Great. I think we could begin here. Thanks everyone for joining us in the afternoon session on day two of the Industrial Select Conference. We appreciate you being here and powering through past lunch. First my name is Adam Seiden, I'm the U.S. Machinery and Construction Analyst. Joining us we have the team from Herc Rentals led by Larry Silber, CEO, as well as Mark Irion, the Chief Financial Officer. Leslie is in the crowd from the Investor Relations team as well. The format of this, you know, session here is we'll pass it to Larry to give a quick introduction about Herc Rentals. We'll be having a conversation ourselves here. We'll open it up for audience questions as well as our audience response system, a bit later if time allows for that. Without further ado, let's jump into it. Larry, thanks so much for being here, and Mark.
Well, thanks Adam, good afternoon, everyone. Glad you can make it to the second day of the conference and join us here. We're happy to be here with you this morning. Also, let me point out, Mark Humphrey is here, our Chief Accounting Officer of the company in the front, in front of Leslie Hunziker. Before I begin, I'd like to point out our safe harbor statement and information regarding non-GAAP financial measures that we might mention during our discussion today, make you aware of that. Our company today, a little background on Herc. We're one of the leading full line equipment rental suppliers in North America. We're primarily based in the U.S. and Canada. We're in 38 states and five Canadian provinces.
We have a very focused vision, mission, and value statement driven by a purpose statement of the company, where we pledge to equip our customers and our communities to build a brighter future. A little bit about Herc. We've been servicing customers for more than 57 years across North America and around the world. In the last seven years, primarily focused in North America. We have over 6,600 team members today, and we operate from over 350 locations, as I mentioned, primarily in the U.S. and Canada. We serve an addressable equipment market in North America of approximately $63 billion today. Our strategies.
We're making great progress in executing on the strategy that we set out in 2016 when we became an independent public company. As we've shifted into high gear and we presented at our investor day a couple of years ago, we've been growing our core business and expanding our specialty businesses through an investment in a combination of fleet, strategic M&A, new greenfield locations in a very healthy demand and positive rate environment that we've been experiencing. At the same time, we've continued to invest in technology, which we just announced at our most recent earnings call that we've rolled out. It's called ProControl Next Generation, and to improve the customer experience as well as the operating effectiveness of our business and our customers' businesses as well.
We've expanded our sustainability program, and we've set very specific goals to reduce greenhouse gas emissions intensity by 25% by the year 2030, using 2019 as a base year for that. We're at best in class safety levels for our business. We were recently awarded a gold medal Military Friendly Employer recipient from the services of the armed services of the United States. Very important to us as veterans make up more and more a part of our organization as we recruit from that workforce. Importantly, we've also invested in growth. We've focused on allocating capital combination through M&A, new greenfield locations. We've also increased our annual dividend, which you've just heard about, and we've executed last year on opportunistic share repurchases.
As you can see, we recently reported our financials, our 22 results for the year. We've made exceptional progress over the last several years in our business. We delivered record level financial performance across the board actually. Equipment rental revenue growth grew at 34%. That was on top of 24% growth in 2021. In support of rising demand, we invested $1 billion in net fleet CapEx last year in our purchases while improving fleet productivity, as evidenced by our increase in dollar utilization on a year-over-year basis. We've also invested in expanding our branch network by completing 18 strategic acquisitions last year and opening 21 greenfield locations in key markets in 2022.
By focusing on our rate growth and operating efficiencies, we've more than offset the inflationary pressures of the marketplace and delivered 160 basis points of Adjusted EBITDA margin improvement and 120 basis points of higher ROIC. Looking at the outlook, we're operating from a much stronger, in fact, our strongest position that this company has been in than any time in the history of the company. Our recently announced financial guidance highlights the plans for outsized growth in 2023. Our plan for net fleet CapEx is in the $1 billion-$1.2 billion range and allows us to maintain double-digit growth in our fleet on rent going forward.
