Good day, and welcome to the Herc Holdings Third 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, Kevin, and thank you. Welcome. Good morning. I'd like to welcome everyone to our third quarter earnings conference call. Our press release and presentation slides were filed earlier today and also posted on the Events page of our IR website at ir.hercrentals.com along with our third quarter 10-Q. 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 third quarter and the nine month result as well as our 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 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 Slide 3 of the presentation for our complete Safe Harbor statement, as well as the 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 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 good morning, and thank you all for joining us. Our team continues to focus on quality of earnings through the execution of company-wide self-help initiatives to increase our operating margins and profitability. Our initiatives once again drove industry-leading year-over-year price improvements that contributed to higher adjusted EBITDA margins and dollar utilizations in the third quarter. We achieved excellent REBITDA flow-through and improved REBITDA margin by reducing expenses in the quarter. In 2019, we focused on the management of our net fleet capital expenditures to maximize return on capital and held OEC about flat compared to the prior year. We are focusing on improving the utilization of our existing fleet control to more capital to expanding our fleet size. This does mean that we are more cautious about the strength of our end-markets which we consider to remain strong. Our interactions with contractors and customers reinforce our continued belief that the markets in which we participate must stable and grow albeit at a slower rate. These factors contribute to our conviction that 2019 will be another good year for Herc Rentals and our adjusted EBITDA guidance for the full year to reflect an improvement of approximately 8% to 10% or a range of $740 million to $750 million. Our strategic initiatives on Slide 5 shows as our roadmap to improve dollar utilization and EBITDA margin, enhanced free cash flow and reduced net leverage. We expect to continue to make annual year-over-year progress in these important financial metrics and are committed to closing the gap between Herc Rentals and our industry-leading peers. On Slide 6, we discuss one of our most important internal metrics, safety performance. We expect our entire team to focus on safety first while assisting our customers and communities with the equipment and services they…

Thank you, Larry, and good morning everyone. Please turn to Slide 14 for the details of our third quarter 2019 results. Equipment rental revenue increased 2.4% from $449 million to $439.6 million in the third 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 successfully focusing on utilizing our own rental fleet and re-renting less fleet. Excluding re-rent revenue from our results, pure rental revenue increased 4.5% year-over-year. Pricing clearly drove our rental revenue growth as fleet on rent declined 1.6% compared to a strong third quarter last year. As Larry mentioned, our strategy for 2019 with self-help with a focus on utilizing existing fleet. In the third quarter, we got the rate structure right but not the utilization. We’ve always stated that we have deferred – rate as reported time utilization that our expectation going into the quarter was that we could drive annual growth by improving our time utilization. We did not quite get the results we expected. It's a challenge for the team to grow all in the organization is holding OEC fleet flat but we remain focused on the challenge however and expect that results going forward with ongoing focus. In addition, the third quarter is seasonally one of the slowest for equipment rental sales as we reduced our sales of rental equipment and sales of new equipment parts and services in the third quarter. Our strategic reductions impact to total revenues has increased 1.6% year-over-year to $508.1 million. I’ll talk to that in more details in our revenue comparison slide. We reported net income of $9.4 million or $0.32 per diluted share in this year third quarter compared with a net income…

Thanks Mark. I'd like to summarize where we are today. Our strategic initiatives are continuing to drive growth in rental revenues and improved dollar utilization. We improved our adjusted EBITDA margin by 220 basis points to 41.2%. We increased dollar utilization to 160 basis points to 40.8%. We improved year-to-date free cash flow from negative $108 million in 2018 to positive $65.5 million in 2019. Our operating initiatives will continue to contribute to strong REBITDA flow-through for the full year 2019. Net leverage is expected to be at the lower-end of our targeted range to 2.5 to 3.5 times by year end and the full year 2019 dollar utilization and EBITDA margin are expected to improve leading to our updated adjusted EBITDA guidance. We’ve assembled an outstanding team and I want to thank each and every one in our team Herc for their hard work and commitment to our business and our customers. We are committed to achieving our stated goals through solid execution to improve volume for our shareholders, customers and employees. Now, we'd like to open the line for questions.

[Operator Instructions] We will now take our first question from Jerry Revich of Goldman Sachs. Please go ahead sir.

Hi, good morning this is Ben Burud on for Jerry Revich.

Good morning, Ben. How are you?

Good. How are you?

We are wonderful, thanks.

Great. Just wanted to start on the topic of pricing discipline. Is there any reason to believe that the industry pricing discipline will be less volatile in this cycle than it was maybe in the past? Are there any tools or specific industry dynamics that you all think would dampen pricing volatility as we progress through the later stages of the cycle?

