of $131 million before acquisitions.

We took a lot more fleet into Q4 of last year, and in the current quarter than we would in a typical winter, which is a driver of our 23% fleet growth year-over-year. In the current environment, we are taking as much fleet as we can get our hands-on, and our volume growth of 29% shows that we are putting it out on rent as soon as it hits. We have ample liquidity to fund our growth plans, and our leverage at 2.3 times is at the lower end of our target range of 2 to 3 times. We also paid out a quarterly dividend at the end of March at $57.5 a rate, which implies an annual payout of $2.34 share.

On Slide 17, we share the latest industry forecasts. IRA is forecasting an increase of rental industry growth of 10% to $57 billion in 2022, and a 32% rental revenue growth is eclipsing the broader industry growth rate. We clearly have much more momentum than the industry in general and are taking market share. This is consistent with past experience with regional companies of scale, with broad range of fleets, and a well-diversified customer base have consistently grown faster than the rental industry in general, and Herc, as a company of scale with a large, well diversified mix of customers.

We are in the early stages of the next construction upcycle, with steady demand, even before we get into any potential benefits from the proposed future boost to infrastructure spending. Equipment supplies are tight, and our teams are challenged to manufacture and deliver new equipment due to worldwide supply chain bottlenecks. This is a very favorable environment to own $4.6 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 solutions business is a real strategic benefit, and we will continue to look to gain, share and grow that business. There's pent-up demand for maintenance and turnarounds, and a lot of our industrial plants in the segment should also rebound in 2022. There's plenty of demand in most of our 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.

On the back of a strong first quarter with excellent top and bottom-line results, and with growing confidence in the momentum we currently have in our business, we are raising our adjusted EBITDA guidance for 2022. We've raised the low end of the adjusted EBITDA range to $1.75 billion in the high end to $1.245 billion of adjusted EBITDA for the full year. That translates to an increase in EBITDA of around 31% to 39% over 2021. We also raised the bottom end of our net fleet capital expenditures guidance to $900 to $1.12 billion.

We're in the early stages of an exciting industry upcycle, and are excited to be delivering excellent performance and growing confidence, as we look to continue to execute on our high growth strategy. With that, I'll turn the call back to Larry.

Larry Silber -- President and Chief Executive Officer

Thanks, Mark. Now, please turn to slide number 19. We frequently talk about our vision, mission, and values. But as you can see from our pyramid, safety is at the center of everything we do, and we continue to serve our customers and communities, while also striving for 100% perfect days.

We do what's right. We're in this together. We take responsibility. We achieve results.

We prove ourselves every day. And we are committed to investing in our communities. So now, operator, let's please open the lines for questions. Thank you. 

Questions & Answers:

Operator

Ladies, and gentlemen, at this time, we'll begin the question and answer session. [Operator instructions] Our first question today comes from Jerry Revich from Goldman Sachs. Please go ahead with your question. 

Jerry Revich -- Goldman Sachs -- Analyst

Good morning, everyone. Hi, Larry, Mark, Aaron, and Liz, good morning. I'm wondering if you could just talk about the pricing guidance over the course of the quarter, if you don't mind. Based on the year-over-year number, it looks like maybe you picked up a point of price sequentially in the quarter.

Is that right, Mark? And can you talk about guidance, if you don't mind?

Mark Irion -- Senior Vice President and Chief Financial Officer

Yeah. I mean, it's probably easier just to look at the guidance, through the year and then into Q1. So it's pretty steady improvements in pricing. Year-over-year, we look forward to continuing to execute on that going through the year.

So we should have pretty steady improvements in pricing throughout the year. So very favorable environment for price, industry discipline, reacting to the sort of cost pressures that were around, and  as good a pricing environment as I've seen in 20 years.

Jerry Revich -- Goldman Sachs -- Analyst

And you know, just to piggyback on that last point, Mark, in prior cycles, the industry has pushed pricing in the high single-digit range, 6%, 7% based on the comment that you just made a moment ago. Is there a potential that year-over-year pricing can hit those level of increases this year? Is that feasible from an exit rate standpoint heading into 23?

