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    Herc Holdings Inc (HRI)

    Q1 2024 Earnings Summary

    Reported on Feb 25, 2025 (Before Market Open)
    Pre-Earnings Price$148.40Last close (Apr 22, 2024)
    Post-Earnings Price$156.62Open (Apr 23, 2024)
    Price Change
    $8.22(+5.54%)

    What went well

    • Strong confidence in growth from mega projects in the back half of the year: Management expresses a strong confidence in their visibility and timing of mega projects, expecting a stronger back half with these projects breaking ground. They believe their line of sight is really good and see no risk in their guidance.
    • Easing equipment supply constraints allowing for timely fleet investments: Equipment supply constraints have improved substantially, allowing the company to get most of the fleet they plan to deliver on schedule. This improvement supports their ability to meet increasing demand and invest in growth opportunities.
    • Rental rates are increasing with no loss of business due to pricing: The company achieved a 5% rental rate increase in Q1 and expects to continue this trend to offset inflationary impacts. Management indicates they are not losing any business due to higher rates, suggesting strong demand and pricing power. ,

    What went wrong

    • Declining ROIC and Lower REBITDA Flow-Through: The core business's trailing 12-month Return on Invested Capital (ROIC) declined by 30 basis points to 10.9% at the end of the quarter due to absorbing back-ordered fleet delivered out-of-season. Additionally, core REBITDA flow-through decreased to 46.4% in Q1 2024 from higher costs associated with new greenfields and acquisitions, which are expected to pressure efficiency for approximately 24 months until they reach optimal performance levels. This indicates a potential short-term impact on profitability and margins.
    • Rising Interest Expenses and Higher Tax Rates Reducing Net Income: Net income was negatively impacted by a 27% higher interest expense year-over-year due to increased borrowings and a 75 basis point increase in the Fed funds rate. Moreover, the effective tax rate increased by 910 basis points in the latest quarter, further reducing net income. This suggests that increasing debt levels and higher interest rates may continue to pressure earnings.
    • Risk of Mega Project Delays Affecting Growth Outlook: There is a risk that expected mega projects may be delayed due to common factors such as funding, labor shortages, and permitting issues. This potential delay is acknowledged by management, and similar postponements have been noted by larger industry peers who have shifted some projects from 2024 into 2025. Delays in these projects could impact Herc Holdings' growth expectations for the back half of the year.

    Q&A Summary

    1. Mega Projects Visibility
      Q: How confident are you in the timing of mega projects?
      A: We feel our line of sight on mega projects is clear and are confident in our guidance, focusing on a segment of these projects amounting to 10–15% of the total.

    2. Rental Rates Outlook
      Q: Update on rental rates for the full year?
      A: We aim to negate inflationary impacts of 5% in 2024, and posted a strong Q1 with sequential improvement, maintaining our balanced contract approach.

    3. Cinelease Sale Proceeds
      Q: What's the timeline and use of proceeds from the Cinelease sale?
      A: We expect to dispose of the assets within the year, with proceeds used to reduce our ABL and support our capital allocation strategy.

    4. Balance Sheet Strategy
      Q: Plans regarding the concentrated debt stack?
      A: Currently 65% floating to 35% fixed; we'd prefer 70% fixed and 30% floating. We aim to be opportunistic in the market to adjust our debt ratio.

    5. Equipment Availability
      Q: Changes in equipment supply and capital allocation?
      A: Equipment availability has improved; we can get most of the fleet on schedule, supporting our capital allocation plan for the year.

    6. Local Market Growth
      Q: Do you still have a positive outlook from local customers?
      A: We see mid-single-digit growth in the local market; inflation and interest rates have some effect, but fundamentals remain good, with mega projects adding balance.

    7. Trench Shoring Acquisition
      Q: Discuss the recent trench shoring acquisition and valuation?
      A: It's viewed as specialty, trading at higher multiples than general rentals; we won't disclose the exact multiple but are excited about the opportunity.

    8. Core Fleet Utilization
      Q: Will dollar utilization stay above 40% this year?
      A: Dollar utilization was about 40% in Q1; we anticipate it will increase into Q2 and peak in Q3, following normal seasonal patterns.

    9. Supply Metrics and Rental PPI
      Q: Does rental PPI reflect the rate environment?
      A: We don't focus on rental PPI; it's volatile and not representative of local market rates.

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