With expectations for stronger operating leverage, as we roll over some of the 2022 inflationary pressures and challenges, we estimate Adjusted EBITDA will be in the range of $1.45 billion-$1.55 billion, representing another year of profitable double-digit growth. We're experiencing all of the trends consistent with an industry upcycle and intend to continue to drive excellent outsized performance as our growth strategy remains in high gear in 2023 and beyond. Before we move into our Q&A with Adam, we'd like to point out why we believe so strongly in our company and in the future growth of our company. It's really based around the five areas. We're a market share leader.
We continue to gain share in a growing market where scale and capability matters. We are one of those companies, few companies of scale. It really helps when it comes to capturing new business, attracting talent to the company, and driving profitability as your scale continues to improve. The industry has attractive long-term dynamic, secular and structural growth from industrial and infrastructure. Mega projects provides substantial opportunities for large national players with strong capabilities. We are certainly one of those large, strong national players. Non-residential construction recovery is on the upswing, validated by the latest Dodge data, other industry data that we measure in our business. We continue to invest in our business. We've been an opportunistic consolidator, creating high-performing branch network to achieve maximum returns in our investment, improve our efficiency in the business.
Our expanded capabilities, solution-based services, technology innovations, and a broad range of specialty equipment offer and provide incremental growth opportunities for us. Our strong balance sheet ensures fleet availability to meet the continued demand, robust demand that we're seeing in the marketplace. We have a diverse and flexible business model which provides resiliency. We're reducing risk, balancing revenue streams, driving efficiencies with a much more diverse customer set, both at the national and the local level, small businesses, large businesses, public projects, private projects across multiple verticals that we operate in today. Our flexible asset management provides for organic growth and, you know, a macroeconomic resiliency in the marketplace. I always say we're, you know, we're not recession-proof, but we are recession-resistant with the type of business that we operate today.
We have disciplined capital management underpinned by a strong balance sheet, and we're investing to sustain in profitable growth while returning shareholder to shareholders through dividends as well as through opportunistic share purchases. With that, sort of brief quick overview of our business, I'll turn it back to Adam to ask us some questions that he's prepared for us. Thank you very much.
Thanks, Larry, for that. I appreciate the overview and, you know, there's a lot of charts with columns moving progressively up into the right. That's always a good sign there. You know, you mentioned one of the, you know, one of the tenants and of the investment thesis is your exposure to mega projects. Certainly mega projects, how that benefits folks with a national footprint like yourself. You know, I think everyone in this room and the audience as a whole has probably heard about mega projects and so forth. I was hoping you could maybe dive in and talk a little bit about what does that actually mean? Like how much, what percentage of a mega project tends to be, you know, equipment? You know, more so of that, how much do those contractors tend to rent from folks like yourselves?
Yeah. No. Great question. First of all, let me start by saying, look, the sort of a background of Herc's business has been in that national account business, and naturally, we're the innovators and the leaders in that back to the early roots of Herc. It's not foreign to us to be able to participate in that type of business and to be very good at it. These mega projects, you know, as we keep hearing about them, are growing and really it's gonna be the business that's gonna go to only the very large players. We will get an outsized proportion of, you know, of that business versus what we'd see on a normal everyday basis in and out.
Typical for a mega project or any kind of big project or big, whether it's a mega project or an EV plant or a data center or something like that, is somewhere in that range of 2%-3% of the cost of that project, the spend on that project would flow down, trickle down, if you will, to rental. We'll see that. If you have a billion-dollar say $20 million-$30 million of rental opportunity in that project, and we'll participate, you know, along with perhaps our larger peers in an outsized proportion of that.
Got it. Does the scale of the project and the size of the project have any bearing on what the margin benefit is to you guys?
I'll let Mark go.
Y eah, I mean, you've got a lot of gear, concentrated in a small space. The rates are negotiated and might not be as favorable as some of the spot market rates, but the profitability and margin potential are the same because you're not moving as much gear in and out. You're not touching it as often, and you've got a sort of concentrated, you know, maintenance, work schedule to work around rather than sort of moving around town having to touch that gear.
