Herc Holdings Inc. (NYSE:HRI) Q3 2024 Earnings Call Transcript
Herc Holdings Inc. (NYSE:HRI) Q3 2024 Earnings Call Transcript February 13, 2024
Herc Holdings Inc. misses on earnings expectations. Reported EPS is $3.24 EPS, expectations were $3.29. Herc Holdings Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Brianna, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Herc Holdings, Inc. Fourth Quarter and Full Year 2023 Earnings Call. Please note that this call is being recorded. [Operator Instructions] I will now turn the call over to Leslie Hunziker, you may begin your conference.
Leslie Hunziker: Thank you, operator, and good morning, everyone. Welcome to Herc Rentals fourth quarter 2023 earnings conference call and webcast earlier today, our press release and presentation slides were furnished in our 10 K was filed with the SEC. All are posted on the Events page of our IR website. Today, we're reviewing our fourth quarter and full year 2023 results with comments on operations and our financials, including our view of the industry and our strategic outlook prepared remarks will be followed by an open Q&A. Now, let's move on to our Safe Harbor and GAAP reconciliations on Slide 3. 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 31st, 2023. 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 for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials. A replay of this call can be accessed via dial-in or through the 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.
Finally, please mark your calendars to join our management meetings at three conferences this quarter, JPMorgan titled conference on February 27th in Miami, Evercore's Industrial Conference in New York on March fifth and Bank of America's Industrial Conference in London on March 20th. This morning, I'm joined by Larry Silber, President and Chief Executive Officer, Aaron Berman, Senior Vice President and Chief Operating Officer, and Mark Humphrey, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Larry.
Larry Silber: Thank you, Leslie, and good morning, everyone. Please turn to slide number 4; 2023 was another year of double-digit growth for Herc Rentals. We delivered a record level financial performance across the board. Equipment rental revenue grew 12% on top of 34% growth in 2022; strong pricing of nearly 7% supported the record top line performance and more than offset inflationary pressure. Demand remains resilient and our diverse end market mix sets us up to take advantage of the most robust sector opportunities like data centers, energy, semiconductors, transportation, healthcare and education, to name just a few. The diversification was important in 2023 as the shutdown of the studio entertainment business that resulted from the prolonged writers and actors strikes had an adverse impact on rental revenues.
In fact, excluding our silly studio entertainment business, rental revenue would have been up 16% year-over-year by capturing an outsized share of market volume and focusing on rate growth and operating efficiencies. Adjusted EBITDA at a record high, increasing 18% over the prior year or 24% when you exclude Cegelease. Reported adjusted EBITDA margin in 2023 was impacted by substantially more lower margin used fleet sales. Fleet disposals, I'd only say increased more than 150% in 2023 compared with 2022 as the supply chain recovered in the first half of 2023 and backwater of new fleet became available. We finally were able to begin rotating out of our oldest equipment. If we exclude center lease adjusted EBITDA margin would have been 10 basis points higher year-over-year.
Similarly, synergies represented a drag on ROIC of about 130 basis points in 2023 in October; you'll recall we announced plans to explore strategic alternatives for synergies. There's not a lot to share until the transaction is complete, but the process is underway and moving along the normal course. Now on slide number 5, you can see that the successful execution of our growth strategies contributed to our outsized performance relative to the overall industry last year. As we continue to scale our business for sustainable growth. We invested in expanding our branch network by completing 12 strategic acquisitions with 21 locations and additionally, opening up 21 greenfield locations in key markets in 2023. We also invested in our high-margin Pro solutions fleet to address growing demand capture and cross-selling synergies and support new specialty locations and our innovative customer-facing digital capabilities were the catalyst to several new project wins last year, especially at the national account level.
