Herc Holdings Inc (HRI) 2016 Q2 法說會逐字稿

Good morning, and welcome to the Herc Holdings Inc. second-quarter conference call.

(Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to Elizabeth Higashi, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Denise. Thank you, and good morning, all.

This is Elizabeth Higashi, Vice President of Investor Relations. I'd like to welcome everyone to our second-quarter earnings conference call. You should have seen the release that went out this morning along with the slides which are available on our website.

This morning, I'm joined by Larry Silber, our President and Chief Executive Officer and Barb Brasier, our Senior Vice President and Chief Financial Officer who will comment on the quarter and year-to-date as well as the industry outlook and our guidance. 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 and Barb, 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 through 5 of the presentation for our complete Safe Harbor statement. The risk factors section of our information statement which was filed with the Securities and Exchange Commission on July 6th, 2016, as exhibit 99.1 to our current report on Form 8-K contains additional information about recent uncertainties that could impact our business. You can access a copy of the information statement and our 8-K by visiting the investor 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 second quarter form 10-Q today. Once filed, the 10-Q can also be accessed through either website.

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 which are furnished to the SEC with our Form 8-K this morning and are posted on the investor section of our website at IR.Hercrentals.com.

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 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.

This concludes my comments. I'll now turn the call over to Larry.

Thank you, Elizabeth. I'd like to thank everybody for joining us this morning at such an early hour. Next quarter we hope to hold the call at a more reasonable time.

Please turn to slide 6. We were pleased to announce the completion of our separation from Hertz car rental on June 30 and celebrated with the opening bell ceremony at the New York Stock Exchange on July 1st. As part of the spin transaction, we issued $1.235 billion in senior secured second priority notes and entered into a $1.75 billion ABL revolving credit facility. We used the proceeds of the bonds and drew on our ABL facility to complete a transfer of nearly $2.1 billion to our former parent as part of the spin.

Now please turn to slide 7. Over the last 12 months, we have focused on positioning Herc Holdings as a standalone public company. We've added corporate staff including IT, finance and legal, just to name a few.

We sold our operations in France and Spain in October 2015 to better focus on our North American operations. We reorganized our North American sales territories by geographic region to support our expansive branch network of approximately 270 locations and increased our sales force by about 100 additional sales professionals.

We have positioned the organization for transformation by beginning the process of expanding our fleet mix into higher dollar utilization gear such as ProContractor tools and ProSolutions equipment. Broadening our fleet is intended to expand and diversify our customer mix so that we aren't as susceptible to economic cycles. We are now focused on implementing our initiatives to improve operating efficiencies and drive revenue growth.

Please turn to slide 8. Equipment rental revenue was $327.9 million in the second quarter compared with $347.7 million for the same period in the prior year, a decline of 5.7% on a reported basis. Last year's quarter and first half data included the results of our operations in France and Spain. Excluding the impact of France and Spain and currency, rental revenue for the second quarter was about flat with the comparable period in the prior year up 0.1%.

Equipment rental revenues in key markets, meaning those outside of upstream oil and gas markets, represented 84% of the total and increased 8.1%. The quarter benefited from good rental revenue growth on both coasts of the United States and in the southeastern US as well.

We saw continued softness in upstream oil and gas markets which declined 27% in the quarter compared to the prior year. Importantly, even including oil and gas markets, worldwide pricing increased 0.5% year-over-year in the second quarter.

Dollar utilization declined 50 basis points to 33.5, primarily as a result of continuing upstream oil and gas headwinds. We acquired about $305 million in revenue earning equipment in the first half and disposed of gear with an original equipment cost of approximately $170 million. We received proceeds of $63 million for these disposals resulting in a net fleet CapEx spend of $242 million.

Now please turn to slide 9. In the second quarter, we continued to right-size the rental fleet in our upstream oil and gas markets and reduced non-premium brand gear. Strategically, we also made decisions to de-emphasize our low margin new equipment sales programs including the elimination of certain equipment dealerships, which also reduced sales in the second quarter compared to the prior year.

