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

Excellent. Well, thank you, everyone, for joining us. My name is Adam Seiden. I lead the U.S. machinery and construction [ sector ] here at Barclays. And for this session here, we're very pleased to have the folks from Herc in attendance. So you guys all know, probably Larry Silber, Mark Humphrey, CEO and CFO; as well as we have Leslie Hunziker from the IR team here in the audience. So the format of this session is primarily a fireside chat. But we'll -- what we wanted to do is first kick it off actually to Larry, just to talk a little bit about some news that some people in here may have heard yesterday, and then we could dive right in. So team Herc, thanks for being here. And Larry, it's a pleasure.

Thanks, Adam, and good morning, everybody, and thanks for joining our session. I'll hopefully kick that off and I got to back up one there. Good afternoon. We're excited to be here today and -- to cover the announcement that we made yesterday regarding Herc's acquisition of H&E Equipment Services. But before diving in, I'd like to remind you of our safe harbor statement informing you of information regarding non-GAAP financial measures. Some of you are probably familiar with our company. Herc Rentals is the third largest rental company in North America. And it's important to understand that our foundation that we've built over the last 9 years since we became an independent public company, that's enabling us to complete this acquisition from a position of strength. Herc is an industry leader in what's a very highly fragmented industry, and we're generating above-market growth, and we are considered a consolidator in the industry. Over the last 4 years, we've invested more than $2 billion in over 50 acquisitions. And we know how to allocate capital to drive value in the business, and we know how to successfully integrate acquisitions as we've done, like I said, over 50 acquisitions to date. Our fully integrated acquisitions conducted over this period of time. We've achieved our target synergized multiples and have consistently generated ROIC in excess of the cost of capital. So as we approach this new opportunity with H&E, we'll be using the same playbook to integrate H&E into Herc. So here's a little bit about the deal and scaling our platform and accelerating a strategy that we've had in place for a while. It's a unique opportunity. There were only really 1 of 2 assets of this size remaining in the industry, and this will help accelerate our [indiscernible]. With H&E, we gain a high-quality rental business that's invested strategically in its fleet, its branch network and its people consistently over the last several years. Together, we'll have a substantially expanded footprint, increased density in key regions with economies of scale in those regions. We'll have geographic as well as customer diversification in those regions. And one of the main things is we'll have a larger and much younger fleet that we're acquiring with this acquisition. The financial benefits are also compelling. The transaction is expected to be high single-digit accretive to Herc's EPS in 2026 and ramp to greater than 20% as synergies are fully realized in the acquisition. And as I'll review shortly, the cost and revenue synergies are substantial, and we believe are highly achievable, and we'll talk to those for sure. Under the terms of our agreement with H&E, the shareholders of H&E will receive $78.75 in cash and 0.1287 shares of our common stock for each share that they own. The transaction consideration mix has been structured to ensure that Herc continues to have financial strength and flexibility to invest in the business and return to our leverage target ratios within a 24-month period subsequent to closing. We'll continue to invest in our core business and technology that drives the sales and service capability, and we expect to maintain the dividend that we initiated several years ago going forward. Herc is making the acquisition, as I said, from a position of strength. And I want to underscore that point here. Since becoming an independent public company and publicly traded in 2016, we've delivered a total shareholder return of 544% to our shareholders. We believe the H&E acquisition will enable us to build on [indiscernible] shareholder returns going forward [indiscernible] sort of a picture of the footprint. The yellow dots represent Herc and the black dots represent the addition of the H&E 160 locations that will be joining the Herc portfolio. Together, once the acquisition is completed, we'll operate out of more than 600 branches or locations, further strengthening our position as the third largest rental company in North America. We'll have a leading presence in 11 of the top 20 rental regions and increased urban density in 7 of the top 10 rental regions in urban markets. We have a clear path to incremental $300 million worth of EBITDA, the synergy upside enabled combination is quite substantial, as you can see. We've identified approximately $125 million of cost synergies, and we've also identified $175 million of EBITDA impact from revenue synergies. And the cost synergies, we expect to see most of the benefits of that in the first 2 years post-closing and the revenue synergies will be achieved over a 3-year period. The ability to extend also our specialty fleet across H&E's network is a big generator of the revenue synergies for us. H&E's offering is primarily in the gentle (sic) [ General ] Rental area with a very narrow portfolio of products, and that will provide substantial cross-selling opportunities in the white spaces for us to bring our specialty fleet and expertise in rental solutions to their customers. General Rental will also be an opportunity because as I mentioned, they primarily operate in 3 main categories. We will expand that category area to about 6,000 subcategories within that and give them ample opportunity to grow their General Rental portfolio with an offering that effectively is about 10x of what they offer today. The third primary bucket, which you see on this slide is really synergies around Herc's technology and digital tools that will enable them to improve their performance and optimize their business whether it's on pricing, whether it's on logistics or utilization of equipment and efficiencies gained in the business. And we feel very confident about these, and I'm sure Mark will talk to these in just a minute. Given the combined company's powerful platform, our increased liquidity and greater investor interest that comes with a scaled company, we believe also that we will experience multiple reratings to our valuation, and we believe that it will become warranted as our scale is recognized in the market. As shown on the chart on the right-hand side of this slide, the uplift from our rerate opportunities will deliver significant additional value to our shareholders. For each incremental half turn in re-rating the implied value of Herc will be approximately $40 a share or an approximate 20% increase to our stock price compared to where we trade yesterday. So with that, I'd like to now turn it over and end with what we look at as the summary to our value proposition for this transaction, and I'm sure this will be something Adam will ask us a lot about.