In the fourth quarter, we conducted our annual culture and engagement survey. The results reflected an improvement in our employee Net Promoter Score that moves us further into the top tier benchmark range. This is a metric I look at very closely with our managers we recognize that our employees are the foundation of our company. They drive our success and high employee satisfaction correlates closely with high customer satisfaction. Finally, between fleet investments, strategic M&A, dividend growth and opportunistic share repurchases. I'm confident that Herc is allocating capital in the right areas and at the right time. Now, let me talk a little about 2024 on slide number 6 and how we're thinking about growth today, we're operating from a much stronger position than in any time in our history with better systems and processes, more diverse end markets, a broader portfolio of products and a growing branch network, economies of scale and a solid balance sheet as one of the largest equipment rental providers with coverage across North America, our size, resources and operational excellence are giving us a significant advantage in the marketplace.
Tactically for 2024, we'll continue to capture mega project opportunities, focusing on those that are a benefit from our existing customer relationships. They are opportunistic geographically or with potential new customers and finally are manageable within our bandwidth so that we can continue to deliver superior service we'll also continue to focus on scale and market share growth, expanding our acquisition targets to the top 100 MSAs and opening roughly 30 more greenfields as our strategy to accelerate growth. It's imperative that we remain nimble, innovative and responsive for our customers. Our new operating system called E3OS [ph] is designed to ensure we're consistently delivering value throughout all areas of the Company in a way that differentiates our service in the marketplace.
Company-wide rollout plan 43 outlets is in place and putting the tools into practice is an important goal for 2024. We'll also continue to shift our channel mix of used equipment sales into the higher return retail market this year, and we'll talk a little bit more about our progress on that front. And finally, fleet efficiency is a high priority for 2024 for our field operations team members who understand the role of continuous improvement and a best in class culture with the disruptions from the film and TV labor strikes and the out of season supply chain deliveries behind us, we see a clear path to delivering margin expansion and ROIC improvement in 2020 for foundation we have built is solid, and we're excited for the opportunities in the year ahead.
With that, I'll turn it over to Alan to take you through the fourth-quarter operating details and provide some of the high-level operational drivers for this year. And then, Mark will walk you through the Q4 financial metrics and share our targets for 2020 for Aaron.
Aaron Birnbaum: Thanks, Larry, and good morning, everyone. Record fourth quarter results for revenue and adjusted EBITDA served as a great conclusion to a year marked by agile execution, geographic expansion and new account wins. I'm really proud of the way our team continues to focus on delivering superior products and services for our customers while executing well against our strategic growth initiatives. Execution starts with safety. And of course, safety is always at the core of everything we do. As you can see on slide 8, our major internal safety programs focuses on Perfect Days. We strive for 100% Perfect Days throughout the organization in 2023 on a branch-by-branch measurement, all of our operations achieved at least 98% of days as perfect equally notable, our total recordable incident rate remains better than the industry's benchmark of 1.0, reflecting our high standards and commitment to the safety of our people and customers.
On slide 9, you can see that we're making great progress on our urban market growth strategy by expanding through greenfield locations and acquisitions in 2023, we spent $430 million in net cash last year on 12 acquisitions for those transactions came in the fourth quarter where we added seven acquired locations to our network on top of a greenfield locations. For all of 2023, 42 new locations were open for acquired, of which 26% were specialty locations; further expanding our high-margin offering and solution selling capabilities. As you know, we are focused on opportunities in high-growth markets that complement our current branch network and fit our strategic financial and cultural filters Moreover, many of the mega industrial projects being announced are in the geographies where we have focused our acquisitions and greenfield additions like Texas, Ohio, Arizona and in the southeastern United States our acquisition process is now a core competency having successfully integrated 43 businesses with 88 locations into the heart network.