These strategic decisions have had some short-term impact on total revenue and EBITDA, but we are positioning our company for the future as a pure rental business.

In the first half we opened four North American locations to support our urban market strategy. And we implemented new rental equipment training programs across North America to support our new ProSolutions and ProContractor gear. By adding new gear in climate control and power generation, as well as ProContractor tools, we've opened up new rental opportunities at the local, regional and national levels. While this is currently a small portion of our overall sales, we are gaining momentum in ProSolutions as our industry subject matter experts and sales teams provide customers with new solutions and services.

We continue to make great headway in implementing the Herc way operating model to improve productivity throughout our locations. In the second quarter, FUR, or fleet unavailable for rent, declined to an average of 12.6%, continuing our improvement trend towards our long-term target of 10% or less.

Please turn to slide 10. We are pleased with the acceptance and traction of our proprietary Optimus pricing tool used by our sales force in driving incremental pricing of our rental equipment and services. We are now encouraging and rewarding the right behaviors and focus on rate improvement every day.

We're very excited about the launch of our new mobile app on July 1 which puts us at the forefront of the equipment rental industry. I believe we will lead technology innovation within our sector. We now have more than 8,000 registered users who can order and track their equipment rentals on their mobile devices.

On January 1, we introduced salesforce.com, our new customer relationship management, or otherwise known as CRM tool, to provide a platform to drive and track performance. It is fully deployed throughout our organization.

Qualified leads are being pushed to our sales professionals, and the tool is being used to increase collaboration across the sales organization.

Herc Rentals Telematics, now known as ProControl, allows our customers to track performance and other processes on the gear they rent. We are working on enhancements and revamping the telematics program in our new ProControl solution, and it will roll out in the second half of this year.

While these new initiatives enhance both productivity and customer service, they ultimately enhance our customer experience, as well. Our focus on customer service will enable our ability to further broaden our customer base and grow revenues as well as enable our customers to operate more safely, efficiently, and effectively.

Now I'll ask Barb to go over the quarter and year-to-date performance. Barb?

Thank you, Larry, and good morning, everyone.

As you know, we are a different company from a year ago. We sold our operations in France and Spain, separated from Hertz rental car, and established ourselves as a standalone public company. We are implementing a new strategy and a new operating model as we transform the company.

Our reported results for the second quarter and first half are on slide 12. To provide you with a better understanding of our operating performance, please turn to slide 13 where we have adjusted our results to exclude the divested operations in France and Spain and the impact of foreign currency translation.

Excluding those items, rental revenue for the second quarter was essentially flat, up 0.1%. Rental revenue from key markets grew 8.1% and represented 84% of rental revenue in the quarter.

Upstream oil and gas markets represented 16% of rental revenue in the quarter and declined 27%. The gains in key markets offset weakness in upstream oil and gas markets. Including upstream oil and gas, worldwide pricing increased 0.5% in the quarter over the same period last year, driven by price increases achieved in key markets and contract renewals.

For the first half of 2016, equipment rental revenue in key markets represented 82% of the total and increased 9.9% over the prior year. Upstream oil and gas rental revenues decreased 30% in the first half and eroded the good performance of our key markets.

Please turn to slide 14. With rental revenues about flat year-over-year, total revenues, excluding France and Spain and currency, declined 5.9% in the quarter and 3.9% in the first half. As Larry mentioned, the impact of planned strategic initiatives to dispose of excess oil and gas and non-premium brand fleet and to eliminate certain equipment dealerships had a negative year-over-year impact for the quarter and first half.

Sales of revenue earning equipment declined $19.4 million in the quarter and $22.2 million year-to-date. The amount of fleet ready for disposal in 2016 was lower due to fewer equipment purchases in 2008, 2009. Sales of new equipment were also lower as we exited certain equipment dealerships and focused on higher margin rental activities.