No, that's right. And thank you, Larry, for the overview there of the transaction. So I guess I'm going to ask a real simple question out of the gate. Why now? Why -- given where we are in the market cycle and what you guys see out there, why buy a company like H&E with that size, particularly with the track record of having done a lot of smaller bolt-on acquisitions over the last number of years here?

Yes. Great question. As I've always said, 2 things I'll comment on that, timing, acquisitions are opportunistic. It became available now. As you know and as many of our investors know, I've been talking about when one of these 2 assets, whether it was either H&E or Sunstate, which is really the only 2 quality assets available that aren't part of the big 3, if you will. I've said when and if they become available, we would have a serious interest, and we would lever up and take on debt to go after one of these. These are great companies. They are quality businesses with great leadership teams, great operational capability. So the reason for now is it became available. And the answer to your second question rather than just smaller bolt-ons is this isn't any different from our strategy to just accelerate our strategy instead of doing 4, 5, 6 bolt-ons a year or more -- or a lot more greenfields, we can do it in one fell swoop, keep our strategy the same. Maybe we'll slow down on the bolt-ons, and we'll slow down on the greenfields and integrate this. And once we fully digest this, we'll go back to that strategy of continuing to look for urban market density.

Well, like you said, I mean, essentially, a willing buyer needs a willing seller. And in this case, there was the seller. So you did mention those keywords lever up, right? And that has been a talking point over the last day or so here. So can you talk a little bit about your comfort in the ability to operate a business with this leverage, bring down that leverage over the 24-month period or even thereafter? And then maybe going back to the fact that Herc has carried a higher leverage...

Let me address the first part, and I'll let Mark address how we're going to lever down, okay? The first part is when we came out and we spun away from Hertz in 2016, we carried a 4.2 leverage ratio, and we were -- and we weren't as healthy a company as we are today. We had a lot of things to fix in the first 4 or 5 years of that journey. So we were doing a lot of investing in systems and fleet and people [indiscernible] neglected for 7 or 8 years prior. So we had to take a lot of that not only the debt that we have, the leverage that we had, we had to run a business, get it going and fix a lot. We don't have anything to fix either in our current business or in the acquired business. All we have to do is really import our technology and import our fleet and import our capability into this one. So there's nothing to fix. We had a much higher leverage ratio, and we'll be able to overcome that, I think, in pretty short order, and I'm going to let my CFO tell you how we're going to do it.

Yes. I mean, I think, right? I mean, sort of out of the box to your point, Adam, leverage is about 3.8x. The way that we've modeled this, the synergies that Larry spoke of sort of the health of the 2 businesses coming together, I think it's going to be a combination of sort of EBITDA growth, synergy recognition and cash flow generation to sort of move you into that range that we've talked about for the last several years of 2 to 3x. And then I think once we sort of cross over and sort of tackle and accomplish all of the synergies this business really does begin to produce a significant amount of free cash flow, which I think, over time, then obviously, depending upon what we decide to do from an M&A perspective and the like, right, you're sort of running back to the levels where we're operating today.