Since initiating the strategy in late 2020, we have efficiently onboard at these companies, teams, equipment, operations and customer accounts to rapidly add value to our operations. As a result of revenue synergies, we've been generating synergized multiples of approximately 3.5x, 2.4x, 0.5x [ph]. This gives us confidence as we explore and evaluate new opportunities and a robust pipeline for 2024. We have earmarked another $500 million for acquisitions. On slide 10, in addition to acquisitions, growing our core and specialty fleet through new equipment investments is a key strategy to expanding our share and keeping up with increasing demand opportunities; you can see our fleet composition and what we see on the right side of the page. Total fleet is now a record $6.3 billion as of December 31st, 2023 center lease fleet represents about 5% of the total.
So when you exclude the center lease assets held for sale are basically would have been about $6 billion at year end. You'll note that high-margin specialty fleet represents approximately 24% of the total beauty rate. Excluding the center lease fleet, specialty makes up about 20% of the total with plenty of room to continue to grow when it comes to last year's fleet investments after receiving a significant amount of back order fleet in the first half of 2023 as the supply chain recovered. And you can see we slowed our intake in the back half spending just 39% of the total annual investment versus 52% in the second half of 2022. Total fleet expenditures for all of 2023, including deliveries of the 2021 and 2022 backwater fleet are in line with overall 2022 spending.
How we see fleet disposals last year were up 150%, reflecting the supply chain's ability to improve production levels, allowing for more fleet rotation into a healthy used equipment market. Our team did an outstanding job of working to close the timing gap between seat growth and revenue growth last year for used sales, we continued to gain traction on our retail channel capabilities, utilizing technology training and sales force incentives to participate more in the higher return channel the amount of fleet at OEC that we sold to retail customers was a record for the company in 2023. For 2024, we are planning to spend in the range of $750 million to $1 billion on new fleet purchases. That gross amount, along with last year's growth fleet purchases should provide for incremental demand from greenfields general market expansion and the mega projects that are either underway or that we have high probability line of sight to it should also cover about $550 million to $650 million of planned fleet disposals, Edah we see in 2024 based on our fleet age threshold by category class.
This year's disposals are expected to follow a more typical cadence with used fleet sales weighted more towards the first and fourth quarters. We also expect new fleet deliveries to return to our more normal seasonal schedule ramping up in the second and third quarters. Now, the supply chain production capabilities have improved. Turning to slide 11, our fleet is well positioned to address the needs of large national accounts and local contractors operating in North America. Local accounts, which represented 57% of rental revenue in the fourth quarter are growing due to Hertz penetration through our acquisition and greenfield strategy, as well as regional growth in infrastructure, education, facility, maintenance and repair and local utilities.
Our national accounts are benefiting from General Growth areas like data centers as well as the federally funded opportunities that are ramping up organizing our national sales reps by end market verticals is also elevating our capabilities and enabling us to increase our presence in under penetrated end markets. Long term, we'll continue to target a 60 40 revenue split between local and national accounts. Turning to slide 12; the equipment rental market is continuing to benefit from strong demand across a variety of end markets, customer segments and geographies in 2024, and this diversification provides for growth and resiliency. You can see here that Herb is positioned well for trending opportunities as the federal and privately funded mega projects, large infrastructure jobs and a domestic manufacturing build-out continues to gather steam.
These megaprojects represent the beginning of a multiyear flow of dollars into the industrial and infrastructure space and is one of the largest players in the rental industry. Our fleet capacity, digital capabilities, on-site management expertise and broad location network sets us up to outpace the rental market's projected growth. Finally, on slide 13, our opportunities for driving revenue growth and increasing profit margin in 2024 are broad-based. We expect to continue to capture the ramp up in the mega-project tailwind to expand share. We are going to leverage proprietary tools, industry benchmark data in our value added services to ensure our pricing remains resilient. Larry told you that one of our priorities this year is optimally managing fleet efficiency.
And that means that we're going to be laser focused by end market project and geography and allocating our fungible fleet to those locations with the greatest demand. Of course, we are also going to continue to build scale through greenfields and acquisitions. We have already completed our first acquisition in the New Year and the pipeline remains strong. Several greenfield locations also have been identified for openings in the first quarter. We'll continue to leverage our industry leading Pro PATROL next-gen e-commerce, logistics and business management system this year to enhance customers' productivity and overall rental experience. And C3OS [ph] is another opportunity to standardize processes and elevate the customer experience being easy to do business with an expert at and efficient at what we do will continue to make us the equipment rental supplier of choice.
