Good day, and welcome to the Herc Holdings Second Quarter 2019 Earnings 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 Elizabeth Higashi. Please go ahead.

Thank you, and good morning, everyone. I'd like to welcome you all for our second quarter earnings conference call. Our press release and presentation slides were filed earlier today and are posted on the Events page of our IR website at ir.hercrentals.com along with our second quarter 10-Q. This morning, I'm joined by Larry Silber, our President and Chief Executive Officer; and Mark Irion, Senior Vice President and Chief Financial Officer. They will review the first quarter as well as the industry outlook for 2019. 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 a few items I'd 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 Slides 3 of the presentation for our complete safe harbor statement as well as Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2018. 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. Finally, a replay of this call can be accessed via dial-in or through a 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'll now turn the call over to Larry.

Thank you Elizabeth and thank you all for joining us this morning. We recently celebrated our third anniversary as a public company on July 1. And we are pleased to report that our strategic initiatives continue to drive growth in revenue and profitability in the second quarter. Our team's focus has been to improve the quality of earnings through the execution of company-wide initiatives to increase our flow through and profitability. Our initiatives successfully drove industry leading year-over-year price improvement and contributed to strong gains and adjusted EBITDA margins in the second quarter. Our focus on costs also contributed to excellent REBITDA flow through. Our targeted management of net fleet capital expenditures for 2019 also helped improve both mix and fleet utilization in the quarter. Our interactions with contractors and customers reinforce our belief that the economy is stable and growing. We are excited about our success in expanding our reach to new customers by providing solutions to meet their equipment and service needs, and are committed to closing the gap between us and our industry leading peers. These factors contribute to our belief that 2019 will be another strong year for Herc Rentals and our confidence is reflected by our increasing adjusted EBITDA guidance for 2019. Now please turn to Slide number 5, the major initiatives of our long-term strategy guide our operating plan and day-to-day activities that drive our performance. We have made tremendous progress to position Herc Rentals to be a leader in our industry by executing on the pillars featured on this slide. Fundamentally, our progress has been driven by solid execution of our long-term strategy. Our continuous focus on customer service and the ongoing dedication and commitment of all Herc team members. At the same time, we are continuing to build a culture that supports…

Thank you, Larry, and good morning everyone. It's been just a year since I joined Herc and I'm even more excited to be part of the Herc team now, than I was when I accepted the position. I'm very pleased with the progress we're making in increasing profitability through improved flow through in higher operating margin. Our entire team is working together to improve the quality of our earnings and our bottom line shows that we are achieving results. So let me start first with our summary. On Slide 16, we see the equipment rental revenue increased 3.8% from $392.5 million to $407.6 million in the second quarter of 2019. Year-over-year growth was driven primarily by improved pricing, but was partially offset by a reduction in re-rent revenue. As part of our self-help initiatives for 2019, we are being focusing on utilizing our own rental fleet and re-renting less fleet. Excluding re-rent revenue from our results, pure ritual revenue increased 5.7% year-over-year, in spite of the impact that we have ahead in certain geographies on our volume. In addition, as we focused on improving performance, we reduced our sales of rental equipment in the second quarter, impacting total revenues which decreased year-over-year 2.1% to $475.1 million. I'll talk to that in more details in our revenue comparison slide. Net results improved in the second quarter of 2019 compared with the prior year. We reported net income of $9.7 million or $0.33 per diluted share in this year second quarter compared with a net loss of $0.3 million or $0.01 per diluted share in 2018. This year's results also included $7.8 million restructuring charge, comprised of a payment of some leases and severance charges. More details regarding our net income bridge are included in our Appendix. Adjusted EBITDA in the second…

Thanks Mark. Before we go to Q&A, I'd like to summarize where we are today. Our strategic initiatives are expected to continue to drive growth in revenue and improved dollar utilization. Our operating initiatives should contribute to strong REBITDA flow-through of over 60% in the second half of 2019, even as we compare to the strong results we posted in the second half of 2018. Given our current expectations, we are raising our adjusted EBITDA guidance range to $735 million to $760 million, which implies year-over-year growth of 7% to 11%. I'd like to thank our Herc team for their hard work and commitment to excellence. We're excited about our future and our purpose. And now, we'd like to have the operator open the line for questions.

[Operator Instructions] We will take our first question from Seth Weber with RBC Capital Markets. Please go ahead.