Got it. You know, like you said, there's a lot of gear in a concentrated location. If I've learned anything over the last year, it feels like it's been hard to get gear. How are you thinking about from the supply side on the market, where gear is, you know, where the ability to get gear today?
Yeah. Look, I don't think much has remained or much has changed. It remains unchanged sort of from a year ago. We are seeing some marginal improvements on the part of our OEMs to be able to get and deliver product to us. We still think 2023 is gonna be much similar to what it was last year, with maybe some improvements coming in the back end of the year. You know, we've been fortunate to get what we need because we've done really good planning and planning over a long period of time. You know, the equipment that we're getting now, we placed those orders over a year ago, right? We're getting it in, and we're taking equipment when it's available, so we have it when the marketplace heats up, you know, for the season.
We're in pretty good shape, better than most. The general conditions around the OEMs is only marginally improved.
That's fair. Within the rental channel, do you get the sense that the large national players like yourselves and some of those large peers that you were telling us, talking to us about earlier, do you get a sense that the that you guys have gotten a disproportionate amount of the gear that has been available, or has it been spread amongst the broader group?
Yeah. Look, I would think that because we are large players that have the capital and the ability to forecast and the ability to take that equipment even in the off-season, as we did this past year in Q4 and into Q1, we are probably getting a disproportionate share of the gear that becomes available. We have the wherewithal to take it, right? And utilize it. Yes, to answer your question.
Fair. You guys have the gear, other folks a bit less so, particularly the smaller folks. I'd assume that, you know, we can see your rate growth certainly shows that you're able to price for it. Play devil's advocate on that for a second. I would say, you know, a long-term thesis in the, you know, for the rental industry has always been that, you know, the rental channel can probably get more pricing. Curious, do you think that the rental industry has been received the right rate growth based off of what you've been able to provide when other folks can't? Then longer term, the question is, you know, is there room for that gap to narrow between, you know, the OEMs and the rental channel on pricing?
No, I mean, I think the industry's coming off one of the best rate years that it's ever had. It's definitely responded rationally and I think proportionately to the sort of supply and demand imbalance out there and the inflationary input costs to the fleet. You know, we've been rational in terms of going to recover that from the customers. We're holding that fleet for like eight years, so there's no need to go and get it all in one year. There's plenty of time to sort of adjust, and that's what the industry tends to do. It's not usually a direct correlation between the pricing we pay for our equipment and the rates we charge to our customers.
Yep.
You know, in this sort of environment, there has been and I think there will continue to be a sort of modest move up in rates over the next couple of years. We went out and said that we're not really gonna try and grab all of this back in one year. We'd be much happier with, you know, three or four or five years of mid-single digit rate growth rather than getting a big increase in 2022 and then having to give some of that back, and we're on track for that. You know, we did 6.6% in Q4, and we're on track for a mid-single digit rate growth in 2023.
Yeah. The other thing that gives us confidence is we're in a much more rational environment today with professional operators today that really understand, you know, the puts and takes in the market, understand the costs of running businesses, and we think that that's sustainable with the level of expertise and professionalism today that exists.
That's a good segue, Larry, 'cause you're talking about, you know, you're in a more rational market, and you mentioned earlier about, you know, recession resilience and so forth, you know, downturn resilience. You know, just because there are some naysayers out there, unfortunately, I hear a lot, you know, about the broader market. If we were to hit a bit of a softer patch, like, you know, could you talk a little bit, or maybe Mark, can you talk a little bit about, you know, how we should think about, you know, what a more typical garden variety slowdown would be for the rental industry and how that affects your sales moving forward?
