Herc Holdings Inc. (HRI) Earnings Call Transcript & Summary

Thank you for joining us, and good morning. Really happy to have Herc here with us. We've got Larry Silber and Mark Humphrey, CEO and CFO. I'm Sherif El-Sabbahy. I work on the machinery team here at BofA. And I'm just going to pass it to Larry, Mark for some opening statements.

Thank you. Well, good morning, everybody, and thanks for joining us. And Sherif, thanks for hosting and having us here in New York City on a beautiful day. I'd like to begin this morning with a brief overview of our company so that you can see who we are and what we do and only take 3 to 5 minutes. But with me this morning is Mark Humphrey. He is our Chief Financial Officer; and Leslie Hunziker, up here on my right, who is our Investor Relations person. So to begin with I'd like to begin with talking about our first slide, which is our vision, our mission and our values. But I think I was supposed to do something about GAAP before that, saying everything here to remind you of our safe harbor statement, apparently, that was missed. But everything here -- make sure everybody is a reminder of our safe harbor statement about what you hear here. And we'll be talking about some non-GAAP financial measures as well. But our mission, vision and values are pretty consistent from when we started this company and separated and became an independent public company almost 8 years ago now. And we're really a support and purpose-driven company around supplying our customers with mission-critical equipment to get their jobs done on their various projects and sites whether it be construction, industrial or any related type of area. And where our pledge is to equip our customers and communities to build a brighter future in terms of what we are doing. Little bit about Herc -- there is the safe harbor, it was out of order. But safe harbor statement, again, a little bit about HERC. We are 58 years old this year and have been consistently doing business across North America in all of the largest communities and larger cities around North America. We have about 7,600 employees to date, and we operate out of 412 locations. We have about $6.3 billion in fleet, and we are operating in a marketplace of $83 billion marketplace. We are only in North America, 5 Western Canadian provinces and 43 states (sic) [ 42 states ] in North America. Our strategies have really been around 5 main areas, which is growing the core of our business, continuing to add fleet to existing locations and expanding those locations with a specialty fleet that brings us into new markets and new products as rental begins to expand outside of core businesses. The next area has really been an investment since we started 8 years ago in technology. We believe we have the industry-leading technology today in terms of supporting our customers, managing our fleet, managing the logistics, and giving us the kind of information that we need to operate the business profitably over a longer stretch of time. Allocating capital has been around fleet expansion. About expanding through greenfield operations as well as through selective M&A in major metropolitan markets that allow us not only to grow the local business, but they add density for us to be able to transact in a mega projects and other types of activity in these top 100 markets. We've also been able to execute at the highest level and we're doing that through what we call E3OS, which is an E3 operating system, that allows us to drive top line growth, leveraging our assets and accelerating our profit expansion through technology and through better utilization of our business. This is really our commitment to our E3OS as being easy to do business with. Expert at what we do and efficient in everything we do for ourselves and for our customers to continue to improve value and improve the bottom line performance of the business for our customers and our stakeholders in the business as well. Also, we're going to be continuing to drive growth as we scale the business, and we have the right pieces in place to scale. We've recently gone from a focus on the top 50 MSAs to now the top 100 MSAs. And we're primarily -- we want to be in marketplaces that have 1 million people or more. We feel that those are recession-resilient. More so than any, what I'll call, suburban markets or non-primary marketplaces. So we're focused on the top 100 MSAs and we continue to be an industry leader, generating above-market growth, and we have a broad-based operation with rental value-added Rental Solutions, equipment experts that add value and allow us to charge for that, what I'll call, engineering or near engineering capability. And delivering premium products and best-in-class services for our customers. We have been since late 2020, a market consolidator. We've completed 46 strategic acquisitions since launching the M&A strategy in our business. And as I mentioned earlier, we've made tremendous investments in technology that are paying off in our ability to manage our business consistently. We're executing the business on a multifaceted approach and through both diversification and expansion geographically. And we believe that our strategy will reduce uncertainty or will increase resilience in uncertain times and enable us to manage the portfolio in a very profitable manner. And finally, we have a very strong balance sheet that will continue to allow us to invest in the strategic areas of fleet growth of greenfield growth of M&A, investments in technology and most importantly, investments in people, education and training that will allow us to continue to grow. So with that, I'll turn it over to Sherif.