Mark Irion -- Senior Vice President and Chief Financial Officer

Yes. No, that's possible. That previous numbers had come off a much lower debt, so that sort of 6% to 7% range in the coming out of the last cycle was on the back of negative [inaudible]. The year-over-year comp there is a little bit different than what we've got here.

But there's momentum and pricing and we'll continue to push it as high as we reasonably can.

Jerry Revich -- Goldman Sachs -- Analyst

OK. Super, and lastly, from a time utilization standpoint, you folks have done a lot of work to prove logistics and fleet availability. I'm wondering, as you're operating heading into peak season here this year, is there more room for fleet absorption heading into 23? Or do you think you're getting the full benefits of fleet absorption over the course of this year based on the guidance in the plant?

Mark Irion -- Senior Vice President and Chief Financial Officer

So time utilization on the shoulders, there's room to improve. You sure to see that in Q1, we had a record here last year and it's even better this year. It's volume growth as you sort of get into peak utilization, the middle of Q3, and then going into 2023, there's no room for movement again on the shoulders just based on seasonality and strengthened demand. There's room in Q1 and Q4 for utilization, and improvement, and absorption.

Jerry Revich -- Goldman Sachs -- Analyst

Appreciate the discussion. Thanks.

Operator

And our next question comes from Seth Weber from Wells Fargo. Please go ahead with your question. 

Seth Weber -- Wells Fargo Securities -- Analyst

Hey, guys, good morning, and thanks for taking the question. I guess maybe for Mark, it sounds like you pulled in your EBITDA incremental target for the year a little bit. I just want to make sure that that's really a function of just the operating expense environment and it doesn't reflect any change in how you're thinking about rates. Given the drop-through run rate is so high, I just want to make sure that you're not getting any more cautious on your rate outlook for the year relative to where you were three months ago.

Mark Irion -- Senior Vice President and Chief Financial Officer

No. I mean, I think we couldn't be clearer on right momentum and right sort of expectations for the balance of the year. I've seen it twice already today. We expect it to continue growing, and we expect it to grow quarter-over-quarter each quarter this year.

The right moment solid, the right environment is as good as it's been in 20 years and we will continue executing on right. So that's as bullish as anyone can get on, right? I think so. Is there cost is the sort of driver we are talking down that we are sort of looking at least flow through in 2022 than we initially anticipated, and there's a lot of cost pressure. We've got mostly volume growth, and the cost increases if you sort of break them down.

But there is cost pressure and inflation in lines like fuel, and maintenance, and wages that are impacting the expected flow through for 22 still about 50% but less than half sort of long-range, sort of target range of the sort of 60% to 70% rate.

Seth Weber -- Wells Fargo Securities -- Analyst

Right. Understood. OK. Thanks.

And then just on the CapEx, the spending guidance, is there any help or any way we should be thinking about just the spending? Is our second, and third quarters about the same? Or do you think that'll be more frontloaded toward the second quarter? Or are the supply constraints still going to keep it more balanced to 2Q 3Q and then I assume fourth quarter is the first quarter of the year.

Larry Silber -- President and Chief Executive Officer

Yeah. Good question. We basically put our majority of our fleet orders out in 2021 to our vendors with the distinct commitment to them that as soon as they have it ready, we'll take it. Right.

We're not sort of saying, look, let's let's sort of pace this through the year. We're taking it as soon as it's ready. Obviously, we normally get a bigger bulk in Q2 and Q3. But if they have it available, we'll take it sooner.

And like last year, like 2021, we didn't slow down in Q4. And our expectation is that our Q4 will continue in a similar fashion to Q4 of 2021 as we prepare for continued growth in 2023.

Seth Weber -- Wells Fargo Securities -- Analyst

OK. Have you gotten any indication from the OEMs that production is getting better, that they're able to improve deliveries relative to what you got in the first quarter?

