Good morning. My name is Aldra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Herc Holdings, Inc. Third Quarter 2023 Earnings Call. Today’s conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Leslie Hunziker, Senior Vice President, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Herc Rentals’ third quarter 2023 earnings conference call and webcast. Earlier today, our press release, presentation slides were furnished and 10-Q was filed with the SEC, all are posted to the Events page of our IR website at ir.hercrentals.com. Today, we’re reviewing our third quarter 2023 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 on to our Safe Harbor and GAAP reconciliation 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 in our annual report on Form 10-K for the year ended December 31, 2022, and our quarterly report on Form 10-Q for the period end September 30, 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 recording of this call and do not approve or sanction any transcribing of the call. 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. Please turn to slide 4. Our third quarter results were driven by our strong business base improved operating leverage and continued M&A initiatives. Total revenue and adjusted EBITDA were third quarter records, driven by a 6.9% increase in rental rate and above market volume growth. Additionally, we ramped up fleet dispositions in the quarter to adjust to higher OEM shipments in the first half of the year and to take advantage of the healthy used equipment market. Use fleet sales carry lower margin than rental revenue, but if we exclude fleet sales from the equation, rental EBITDA or REBITDA as we call it, generated a significant margin and flow-through improvement in the quarter. Of course, as expected, and as noted on the slide, EBITDA margin in the quarter was impacted by the sale of nearly three times more fleet at OEC and continued disruptions from labor strikes in the studio entertainment industry. In the third quarter, our capital allocation strategy focused on profitable growth investments, supported an incremental increase in ROIC compared with last year. On slide 5, we're working in a favorable operating environment as the equipment rental market continues to benefit from strong demand across a variety of end markets and geographies. And we continue to outpace market growth as a result of our premium assets, national footprint, broad-based capabilities, and expert services. Our third quarter rental revenue grew another 8% on top of the 35% growth last year. Excluding studio entertainment, rental revenues increased 13% over the prior year quarter. The studio shutdowns continued into the fall as the Actors Guild joined the screenwriters on strike, making the first time in 63 years that the Hollywood writers and actors were striking at the same time. While the writers finally resolve…

Thanks, Larry and good morning, everyone. The solid performance of our operations and field support teams, combined with steady demand across our end markets, continue to provide a favorable environment for us. Thanks to the hard work of Team Herc, we have demonstrated continued progress in our journey to build scale and market leadership through flexibility, efficiency, strategic network, and a customer first mindset. Turning to slide 9, our day starts with safety, which is at the core of everything we do. As you know, our major internal safety program focuses on perfect days. That is days with no OSHA recordable incidents, no at-fault motor vehicle accidents, and no DOT violations. We strive for 100% perfect days throughout the organization. In the third quarter on a branch by branch measure, all our branch operations achieve at least 97% of days as perfect. Equally notable, our total recordable incident rate remains better than the industry benchmark of 1.0, reflecting our high standards and commitment to the safety of our people and customers. On slide 10, let me shift to a progress update on our growth strategies. One of the key initiatives of our urban market growth strategy is expansion through greenfield locations and acquisitions. In the third quarter, we added eight locations to our network, four greenfield locations and four locations from two new acquisitions. As you know, we focus on acquisition opportunities and high growth markets that complement our current branch network and fit our strategic, financial and cultural filters. Of the acquisitions in the quarter, both were general rental companies. One was in Southern California, which includes the largest metropolitan markets in the U.S. and the other was Houston, a top 10 market. These acquisitions support our strategic goal of increased density and resilient urban markets. Moreover, many of…

Thanks, Aaron, and good morning, everyone. I'm starting on slide 15 with a summary of our key metrics for the third quarter. Larry and Aaron touched on many of these line items, so I'm just going to provide some additional color. 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 250 basis points in the quarter, supporting improvements in adjusted REBITDA margin and flow-through of more than 76%. The adjusted REBITDA margin of 49.3% was a record, exceeding our previous peak margin by 200 basis points. Additionally, net income grew 12% while diluted EPS grew 18% to $3.96 per share. Let's walk through some of the other performance drivers on slide 16. Here, you can see the rental revenue and adjusted EBITDA walks year-over-year. In the revenue chart, rental rate was up 6.9%. Fleet on rent increased 11.5% and mix and lower re-rent revenue was unfavorable by 9.9% compared with the third quarter a year ago. The decline in Studio Entertainment revenue is calculated in mix as is inflation, which together accounted for approximately 90% of the mix impact. Additionally, ancillary revenue was impacted by reduced re-rent revenue in the quarter, primarily reflecting better fleet availability, which positively impacts adjusted EBITDA and REBITDA margins. The catch-up in supply deliveries and the added season mix of fleet received in the first half, combined with the drop-off in Studio Entertainment revenue resulted in dollar utilization of 42.1% in the third quarter, versus 45.3% last year. As Erin mentioned, we work through the quarter to right size the fleet and feel good about where we are heading into the fourth quarter. Additionally, we saw sequential improvement and dollar utilization every month this quarter following the…

