Good day and welcome to the Herc Holdings Inc Fourth Quarter and Full Year 2018 Conference Call. Today’s conference is being recorded. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Ms. Elizabeth Higashi. Please go ahead.

Thank you and good morning everyone. I would like to welcome you all to our fourth quarter earnings conference call. Our press release and presentation slides went out this morning and both are posted on the Events page of our IR website at ir.hercrentals.com. Please turn to Slide 2. This morning, I am joined by Larry Silber, our President and Chief Executive Officer and Mark Irion, Senior Vice President and Chief Financial Officer. They will review the quarter and full year results for 2018 as well as the industry outlook. The prepared remarks will be followed by an open Q&A which will also include Bruce Dressel, Senior Vice President and Chief Operating Officer. Before I turn the call over to Larry, there are few items I would like to cover. First, today’s conference 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. Please refer to Slide 3 through 4 of the presentation for our complete Safe Harbor statement. The company’s Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission this morning contains additional information about risks and uncertainties that could impact our business. You can access the copy of our 2018 Form 10-K by visiting the Investors section of our website at ir.hercrentals.com or through the SEC’s website at sec.gov. On a related matter, we expect to file our third quarter Form 10-Q later today, which will be available through either websites. 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 material, which were furnished to the SEC with our Form 8-K this morning and are also posted on the Investors section of our website at ir.hercrentals.com. Finally, a replay of this call can be accessed via dial-in or through 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. I will now turn the call over to Larry.

Thank you, Elizabeth and thank you all for joining us this morning. We are very pleased with the strong fourth quarter and full year results we reported earlier today. Our strategic initiatives drove volume, improved year-over-year pricing and continued our fleet diversification. In 2018, we achieved strong rental revenue growth and improved flow-through by controlling direct operating expenses and reducing SG&A. We increased our utilization and adjusted EBITDA margin year-over-year every quarter in 2018 and we expect to continue improve both going forward. The strong 2018 results are a springboard for the continued organic growth we expect in 2019. Our guidance range for 2019 adjusted EBITDA is $730 million to $760 million, an increase of 7% to 11% over 2018. Now, please turn to Slide #6. By now, you are all familiar with four of these five strategic initiatives. Early this year, we added a fifth pillar developing our people and culture. We have always believed that our people support the achievements of our customers and communities everyday and as such, our people are the major differentiator for Herc Rentals in a highly competitive industry. It’s important for us to highlight our commitment to development of our people and culture for a set of priorities outlined here. First, we intend to attract and retain talent, align performance through a shared purpose, create a supportive workplace culture and finally expand continuous learning. The major things of our other strategic initiatives remain the same even as we continue to refine the elements within each pillar. Within our expand and diversified revenues pillar, our initiative to broaden our customer base consists of two main strategies. First, by expanding and diversifying our fleet we are focused on increasing our share of our customers’ equipment rental spend or budget. Second and equally important we are…

Thank you, Larry and good morning everyone. We continued to make good progress this quarter and for the full year. Our journey is still in the early stages, but as you can see from our top line growth, we are well positioned to maintaining our focus on flow-through and margin improvement in 2019. If you turn to Slide 15, we will review the Q4 financial summary. Larry has already provided an overview of annual performance. Now, I will focus on some details of the fourth quarter. I will reiterate a few highlights then I will walk you through the fourth quarter year-over-year changes. We are pleased to report equipment rental revenue grew 8% to $447.7 million in the fourth quarter of 2019 against some tough comps of $414.5 million in the prior year period. The growth was driven by improved pricing mix and increased volume. Total revenues increased 10.6% to $543.7 million year-over-year, our sixth quarter of double-digit growth. Net income in the fourth quarter was $33.3 million or $1.16 per diluted share compared with $214.3 million or $7.44 per diluted share in the fourth quarter of 2017. Both quarters included net tax benefits related to the Tax Act of 2017 was $6 million or $0.21 per diluted share this quarter compared with a net tax benefit of $207.1 million or $7.19 per diluted share in last year’s fourth quarter. Adjusted EBITDA in the fourth quarter of 2018 improved to 11.6% to $198.4 million over the same period in 2017, an increase of 17% for the year-to-date period. Adjusted EBITDA margin was 36.5% in the fourth quarter, a 30 basis point increase year-over-year and an increase of 120 basis points to 34.6% for the full year. We continue to focus internally on REBITDA which measures the contribution from our core…