I want to thank Team Herc for their commitment to operational excellence and safety. Their professionalism shows up in execution of our services to our customers every single day, and they are a valuable differentiator for Herc. Now, I pass the call on to Mark.
Mark Humphrey: Thanks, Aaron, and good morning, everyone. I'm starting on slide 15 with a summary of our key metrics for the fourth quarter. Larry touched on the full year 2023 line items. So I'm just going to provide some color on the fourth quarter for rental revenue, about two thirds of the growth was organic and a third came from acquisitions. Doe and SG&A as a percent of rental revenue improved 80 basis points in the quarter, supporting improvements in adjusted EBITDA margin and a flow-through of roughly 65%. The adjusted EBITDA margin of 48% was a 70 basis point increase year-over-year. Let's walk through some of the other key performance drivers on Slide 16. Here, you can see the rental revenue and adjusted EBITDA walks from four Q 2022 to 4 Q 2023.
And the revenue chart, the roughly 5% increase year-over-year was made up of 5.8% increase in rate and a 9.4% increase in OEC. fleet on rent mix was an offset of about 10%, reflecting the impact of center lease and higher equipment inflation. When it comes to revenue, the mix impact for inflation adjust the volume measured in OEC dollars [ph] to a unit increase year-over-year. Inflation accounted for approximately 50% of the mix impact. As we mentioned in October, the 2023 fourth quarter had a difficult comp due to hurricane and generating rental revenue in the 2022 fourth quarter, that was about two times higher than typical weather related events. Comparatively 2023 had no major weather catalysts, resulting in a fourth quarter rental revenue headwind of approximately 3% year-over-year.
Similarly, and as expected, dollar utilization of 40.9% in the 2023 fourth quarter was lower than the 43.5% a year earlier, primarily as a result of the drop off at Studio Entertainment revenue, which accounted for 170 basis points of the year-over-year difference as well as the tough weather comp in the fourth quarter. We also continued to right-size the fleet with less onboarding of new fleet and higher rotations as is typical for the off-season. Moving to the adjusted EBITDA waterfall chart on the right profit benefited from higher rental revenue and significant leverage from lower operating expenses as a percent of revenue for the studio Entertainment's top line weakness on its fixed cost base was a partial offset, especially as we brought back furloughed workers at the end of the strike in November without the associated revenue ramp.
Also, the 2022 fourth quarter benefit from hurricane E and unadjusted EBITDA was more than double a typical weather related benefits in comparison with no benefit in the 2023 fourth quarter. Adjusted EBITDA margin in the quarter was flat year-over-year, but up 50 basis points excluding center lease, despite the typical drag from lower margin used fleet sales. Our summary financial results on Slide 17 exclude Studio Entertainment from both periods. In order to give you a better sense of how well the base business performed in the recent quarter and full year. For example, rental revenue growth would have been approximately 300 basis points higher in the fourth quarter than the actual result and our already record level. Our EBITDA margin was stronger by 90 basis points at 48.9% with a flow through of 60.7%, which is more than 580 basis points better than the prior year.
A full reconciliation of quarterly performance metrics, excluding Studio Entertainment, can be found on Slide 28 in the appendix of our presentation. Shifting to capital management on slide 18, you can see that we have no near-term maturities and ample liquidity to fund our growth goals as we continue to allocate capital to invest in our business and drive fleet growth into this cycle. We remain confident in our business model and are committed to increasing shareholder value. In the fourth quarter, we declared a quarterly dividend of 63 and a quarter cents, which represents $2.53 per share for the year. Last week, we raised our annual dividend 5% or $0.13 per share to $2.66 per share for net capital expenditures exceeded cash flow from operations in the year ended December 31, 2023, with cash outflows of $65 million before acquisitions.