Aaron Birnbaum -- Senior Vice President and Chief Operating Officer

Seth, this is Aaron. For the most part, our vendor suppliers are delivering the product that we expected to get, although as we said before, often it's 30, 69 days late. Some OEMs have trouble delivering what was expected more than others. But we're able to fill that gap kind of being nimble and and finding other opportunities.

So we continue to have quite a bit of fleet coming in through this first quarter and Q2 should be a bigger quarter than Q1. 

Seth Weber -- Wells Fargo Securities -- Analyst

OK. Guys, thank you. I appreciate it. 

Operator

Our next question comes from Ross Gilardi from Bank of America. Please go with your question. 

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

Thanks. Good morning, guys. Just the mechanics of the net CapEx guide. I mean, went up by about $40 million at the midpoint.

I mean, is that in the gross number? Or are you cutting back on disposals relative to [inaudible] initial expectations? And then how much of that $40 million is do you think is just due to cost inflation versus units?

Mark Irion -- Senior Vice President and Chief Financial Officer

It's really just sort of taking, I guess, a little bit of the hedge out of the expectations for delivery. It's coming from the top, the gross line. Sales are in line with our expectations, I mean, we went into the year planning to sell, minimal amount of fleet and just maximize the size of the rental fleet. And they haven't really been any changes to the cost of the equipment from our expectation.

So most of the left coming from just taking hits out of the growth line with no real impact from inflation over our expectations.

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

OK. Got it. And then can you talk a little bit more about your strategy on CapEx in advance of infrastructure next year? And do you expect this is $40 million? It's a big number, but it's a small number, I guess, in the grand scheme of things. But in any event, we expect that additional equipment to arrive early are enough to influence fiscal 22.

Or is it more about frontloading 2023 in advance of US infrastructure stimulus starting to scale up at the end of the year?

Larry Silber -- President and Chief Executive Officer

Yeah, I think it's more about continuing the pattern we've had for the last several years of ordering early, and staging that equipment in 23, and making sure that we get plenty of visibility to our OEMs so that we're at the front of the line. So to say, by, committing locking those orders down, securing production slots, and making sure that equipment is flowing as it has been flowing for 21 and 22.

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

OK. Thanks, Larry, and then just a couple of more of my question, if I could squeeze in. So how much of the EBITDA guidance is from the divide increases from acquisitions, and how much of it is from, either increase fee on rent, or rate relative to your initial expectations, and then just want to verify where you think fleet OEC is by year-end 22? Right now I think it's around five and a half billion, but want to run that number by you based on your latest CapEx forecast, and where should we be on depreciation for the full year? Thanks

Mark Irion -- Senior Vice President and Chief Financial Officer

So if you sort of break down the listing in guidance, if you said go midpoint to midpoint, then that's equal organic growth in terms of potential volume on rent and M&A, and also there's a bit of messiness to it just in terms of where the sort of the contraction of the range, and lifting the range up over the bottom end. So, sort of equal parts, I guess, confidence in the outlook, organic growth expectations bigger than what we [inaudible] There's a whole bunch of other [inaudible] who want to help me with them sort of one at a time.

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

Yeah, Mark. What's the exit rate on? We see at the end of the year is at around five and a half billion based on your latest CapEx forecast, and where should we be on depreciation for the full year?

Mark Irion -- Senior Vice President and Chief Financial Officer

OK. Yeah, good. Sorry about that. Yeah, no, that's about rate.

In terms of the exit rate on OEC at the end of the year, and sort of 10% to 11% of average OEC was a good sort of marker for depreciation.

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

Perfect. Thank you.

Mark Irion -- Senior Vice President and Chief Financial Officer

Thanks Ross.

Operator

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

Rob Wertheimer -- Melius Research -- Analyst

Thanks. Good morning, everybody. Well, so Mark, thanks for the cost comment. I mean, obviously, you guys have a lot going on with investing for growth, with incorporating acquisitions, inflation in the business, etc..

And I guess even elevator repair, as you hopefully, you mentioned the fuel cost. Are you able to say just kind of on a clean basis? Is your cost structure pure inflation above or below your current pricing? Just stripping out the cash to bring out the other costs. 

