Herc Holdings reports strong Q2 2023

Herc Holdings Inc. reports financial results for the quarter ended June 30, 2023 and equipment rental revenue was $702 million and total revenues were $802 million in the second quarter of 2023, compared to $605 million and $640 million, respectively, for the same period last year.

In the second quarter of 2023, the Company reported net income of $76 million, or $2.66 per diluted share, an increase of 12 percent compared to $73 million, or $2.38 per diluted share, in the same 2022 period.

“We continue to generate strong, double-digit growth as a result of sound strategies and an unmatched team of product and logistics experts that embody a customer-first mindset,” says Larry Silber, president and chief executive officer. “In the second quarter, Team Herc increased equipment rental revenue by 16 percent on 7.8 percent higher pricing, despite continued supply chain inefficiencies and labor disruptions in the film and television industry, which has all but halted our studio entertainment business. Growth in national account revenue and local market expansion through acquisitions and greenfield locations drove rental revenue higher, while strong returns on fleet sales represented an incremental benefit to total revenue. This, coupled with cost efficiencies, supported a 24 percent increase in Adjusted EBITDA year over year.

“Our non-residential and industrial markets are healthy and growing with outsized opportunities coming from federally funded, large-scale infrastructure and mega projects. The favorable market environment coupled with our expanding branch network, broad selection of premium equipment, leading customer experiences, comprehensive fleet management services and advanced technologies position us to continue to capture above-market growth in 2023 and over the longterm,” says Silber.

Q2 2023 financial results

• • Total revenues increased 25 percent to $802 million compared to $640 million in the prior-year period. The year-over-year increase of $162 million primarily related to an increase in equipment rental revenue of $97 million, reflecting positive pricing of 7.8 percent and increased volume of 17.3 percent. Sales of rental equipment increased by $64 million during the period.

• Dollar utilization was 40.3 percent compared to 42.5 percent in the prior-year period. The change is primarily due to a slowdown in the studio entertainment business as a result of labor disruptions in the film and television industry, as well as the continued supply chain challenges that have disrupted the normal cadence of deliveries.
• Direct operating expenses of $282 million increased 14 percent compared to the prior-year period. The increase was primarily related to strong rental activity and associated additional headcount, in addition to higher maintenance and facilities expenses as we increase our fleet size and expand our branch network.
• Depreciation of rental equipment increased 24 percent to $161 million due to higher year-over-year average fleet size. Non-rental depreciation and amortization increased 22 percent to $28 million primarily due to amortization of acquisition intangible assets.
• Selling, general and administrative expenses was $111 million, or 14 percent higher primarily due to increases in general payroll and benefits, credit and collection expense and selling expenses, including commissions and other variable compensation increases.
• Interest expense increased to $54 million compared with $25 million in the prior-year period due to higher interest rates on floating rate debt and increased borrowings on the ABL Credit Facility primarily to fund acquisition growth.
• Net income was $76 million compared to $73 million in the prior-year period. Adjusted net income increased 3 percent to $77 million, or $2.69 per diluted share, compared to $75 million, or $2.47 per diluted share, in the prior-year period. The effective tax rate was 26 percent in both periods.
• Adjusted EBITDA increased 24 percent to $352 million compared to $284 million in the prior-year period and adjusted EBITDA margin was 43.9 percent compared to 44.4 percent in the prior-year period. A decline in the Company's studio entertainment revenue year over year, as well as sales of used equipment, which more than quadrupled over last year's second quarter sales, impacted the margin performance in the latest quarter.

2023 first half financial results

• Total revenues increased 28 percent to $1,542 million compared to $1,208 million in the prior-year period. The year-over-year increase of $334 million was related to an increase in equipment rental revenue of $224 million, reflecting positive pricing of 7.4 percent and increased volume of 20.0 percent. Sales of rental equipment increased $107 million during the first half of 2023.
• Dollar utilization decreased to 40.0 percent compared to 42.0 percent in the prior-year period. The change is primarily due to a slowdown in the studio entertainment business as a result of labor disruptions in the film and television industry, as well as the continued supply chain challenges that have disrupted the normal cadence of deliveries.
• Direct operating expenses of $563 million increased 19 percent compared to the prior-year period. The increase was primarily related to strong rental activity and associated additional headcount, in addition to higher fuel, maintenance and facilities expenses as we increase our fleet size and expand our branch network.
• Depreciation of rental equipment increased 26 percent to $313 million, due to higher year-over-year average fleet size. Non-rental depreciation and amortization increased 23 percent to $54 million primarily due to amortization of acquisition intangible assets.
• Selling, general and administrative expenses was $217 million, or 17 percent higher primarily due to increases in selling expenses, including commissions and other variable compensation, credit and collections expense, and general payroll and benefits.
• Interest expense increased to $102 million compared with $48 million in the prior-year period due to higher interest rates on floating rate debt and increased borrowings on the ABL Credit Facility primarily to fund acquisition growth.
• Net income was $143 million compared to $131 million in the prior-year period. Adjusted net income increased 9 percent to $146 million, or $5.03 per diluted share, compared to $134 million, or $4.41 per diluted share, in the prior-year period. The effective tax rate was 20 percent in the first half of 2023 compared to 21 percent in the prior-year period.
• Adjusted EBITDA increased 27 percent to $660 million compared to $521 million in the prior-year period and adjusted EBITDA margin was 42.8 percent compared to 43.1 percent in the prior-year period. A decline in the Company's studio entertainment revenue year over year, as well as sales of used equipment, which more than tripled over last year's first half sales, impacted the margin performance.
• As of June 30, 2023, the Company's total fleet was approximately $6.2 billion at OEC.
• Average fleet at OEC in the first half increased year-over-year by 27 percent compared to the prior year period.
• Average fleet age was 46 months as of June 30, 2023, compared to 49 months in the comparable prior-year period. 

Disciplined capital management

• The Company completed six acquisitions with a total of 10 locations and opened nine new greenfield locations during the first half of 2023.
• Net debt was $3.5 billion as of June 30, 2023, with net leverage of 2.5x compared to 2.4x in the same prior-year period. Cash and cash equivalents and unused commitments under the ABL Credit Facility contributed to $1.5 billion of liquidity as of June 30, 2023.
• The Company declared its quarterly dividend of $0.6325 payable to shareholders of record as of May 26, 2023, with a payment date of June 9, 2023.
• The Company acquired approximately 990,000 shares of its common stock for $107 million during the first half of 2023. As of June 30, 2023, approximately $174 million remains available under the share repurchase program.

Outlook
The Company is reaffirming its full year 2023 adjusted EBITDA guidance range and net rental capital expenditures guidance presented below. The guidance range for the full year 2023 adjusted EBITDA reflects an increase of 18 percent to 26 percent compared to full year 2022 results.

Adjusted EBITDA: $1.45 billion to $1.55 billion

Net rental equipment capital expenditures: $1.0 billion to $1.2 billion

As a leader in an industry where scale matters, the Company expects to continue to gain share by capturing an outsized position of the forecasted higher construction spending in 2023 by investing in its fleet, capitalizing on strategic acquisitions and greenfield opportunities, and cross-selling a diversified product portfolio.

www.HercRentals.com

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