Thank you for that overview. Just off at a higher level. The question on everyone mind -- or investors' mind really is growth and the ability to grow. So it's clear post Q1 results that there is some local slowing. There is a little bit of a headwind on a company specific level from greenfields as they ramp and things of that nature. But just at a high level, you mentioned recession resilience. Could you maybe look at a high level and maybe how Herc has changed in the last decade, how the industry has changed? What gives you confidence and the ability to kind of normalize at these higher levels versus kind of seeing the fall that you might have seen in the past?

Yes. No, great question. And I think what you hit on in the second part of your question is more what we're seeing rather than a slowing. We're seeing more of a normalizing business and going back to pre-COVID levels, let's say, 2018, 2019 levels is what we're seeing. So it's -- we're coming out of that post COVID, which was high growth and primarily because of a lack of gear. And really the big three were the only ones that were able to respond correctly to that period of rapid growth. But the difference between the company today and what it was maybe 10 years ago or even 5 years ago is we're technology enabled. We're really at the forefront and leadership level of having all the equipment be telematically enabled. We have all kinds of data now in the business that didn't exist 10 years ago. In fact Rouse Analytics, which is a key tool that we use to help us price in the marketplace, help us manage a level of fleet that's in the market, understand competition -- has over 60% of the market participate now putting data into that. Key analytics, having our systems capability to know where our equipment is, over 60% of our fleet now is telematically enabled. And it will be -- by the end of the '25, we'll be at 100% of our fleet be telematically enabled so you can monitor and measure the performance of that fleet. You can see how that fleet is operating. You can see what's going on, whether it's running hot, whether there's high or low oil pressure, all kinds of capabilities around technical support that will help us better manage the fleet. Additionally, there's been consolidation in the industry. Consolidation is making it sort of be more around the big three being able to perform very well and to really have an industry-leading position and not necessarily a lot of big regional mom-and-pops that existed prior to 5 years ago where most of that's been consolidated. Most of the big regional players have been consolidated. There's very few large regional players left. So with consolidation comes efficiency, come scale comes greater capability. And then finally, we've been -- the business is different from where it was as primarily focused around classic gear, 5 years ago. We've added a whole portfolio of specialty equipment that gives us greater capability, greater penetration into customers and markets and allow us to improve the overall profitability of the product portfolio.

And looking sort of more at the local markets where there has been a moderation in the rate of growth. I guess when we look at those, what would it take to drive a re-acceleration in growth in sort of the second half of the year 2025? Is this more tied to interest rates? Or is there enough momentum in the economy to kind of see that re-accelerate again?

Well, a little bit of both. I think the local markets have certainly normalized, but it's a big part of our business. We like to think and we're keeping our local to national account business a 60-40 split, 60% local business, 40% national accounts. Most of our acquisitions have been businesses that have been focused in local markets. And then we add in our specialty gear to that to give us greater penetration and get greater capability in those local markets. But certainly, to your point, interest rates have been -- and maybe it goes back to pre-COVID when the local markets around shopping centers, strip malls, other activity in those markets have been affected by interest rates and has slowed that down. I think if interest rates do come down as they're predicted, maybe not in '24, but '25 and beyond. There can be an uptick in those local markets that will support an already high level. But we're participating at a pretty significant level today. And anything that comes back, I think, will be added opportunity for us, not necessarily bring it back to any different level. It will just be added opportunity.

And within those local markets, have there been verticals where you're seeing more resilience? Is the slowing coming from more specific areas?

Well, I think the slowing that we've seen has been around that light commercial, light industrial activity. And certainly, slowing has been in an area that we don't participate anyway has been in housing. But when housing brings other activity, when they're building housing, they have to add schools. They have to add hospitals. They have to add shopping centers. And that's where we would play. We wouldn't necessarily play in housing.

And then another [indiscernible], of course, continues to be mega projects. We've heard of some delays, timing shifting here and there. Have you seen any change in your expectation for how these mega projects are coming online? Or do you expect further delays through the year?