On slide 15, adjusted EBITDA, excluding France and Spain and currency, declined 7.8% to $131.1 million in the quarter. Contributions from key markets more than offset declines from upstream oil and gas markets. We experienced losses of $7.1 million in the quarter and $15 million in the half from the sale of revenue earning equipment. We depreciate our gear over its useful life to a targeted residual value and typically expect no gain or loss upon sale.

Due to an oversupply of certain categories of used equipment and a higher proportion of used equipment sold through auction channels, we realized below average proceeds so far in 2016, resulting in losses for the quarter and first half.

You may recall that as a division of Hertz, gains or losses from the sale of revenue earning equipment were included within depreciation and, therefore, excluded from EBITDA. As we have conformed our financial statements to the industry, such gains or losses are now included in EBITDA.

Please turn to slide 16. In the first half of 2016, we took delivery of $305 million of fleet, compared with $437 million in the first half of 2015. Additions were managed prudently as we improved FUR and absorbed the oil and gas fleet, while continuing to add fleet for ProSolutions and ProContractor equipment to improve our fleet mix, customer mix, and dollar utilization going forward.

Proceeds from disposals of revenue earning equipment of approximately $170 million at original cost amounted to $63 million in the first half, as we continue to right-size our upstream oil and gas fleet and dispose of non-premium brands.

On a net basis, meaning growth expenditures less cash proceeds, we have spent $243 million year-to-date compared to last year when six month net capital expenditures were $337 million. OEC at the end of the first half of 2016 was approximately $3.5 billion, up about 3% compared to June 30 of 2015. Our average fleet age is now about 46 months.

On slide 17 we have summarized our debt structure. At the time of the spin, we had drawn $839 million on our $1.75 billion ABL facility. Given our cash balance and our available borrowings under the ABL, we have ample liquidity.

Please turn to slide 18. Given the continuing weakness in upstream oil and gas markets, lower projected volume in certain key markets, and recent adjustments in economic indicators relevant to our business, the company has lowered its 2016 guidance range for adjusted EBITDA to be between $520 million and $560 million.

As a result, we are managing net fleet capital expenditures, defined as revenue earning equipment expenditures less proceeds from disposals of such equipment, to be between $375 million and $400 million.

And now, Larry will conclude with comments on the industry outlook. Larry?

Thanks, Barb.

Please turn to slide 20. Beginning in July, we started to see changes in some of our markets. Economic and rental industry sources began to cite slower growth than what was previously forecast.

The July 2016 IHS projections now estimate the equipment rental market in North America to be $49 billion in 2016 versus the $50 billion projection they made in April. Compound annual growth rate through 2019 is now projected at 4.9%, while it had previously been 5.3%.

On slide 21, you can see that other recently reported economic projections have also suggested that the first half of the year was slower than previously reported but that 2017 continues to look positive. Dodge analytics predicts nonresidential starts at $218 billion in 2016, a decline from the $228 billion in previous estimates.

The compound annual growth rate from 2015 to 2018 recently declined from 9.1% to 6.9%, a significant decline but still a robust number. The ABL index remains above 50 at 52.6 in June, which is positive as it is a forward-looking indicator. And while nonresidential starts have slowed, they do remain positive.

Other construction and industrial outlook data continues to suggest the cycle still has room to grow, with indicators showing growth, albeit at a slower rate than had been projected earlier this spring. We remain confident that our initiatives are creating a strong foundation for our continuing transformation and positioning us well for the long term.

Before we open up to Q&As, please turn to slide 22 which summarizes our long-term opportunity to build value. Our strong brand and reputation is recognized by customers, suppliers, and employees. The long-term industry fundamentals are enhanced by a long and live growth runway as we expand our customers and product lines.