Thanks Mark. Before we move to the Q&A portion of the call, let me summarize where we are in our journey. Please turn to Slide #22. We are very pleased with the results we reported today and on our outlook for 2019. Our strategic initiatives are expected to continue to drive growth in revenue and dollar utilization. We expect to maintain REBITDA flow through of approximately 60% to 70% throughout 2019. And our adjusted EBITDA guidance is expected to be 7% to 11% higher than our 2018 results and we expect dollar utilization and REBITDA margins to steadily increase. And now we look forward to your questions, so operator, please open the lines.

Thank you. [Operator Instructions] We will take our first question today. Please go ahead. Your line is now open.

Yes. Hi, Neil Frohnapple with Buckingham. Congrats on a great quarter and year.

Thanks Neil.

Maybe a starting off question for Mark just on wanted to drilling on direct operating costs, so they ticked up a little bit in Q4 versus Q3, just curious looking out what’s embedded in EBITDA guidance for direct operating growth in 2019. And then as a follow-up could you just talk more about the initiatives to reduce direct operating costs, are there still opportunities for improvement here and if so can you highlight some of these initiatives?

Yes, sure. I mean I think the general goal as we stated is just to sort of have DOE running flattish I guess which is very technical term. But that’s – and there is going to be a bit of noise just with certain amount of variability with revenue induced costs. But I would say the sort of guideline there is somewhere around 5% is something that we should be able to achieve that would generate the flow through that we are looking for. The initiatives that we have rolled out involved some XPO Logistics in terms of sort of consolidating the spend of [indiscernible] and similar initiatives with regards to fuel those are in place gaining traction and creating sort of savings in terms of the increase not necessarily absolute savings. And we continue to focus on the logistics of the business, so there are opportunities that we think for additional efficiencies as we go forward. So the general goal is flattish sort of DOE and SG&A to drive the flow through and that’s sort of what we are looking to focus on through 2019.

Okay, that’s helpful Mark. And then the net fleet CapEx outlook obviously implies less growth CapEx this year than in 2018. So, can you just talk about your confidence in achieving higher time utilization on like-for-like equipment, higher rental rates this year in order to deliver, I guess, greater than 5% revenue growth in order to leverage the DOE?

Right. We’ve made substantial investments in our fleet over the last couple of years and we are sort of coming to a point where we’re looking just to maximize our utilization of those investments. So, putting less new CapEx than on top, just sort of human nature and efficiency and just the focus will allow us to improve our time utilization. We see markets very strong across our footprint and the demand opportunities [indiscernible]. So, 2019 becomes a self-help year in terms of just taking advantage of the investments that we’ve made historically maximizing the utilization on those, focusing on right and focusing in on efficiency just to get our margins improved and to improve the business performance.

Okay, thanks. I’ll pass it on.

Great, thanks.

Thank you. We will now move to our next question today. Please go ahead, your line is now open.

Hi, good morning. It’s Seth Weber from RBC.

Good morning, Seth. How are you?

I’m fine, thanks. How are you?

Terrific.

I wanted to I’ve couple of questions. Just the OEC on rent, the volume number 2.3% was a little bit lower than what we are looking for year-over-year growth. It’s the lowest spend in a while, I mean was there anything going on there that you’d call out, or is that sort of the right way to think about it going forward? First question. Thanks.

Hi, Seth, this is Bruce. So, I would tell you that there is some room for improvement there and we’re focused on it as Mark stated. In our net CapEx guidance, we feel there is room for some improvement in our time utilization, and we see that as opportunity.