No. I mean, I think it sort of behaved the way that we expected it. I think we've said publicly many times that it's back-half loaded for us as we work our way through 2024. So I think when you're talking about projects and specifically large projects, right, any project has fits and starts to them, attached to them. And I wouldn't say that mega projects, by and large, are really no different. And so I think because of our strategy where we're out, we've said we're trying to get to sort of a 10% to 15% share of these opportunities. And so really for us, that kind of comes back to 40% to 50% of them that we're able to track both relationally as well as sort of progress very, very closely. And so I would say, big picture, it sort of behaved exactly the way that we thought it would.

And you sort of talked about maintaining the 60-40 national local mix...

Local national.

I'm sorry, local national. And also kind of targeting a 10% to 15%, call it of these mega projects. So as you're looking at these larger mega projects, what makes a project attractive or unattractive as you look to kind of fill in those?

Yes. Great question. Generally, an attractive project to us is one where we having a contractor that we already have a relationship with that has been named as the primary or one of the primary GCs on a project. So if we have a relationship with that customer. We've been doing business with our national accounts for 30 years now. We have 30-year relationships with most of these big contractors that are being named to that. So if we have an existing relationship, we know how to do business with them. They come to rely on us and they know that we can supply their needs and do that. Secondarily, we look at the market, do we have enough density around that mega project in that area where we have multiple branches to be able to support that with gear, with technicians, with labor that is required to operate in that. And then we look at what's the type of year that they need? And is it the mix that is sort of in our sweet spot. And does it have an opportunity for us to not only bid on that bundle of products, but then can we bring our specialty gear in there to make that a more attractive opportunity for us as opposed to just bidding the bread and the milk we have an opportunity to bring in specialty gear that has a certain amount of engineering capability that allows us to sort of uplift the pricing profile of that job to begin with. And finally, I think what's important is in an industry that we know is it an industry that we have capability and that we've done somewhere else. So we're reluctant to sort of go into places that are necessarily outside of our sort of knitting. We like staying within our knitting with the type of projects that we've done over the last 60 years that this company has been in business.

And you touched on sort of the specialty being able to pull up the rate a bit. As we look at these mega projects, there is this higher volume, lower rate dynamic as you're putting up the quotations. Could you maybe speak to maybe what the quotations looks for [indiscernible] classes? How the specialty feeds in at those higher rates and kind of brings up that level?

Yes. I mean, good question. I mean, so generally speaking, you could have a bid where they're asking you for 20, 30, 40 sort of specific CAT classes of gear, right? And so there's -- that's probably going to be a very competitively bid process with the other 2 big guys primarily. But I think that when you have sort of the breadth and depth that we have and the other 2 have, right, you have the opportunity to go in and say, "okay, I'm willing to do this, because I have the opportunity with my other product offerings and solutions and the engineering solutions and the like that we provide." And so when you ultimately put all that back together, and evaluate it, it really doesn't look much different than sort of the dollar utilization you're getting just about anywhere else in your business. And then the upside to that is, is that you have what we call permarent, right? I mean you ultimately can have gear out on rent for a long period of time. So you've got minimalized touches and transportation and those things. And so when you ultimately blend it all back together, it looks a lot like your sort of consolidated dollar utilization looks.

And as we think about that, is there something where maybe you see the main CAT classes that you initially quote on pulling on site? And then the specialties kind of different phase of the project? It sort of peppered throughout the link of that contract?

Yes, exactly. That's exactly what happens. Generally, when we get awarded a project and we have an on-site, we'll load it up with the products that we quoted. And then as a project progresses to different stages, first, they have to clear the earth, and they have to pin foundations, then they put up walls and then once they put up walls, they need to start air conditioning this. So that specialty gear that we'll bring in. And they'll have to bring power in. So we'll have to have load banks a specialty gear to help them test the load capability of that facility. And then you'll have different types of mechanical and electrical and plumbing contractors. And welding come in. So there'll be different gear that those contractors will need, and that's where specialty products come in, and we'll bring those in as different phases progress, and we'll move those back out. And that's where having facilities in close proximity allows us to manage those projects according to the different phases. Yes, exactly spot on.

You spoke to this earlier, seeing a ramp in the back half on your earnings call. You noted that you expect to end the year with above-average Rental revenue growth. What's giving you that confidence in the 2025? Do you have better visibility sitting here today on the start of those projects on maybe the timing of them and how they're landing?