Thanks, Mark. Now please turn to slide 21. Everything we do really starts with our vision, mission and values and a purpose statement that focuses on equipping our customers and communities to build a brighter future. We do what's right, where it fit together, we take responsibility, we achieve results, and we prove ourselves every day. Now before moving on to Q&A, I want to remind you that we'll be hosting our next Investor Day on November the 2nd. The event will take place here in Bonita Springs, Florida and will be available via webcast. With market opportunities significantly growing for Herc and having already achieved nearly all of our three-year targets that we set back in 2021, this will be an opportunity to set new guideposts for the future of our growth trajectory. I hope you'll be able to join us. With that, operator, we'll take our first question.

[Operator Instructions] We'll take our first question from Rob Wertheimer with Melius Research.

Thanks and good morning, everybody. So my question is really on demand. And I think you're pretty clear on the big picture outlook. But I want to narrow it down into, I guess, this quarter and last, where you sort of saw rental revenue grow at a slower pace than the fleet. And I wanted to ask if that's because you didn't see the pockets of demand you thought you would have for the fleet that was coming in or whether it's largely an effect of the fact that you've got more fleet transition as you're selling more and bringing more in a seasonal pattern. So really, is it demand didn't quite show up like you thought? Or is it just transitional cost?

Yes, Rob, demand landscape is still really good. And even as we look out over the next couple of quarters, it looks good. The fleet revenue balance and what we did in Q3 really was to kind of reset that balance because of the fleet, as I put in my remarks, they came in last year and then the first part of this year with the supply chain that got corrected. And so we wanted to correct our balance and that's what we did in Q3. But the demand outlook is still good.

Perfect. I think you're pretty fair on excuse. So does that imply then that as you get to a more normal season or a more normal pattern of fleet coming in and fleet going out that drag of -- transitional drag goes away and you kind of revert on some of the time [inaudible]

Yes, precisely. And we'll continue to get the operating leverage of the business as that equation with fleet of revenue stays balanced. And that's how we'll plan for next year's fleet adds. And that's the visibility we see going forward for the next several quarters.

We'll go next to Jerry Revich at Goldman Sachs.

Yes, hi. Good morning, everyone. I'm wondering if you could just talk about the pricing environment into October. It's nice to see a positive variance in pricing in the quarter, I think versus most expectations even with utilization softer. Would you attribute that to the interest rate environment? And any context that you can provide on how the leading edge is tracking in October, if you don't mind?

Yes. I mean I think the way I would answer that, Jerry, is one, I think that the industry has remained extremely disciplined throughout the first three quarters of this year. And then I think secondarily, right, it's also an extremely healthy environment. And so I think we've posted 7 through the first 9 months of the year. And I think that I would direct you as you sort of look into October and fourth quarter, that would be a mid-single digit sort of pricing lift for fourth quarter.

And Mark, maybe just to put a final point on that. I mean, normally, seasonally, pricing is up 50 basis points sequentially, October versus September, are we on pace for that normal seasonality?

Yes, I would say that all seasonal trends are being followed.

Okay, super. And then Larry, in your prepared remarks you spoke to just the cadence of CapEx this year versus normal seasonality as we think about that cadence continuing into the early part of '24, is it fair to expect CapEx to be down year-over-year in that 15% to 20% range in the first half, just given the timing of the deliveries? Or any comments that you would make about the capital budget for '24, please?

Yes. Well, look, in total, we're still fine-tuning the capital plans for '24. I think we'll have a better look on November 2 for the next three years in terms of what our CapEx spend will look like and better be prepared to give you a better guidance and more guidance on that. But I think you'll see us revert to a normal seasonal inflow pattern as the manufacturers continue to improve. And I would say we'll revert to that with the exception of the couple of categories that we mentioned, the [inaudible] word platform access related manufacturers are still struggling and not achieving their promise dates and their deliveries as we would like to see them. And as our requirements continue to grow in those areas. So we'll take that equipment when it becomes available. But outside of that, you'll see us revert to a more seasonal flow of material coming in to match our demand requirements.