Sure. Was there something in the quarter that you consciously pushed rate for volume? I mean was there something in the quarter though that you would call out that made that number a little bit light?

No, I wouldn’t say other than some fairly tough comps year-over-over, but nothing in the market overall.

Okay. So, you’re not surprised by the number, I guess.

No, I mean there was there could be there was some opportunity there and we’re focused on that. But across as Mark stated, across all of our geographic markets we saw strong opportunity and growth and really a good healthy environment for pricing.

Okay. And then, I might sorry, if I missed this, but did national account revenue grow in the quarter? I know it was up for the year, but was it up for the quarter as well?

Yes. So, it was up for both the quarter and the year, and continues to grow albeit at a slower rate than our local accounts.

Sure, okay. And then just lastly, we’re two months into the quarter here, we’ve heard some chatter that weather has not been helpful in the first quarter. Is there anything you you’d call out with respect to weather in the first quarter or is it kind of business as usual?

No, I would tell you whether it was the fourth quarter or first quarter here, could the weather have been better, sure, but we are staying focused on diversification strategy and the fleet and the customer in their urban market footprint, so weather shouldn’t be an excuse.

Okay, thanks very much, guys. Appreciate it.

Thank you.

Thank you. We will now go to our next question today. Please go ahead, your line is now open.

Hi, it’s Rob Wertheimer, Melius Research.

Hey, Rob, how are you today?

Good, thank you. Could you just, I mean I think you’ve answered the question somewhat, but I wanted to just probe a little bit on your CapEx outlook for next year. You remain, I assume fairly confident the market demand is there and that’s not, I guess, the driving reason for spending a little bit less than you otherwise could. Are you more confident that you can drive up time utilization through improvements that you made? Are you more focused on the balance sheet? Are you may be just a little bit more on what your decision framework was?

Look, we are absolutely confident in the markets and the strength of the markets that we came out of 2018 with and we are just being more prudent in our capital. As Bruce mentioned, we have some room for improvement in our time utilization. We have added quite a bit of fleet over the last couple of years. We think we can squeeze a little more out of that fleet and up-tick it by being a little more disciplined with the capital on the one end. Look we are always going to be disciplined about looking at the balance sheet equations, but at the same time we feel we have ample opportunity to squeeze some more time out of our existing fleet before we look still adding $400 million worth of fleet to lot of fleet, so it’s not like we are about adding to the fleet, we are just being prudent about where we put it.

Perfect and if you wouldn’t mind I mean obviously there was a lot of consternation in 4Q about where the economy was going and so forth, are you seeing I mean could you just give us a walk through of your end markets, are you seeing anything that’s particularly weak or maybe characterize the end markets? Thanks.

No. This is Bruce again. We are seeing kind of strength across all geographic areas including Canada in all segments of our customer base and kind of product mix like I stated earlier show kind of stronger markets that we are seeing a healthy environment for pricing and we feel comfortable that will continue into 2019.

Yes. And I will add to that one of the – you got to remember where our strategy is, our strategy is focused around large urban markets, urban centers which are going to continue to have ample work going forward and we are not really seeing anything that would give us any level of concern across those markets.

Okay. Thank you, gentlemen.

Thank you.

Thank you. We will now go to our next question today. Please go ahead.

Hi, good morning. This is Ben Burud on for Jerry Revich, Goldman Sachs.

Hi Ben.

Good morning.

Good morning, could you guys help us think about what level of price increases are embedded within your 2019 guidance, particularly in the context of the 2.9% pricing growth you reported this quarter and just looking at the back of the envelope based on your EBITDA and CapEx guidance it would appear that 2019 pricing growth of mid-2% range was embedded, is that kind of the ballpark we are looking at?

We are not providing any specific guidance on pricing. I mean we have provided the guidance on EBITDA which includes sort of thoughts on revenues and pricing. But this has been consistent high-2s with the 3.2% in Q3 which you can see on the slide on Chart 9 and we don’t expect any change in direction in terms of our ability to generate pricing growth for 2019.