Our core branch footprint and recent additions are well positioned and a solid foundation for expansion. We have significant opportunity for operational and financial improvement, and we are committed to disciplined capital management and cost controls through any market cycle. Our customer focused culture is differentiated by a suite of services and technologies that will enable our customers to operate safely, efficiently, and effectively. Finally, we have assembled a savvy and experienced leadership team to drive long-term shareholder value.

I'd like to thank all of our employees, all of our customers, and all of our suppliers for their tremendous efforts and help that they have gone through and provided during our spin transaction.

And now, operator, let's take some questions.

Thank you, Mr. Silber. We will now begin the question-and-answer session.

(Operator Instructions)

And your first question will come from Neil Frohnapple of Longbow Research. Please go ahead.

Hi. Good morning. Congrats on the completion of the spinoff.

Thank you.

First off, you indicated that you continue to right-size fleet in upstream oil and gas markets in the second quarter. Larry, how is your fleet positioned in these markets today? Are you still planning to reduce or redeploy equipment in the back half of the year, or do you feel like your fleet's largely right-sized at this point.

And, I guess just as a follow up, did you close any branches in the quarter within oil and gas markets like you did in the first quarter?

I'll let Bruce address, our Chief Operating Officer address that and we can talk to those items.

Hi, Neil. This is Bruce. So, I think we've made really good progress on right-sizing the upstream oil and gas fleet. We still see some headwinds in Canada. So there's still a bit of cleaning up to do, but overall, I think we've gotten the lion's share out of the way.

And the closing of the branches, that was completed in the first half and there was no other closures in the second quarter.

Got it. All right. That's helpful. Thank you.

And what was worldwide pricing in Q2 excluding upstream oil and gas branch markets? Do you guys have that handy?

Yes, excluding upstream oil and gas worldwide pricing was up 1.7%.

OKay. And I think you also mentioned that contract renewals helped pricing in the quarter. Can you provide more granularity on this?

I'm assuming there's probably more opportunities as we finish out the year and you start to reprice some of your annual contracts, but any more color you could add there would be helpful.

I don't think we're going to go into detail about it, but we are continuing to see the improvement we made in the first quarter as we continue to renew our large national account customers.

We also see the intake of some of our different initiatives and ProContractor solution and ProContractor tool into that customer base as well.

Neil, it's Elizabeth. I'll let you ask one more quick question and then we're going to go to the rest of the queue.

I'll pass it on for now. And I'll just hop back in queue. Thank you.

Our next question will come from Joe Box of KeyBanc Capital Markets. Please go ahead.

Good morning, guys.

Good morning.

So Barbara, can you just give us a waterfall on the new EBITDA guide versus prior so we could see exactly where the net change is coming from.

Can you say more about your question? What exactly you're looking to bridge, Joe.

What I'm trying to understand is what's ultimately driving the decline in your EBITDA guidance. How much of that is a function of rental rates? How much of that is a function of the decline in used equipment sales, any granularity there would be helpful.

So I think it's a combination of a number of things, Joe.

It's obviously our EBITDA is impacted by the losses on the sale of revenue earning equipment as we indicated when we were a division, those used to go in with depreciation and they weren't in our EBITDA.

But I think a couple of factors that we've mentioned, and I'm not going to break down specific numbers, but it's oil and gas is having a big impact, obviously, and then some lower projected volume in certain markets and recent adjustments in some of these indicators that Larry referenced.

I think a couple things we pointed out earlier this year on the road show too, helping you bridge from a division of Hertz to a standalone company was the gain or loss on the sale of EBITDA and also some standalone public company cost.

Those are the primary items that bridge the gap.

Joe, I think we are seeing continuing headwinds in oil and gas that we had forecasted originally would curtail. The comps will get better in the back half, but the pressure is there, probably a little longer than we had anticipated and as Barb mentioned, the other areas are impacting the EBITDA bridge that you're referencing.

Larry, can you just put some additional context around what you've seen specifically in July?