We'll move next to Ken Newman at KeyBanc Capital Markets.

Hi, good morning, guys. Maybe just to start with the demand outlook. Obviously, it seems like demand across both our national and local accounts still remains pretty strong here. But I'm curious if you could just -- maybe give a little bit more color from what you're seeing both on project visibility and maybe to tack on to Jerry's question on the pricing, if you've seen a big or a wider divergence in pricing between the local and national accounts.

The divergence, no, there's still a good appetite for equipment, whether you're in the local or the national landscape. The demand, as I said, is good. The mega project landscape, there's so many projects out there. And many are online, but most of them haven't come online yet, and we see a lot of them coming online over the next three quarters. But there's plenty of work out there. And as I mentioned, high demand for the fleets. So we're pretty positive on the entire local and the national project landscape.

Yes. Okay. And then for my follow-up here, just on Cinelease. I think it's interesting that you guys are looking to potentially divest that business. And I know it's early in the negotiations here, but just any thought or color on how you think about just how tough the environment could be for sale in the near term, if that's even possible, just with the funding rate environment. And also just if I think about the prior guide, I think we tried to take out all the impact from Studio rental revenue and EBITDA from last year last quarter. So maybe just a little bit more detail on what drove the negative surprise this quarter.

Yes, I'll take the first part of that. And then I'll let Mark address the financial side of that give you some more detail can fill up, this Cinelease business is the premier business in the industry. It's a gold star business that is well recognized, well known for its capability. And its service excellence within the TV and film industry. We -- while it is early in the process, and we just announced it last evening, we believe the demand for that business will be quite strong. There will be a large appetite for it amongst the real estate consolidators that are developing and continuing to grow in that industry. And we expect a very good and strong process for that business. Like I said, it is the premier business in the industry and something that we are very much feeling like it will be strong for us. Mark, do you want to--?

Yes. And then, Ken, in terms of sort of the midpoint guide moved down, I tried to cover that off in my prepared remarks. But really, there was sort of driving three factors there. One, we said in Q2, right, that we anticipated that M&A activity would help fill that impact that we were feeling from Cinelease. And I think that the reality is that the M&A is opportunistic. And just from the cadence of the closes particularly year-over-year, those have been pushed out further into Q3, really the activity that we had in Q3 was done three days before quarter end. And so that activity is pushing out into Q4 and then even possibly into Q1. So that was a big driver there. I think that the cuts and the impact from Cinelease is deep. And I think lastly, no storm activity in '23, particularly comp up against’22 is also an impact that we had to take into consideration, and we've got visibility now here in October that it's not going to happen.

We'll take our next question from Seth Weber at Wells Fargo.

Hey, good morning. I just -- I wanted to just clarify, make sure I'm understanding the CapEx message for this year, was there a -- has there been any change to your gross CapEx number for 2023? Or is it just -- I think I heard some comments about some growth CapEx getting pushed to '24 million versus '23. I'm just trying to understand your new CapEx range, does that incorporate any changes on the -- what you were planning to buy side or taken for 2023?

Hey, Seth, it's Mark. Good question. I think really, we tried to put this in prepared remarks. But really, it's an impact and a combination of two things, right? We had some 2023 orders pushed out. And then obviously, we're disposing of a bit more here than we had originally guided to. And we mentioned that in the prepared remarks as well. I think the only other thing I would say to you is that in Q2, right, we guided to the low end of the range. And so really, this is just us tightening that range up for you, but there's no difference or variance to really our messaging from Q2.

Okay. And is the push out something that happened during this that you observed during the third quarter? Because I think -- I feel like you had sort of in the second quarter, you had talked about some deliveries and stuff moving around as well. Is this an incremental update where more stuff is getting pushed into 2024 or it's kind of improving?

Yes. In the remarks Larry mentioned some of the product types like access equipment, which is we call them some material handling and some aerial booms, they're getting pushed out just like they did in '22 and kind of rolled into '23. Some of the stuff we wanted in '23 is rolling into '24. Now we're getting some of that product, but we're not getting as much of the product as we desire to have. So that's really the sequence that's happening. The other parts of the supply chain are working better than they have in the last three years. But there are, the access equipment that is kind of rolling over into the next year. And as I mentioned also, some of those product types and access equipment, part of that equipment got the highest demand in the marketplace. So we'd like to get more of it, but we're not able to -- some of our expectations of receiving it this year is kind of rolling over to '24.