Yes, look, I think that just as a matter of course, the industry is much, much better situated today than it was during any previous cycle, partly as a result of consolidation, but more importantly as a result of the tools that we all have and employed today in the market. So, I would think and I would expect that there will much more discipline as we go into any kind of a cycle. Bruce, you may want to comment.

Yes, I would second what Larry is saying. Just with all the consolidation kind of the big gets bigger and the investment everyone has made in technology, you can see that LAR pricing with our proprietary Optimus tool, we are all – the industry is driving better pricing and I think that's – this leads to better discipline.

Got it. And as we began to think about 2020 equipment procurement, can you give us an idea of what type of price inflation you might face on new equipment purchases? And how is your ability to manage that potential inflation evolve in recent years?

Yes, look, I would say, we are in the very early stages of discussing 2023 requirements with our key vendors. But I would expect our inflation at being similar to what we experienced last year.

Got it. Thank you.

Thank you.

Our next question comes from John Healy of Northcoast Research. Please go ahead.

Hi, thank you.

Hey, John.

Hey guys. Congrats on a great quarter.

Thank you.

I wanted to ask about 2020 potential. Is it revenue growth level in the business today and it’s very clear that you are closing the gap relative to peers on margins is the main objective. What sort of revenue growth level do you think the company needs to get to show further contraction in net - net spread versus peers?

Yes, hi, John. I mean, we are still looking for sort of high-single-digit revenue growth going into 2020 in market still similar to what we’ve got in 2019 so it should be supportive. We'll be looking to continue rate growth challenging ourselves on approved time utilization and with sort of mid levels of [Indiscernible] consistent with 2019 we can still be sort of low-single-digits growth in fleet. So that sort of adds up to sort of high-single-digits and that diversification going into 2020.

Great. And then when I think about just the SG&A line, you guys have done a really nice job there managing that lower for the last three quarters. How much more trending is there? And how do we think about SG&A growth relative to revenue growth at this point in the cycle?

Obviously, John, we feel really good about where we are. We would probably try to hold that flattish going forward and try to leverage volumes in our locations. There might be some marginal inflation increases and obvious commission structure as we grow volume. But we are going to try to hold it flattish and leverage volumes. Mark, do you want to add to that?

Yes. I think that the - most of consulting costs in 2018 for the run-off by the end of – end of this year in terms of the RBA comp. So we are sort of hitting into a sort of flat line for SG&A going forward.

Great. I think a final question for me. Could you guys mention the better lower end of the leverage range in 2020 of EBITDA growth, I would imagine that free cash flow would only be stronger. So is there are any priorities or anyways that we should be thinking about you guys deploying that incremental free cash flow in 2020? Or is it a situation where you might get a little bit cash on the books kind of the urban having rainy days on December?

I think we’ve been pretty consistent with our, sort of messaging as we will continue to pay down debt with free cash flow for the short to medium term. So and that's the same primary goal going forward.

Thank you guys.

Thank you, John.

We will now take our next question from Seth Weber of RBC Capital Markets. Please go ahead.

Hi, this is Brendan on for Seth. Good morning.

Good morning.

Just wondering if you could give more color on the positive commentary that you are hearing from your customers. Is there any particular end-market that you are seeing that are more optimistic than others? And then, could you remind us your exposure to upstream oil and gas and comment on customer demand there?

Hi, Seth. This is Bruce. End-market demand and what we are hearing from our customers pretty much across all regions where we serve in North America. And then on the LNG part, our LNG market actually ticked up a hair year-over-year. So we are seeing – even though there is a bit of weakness in that market, I think we are performing well. We were very focused on the capital that we deployed into that market over the last year and so we are doing well there. So, overall, it’s pretty good market across North America.

Well, and I would add to that. Remember, over the last four plus years, we have dramatically reduced our dependencies on the upstream oil and gas markets. So, we’ve been very selective about where we participate and where we play.

Okay. Great. Thank you.

Our next question comes from Steven Ramsey of Thompson Research Group. Please go ahead.

Good morning.

Good morning, Steve. How are you?

Good. Thank you. I wanted to start on the CapEx plans. Net CapEx now is near $50 million with fleet on rent down a tick. And then rising – it was always at a high-end of the net CapEx range. So what – does it sounds like it would be tilting to lower end. So what is driving you guys or the factors driving you to add fleet now at this point of this year?

So I think, Steven, I think it's important to notice that our CapEx spending this year is down significantly from prior year. So, I think it’s almost 20% reduction and new CapEx year-over-year at the top-end of our range. So that’s the main driver why the fleet is down year-over-year and it’s not in range to our guidance range with it hitting in on the top-end and there is still opportunity to commit CapEx and both fleet and to locations and we’ve taken advantage there. This is substantially be good year-over-year. I want to remind the main driver of fleet growth range.