Got it. And I think we'll touch on all those levers between EBITDA growth in the future synergies, we're going to touch in a second and cash flow. But one thing that's a little bit of an outlier to those trends is Cinelease, right? So Cinelease is -- you guys have stated your intentions of looking to monetize that. The proceeds that you received from Cinelease, is it -- does that go towards helping to pay down the leverage?

Yes, we'll take the proceeds from Cinelease and pay down the ABL. It's effectively modeled inside of our 2025, obviously, it's not free cash flow by definition, but we will certainly use those proceeds to pay down the ABL.

Got it. So now let's touch on the synergies, right? So you had the nice stacked column chart in the slides there. And it always looks great on slides, but it's -- sometimes it's harder in practice. So maybe if you could just walk through for me how you see those synergies feathering in here over the time horizon that you've modeled out here? And does it get harder and [indiscernible]

Let's start on the rev side. I think Larry touched on the areas of focus for us. It's really sort of an overlay of what we've done over the last 9 years in terms of building a specialty business that is extremely accretive to Herc Rentals and one of the primary reasons that we've improved margins by 1,000 basis points over that period of time. So looking at their fleet lineup, I mean they have virtually nothing in terms of the way of specialty product and offering. And so that component -- and we sort of broke it down by category of offering that we do sort of overlaid our performance into them to look at what the power of possible would, in fact, be. We didn't take all of that and assume we would -- they would look exactly like us at the end of 3 years, but we've modeled that accordingly. I think the other component here is the gen rent side of the house, where we have a significant more -- significantly more cat classes than they do from a product offering perspective. And so we think that there's a general uplift there just taking gear that we already have and moving it into what is a footprint that is extremely likable for us. And so those 2 things, I think, when we think about sort of how those synergies -- the rev synergies will play into this, we're sort of anticipating somewhere in the order of magnitude of 20% of that rev synergy being accomplished at the end of the first 12 months of the transaction and then up to 60% as the specialty product begins to roll through and the knowledge and know-how to sell those solutions roll through. And then we would think and expect that at the end of year 3, we would have sort of the 100% of the known at that time. Taking to the cost side of the house. I think that the cost side of the house is sort of relatively evenly split, I would say, between the G&A and the operations side. There's a bunch of moving parts in there. But I think when we look at that, we're sort of anticipating that 60% of the anticipated cost synergy would be in at the end of the first 12 months, then probably at 90%, give or take, at the end of 2 years and then would expect to sort of be fully vetted by the end of the third year from the cost side.

Got it. And you mentioned a little bit about moving fleet that you already have into existing H&E locations and so forth. So the broader question is around free cash flow because in order to meet the ambitions of what you're looking to do, I'm sure you want to expand those cat classes, et cetera, that you just spoke to. So what is the combined free cash flow profile of the business? Is it greater than where we are today?

It is. I think the synergy component of this is so cash generative, right? I mean you think about sort of EBITDA contribution of $300 million, so sort of after tax, you're talking about low $200 million cash flow -- free cash flow profile there. And so I think when you roll that forward and you sort of look at the business on a normalized basis, right? And so obviously, growth CapEx plays into that. One of the most exciting things about the synergy opportunity for us is that we actually think that we can do it capital light, if you will. We think that we can accomplish that revenue synergy with about a net $300 million of gross CapEx. And so the return on that becomes extremely compelling. And then when you roll that through to what the free cash flow profile looks like on the combined business, the way that I think about it, normal fleet growth, normal disposition growth, you're probably talking somewhere between 10% to 15% free cash flow to your overall revenue of the combined business on a normalized basis.

Got it. 10% to 15% of the normal -- of the revenue. Okay. So maybe just to button up the conversation on [indiscernible], and then we'll go back to where all the questions were going to be prior to yesterday. But on just integration, right, like Herc has the experience of doing a lot of these bolt-ons and so forth. As you said, this is kind of all in one full swoop. So how do you think -- your level of confidence, how do you think the management team is ready to execute on some of these -- on now what is a much bigger asset?