Got it. Okay. So it's not -- you wouldn't characterize it as a change in your demand for the equipment?

No. If we could get more access equipment, we would take it as soon as we can get it.

Okay. And then just a follow-up. The used sales margin, I guess, how would you characterize your channel mix going forward? It sounds like you sold more stuff through auction this quarter, margins were a little bit light year-over-year or sequentially. I mean, is that -- is this the mix that we should contemplate going forward? Or do you think you move more towards retail and margins get better going forward?

No. Our focus going forward is a more heavily weighted retail wholesale channel for disposals. And we were making a lot of progress on that over the last three or four quarters. Just in this recent quarter in Q3, we wanted to really focus on rebalancing the fleet to the [inaudible]. And so we had to use auction more than we wanted but mission accomplished, right? We got done what we needed to get done, and we're back to dispose them through the retail wholesale, which is a bit of a journey for us, right? We have to get that activity going through our entire sales force and marketing efforts. But that's where we're going. That will help drive more proceeds to our bottom line in subsequent quarters.

Okay. So you would think fourth quarter used sale margin should more reflect what you guys were putting up prior to third quarter or something?

Yes, more of what you saw in our previous quarters this year and maybe Q4 last year.

We'll go next to John Healy at Northcoast Research.

Great. Larry, I just want to ask a big picture question. I think the ARA came out this summer, kind of talked about the year being kind of a high single-digit growth year for the industry and next year being, I know somewhere around 3% or 4%, I want to say. Just your big picture thoughts about those forecasts. And as you look at those forecasts, do you find them reasonable and reflective of the market as you see it? And how do you think Herc should perform relative to maybe those industry benchmarks?

Yes. Look, I think for the most part, ARA is maybe even a little light on what we think the growth possibly could be. I think the growth in '23 is more like 10.5 and in '24 is going to be mid-single digits. And so I think as we've mentioned in the prepared remarks, we think we're going to outperform the market by maybe a factor of two. And I think it's really being driven by the onshoring the mega projects, the infrastructure projects, as well as our growth in the local market with the M&A and the greenfield activity that we're doing. So we're fairly bullish on what we see going forward.

Great. And I just want to ask your thoughts about capital allocation going into next year. I know you guys have taken a balanced approach between the dividend, buyback and M&A. But when I look at the company, I think you have something in your slides today where you talked about acquisition multiples around 5.5% and getting to a synergized multiple around 4% or so. The company itself today is probably trading below those acquisition multiples. So I mean, do you think about pivoting more towards the buyback as you look to next year? Or how do you think about that for going forward?

Yes. Look, I think as we've said before, we'll reevaluate our strategy around capital allocation as we go into next year with our board and determine what's in the best interest of the shareholders and continued positioning and growth of this company. So all of those are long-term views that we're going to take on it. So it's really not what I would call a short-term decision around where that is.

And we'll move next to Mig Dobre at Baird.

Yes. Thanks. Good morning. And just to follow up on that last statement, Larry. So industry growing maybe mid-single digit, you're aiming for twice that, so call it, high single or maybe 10%. That's obviously great. I'm curious kind of how you think about the moving pieces in terms of what gets you there, pricing versus fleet growth versus utilization, if you can provide some context around that.

Yes. Look, I think it's all of that, Mig. I think you'll see a mixture of pricing and fleet growth, the utilization as well as M&A activity that will allow us continue to have that kind of trajectory. We do not see a recession at all, regardless of what the folks in your world might think.

Fair enough. Just to make sure that I -- we clarified this a bit because everybody kind of asked the questions around CapEx. But it seems to me that with higher disposals, if you're talking about fleet growth into 2024, that would necessarily imply higher CapEx. Do I have that right? Thank you.

Well, we're not ready to disclose what we're thinking about CapEx for next year, as Aaron mentioned in the prepared remarks, we've had a fair amount of pent-up demand as a result of COVID and the inadequacies of the supply chain over the last three years that allowed us to then have a higher level of disposals going into the fourth quarter of this year. We're still evaluating our CapEx plan for next year and the following two years, and we'll be able to share more of that with you on November 2 at our Investor Day.

And at this time, we have no further questions. I'll turn the conference back over to Leslie for closing remarks

Thank you for joining us on the call today. We look forward to updating you on our progress in the quarters to come. Of course, if you have any further questions, please don't hesitate to reach out to us. Have a great day.

And that does conclude today's conference call. Thank you for your participation. You may now disconnect.