Great. And then, by seeing on the growth of infrastructure projects, maybe talk to how that impacts your specialty fleet or is the specialty fleet utilized as much on the infrastructure?

Yes, look, infrastructure continues to be a growth market for us, particularly, as we are focused on urban markets, high-density markets in North America and with running of a paramount of some being towards the local and state level. So, infrastructure is strong for us. It continues to be strong and grow. I would say that our specialty equipment doesn’t necessarily impact that infrastructure business too much. Certainly, there is a little bit on the fringes. But our specialty gear and ProSolutions and ProContractor products more supports our general recreation, remediation and local contractor business. So, it’s more of our classic gear which is the 80% of our total, that supports the infrastructure activity.

Great. And then, lastly, I think one on re-rent. Is the bulk of this opportunity, the benefit of reduced re-rent revenue, is that now past us? And this is more reflective of kind of ongoing re-rent impacts? Or is that still kind of a tailwind to results because you would use that from the high levels of that?

I think the rate of change will slow down going forward. So, lot of the dramatic reduction. It’s not really a tailwind It's a tailwind, sort of recorded revenue I guess, but it sort of a revenue shift and a margin improvement also. So the rate of change will change with what we have stated to the re-rent and that will get through, but it is likely to continue at – although at a slower rate or with the mix couple of quarters.

Excellent. Thank you for the color.

Sure.

[Operator Instructions] Our next question comes from Brian Sponheimer from Gabelli Funds. Please go ahead.

Hey, good morning everyone.

Good morning, Brian and how are you?

I am excellent. Hope you are doing well.

Thank you.

One clarification on the net CapEx. Is that buying more or selling less fleet?

It’s – I mean, we are really just hitting towards the higher end of the range. Q3 fleet was down, but that’s really just seasonal. So you will see an uptick in Q4 as per the normal seasonality and in terms of the cadence of our fleet sales. So, it was really just hitting in on the higher end of the range rather than bringing more or selling less.

Okay.

And it is down 3% year-over-year. So, it’s the high end of the range, but we started with and had a significant reduction from prior year.

Okay. A really small mix in the quarter, any impact from the hurricane wasn’t as far as branches that had shutdown and then, nothing to clean up?

Yes, no, it was – the hurricane was sort of a bit nothing quite frankly. As much gear came off line in the impacted area went on right in preparation of a major storm. So it ended up being a net zero.

Okay. And as you look at your disposal markets putting more through the auction channel this quarter versus other merchants selling as yourself, et cetera. How do you see that market shaping up? And what is your thought on the broader used equipment market right now?

Yes, let me sort of answer the first part, maybe Bruce can answer the second part. The first part is really a strategic decision for us to keep ourselves people focused on rental which is where we make our money and where the activity is and these are resources most appropriately. So, we have determined but while we still do a fair amount of wholesale and retail business, the vast majority of our activity will be through the auction market. It’s just more efficient and margin with rental that are enough to distract the people on a regular basis to focus on leaving the retail and the wholesale markets. So, I think, longer-term, and going forward, you'll probably see more of that of what we’ve evolved through and then maybe Bruce can comment on the market in general.

Yes, hey, Brian. So, just overall market is stable and it’s positive market for us right now. And we see that continuing into the future.

All right. Great. And I look forward to talking to you later and nice job again.

Thanks, Brian.

Our next question comes from Bill Mastoris of Baird. Please go ahead.

Larry, acknowledging that you are trying to increase on the utilization rates on your existing fleets, but also taking into account that your end-user seem to be expressing a pretty optimistic outlook. As we look to 2020 and as you continue to change your rental mix and reduce the average age of your fleet, is 2020 CapEx, is that going to go up and if you care to lay out a range that would be great. And then, I do have a follow-up.

Hi, you are still putting together 2020 sort of plans in detail. But our current expectation is that net CapEx will be in the same sort of range as what we’re seeing in 2019. But more dramatic increase will decrease from here.

Okay. And then, my follow-up is and this one is for you Mark. This has to do with kind of the deleveraging strategy. Might we expect that we are going to see some debt pay downs on the ABL? Or is that deleveraging going to be a little bit more towards really the expansion of EBITDA? Or might we see some open market purchases of, let’s say some of the bonds that you recently issued?

I think that there will be absolute pay down of ABL. So we are in a position where we expect to be generating free cash flow. So that will be applied to pay down the ABL unlikely that will be in the bond market in the short to medium-term.

Okay. Thank you very much.

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

Thank you, Kevin, and thank you all for joining us today. As always, if you have any further questions, please don't hesitate to call me and we look forward to seeing you all soon. Thanks a lot.

The conference is now concluded. Thank you for attending today’s presentation.