Mark Irion -- Senior Vice President and Chief Financial Officer

No. Well, I mean, this volume is probably the biggest driver, right? If you sort of look at it in the context of 32% rental revenue growth. So volume is the biggest driver and in fuel, and but I guess, talking to a directly, it's probably 50-50 in terms of volume and unit costs. So the inflation impact on fuel is the most of the line item.

So it's not as significant, and wages and, maintenance expenses, it's significant in fuel, but it's like 50% volume and 50% unit costs.

Rob Wertheimer -- Melius Research -- Analyst

OK. Maybe, I didn't ask it cleanly, but wage inflation and all the other pure inflation is maybe less than the 40% running rate now. 

Mark Irion -- Senior Vice President and Chief Financial Officer

No. So wages overall are running mid-single digits, and mainly expenses are mostly volume. So, sort of the data base, sort of drivers of [inaudible], but single digit is the biggest line item in there, delivery and fuels the next that's got sort of 50% volume, 50% unit costs and maintenance expenses are mostly volume.

Rob Wertheimer -- Melius Research -- Analyst

OK, perfect. Two more, one minor one. When you do a I guess it's a fuel surcharge or whatever, does that come through as rental rate or of the separate? And then just if you have any comment on what pricing looks like from the regionals in the industry, where the industry is kind of all following price increases and I'll stop there. Thank you. 

Mark Irion -- Senior Vice President and Chief Financial Officer

So fuel surcharges don't come through in retail, right? They do come through, and the retail revenues that you look at in the PNL, but it has not factored into our rate growth. And yeah, it looks like this pricing discipline across the board is an overall lift across the country, across the board in terms of size. Everybody seems to be focused on on pricing.

Rob Wertheimer -- Melius Research -- Analyst

Perfect. Thank you. 

Operator

And our next question comes from Steven Ramsey from Thompson Research. Please go ahead with your question.

Steven Ramsey -- Thompson Research Group -- Analyst

Hey. Good morning. Wanted to dig in on raising the low end of CapEx. I just wanted to make sure.

Is that Q1 delivery being better or is that a better delivery times in Q2 and Q3?

Larry Silber -- President and Chief Executive Officer

Well, Q1 deliveries in Q1 where within expectations, maybe even a little bit better than what we expected. That said, as I mentioned just a few minutes ago, we continue to see some delays,like 30 or 60 day delays. But now, we've been experiencing that since the back end of 20 and into 21. So it's becoming more of a normal flow, even though the delivery days are being extended a little bit.

We're just carrying over the past, and we're getting the volume that we expected in the quarter. So the volume of deliveries is on target, maybe a little better. And and we expect that as we roll through the year, it will improve, and we should see, obviously, higher deliveries in Q2 and Q3. 

Steven Ramsey -- Thompson Research Group -- Analyst

OK. Helpful, and then within the fleet, specialty equipment is nearing the low end of that target range, 25% to 30% of OEC currently. Do you expect to break into that optimal range in FY 22 or is that beyond.

Larry Silber -- President and Chief Executive Officer

I think over the next 12 to 18 months, we'll break into the medium part of that optimal range. We continue to invest heavily in it, and perform very well. 

Steven Ramsey -- Thompson Research Group -- Analyst

OK. Helpful, and then last thing for me, contractors are pressured, obviously, with the lack of labor and materials challenges in getting their projects done. Is this changing how long your fleet is staying on a jobsite in there for helping utilization, or is there some visibility into that dynamic potentially playing out in the busy season?

Larry Silber -- President and Chief Executive Officer

I mean, it's hard to tell. There's big projects out there that are able to find their labor to get those jobs started. I think, there are some sectors maybe oil and gas, or the fires back up. It's going to be hard for them to get that labor to kind of get the rigs going again.

So that might be a problem there if they try to expand that vertical business. But we really haven't noticed it, that it's business as active, and projects that are coming online, they're coming online.