Right. Well, you know, we ran the playbook in 2020, so we saw it all happen in real time. That was a pretty significant slowdown, and our revenues were down 9%. EBITDA was down 6%, we actually improved our margins in 2020 and generated $400 million worth of free cash flow. You know, the cash flows are countercyclical in this business. When we're investing in the fleet, you know, we're increasing our debt or nominally free cash flow neutral. We pay it down when we're shrinking the fleet or not investing in the fleet as heavily. You know, we've been through multiple recessions. The industry gets better and better, I think, with each one in terms of how they respond. We certainly came through 2020 with, you know, flying colors and able to respond to the changing demand environment and switch to, you know, 35%+ growth in 2022.
Yeah. Maybe Mark, to piggyback on that just from a free cash flow perspective, 'cause, you know, when you're a company like yours that's buying a lot of CapEx, sometimes, you know, the free cash flow profile on a Bloomberg screen could get obfuscated pretty fast. Just when you think about into a, you know, if there were to be a slowdown at any point, cycle over cycle, your free cash flow growth would be better today than it was then.
Yeah. No, we're investing in our company right now and growing revenues and growing fleet 30%, you know, growing EBITDA, you know, almost 40% margins, ROIC. It's the right investment decision for us as managers of the capital. If we were to grow at 10%, we would throw off $300 million worth of free cash flow. If we were to stop growing altogether, you know, there's a significant amount of free cash flow. It's really the pace of growth that has us free cash flow neutral. If we were on a steady state Petri dish, you know, sort of growth curve, there would be free cash flow available.
There you go. You know, one way to get cash in the door too is by selling fleet. You know, just curious, when you think about, you know, the used market today has been healthy. Curious if you would still characterize it similarly. From your ability to dispose equipment, how you sit today and what the, you know, if there's a path to improving those disposal over time.
Yeah. No, great question. Look, you know, over the last couple of years, because of the pandemic and because of a constrained supply base, we elected to, you know, age our equipment and hold onto it a little longer. The only, you know, equipment that we really sold or disposed of was primarily through the auction channels. Fortunately, we were in the, you know, sort of the highest rate or rate environment for the sale of used equipment, and we still are. Even though it might have come a little bit down off the peak, we're still the highest it's been in history. We still see a very good market out there.
As we return to some more normalized supply markets, we'll dispose of more equipment, and we'll shift our channel more to a retail sale, which will enable us to improve margins as well as you know, dispose of fleet that, you know, we believe is the right aged fleet to start putting out into the market. We expect to do more of that in 2023 and continue that as we go forward. Certainly as the supply chain improves, we'll be able to continue to grow along the retail disposal channels.
Excellent. Thank you. We'll shift to the audience response questions here for a second. The first question is, do you currently own the stock? One, yes, overweight, two, yes, market weight, yes, underweight, or no. When the timer comes up, if you could respond. Okay. Talking to the right people. Next question, please. What is your general bias toward the stock right now? Positive, negative, or neutral? All right, 55% positive. 55% positive with a whole lot of non-owners. There you go.
That's good.
Next question. In your opinion, through cycle EPS growth for Herc will be, one above peers, align with peers, or below peers? I'm excited for this one. All right, 67% above peers. Next question, please. In your opinion, what should Herc Holdings do with excess cash? Bolt on M&A, large M&A, repos, debt pay down or internal investment? Mark, any guesses?
I'm excited for this one. I can guess.
All right. A kind of split actually across the board. Bolt on M&A and then repos and debt pay down. That is an interesting one, and maybe we'll stop there for a half second just to talk about some of the M&A that you've done. You have a target, right, of $500 million, on an annual basis. Just curious, you know, first on that, like how hard is it to find $500 million of assets on a year basis and get that through? Then, you know, more so how long can you sustain that momentum?
I'll take the first part, and I'll let Mark handle the second part since he's my banker. You know, the first part, look, it's not easy. You know, M&A is sort of opportunistic, but we are in a very favorable environment, right? As the big keep getting bigger, and I think that's recognized in the marketplace, certainly by the 5,000 or so mom-and-pops that are out there.