Alright. And then you have commented on wanting to get pro-solutions and pro-contractor up 25% to 30% of the fleet over the medium-term with pair at 21% today, can you help us think about how that will evolve over 2019 and can you give us an idea how accretive that specialty grouping as a whole particularly year-over-year in ‘19 versus ‘18?

Yes. So this is Bruce again. So you are correct, we have always stated over this kind of 5-year journey that we would like to get that portion of our business to – into that 20% to 25% of our fleet. We are continuing to invest in the business we see opportunity. I spoke a little bit couple of quarters back about the absorption of the fleet that we bought for that that was put into that business, but there is still some room there. And it does drive a better return than the other parts of our business. So we will continue to invest.

And just upon a clarification so was it – over the 5-year plan is it 25% our 30% of the fleet or the 20% to 25%?

No. It’s 25% to 30% of the fleet.

Got it. And then would you expect the return profile to improve year-over-year in ‘19 versus ‘18?

Correct. Yes.

Got it. Thank you.

Thank you.

Thank you. We will now go to our next question today. Please go ahead. Your line is now open.

Hello.

Good morning.

Good morning. This is [indiscernible]. Thanks for taking my question. The free cash flow guidance next year because CapEx is going to be less, what is the net fleet capital expenditures as opposed to the gross number? In other words, what’s the free cash flow number you’re expecting next year will range?

Jordan, we’re not really providing explicit free cash flow guidance. You can sort of walk through, I guess, your own estimates based on the sort of main point of the guidance that we’ve given. So, there’s adjusted EBITDA and then just some sort of broad-brush strokes, if you take out interest expense, whatever the expectation is there. Net CapEx as we’ve guided is $370 million to $410 million. There’s also that’s net fleet CapEx, so there’s also a non-Fleet CapEx, which you can look at what we did last year and come up with a number. But certainly, there will be a big increase in our free cash flow in 2019 just given the increase in cash flow coming in the form of EBITDA and the decrease in net fleet CapEx, which is the main expenditure that we incurred.

Seems like it could be several dollars per share in free cash flow versus basically breakeven this year, is that crazy?

It’s not crazy, not crazy, no.

Okay. And the EBITDA margin next year the $730 million to $760 million, you think about revenue, what REBITDA or EBITDA margin does that assume?

Again, we’re not really explicitly guiding on EBITDA that involves a lot and another couple of numbers in our guidance that we’re not comfortable putting out. But we do anticipate an increase in our EBITDA and an increase in our EBITDA margins through the year. And as you sort of fill out your model, I’m sure you will be able to put that together.

So, it was about 160 basis points this year. I would assume it’s at least that amount next year, because you won’t have the changeover from the heart system next year as well, correct?

Correct. So, the cost some of the spin-off costs that we incurred in 2018 and some of the consulting costs that we incurred in ‘18 with regard to remediating the material weaknesses will all go away in 2019.

Give me a sense as to how much that was to margin, 50, 60 basis points?

We are not we’re early in the year, where we’re just providing general guidance along the lines that we’ve put out, Jordan, so I can’t really get too much more specific there with you.

But it just seems like ‘19 could be a phenomenally strong year for our margin acceleration and much greater free cash flow, which hopefully will be recognized by the Street?

Yes. And that’s implied in the guidance that we provided. So, we continue to see the Street that the end of 2018 was. We’re going to continue to build on that and focus on margin improvement for 2019, focus on improving our rights for 2019 and continuing the journey that we’re on.

Hey, Jordan, we’ve got holding some more folks who are lined up to ask questions. So, we’re going to probably talk to you later, so if you could just do one short question really fast and then we move on. I’m sorry, you’re done. Okay, next one.

Thank you. We will go to our next question. Please go ahead, your line is open.

Hi, everyone. Brian Sponheimer.

Hey, good morning, Brian.