Hi, thanks for taking my question. This is Brendan on for Seth. So obviously your rate growth has been extremely strong over the past several quarters. Do you think that, that level of growth is sustainable? And I guess, what are your thoughts on kind of a normal run rate for rate growth going forward?

Well, look, we don't really give forward guidance on rate growth or really any of our metrics. But let me – let Bruce talk to what he is seeing in the marketplace and how he is handling that.

Yes, I guess without giving any guidance, I would say the pricing is reflective of a pretty healthy demand out in the marketplace and we'll stay – we'll continue to be focused and discipline on achieving rate in the near-term.

Okay, thanks. And then, you mentioned that customers are still optimistic, you're hearing some optimism from them. How much project visibility are you getting from the fields for the rest of this year? And then, you mentioned that you don't give guidance, but I guess any high level thoughts for projects of what you're hearing from the field heading into 2020?

Yes. Bruce, again here. I would tell you that from – everything we hear from our customers or from all our people in the field, everyone is feeling very comfortable with the amount of backlog to the system in the large projects that are getting ready to start or have started. So we feel very comfortable with kind of continued strong demand in the marketplace.

Okay. Thank you.

We will take our next question from John Healy with Northcoast Research. Please go ahead.

Thank you. To me the story of the quarter or the rates in the REBITDA improvements, I want to spend my time there. On the margins, I think three years ago you guys kind of came out of the gates and started your own journey. I was hoping you could just revisit those margin targets for us again. I know initially there were EBITDA margins and then went to REBITDA margins. I just kind of want to get your thoughts on, where you started your journey? If you thought you'd be where you are at this time and if you still think over the next two years what the number is that we can think about you guys targeting closing in on?

Hi John, yes. I mean we are obviously very excited with the amount of traction we've got in terms of flow-through in the margin improvement, it's a team effort, in terms of focusing on cost and focusing on rate and just generating healthy revenues and pushing that through to the bottom line. There is still a gap between us and sort of the peer group in terms the industry that we're focused on closing. And we're looking to sort of push those margins up towards the REBITDA margins up towards the high 40s over the next couple of years. So that's the target that we've set for ourselves and we're going to continue sort of pushing along in that direction.

Okay. Excellent. And then just on the pricing, I was wondering if you could give us some color of what drove the pricing. Obviously demand is healthy for you guys and – but is it a lot of customer mix changing? Is it best practices in terms of maybe ancillary items in the pricing? I was hoping just to try to understand, how you guys got to a number that's close to 5%, which seems well above the industry right now?

Yes. So Bruce again. so you're correct, it's reflective of a healthy environment. And I think also as we stated for the last 13 quarters, we're very focused on pricing with our proprietary optimist tool. So it's a bit of mix of some science in our tool and then absolute focus and discipline to driving rate, and we see opportunity to continue.

Great. And then just final question for me. Is it reasonable to expect that the re-rent revenue headwind would continue into 3Q and 4Q or any color there?

Hi John, yes. It will be dragged into Q3 and Q4 like a lot of these margin improvement initiatives that will slow down rolling into next year as we start rolling over some of the reductions that we've taken. But yes, there will be a continued reduction in re-rent expense in Q3 and Q4.

Understood. Thank you guys.

Thanks John.

We will take our next question from Steven Ramsey with Thompson Research Group.

I was just – wanted to get your thoughts, if we look at on I think Slide 14, the Dodge outlook, the industrial spending outlook. Thinking long-term certainly and any one I guess can have an outlook on the large market. But if those broad trend lines come to fruition in that flat to down activity at still pretty high levels. Do you start to position yourself for that eventuality, now with the lower fleet and kind of reduced CapEx year-over-year, or is this something you gradually work yourself into to prepare for that kind of market?

Yes look, I think the forecasts are pretty healthy and as you said there, they may be flattening, but at a very high level compared to historic levels in the industry. We’ll continue to watch and adjust our fleet according to activity. But at the moment, all of our markets are healthy and we'll continue to put fleet where we have the opportunity and where the demand exists.

Great. And then kind of same topic, I think you cited reduced spending from industrial customers. I know it can be mixed by quarter. Can you maybe talk the context of that, and then how that plays into the positive feedback you're getting for the second half of the year?

Yes, this is Bruce again. So if you kind of compare what we showed in Q1 in our national business was down 4.9% year-over-year and we've kind of moderated that going into Q2, which we said was kind of a timing issue. So we see that kind of correcting itself and some benefit to the upside on that going into the back half. So I think overall, our – it wasn't really reduced spending as much as it was timing on when the spending came and we see that kind of moderating and working itself out in the back half.

