Herc Holdings Inc.

Thank you for standing by. My name is Mandeep and I'll be your operator today. At this time, I'd like to welcome everyone to the Herc Holding second quarter 2024 earnings column webcast. All lines being placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Leslie Hunziker, Investor Relations. You may begin.

Thank you, Operator, and good morning, everyone. Welcome to HERC Rental's second quarter 2024 earnings conference call and webcast. Earlier today, our press release and presentation slides were furnished, and our 10Q was filed with the SEC. All are posted on the events page of our IR website. Today, we're reviewing our second quarter 2024 results, with comments on operations and our financials, including our view of the industry and our strategic outlook. The prepared remarks will be followed by an open Q&A. Now let's move to our safe harbor and gap reconciliation on slide three. 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'd like to caution you that the actual results could differ materially from the forward-looking statements made on this call. You should also refer to the risk factor section of our annual report on Form 10-K for the year ended December 31, 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 Morgan Stanley's 12th Annual Laguna Conference on September 11th. This morning, I'm joined by Larry Silber, President and Chief Executive Officer, Aaron Birnbaum, 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.

Thank you, Leslie, and good morning, everyone. Let's turn to slide number four. In the second quarter, we continue to deliver on our long-term growth strategies, focusing on the fundamentals of increasing market share and geographic density for scale, optimizing fleet mix with greater penetration of our specialty equipment offering, and leveraging proprietary and industry data and technologies to enhance our competitive position and customer satisfaction. We're continuing to make progress on all of these initiatives. How we manage fleet logistics is another important driver of profitable growth for us, especially as we set ourselves up to incrementally benefit from the substantial infrastructure and mega project opportunities. Our fleet management team has done an outstanding job this year, pacing the investment in new equipment to align with dynamic demand trends while also redeploying existing fleet to our highest demand regions to drive greater asset utilization. As a result, in the second quarter, fleet efficiency improved on a sequential monthly basis, and June turned the corner with revenue growth year-over-year outpacing fleet growth heading into the peak season. Moving to slide five, this is our year-to-date financial scorecard. After the first quarter, we told you that the second quarter would be our slowest growth quarter for 2024, ahead of more robust rental activity in the back half of the year. As you saw from comments in our press release this morning, second quarter revenue tracked to our plan and highlighted a lot of continuing positive trends. For example, rental rate was up 3.5% year over year on top of our toughest comp of 7.8% last year and a 5.5% rate increase in the second quarter of 2022. That's nearly 17% increase in just two and a half years. Further, pricing is improving on a sequential basis, reflecting our leadership as well as ongoing industry discipline. And based on benchmark data, HERC volumes continues to significantly outpace overall rental market growth with the biggest competitive differentiators being our participation in the expanding mega project pipeline and the diversification of our branch locations, fleet mix, and end markets. Finally, our execution on strategic acquisitions and greenfield openings remain strong, with 17 locations added in the recent quarter, which aligns with our goals for building our brand geographically, cross-selling our specialty product lines, and driving efficiencies through scale. Of course, as you also know from our press release, revenue growth in the local market is tracking a bit slower than we had originally thought. Although recent acquisitions are offsetting the deficit for HERC after three consecutive double-digit increases in local revenues, we expect same-store growth to normalize in 2024 to more of a mid-single-digit rate similar to what we experienced in 2019. Our forecast assumes some moderation in interest rates to support the local contractors' continued willingness to fund new projects. Those expectations have been continually deferred, and every month the Fed leaves interest rates steady. It caused more uncertainty for local contractors. That's put increasing pressure on industry volumes, and as a result, we now expect same-store local market growth at more of a low single-digit rate for 2024. Adjusted EBITDA margin primarily was impacted by challenging fixed-cost absorption, given this was our lowest revenue growth quarter, as well as an unfavorable trade-off in profitability as contributions from our 2024 acquisitions and greenfields initially generate lower incremental margins than our established local account business. Additionally, we had a few expense categories like freight and insurance that were higher year over year, which Mark will talk about. With six months behind us and early visibility into the summer season, let me jump to slide number six to give you a sense of how we're thinking about the second half of the year and what that means to full-year guidance. Of course, our guidance is always based on our current view of the operating environment. So both local market challenges and 2024 acquisitions completed as of today are factored into our latest expectations as we reaffirm our original guidance for rental revenue, adjusted EBITDA, and net fleet capex. For megaprojects, activity on our largest job sites is tracking right where we expected, and we're capturing our targeted 10% to 15% share across a variety of end markets from chips, battery, and LNG facilities to data centers and renewable energy plans. We told you that our guidance was back half loaded this year with mega projects being the catalyst to accelerating revenue growth in the third and fourth quarters and targeted fleet additions from second and third quarters supporting that outcome. This is still the case. When it comes to maintaining our EBITDA guidance range, this is also a tale of two halves. We expect operating leverage from seasonal revenue growth and the adjustments to our cost structure in the second quarter to put us within our targeted profit range. Supporting Revathal flow-through improvements, the third and fourth quarters averaging roughly 50% for the second half of the year. For Net Fleet CapEx, the guide also remains intact. The breadth of the range provides us with optionality as we deploy fleet into the peak season, and a healthy supply chain gives us further flexibility. As I mentioned, our fleet group is being very disciplined and agile in how they're approaching the timing and regional allocation of investments in new equipment. And our entire operations team is focused on fleet efficiency as a priority. From what we're seeing in our Rouse data, the overall industry is being equally disciplined when it comes to fleet growth. Today, volume trends are dynamic. The good news is that we have a fungible, expansive product line national account capabilities, and a diversified operating model. With the actions taken in the second quarter to move our fleet to our highest growth regions and align our cost structure with demand trends, we feel good about our position heading into the peak season and over the long term. Aaron will talk a little bit more about our current operating trends, and then Mark will take you through the core business performance and more specific puts and takes that support our full year guidance range.