I know you noted earlier some high level macro items that could suggest lower growth. I'm curious if you've seen that within your business. It sounds like you're noting lower volume in some key markets. I'm curious if that's actually manifest itself or is that more just kind of caution on your part.

Hi, Joe. This is Bruce.

So we've seen continued strong performance on both coasts. I would say we've had a little bit more headwinds in Canada than we had anticipated. The team up there is doing an outstanding job in dealing with the circumstances they've been dealt.

And then, we had a little slower uptick in the kind of July season, in the end of June, in kind of the central areas of the US, and then we had a little small kind of knock-on effect from the Fort Mac fires.

So, all of those things combined, we thought it was prudent to adjust the guidance.

Got it. One last quick one, if I may.

Obviously, one of your peers is out sequentially raising rates in May and June. First, can you maybe talk about your current view of rates in the market and then second, can you note, did you see specifically a sequential improvement in rental rates throughout 2Q?

Yes, you know, we have reported, and during our road show, we talked about sequential improvement in rates and we continue to see sequential improvement in rates and I think of the last 16 quarters, 12 quarters, we've seen mostly sequential improvement rates over the last 12 quarters.

Got it.

12 months. I'm sorry, 12 months, not 12 quarters.

Right. All right. Thank you, guys.

The next question will come from Dan Furtado of Philadelphia Financial. Please go ahead.

Good morning, guys.

Do you mind discussing what you saw in terms of equipment values as the quarter went on?

I know that Ritchie Brothers, who auctions used equipment, saw a rather severe decline in the last month of the quarter. And I'm just wondering if the weakness you saw in the sale of used equipment was relatively consistent or if there was a trajectory to it throughout the quarter. Thank you.

Hi, this is Bruce.

I would say that we have been seeing a softness in certain categories equipment typically that are tied to used in the upstream oil and gas, and that would be wherever you're disposing of that equipment. Historically, yes, there's been a weakness and a softness in that type of equipment.

I'm not quite sure I would say that it got any worse in the last couple weeks, but overall we've seen a softness in that kind of equipment as we disposed of it and the ability to retail that type of product or wholesale, so we've had to push that towards the auction channel which historically we wouldn't have done.

Got it. Thank you.

(Operator Instructions)

The next question will come from Michael Cohen of Opportunistic Research. Please go ahead.

Hi. Thank you so much for taking my question.

First question is, what are your debt covenants on the warehouse line or on your revolving facility?

Our debt covenants are pretty typical. We have some restrictions around certain types of payments like dividends, our ability to dispose of assets, incur additional indebtedness, things like that.

From a real covenant perspective, the only one that is a springing covenant that if our liquidity drops below 10% of the available limit, then we need to meet a fixed coverage test of 1 to 1.

So as you can tell from our capital structure, we are pretty far away from that in terms of tripping that potential covenant, but those are the types of things that we would be restricted from doing.

Excellent. That's great to hear.

In terms of, as you mentioned, the depreciation or the equipment sale versus the depreciated book value on it in the first half of the year, is that something where you might adjust the depreciation schedule on a go-forward basis to try to mitigate those losses on a one time basis?

Absolutely. Absolutely. In fact, we periodically, regularly review our depreciation values and look at how our residuals are tracking and reset the useful lives. So we do that regularly and adjust that several times a year, yes, absolutely.

And how would that manifest itself through your P&L on a go-forward basis?

You see the adjustments through depreciation expense over time.

Got you. And so would you expect higher depreciation expense over the coming quarters in anticipation of kind of the weaker --

I don't think we'd expect anything significant.

Okay. Great. Thank you so much for taking my questions.

You're welcome. Thank you.

The next question will be from Brian Sponheimer of Gabelli & Company. Please go ahead.

Hi. Good morning, everyone.

Good morning.

If I'm thinking about the prior guide of the $600 million midpoint, were the public company standalone costs incorporated into that?