We've been afforded some really good, you know, favorable press, if you will, in the market, where if someone has either reached a point where they don't wanna make further capital investments in the business, they've reached a point where they don't have a succession plan for their business, and they're looking for a viable suitor, we fall squarely into that because we are, you know, a growth company. We're gonna give their employees an opportunity for a further career and a good career. In fact, we've retained 93% of the people for the 35 or so acquisitions we've done over the last 2 years, and it's really been, you know, a good climate. While it's hard, there's ample opportunity out there for us to do that.
As far as the future sustainability, I'll let Mark pick that up.
Yeah. No, I mean, there's plenty of opportunities out there. We see, you know, maintaining a $500 million-ish cadence for, you know, for the long term as being achievable, and we'll keep working towards that. We've got the team built up. You know, we've been at it for two years, so it's becoming, you know, part of the core competency internally and there's plenty of, you know, candidates out there for acquisition.
Got it. Maybe we'll move to the next question here. In your opinion, on what multiple of 2023 earnings should Herc Holdings trade? Less than 10 times and then bands up to higher than 21 times. These are standardized questions.
Six is the right answer.
Not six times for the audience.
No. No, no.
Six is our option number. Yeah. All right. Perfect. 13-15 is what the audience suggests. Next question, please. What do you see as the most significant share price headwind facing Herc today: core growth, margin performance, capital deployment, or execution strategy?
We get one of these for the next board meeting.
Yeah, I know.
All right. It's about split between core growth and capital deployment. Earlier on, we were just touching on the M&A side there and core growth probably gets a little bit to the cycle. Margin performance is not on that list. What's very interesting, though, and you guys can speak to it, even more so, but if you go back a couple of years, probably margin performance would have been, you know, towards the top with the gap between yourself and peers. I guess when we think about on the margin side, you know, as we look into 2023, you had some assumptions on your slides there, and you were talking about 50%, 60% EBITDA incrementals. How do you see the pacing of that playing out through the year?
Q1 is always the most challenging in terms of operating leverage and fixed cost absorption, which flows into the flow-through. You saw it last year dramatically with a big sort of inflationary impulse that, you know, challenged the flow-through. It's not gonna be as dramatic this year, but flow-through does build. We closed, you know, Q4 at 54%. We've got a good sort of run rate into Q1. It will slow from there and then sort of build to the mid-50s again, similarly to what we saw last year.
Excellent. Moving to the last question here. Does ESG play an active role in your investment decision relating to the company? Yes, ESG is a positive. The second is yes, it's a negative. Third is no, it doesn't. Fourth is just no. No, the future. All right. Survey says three. No, it doesn't play a role in our assessment of the company. I've been telling corporates this all conference that this result is almost standard now. It feels like everybody's getting the exact same thing. Which is interesting because I think we all have to do a little bit of an introspective look based off of, you know, where things are headed.
You know, with the couple seconds that we have remaining here, I guess, Larry, since I have you, and we were talking a little bit about the past, you know, you think about what the company has done. You know, it's grown obviously in revenue and EBITDA and your fleet. I mean, where do you think, you know, you still have the most work that you need to address?
Yeah. No, great question. You know, the company's come a long way. We've done so many wonderful things over the past seven years to really improve the company. I'd say, you know, everything that we wanted to do is more or less up to par and achieved from that standpoint. I think the main area that we're focused on is making sure we continue to train, educate, and retain our employees. The industry has historically been known as a high turnover industry. We've been able to make some significant improvements there. We're doing that by growing our own from within, filling our ranks with folks, giving them training, education, that turnover. That's one area that we continue to be focused on. The second area I've mentioned earlier, we rolled out our ProControl NextGen platform.
A continued focus on innovative technology. Even though I think we're at this point, above our peers in terms of what we've introduced recently, we'll need to continue to invest in there, stay ahead of that, in order to make sure that we're providing our customers with the type of tools and resources that they need to become the asset manager that we wanna be in the business forum.
Excellent. With that, please join me in thanking the Herc team, for coming out. Thank you all for attending the session.
Thank you all.
Thank you.
Thank you.
Yeah.