Steven Ramsey -- Thompson Research Group -- Analyst

Helpful. Thank you.

Operator

And our next question comes from Ken Newman from KeyBanc. Please go ahead with your question. 

Ken Newman -- KeyBanc Capital Markets -- Analyst

Hey. Good morning, guys. Thanks for taking the question. I just wanted to put a finer points on the SG&A leverage into the second quarter and the rest of the year.

I understand you expect it to improve versus the first quarter, but I'm curious if you think that the SG&A leverage could return to prior year levels barring another spike in fuel costs.

Mark Irion -- Senior Vice President and Chief Financial Officer

So there's not a lot of fuel in SG&A, that's not really a driver there. I mean, I think you'll see that the same guidance. Well, you will see the same guidance going through the quarters where it's in as a percentage of rental revenues as the highest in Q1 as it is in any quarter of the year, it will reduce as a percentage of rent or is going through the year just with as the revenues increase and you get more leverage off to that. In terms of flow-through, we're sort of taking down our expectation will be conservative on our expectation with flow through most of that.

[inaudible] that's not really SG&A a driver. So I think to answer that succinctly, we will get more leverage on if going through the year and 2022.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Understood. And then for my follow-up, I just you've spoken pretty positively, obviously, about the rate environment and about improving volumes going through the year. Can you help us kind of think about how you're thinking about dollar utilization? It sounds like you expect the first quarter to be the low watermark for the year, but is it reasonable to think that dollar utilization is up year-over-year, every quarter for the rest of the remaining three quarters?

Mark Irion -- Senior Vice President and Chief Financial Officer

Yes. Yeah, if you think about cost inflation going in, it takes one year of your fleet, we're holding that fleet for seven years, so we've really got seven years to recover that any increase the cost of the fleet with rate, so that's not a real challenge, and that's really kind of a key thing to focus on in terms of having an inflation resistant model. So I think that's the way to approach it in the sort of seven years to get back this quarter's cost inflation in the fleet. And we've got a very good shot at doing that.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Understood. Thanks.

Operator

And our next question comes from Mig Dobre from Baird. Please go ahead with your question. 

Mig Dobre -- Robert W. Baird and Company -- Analyst

Thank you. Good morning, everyone. I figured out I'd just start with a quick clarification on your earlier comments, Mark, when you were talking about rental rates improving sequentially, but just to make sure we're clear, are you meaning that the year-over-year growth in rental rates will continue to accelerate sequentially as the year progresses? Is that how to interpret that?

Mark Irion -- Senior Vice President and Chief Financial Officer

Yeah, I think we are looking to [inaudible] increasing year-over-year growth increasing from the 4.3% that we've got in Q1 each quarter going forward through 2022. And then plays sequential write increases.

Mig Dobre -- Robert W. Baird and Company -- Analyst

OK. I see, and again, given the basic facts that you commented on, I'm sort of curious as to what gives you the comfort, or the confidence that these trends can be sustained on more difficult comps as the year progresses. And then, maybe to an earlier question, is it fair to assume that the exit rate on rental rates down into 23 could be somewhere north of 5%?

Mark Irion -- Senior Vice President and Chief Financial Officer

I mean, you just look at our history. We had any commentary around [inaudible]. We've got an ability to rise each quarter sort of year-over-year in this type of environment. And we're looking forward to doing so in a more favorable environment than what we've done it in has historically.

We're at 4.3, we're saying it's going up each quarter, then that's heading up toward five. So yeah, I think we're looking at. It's certainly something higher than 4.3 by the end of the year, and we'll continue sort of pushing it as far as we reasonably can. There's not really a desire to run that up into a seven or an eight, or go sort of and just put it all out there.

And one quarter we'd rather have a steady improvement, some of this is coming from our national accounts where we need to sort of work in a competitive environment, and just manage this in an a modest way, and manage the relationship with our customers. So we're not looking to take advantage and gouge rates, but we need to recover the costs in our business, and we'll look to do that sort of steadily and modestly through the course of the year.