Mark, a little reeducation about your depreciation of equipment, and you may not need to get too much into a comparison mode, but just how you look at it before you sell it?

Well, I think it’s in our K in terms of our depreciation policies and if you feel like digging for case and comparing them to other rental companies, you can sort of see there’s a bit of a distinction there. The primary distinction being in our depreciation policy tries to have a zero gain on equipment sales at the end of the life. And I mean that is what it is. And you can see that there is a big distinction in our used equipment margins when we sell it. There’s not a big distinction in the proceeds that we get as a percentage of OECs that we’ll get in the same proceeds. That’s purely a function of the depreciation schedule and that’s sort of the main distinction that we’ve got. And that’s why we are sort of focusing our attention and our internal focus and trying to communicate to you guys that EBITDA is the real way to sort of measure our performance just given that distinction in depreciation.

Right, certainly. Well, I’m trying to get at so if you start to sell less equipment in 2019 and 2020 because you have refreshed the fleet, just for those that are looking at the EBITDA line as opposed to the REBITDA line from a margin perspective that should be less impactful and less negative for you at that line, correct?

That is correct. If you sort of just mathematically took used equipment sales down to zero, then you are left with REBITDA and you have got a clean comparison between EBITDA and REBITDA at that stage.

Right. Well, congratulations to all of you. Look forward to talking to you after the call and best wishes for 2019.

Thanks Brian.

Thank you. We will now go to our next question. Please go ahead.

Good morning guys. This is Steven Ramsey at TRG. Thinking about Greenfield locations this year, made a few last year, can you talk about kind of how you are targeting cities for this year and are those connected to existing branches and will the fleet in those Greenfields, are they more weighted into the pro-category in the targeted range of that 25% to 30%?

Well, I will maybe start with your last question first. Generally when we look at adding a location we would tend to look at primarily a classic location that most likely would have ProContractor product and may have a smattering of ProSolutions equipment in it. So we wouldn’t necessarily be targeted for those as a standalone per se. They would be perhaps contained within that business. But our main focus continues to be rounding out and filling out our urban markets where we can add capability and also improve our operating effectiveness by having additional facilities in urban areas that allow us to move and transfer fleet and maintain fleet to be more accessible to our customer base in large cities and large urban markets. Perhaps, Bruce do you want to that?

No Larry, I think you covered it well. We’re just focused on the large urban markets, large MSAs within the kind of footprint that we are already covering and filling in those markets to gain better efficiencies of our fleet, better utilization. And we will add some pro-solutions specific locations in those markets we call it kind of a green growing market. Once we have that we can layer in a pro-solutions business, especially a business that kind of benefits from dealing with our existing customer base and gaining more wallet share from that customer that we are already serving.

Great. Thanks. And then thinking about CapEx that’s non-rental in the mid-70, high-$70 million in the past couple of years, is that where the Greenfield where we would see most of that on a CapEx basis and should we see since you are talking Greenfield in ‘19 being similar should we see some ballpark range in the $70 million ish on non-rental CapEx?

This line includes I hope the Greenfields leasehold improvements and build-outs are included in that line, but the main driver is delivery vehicles and delivery fleet, so the Greenfields aren’t really a significant amount in that number. I think for ‘19 you can probably look at that as reducing similar to as of the net rental fleet CapEx. So you would probably expect that to sort of drop down a little bit going into 2019.

Great. Thank you.

Thank you.

Thank you. We will go to our next question today. Please go ahead.

Hi. It’s just a quick follow-up, Seth Weber. Just a clarification the 60% to 70% pull through number I think Mark that you cited is that EBITDA or REBITDA?

REBITDA.

Okay, super. Thank you, guys. I appreciate it.

Thank you.

Thank you. We have no further questions at the moment.

Okay. Well, thank you all for joining us on the call today. And if anyone has any further questions as always please don’t hesitate to call me. We look forward to seeing you all soon. Thanks a lot.

Thank you. That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.