Our current leverage ratio at 2.5x is well within our two to three times target range and in line with our expectations as we invest in growth. Moving on to slide 19, you can see the continued strength in our primary end markets. In the upper left, the ARA estimate for 2020 for North American rental industry revenue is $82 billion or 6.5% growth over 2023 on the bottom left as the Architectural Billing Index, which reported below $50 billion [ph] in December. It's not unusual to see the Billings Index be choppy in the back half of the year, but saw a similar trend in 2022. ABI is just one indicator of future construction activity. We will continue to monitor it in conjunction with other data points over the next 12 months between two of our key markets, our industrial and non-residential construction.
Combined, these markets reflect about two thirds of our customer base and both are likely to outperform other consumer-driven end markets due to new mega project construction and as the re-shoring of U.S. manufacturing capacity continues to gather steam. Taking a look at the industrial spending forecast on the top right; industrial info resources is projecting the second highest level on record for 2024 at $408 billion on top of last year's peak $413 billion spent in the lower right corner quadrant is Dodge's forecast for non-residential construction starts. You can see in 2024 starts are estimated to increase 4% to $458 billion. The dotted line on both of these charts reflects growth over pre-pandemic levels. You can see that last year and the next three years are projected to be the strongest periods of activity that this industry has ever seen.
Additionally, there's another $342 billion in infrastructure projects slated for 2024; that's a 7% increase over 2023. If you flip to slide 20, you can see that our guidance highlights our plan to continue to outpace market growth again in 2024. As noted, guidance is presented on an organic basis and excludes the performance of center lease, which is held for sale and is expected to close in 2024. Our intention is for net fleet CapEx to be between $500 million to $700 million, supporting dollar utilization improvement and 7% to 10% organic equipment rental revenue growth, used equipment disposals at OEC in 2024 will moderate by 20% to 30% versus the 2023 level. Last year's catch-up rotations allowed us to optimize our fleet age, and we like where we currently are sitting 45 months.
Our young fleet gives us advantages in the marketplace and flexibility if market conditions change. Our initiation of rental revenue guidance at 7% to 10% growth is intended to provide a reasonable range based on projected market growth, which is about 6.5% for 2024, as well as heard specific incremental opportunities from greenfields and the mega projects in our pipeline. We feel good about this range based on our current visibility, more experience with the pace of the mega-project rollout, the return to more normal growth trends in the local market. And of course, feedback from our team in the field, while inflation on new equipment purchases for 2024 has moderated. It is impacting our total fleet by approximately 5%. We exited 2023 with a mid-single digit price increase for 2024.
Our goal is for pricing to offset any inflationary pressure benefiting from operating leverage. We estimate adjusted EBITDA will be between $1.55 billion and $1.6 billion, representing another year of profitable growth, ranging from 6% to 9% when comparing the adjusted EBITDA growth rate with the equipment rental revenue growth rate to roughly 100 basis point difference is our expectation for a lower amount of used equipment sales versus 2023. Overall, the strong demand we're experiencing across the manufacturing, industrial and infrastructure markets, along with the stability that comes from industrial and commercial maintenance projects is consistent with an industry and an upcycle. And our guidance reflects that we intend to continue to deliver strong financial metrics as we execute on our proven growth strategy.
With that, I'll turn the call back to Larry.
Larry Silber: Thanks, Mark. And now please turn to slide 21. Everything we do starts with our vision, mission and values and our purpose statement and focuses on equipping our customers and communities to build a brighter future. We do what's right? We're in this together, we take responsibility. We achieve results and we prove ourselves every day. With that, operator, we'll take our first questions.
See also Top 15 Electric Bike Brands According to Reddit and 35 Biggest Football Clubs in the World.
To continue reading the Q&A session, please click here.