So, let me just walk you through it, okay?

As a division of Hertz, our initial range was $600 million to $650 million. Then we adjust out of that public company costs, gains or losses on the sale of revenue earning equipment, and then we get to our number of $520 million to $560 million.

Right. No, I understand that.

So, the public company costs were not, if I'm thinking about the guidance that was given out earlier in the year, just to try and understand this from a true apples-to-apples basis on what's changed, whatever the public company costs were not in the $600 million to $650 million, then?

They were not. But you're right, they were not.

Okay. So the real change here is not in the loss for the RE?

Public company costs were not in the $600 million to $650 million. That's right. Neither of those items were in the $600 million to $650 million.

Okay. If I'm thinking about just the core rental business going forward, is there an amount that you can maybe bucket that would have caused any sort of change in the EBITDA guidance, whether it's $10 million, $15 million, just whether the underlying business itself is also changed to a certain degree.

Look, I'm not going to break out the numbers for you. I think we had indicated previously that the public company costs were in the low 30s, and I think you know that our loss on the sale of RE for the first six months was $15 million. The other represents weakness in oil and gas and the other factors that we spoke to.

Okay. Great.

This is Elizabeth. Just to add, we had shared with you the recast numbers which showed including public company costs and, at the time, the $8 million year-to-date loss on the sale of revenue earning equipment that the adjusted EBITDA had been $550 million to $610 million.

Okay.

And that $8 million went to $15 million, obviously.

That helps greatly. Thank you, very much.

Certainly.

And our next question will come from Michael Song of Freshford Capital. Please go ahead.

Good morning.

Good morning. How are you?

I'm good.

Just taking a step back, could you talk about the margin differential that currently exists between yourself and your peers? I really just want to understand why does that margin gap exist in your mind, and do you guys think you can bridge that over the long term?

Sure. Let me take a stab at that, and then I'll ask Bruce to sort of chime in after.

As we had been telling you over the last couple of months, nearly 50% of our business comes from our national account business. Our national account business tends to be probably more competitive than the spot business, and I would say we have a spot regional local business. And I would say we have a significantly higher amount of national account business in our portfolio than perhaps some of the industry peers that you're looking at. And that makes up a significant major portion.

I would say certainly the input costs add to that, as we continue to drive our input cost down, it gives us a better purchasing price which goes into a lower OEC cost, which then affects our dollar utilization on the outcome as well.

Those are some of the main contributors to that.

Bruce, you want to add anything?

Yes. It's really kind of four major levers, right.

It's fleet mix. It's customer mix. It's volume throughput through the existing infrastructure that we have in place, so those are all the main levers there that drive better profitability within our organization and start to drive our returns up towards what our peers are.

So as I can throw more revenue through my existing locations, as I can get the fleet mix right towards higher revenue, higher yielding dollar utilization product, diversify our customer mix away, not away from national accounts, but grow that side of our business and maintain and defend and service those great national account customers that we currently have and expand the mix that we rent to that customer, that will drive better profitability of our business.

And just a follow-up. Obviously those steps will take some time. But if you are able to accomplish those goals, is there anything structural that would lead one to believe that your margins would be different than your peers over the long term?

I think we have said during our road shows that within our planning period we expect to be amongst our peers in our financial metrics, so I don't believe there's anything structural.

I think it really has to do with, as Bruce talked about, changing the fleet mix, making sure that we're adding to our customer mix in terms of diversifying away or diversifying and adding to our national account base with customers that will afford us greater opportunities for profit enhancement. And I think those are the key things.

I don't think there's anything structural at all standing in our way.

All right. Thank you, very much.

And with no additional questions, we will conclude the question-and-answer session.

I would like to turn the conference back over to Elizabeth Higashi for any closing comments.

Thanks, everyone for joining us today. If any of you have any further questions, please don't hesitate to contact me. My phone number is on the bottom of the press release and on the website. Talk to you soon.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.