Mig Dobre -- Robert W. Baird and Company -- Analyst

It sounds very fair. Thanks for that clarification. And then a question on the flow-through REBITDA, you're pretty clear as to your full your expectations. But, obviously, we started pretty slow at 37 and change.

So I'm kind of curious as to how we should be thinking about the guidance of this flow through. Do you fully catch up to that 50-plus arranging in the second quarter? Or is this more of a back-half-loaded type situation?

Mark Irion -- Senior Vice President and Chief Financial Officer

Yeah, I think, I mean, you're right. It's back-half-loaded. So there's a leverage, a portion it is just lumps that we've got in Q1 that we don't see recurring in Q2. But a portion of it is just leveraging this investment and fixed costs that we've made with higher revenues as we build through.

So as you get into your higher revenue quarters, which are Q3 and Q4, you get more leverage on that and improve the flow through. Obviously, to get to 50% to 60% for the year, it will have to be higher than 50% in the back half to make up for the city activity it's printed in Q1.

Mig Dobre -- Robert W. Baird and Company -- Analyst

OK. But sequentially we shouldn't be thinking considerable improvement just given everything that's happening with costs. It's more of a Q3 and Q4. That's what you're saying.

Mark Irion -- Senior Vice President and Chief Financial Officer

Yeah, just steadily improvement each quarter through the year.

Mig Dobre -- Robert W. Baird and Company -- Analyst

And then lastly, sort of a longer-term question. You provided CapEx targets at your Analyst Day, if my memory serves this $2.5 to $3 billion over the 2021, 2024 time frame. And a few months have gone by here, and obviously, the demand environment is pretty good. We have more clarity on infrastructure.

I guess I'm kind of curious if your thinking on this CapEx through this intermediate-term has changed at all in terms of either the low end or the high end. And also, if the guidance in terms of how you're looking at deploying this capital through the period might have shifted at all. Thank you.

Mark Irion -- Senior Vice President and Chief Financial Officer

So that guidance was pretty much organic guidance, right? So as the M&A stacks up, that M&A, those branches, and those acquisitions take a little bit more capital, so that increases that number. We're in line with our 2022 expectations, but probably getting more bullish into 2023. So I think to the extent that we're confident in the end markets and confident in the cycle, we'd be looking to spend over and above that capital guidance that we put out last year.

Mig Dobre -- Robert W. Baird and Company -- Analyst

Very helpful. Thank you, guys.

Mark Irion -- Senior Vice President and Chief Financial Officer

Thanks, Mig.

Operator

Our next question comes from John Healy from Northcoast. Please go ahead with your question. 

John Healy -- Northcoast Research -- Analyst

Thanks. Just two quick questions for me. I was just hoping to understand on the acquisition side of things, how do we think about the revenue contribution for acquisitions for the year? I know you said it was about 25% of the growth in Q1. Is that a good proxy to use for the rest of the year or is the contribution from those lines differently? And then just a clarification question.

The 4% rate this quarter, and then you kind of  optimism that it could potentially get better from here. Is that what's based into the guidance? Is it plus 4% price? Is that the number that's in the guide or is there a different number there?

Mark Irion -- Senior Vice President and Chief Financial Officer

So John, I think the acquisitions, if you think it through the almost 500 we did last year. The full impact of that is running into Q1, into the guidance as expected, right. So that's not part of the range raised. We did the larger acquisition, Cloverdale, which we just closed yesterday.

That has the most impact on the lifted guidance. And that's factored into the rise. And then, The what was the other part of your question?

John Healy -- Northcoast Research -- Analyst

Pricing.

Mark Irion -- Senior Vice President and Chief Financial Officer

Pricing yeah, so we've got 4.3% rate in Q1. We're saying we're going to grow that every quarter this year. So we do have more than 4.3% pricing factored into our guidance.

John Healy -- Northcoast Research -- Analyst

OK. And then just on the M&A side of things, how would you characterize the the pipeline there? Obviously, you guys are talking about wanting to get more fleet. Should we interpret that same level of optimism and enthusiasm to be on the M&A side? So maybe there's more properties that you closed in the quarter on the horizon for the rest of the year? Or are you going to take some time and try to level things out of it? 