Yes. No, great question, Adam. And certainly, something that we've been ready for, we've been trying to do already to be prepared for it. But we're going to break this down more into a regional focus. We operate in 10 regions across North America with Canada being one. All of these locations happen to be in the U.S. and into 9 regions where we've done multiple acquisitions in all these 9 regions already with regional teams, region vice presidents and their teams and support staff that have all fully integrated numerous acquisitions. We've done 51 acquisitions to date over the last 4 years, and they've all been able to do this. So we're going to break this down on to a regional basis and make sure that our region vice presidents are running each of these as well. None of them are going to have more than 20 locations additive to any one particular region. And we already have a team of people out there that support all of this acquisition integration. Those people will be dedicated to this project. Obviously, we're going to slow down any other deals and any other greenfields for the moment. We'll complete what's in process, certainly on greenfields as well as brownfields and things that they might have in order, but we won't add anything new to the list. So we'll have a big team of field people that we can flex to address this integration activity. Obviously, the #1 thing will be, from a technology standpoint, get them up on our system quickly, give them visibility across our organization to fleet utilization. So all of our tools that we use, whether it's our Optimus pricing tool or on-the-go fleet management and logistics tool and our click analytics -- data analytics tool, give them that capability so they can improve their performance and give them the training on that. So we'll get that done post [ ACE, ] and that will happen on an organization-wide basis. And then the integration will happen on a local basis, on a region-by-region, district-by-district basis. So we're very confident. We've been looking for this kind of opportunity. And we believe integration today is one of our core competencies that we've developed over the last 4 years.

So you said the word region a lot in that reply. And that, I guess, gets to the next thing here, right? Is -- when you look at the market broadly across the national picture, how does that compare versus what you see on a region-by-region basis? Like how much white space is there -- out there for you to grow and so forth?

Well, certainly, within this acquisition, there is plenty of white space from a product portfolio standpoint because H&E is an outstanding business, great management team, great performance. Their product category is narrow. So certainly, whether it's additive on the gen rents or additive on the specialty or additive on the technology to give them capability to be involved in bigger national accounts as well as mega projects. There's white space there. But remember, this industry is still highly fragmented. There's plenty of opportunity. We're not anywhere near fully penetrated in this industry. There's still a secular movement from ownership to rental. And we've only really been focusing on the top 100 MSAs. We can always go to the next 50 MSAs to look for growth [indiscernible] as we build out and achieve the share and where we're focused around the top 100, we'll look to the next 25 or the next 50, and there's plenty of white space with lots of mom-and-pops out there that would be ripe for consolidation at a later date or greenfield opportunities in those markets where we want to build density.

I guess that gets to the above-market growth that you guys have been calling out for some time. So we talked a little bit about greenfields and M&A as far as what's done. So maybe just to set the table rather, level set. If you think about before we get to H&E, the business is still integrating and digesting some of what's been done previously. So maybe into 2025, you guys talked about a little bit of a drag from some M&A and greenfield and what that meant on margin and so forth. So what is -- could you give us more color as to what is that drag and how that plays out for '25 and '26, I guess, and how they build the scale up?

Yes. I mean I think the expectation, right, is a bit of more of the same from a local market perspective, right, that low single-digit sort of growth. And so when I think about that, you really have probably the way that we sort of measure local may be a bit different, but that local business is probably net neutral -- inside of '25. So when you think about where we've pegged the growth at 4% to 6%, right, take the midpoint there, right? You've got a couple of points of tailwind coming in from the M&A, primarily back half of 2024 M&A. The remainder of that growth profile into 2025 is national account mega project activity and some infrastructure type work that probably rolls into and gets counted as local as we sort of reported out. But that's really how we're seeing at least today, how 2025 plays out.

Great. One more before I get to the audience response questions here. Just on -- there was -- maybe it was just a one liner in the script from the call, but Aaron mentioned as far as product line expansion and so forth. I'm asking the question because from a product line expansion side, some of your peers have certainly spoken a lot about that. So just curious, when you guys talk product line expansion, what does that mean for Herc?

Yes. I think when we're talking about it, look, there's certainly the obvious of expanding our capabilities around trenching and things that we've done. But there's -- within the products that we have, there's really technology expansions, things that are enablers to our customers that give our customers greater control, greater efficiency and greater utilization of the product around that. So it's really more around technology enablers within the product line expansion outside of the obvious, just adding new products to our portfolio as they come out and are developed.