Great. And quickly on new customer accounts, can you describe how you're winning them over? Are you winning these from large companies? Or converting customers from owning equipment to rental? And is there a certain type of customer that's kind of driving these new accounts?

Yes. So Bruce, again. So across the board I would say everything you just touched on, so it's from the largest customers to kind of what we call mid-market, but you can see that we're accomplishing it without having to use rate. So the market is strong and helpful in what we're doing and cooperative. And so it really as what – like Larry said in his end remarks, this conversion from ownership to rental, there are just more and more customers out there looking for rental as the solution over ownership, especially in our big large urban markets that we're focused on.

Great. Thank you.

We’ll take our next question from Neil Frohnapple with Buckingham Research.

Hey, good morning. Congrats on a great quarter.

Thanks, Neil, good morning.

I wanted to start – good morning. Mark, direct operating costs were flat versus Q1, despite rental revenue being higher and DOE was down again on a year-over-year. I think earlier in the year you said direct operating costs could be flat up 5% in 2019, can you just update us on this now? And should we expect this to be down for the full year now with your initiatives and lower re-rent rev?

Hi. Yes – no, we’re really excited with the results that we're generating in terms of our cost management, we're getting much more efficient in terms of the way we’re running the business and we are utilizing internal resources as opposed to spending money on external resources wherever we can. I think the guidance is still the same, we're sort of looking for flattish DOE, it’s not aligned that you can't keep going down while revenues are going up for an extended period of time. So we're sort of looking at that less than 5% sort of growth rate for the short to medium-term going forward on that line item.

And just to be clear there Mark, you're talking about inflation versus the first half or will it be flat year-over-year?

Year-over-year flattish, so less than 5% growth sort of year-over-year.

Okay. Got it. And then just a quick question on time utilization, I know you don't explicitly disclose it. But just curious to weather impact on that and can you say whether time utilization was up or down year-over-year in the quarter at least? And just thoughts on time utilization for the back half of the year distractingly? Thanks.

I think so we don't talk the time – there was – we had a impact on various markets during the year, and that impacted our volume. So you can sort of see the correlation between fleet size and volume, there was an improvement in the overall utilization of our fleet. We are focusing, as we mentioned in the prepared remarks on just getting the right fleet in the right markets, becoming more efficient with that fleet and getting more utilization on in terms of time with the customer and in terms of rental rates. So that's what's driving out dollar utilization.

I would just kind of pile on to say that we continue to see there's room for continued improvement in the future and we're very focused on that.

Okay, great. Thanks so much.

We'll take our next question from Ron Wertheimer with Melius Research. Please go ahead.

I think that's Rob Wertheimer, hi everybody. I do sometimes write emails around by mistake. So just a quick one, actually two kind of big picture questions for your Bruce, to the extent that you're willing to answer them, you alluded that the category shifting over to rental, I know you've done a bit to expand what can be rented and so forth. One of the questions I've always had about the rental outgrowth theme is that, EWP is the product that’s mostly rented for a long time. So where are you seeing in categories that sort of shift to rental being most prominent right now?

Look, I don't want to go into any specific segments or customers, but I would tell you it's broadly across all kinds of customers. You are correct, the early work platform market is probably maturing and the amount of business that's out there, but across all the other kind of segments of product, whether it be specialty, which our ProSolutions businesses, so HVAC, power, water transfer, all of what we kind of consider ProContractor and just broad range of products out there that more and more customers from, like I said earlier, kind of mid-tier customers that were really highly focused on to some of largest companies and corporations out there are viewing rental as a better solution. Just because I know the infrastructure question will probably come up. We have seen and – recently, put out information where state and local infrastructure, and just local spending overall has been increasing and we're seeing the benefit of that. I think our industry is seeing the benefit of that. So more and more kind of local, municipal, state governments are using rental as a solution other than getting capital to buy their own equipment. And I think this is all driven by the same thing and this is kind of large urban market, it's more difficult to find mechanics, it's more difficult to find drivers and to find space to actually store and work on the equipment, so that's our specialty, that's our industry’s real value that we are adding more and more people are crossing over to rental as an answer.

Rob, this is Larry, if you want to really look at the types of products, say look at our ProSolutions guide and our ProContractor tool guide and you'll see the kind of products that we've recently added that expand the categories and the reach to the customer bases that we're targeting.

