Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Herc Holdings Inc (HRI, Financial) reported a 9% increase in rental revenue and a 2.3% increase in adjusted EBITDA for the second quarter.
- The company saw a 3.5% year-over-year increase in rental rates, contributing to a nearly 17% increase over the past 2.5 years.
- Herc Holdings Inc (HRI) added 17 new locations in the recent quarter, aligning with their goals for geographic expansion and specialty product line cross-selling.
- The company is capturing a targeted 10% to 15% share in mega projects across various end markets, including chips, battery, LNG facilities, data centers, and renewable energy plants.
- Fleet efficiency improved on a sequential monthly basis, with June showing revenue growth year-over-year outpacing fleet growth heading into the peak season.
Negative Points
- Local market revenue growth is tracking slower than expected, with same-store growth expected to normalize to mid-single digits, similar to 2019 levels.
- Adjusted EBITDA margin was impacted by challenging fixed cost absorption and higher year-over-year expenses in categories like freight and insurance.
- Higher interest expenses year-over-year due to increased borrowings on the ABL revolver to fund acquisitions impacted net income.
- The company faced a more pronounced slowdown in local project starts, particularly in the western regions, affecting overall revenue growth.
- Incremental $14 million of expense headwinds reduced expected flow-through from 40% to 14.5% in the quarter.
Q & A Highlights
Q: You saw weakening in June. Is the fleet you moved strategically spoken for, and is the process of moving fleet around over if things weaken further?
A: We moved the fleet as a normal course of business to focus on fleet efficiencies. We did more of it through Q2 to get things balanced, and as we exited June, we were fleet-efficient. This process will continue as needed.
Q: How do you think about CapEx if smaller markets stay weak? Would you do less organic CapEx or more small acquisitions?
A: We have about $250 million to $500 million of gross CapEx to play with, giving us a ton of optionality. We'll play it as it comes, given the health of the OEMs and the availability of the fleet.
Q: Is the local market slowdown making mega projects more competitive, and are you shifting fleet from local projects to mega projects?
A: The local market slowdown was primarily in our western regions. We are not seeing an impact on pricing in either local markets or mega projects. The market remains disciplined.
Q: Can you shed more light on the pricing dynamics within the 3.5% increase? Are you prepared to cede volume to lead on prices?
A: The contract versus non-contract pricing behaved as expected. We had about 60 basis points of sequential price improvement in the quarter. We focus on fleet efficiency and differentiation rather than getting into pricing wars.
Q: Can you provide an update on the expected timing of the Cinelease sale and any parameters on the realization?
A: The process is ongoing, and we still expect to complete a transaction this year.
Q: Given your line of sight on mega projects, are they starting to get underway as planned for the second half?
A: We are confident in the tailwind from mega projects for the rest of the year. We knew the second half would be stronger, and we are happy with our performance on mega projects in the first half.
Q: How long does it typically take for you to get acquisitions up to corporate average EBITDA?
A: Generally, it takes about 18 to 24 months for acquisitions to reach corporate average EBITDA. Some may come up quicker, depending on various factors.
Q: How long do you think it would take for local markets to react to interest rate cuts, and how big do the cuts need to be?
A: Generally, it takes about six months for local markets to react to interest rate cuts. The market needs to see that the environment is trending in the right direction.
Q: How balanced do you think the market is right now in terms of supply-demand?
A: The market is tightening, and the fleet levels in the industry are at a good disciplined level as we head into the peak season.
Q: Can you offer some sensitivity analysis on the impact of interest rates on your business?
A: It's hard to quantify, but interest rates affect market sentiment. If indicators show that rates are moderating, we expect a more receptive market to construction starts.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