Got it. All right. If we could flip to the audience response question, please. I think probably everyone has experience of doing this in the last couple of sessions, but a question will be up here and if you could reply on your -- the gadget you have in front of you. So the first question is, do you currently own the stock? Yes, overweight, market weight, underweight or no? I can start the clock. All right. Now the answer is... All right. About half the room is no. It's really actually a roughly even split to be honest with you, yes.

Very close.

Overweight and no. Next question, please. What is your general bias towards the stock right now? Positive, negative or neutral? Start the clock, please. Very split room, about half positive, half neutral actually. Moving forward to the next one. In your opinion, through-cycle EPS growth for Herc will be above, in line or below peers? Start the clock. About in line with peers. All right. Moving to the next one. In your opinion, what should Herc do with excess cash? We just spent a lot of time on M&A. But here you go, M&A, bolt-on larger repos, [indiscernible] debt paydown and internal investment? Start the clock, please. Thank you. All right. So debt paydown. I wonder if we did this pole 2 days ago. Next question. In your opinion on what multiple of '25 earnings should Herc have less than 10x up to higher than 21x? We can start the clock. All right. So 10 to 12x, 13 to 15x. Next question, please. And the last one, what do you see as the most significant share price headwind facing Herc? Core growth, margin performance, capital deployment or execution? Start the clock. All right. Execution. Well, we just spent a lot of time also on how they're going to execute. So it will be interesting next year where things are. So maybe normally, I take this, and I start asking about like free cash flow questions and all that stuff. I think we've got a sense of where that goes. But I wanted to go back to the Analyst Day slides from a couple -- from now a couple of years ago. The company laid out several different scenarios at the Analyst Day. And to me, it felt like some of the numbers that have been talked about and have been shown now, they reflect the double market growth scenario. So -- is that a fair assessment still of how things have played out now a couple of years in? And then in that number, tying to free cash was a $900 million to $1.2 billion number. Again, of course, that's pre all this H&E conversation. Is that still where you guys are thinking? Or is there upside or downside?

No. I think sort of that mid -- that double market growth, the slide is ingrained in my head now. But yes, that sort of -- and that really runs back to what I was saying earlier, right? That's sort of a normalized CapEx outlay for us, which then should provide somewhere in that 10% to 15% of revenue. And that's sort of what that's implying there and kind of what we just did inside of 2024 as well, $300-plus million. So I think that's where the expectation would be in a normalized growth environment, right? And then I think the other thing sort of tying it back to the overall expectations inside of that Investor Day, obviously, a lot has changed from then until now. And I really think we need some additional clarity from the Fed and the macro and loosening up that local market again with probably some incremental interest rate cuts to spur that. And I think once we gain that clarity, we'll come back. I think at the end of the day, we are completely confident that the numbers that were put on and inside of that Investor Day presentation are absolutely doable we just need this -- that was on the underpinning of a market growth of 5%, and we're sort of at 1% now, right? So I think once we sort of see the clarity, we'll come back and sort of reload on what the expectation and the time line should be.

Excellent. That's helpful. And maybe just to wrap up, Larry, we've been chatting since you guys spun off from Hertz. So the company has grown multiples on revenue, EBITDA, OEC, et cetera. Here we are growing the company again or talking about another growth leg here. That's all what we see from the outside, but the concluding question here is just what is one part of the business or the model that we can't model on our end that you think is helping to drive the success of Herc?

Yes. I really think there's probably 2 things that you don't really get to sort of see every day and the first is technology and the position that we have and the gains that we've made in terms of the technology that we're offering not only ourselves, but our customer base and our OEM suppliers and how we're interfacing with them, you really don't see that fully connected or connectivity across that channel. So that would be number one. And number two is really the growth and the development of the people. We really have outstanding people that have long tenure in management. It's not uncommon for us to have multiples of people in region -- districts and regions that have 25 to 30 years with the company and continue to perform and grow and then developing the next level of leaders that come up below them. So the people is really important. And remember, just as a closing here, you have 2 of the oldest rental businesses in the world coming together here. We are celebrating our 60th anniversary this year. H&E celebrated their 60th anniversary 2 years ago. So you have over 120 years of combined rental experience coming together, and there's best shared practices that will really help both of these companies propel to the next level.

120 years and still growing. There you go.

Still growing.

All right. Well, please join me in thanking the Herc folks for being here. Really appreciate it.

Thank you very much.