Well that's a very helpful answer. Thank you. And then this one may be a bit sensitive also I guess, but just Bruce, you made clear that you're doing great on pricing and do you think there's still room to go. I'm a little bit curious if that's because you're not quite a parody with other large nationals or whether, you've sort of figured out how to deliver more value to the smaller customer. And therefore the price competition versus locals becomes less relevant. I'm just a little bit curious if you can say where that room in pricing exists still in the outside?

Yes. First, I absolutely do not believe that we are under priced in the market. And we have the data internally and some external data that we have confirms that. And once again, I would go back to, it's a healthy environment that's receptive to pricing increases and we're very disciplined, and we have the science in this optimist proprietary tool that allows us to execute on that. We'll still stay very, very disciplined on that and continue to offer a value proposition to our customer that enables us to continue to push price.

Okay. Thanks everybody.

We'll take your next question from Jerry Revich with Goldman Sachs. Please go ahead.

Hi. Good morning everyone. This is Ben Burud on for Jerry.

Hey, Ben.

Hi, good morning. I was just wondering if we could get an update on how you all are thinking about the evolution of the fleet from here. I completely understand the focus on utilization, but obviously the OEC has been flattish past two quarters. Can you kind of give us a more immediate term view on when you see OEC began to grow again on a year-over-year basis?

Yes, I mean, I think this is sort of marginal decrease, you're seeing in this quarter is more just I think due to a heavier sales in the Q1. At this stage in the cycle, we will be looking at a reduced sort of net CapEx spend level similar to what we're seeing this year going forward and that should generate flattish OEC growth over the next couple of years. It's something less than 5% maybe sort of 3% to 5% range. So the market is still receptive to increased fleet size and volume growth. We're focusing at the moment on utilization and just getting more efficient with our own fleet. It's more of an internal improvement initiative rather than a market sort of reaction. So that's a couple of quarter tied improvements where we're getting success there and we'll be moving into a sort of low fleet growth sort of mode going into 2020.

Got it. And if we think about dollar utilization, really strong number in 2Q and if we think about how it's going to progress into the back half, is there any reason we shouldn't see the same, let's say 400 basis points sequential improvement into 3Q that we've seen over the past two years, after the really strong 2Q frame?

I mean we'd expect the same seasonality going into Q3 of the Q2 that we've seen in prior years. So there's no reason, that there's nothing that we see out here is going to change the normal seasonality in 2019. On a year-over-year basis, we are looking on a go-forward, at sort of plus 200 basis point improvement level. It's been a little bit accelerated this year just as we really concentrate on our internal improvements and internal utilization of the fleet. But we see our goals going forward is about 200 basis point improvement year-over-year on dollar yield.

Understood. Thank you.

And we will take our last question from Michael Cohen with Opportunistic Research. Please go ahead.

Hi everybody. Thanks for taking my question. I have a quick question on sort of the balance sheet. How are you guys thinking or perhaps you could refresh our memories on what you're thinking for a long-term debt-to-EBITDA ratio which is continuing to improve on kind of both sides, I would assume the debt gets – begins to get paid down a bit after the short quarter, short transaction related costs, but one could envision you guys getting down into the mid-two times, so is there a target that you guys have long-term?

Right. Our stated range is 2.5 times to 3.5 times, our thoughts on that will evolve based on where we see ourselves in the cycle and where our opportunities for growth are coming from. I think where we are today will look to push that down towards the lower-end of the range and potentially below the lower-end of that range and then reconsider sort of long-term strategy at that stage.

Okay, great. And then maybe to sort of ask the yield question or the pricing question slightly differently, how much of it is related to kind of specialty ProSolutions and ProContractor, obviously those had outsized growth relative to the other categories as a percent of the OEC, is that a solid explainer of things?

Well, that would potentially be a explainer of some of the dollar utilization gains, because you're getting a better rate for the dollar investment on pricing, it's straight, year-over-year pricing doesn't really matter, whether it's ProSolutions or aerial or platform whatever it is, whatever you're achieving for that range of product year-over-year and that's your price improvement year-over-year, so it has nothing really to do with the mix of the fleet.

Okay. Thanks guys.

Thank you.

Thank you very much.

This concludes our question-and-answer session. I would now like to turn the conference back over to Elizabeth Higashi for any closing remarks.

Thank you all for joining us today. And as always, if you have any further questions please don't hesitate to call me. We look forward to seeing you all soon. Bye-bye. Thank you.

Bye-bye.

Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.