Larry Silber -- President and Chief Executive Officer

Now, we have a, John, we have a fairly robust pipeline of both smaller and larger acquisitions, that are strategically located in markets and in product lines, that focus on what we want to do in our top 50 MSAs. So it's a robust funnel. And we we hope to continue along the same path that we demonstrated in Q1 and early Q2.

John Healy -- Northcoast Research -- Analyst

Great. Look forward to it. Thanks. 

Larry Silber -- President and Chief Executive Officer

Thanks, John.

Elizabeth Higashi -- Vice President of Investor Relations

I think we have time for one more question. 

Operator

And our final question today comes from Steven Fisher from UBS. Please go ahead with your question. 

Steven Fisher -- UBS -- Analyst

Great. Thanks for taking the questions. I think you mentioned to Ross earlier that you don't expect any change in the inflation to your fleet purchases. Just curious, is that because there are no further surcharge, or requests, or Increases in that, that pricing this year from your major suppliers after sort of the agreements last year? Or is that you're just able to say, hey, you know, no, thanks.

We already have our agreements for this year?

Larry Silber -- President and Chief Executive Officer

 Well, we have had some very few, less than a handful of requests from some suppliers for some consideration around surcharges based on incremental costs. We've been able to, for the most part, avoid that, or diminish that. And as Mark mentioned earlier, if we did see anything, it would be minimal and would happen. We have seven years to recover those costs.

But the vast majority, I would say 99% of our suppliers have not requested any surcharge. And like I said, less than one handful of suppliers have. So it's a very small factor. And those that have been requested have been minimal.

Mark Irion -- Senior Vice President and Chief Financial Officer

But the comment I made was that the cost of the fleet that we received in Q1 was in line with the price. The inflation was in line with what we expected. We do expect cost inflation going forward. So there will be additional cost inflation on that fleet going into 23 over what we've been paying in the first quarter of 22.

Steven Fisher -- UBS -- Analyst

OK. That's helpful. And then just you mentioned the ability to catch up on pricing for fuel costs in Q2 after that big march step up. Is that going to end up just being sort of a dollar for dollar going forward where you were less than dollar for dollar offset in, say, February and March? Or can you actually get that pricing ahead of what the fuel cost increases and sort of generate a margin on that?

Mark Irion -- Senior Vice President and Chief Financial Officer

So, we don't charge or we don't surcharge the customers don't use all of our fuel burn, if you like. So only part of that's recovered in the surcharge. The margin will come back in Q2. So, the surcharge went in after the cost increase really late in the quarter, and we'll get the benefit from that going into Q2, which will impact our flow through.

But no, we don't really get a dollar for dollar of every fuel that we burn in terms of chargebacks.

Steven Fisher -- UBS -- Analyst

Thank you very much. 

Operator

And ladies and gentlemen, at this time, we've reached the end of today's question and answer session. I'd like to turn the conference call back over to Elizabeth Higashi for any closing remarks. 

Elizabeth Higashi -- Vice President of Investor Relations

Thank you, Jamie. And thank you all, everyone, for joining us on the call today. As always, if you have any further questions, please don't hesitate to give me a call. And we look forward to seeing you all soon.

Thank you.

Operator

[Operator signoff]

Duration: 59 minutes

Call participants:

Elizabeth Higashi -- Vice President of 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

Jerry Revich -- Goldman Sachs -- Analyst

Seth Weber -- Wells Fargo Securities -- Analyst

Larry SIlber -- President and Chief Executive Officer

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

Rob Wertheimer -- Melius Research -- Analyst

Steven Ramsey -- Thompson Research Group -- Analyst

Ken Newman -- KeyBanc Capital Markets -- Analyst

Mig Dobre -- Robert W. Baird and Company -- Analyst

John Healy -- Northcoast Research -- Analyst

Steven Fisher -- UBS -- Analyst

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