HRI - NYSE

Thank you for standing by. My name is Mandeep, and I’ll be your operator today. At this time, I'd like to welcome everyone to the Herc Holdings Second Quarter 2024 Earnings Call and webcast. [Operator Instructions] I would now like to turn the conference over to Leslie Hunziker, Head of Investor Relations. You may begin.

Thank you, operator, and good morning, everyone. Welcome to Herc Rentals second quarter 2024 earnings conference call and webcast. Earlier today, our press release and presentation Slides were furnished, and our 10-Q was filed with the SEC. All are posted on the Events page of our IR website. Today, we're reviewing our second quarter 2024 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’d like to caution you that our actual results could differ materially from the forward-looking statements made on this call. You should refer to the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 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 through the 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. Finally, please mark your calendars to join our management meetings at Morgan Stanley's 12th annual Laguna Conference on September 11th. 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. Let's turn to Slide number four. In the second quarter, we continued to deliver on our long-term growth strategies, focusing on the fundamentals of increasing market share and geographic density for scale, optimizing fleet mix with greater penetration of our specialty equipment offering, and leveraging proprietary and industry data and technologies to enhance our competitive position and customer satisfaction. We're continuing to make good progress on all of these initiatives. How we manage fleet logistics is another important driver of profitable growth for us, especially as we set ourselves up to incrementally benefit from the substantial infrastructure and mega project opportunities. Our fleet management team has done an outstanding job this year, pacing the investment in new equipment to align with dynamic demand trends, while also redeploying existing fleets to our highest demand regions to drive greater asset utilization. As a result, in the second quarter, fleet efficiency improved on a sequential monthly basis, and June turned the corner with revenue growth year-over-year outpacing fleet growth heading into the peak season. Moving to Slide five, this is our year-to-date financial scorecard. After the first quarter, we told you that the second quarter would be our slowest growth quarter for 2024, ahead of more robust rental activity in the back half of the year. As you saw from comments in our press release this morning, second quarter revenue tracked to our plan and highlighted a lot of continuing positive trends. For example, rental rate was up 3.5% year-over-year on top of our toughest comp of 7.8% last year, and a 5.5% rate increase in the second quarter of 2022. That's nearly 17% increase in just two and a half years. Further, pricing is improving on a sequential basis, reflecting our leadership as well as ongoing industry discipline. And based on benchmark data, Herc volumes continues to significantly outpace overall rental market growth, with the biggest competitive differentiators being our participation in the expanding mega project pipeline and the diversification of our branch locations, fleet mix, and end markets. Finally, our execution on strategic acquisitions and greenfield openings remain strong, with 17 locations added in the recent quarter, which aligns with our goals for building our brand geographically, cross-selling our specialty product lines, and driving efficiencies through scale. Of course, as you also know from our press release, revenue growth in the local market is tracking a bit slower than we had originally thought. Although recent acquisitions are offsetting the deficit, for Herc, after three consecutive double-digit increases in local revenues, we expect same-store growth to normalize in 2024 to more of a mid-single digit rate, similar to what we experienced in 2019. Our forecast assumed some moderation in interest rates to support the local contractors' continued willingness to fund new projects. Those expectations have been continually deferred, and every month the Fed leaves interest rates steady, it caused more uncertainty for local contractors. That's put increasing pressure on industry volumes, and as a result, we now expect same-store local market growth at more of a low single-digit rate for 2024. Adjusted EBITDA margin primarily was impacted by challenging fixed cost absorption, given this was our lowest revenue growth quarter, as well as an unfavorable trade-off in profitability, as contributions from our 2024 acquisitions and Greenfields initially generate lower incremental margins than our established local account business. Additionally, we had a few expense categories like freight and insurance that were higher year-over-year, which Mark will talk about. With six months behind us and early visibility into the summer season, let me jump to Slide number six to give you a sense of how we're thinking about the second half of the year and what that means for full-year guidance. Of course, our guidance is always based on our current view of the operating environment, so both local market challenges and 2024 acquisitions completed as of today are factored into our latest expectations as we reaffirm our original guidance for rental revenue, adjusted EBITDA, and net fleet CapEx. For mega projects, activity on our largest job sites is tracking right where we expected, and we're capturing our targeted 10% to 15% share across a variety of end markets, from chips, battery, and LNG facilities to data centers and renewable energy plants. We told you that our guidance was back half-loaded this year, with mega projects being the catalyst to accelerating revenue growth in the third and fourth quarters, and targeted fleet additions from second and third quarters supporting that outcome. This is still the case. When it comes to maintaining our EBITDA guidance range, this is also a tale of two halves. We expect operating leverage from seasonal revenue growth and the adjustments to our cost structure in the second quarter to put us within our targeted profit range, supporting REBITDA flow-through improvements, the third and fourth quarters averaging roughly 50% for the second half of the year. For net fleet CapEx, the guidance also remains intact. The breadth of the range provides us with optionality as we deploy fleet into the peak season and a healthy supply chain gives us further flexibility. As I mentioned, our fleet group is being very disciplined and agile in how they're approaching the timing and regional allocation of investments in new equipment, and our entire operations team is focused on fleet efficiency as a priority. From what we're seeing in our Rouse data, the overall industry is being equally disciplined when it comes to fleet growth. Today, volume trends are dynamic. The good news is that we have a fungible expansive product line, national account capabilities, and a diversified operating model. With the actions taken in the second quarter to move our fleet to our highest growth regions and align our cost structure with demand trends, we feel good about our position heading into the peak season and over the long term. Aaron will talk a little bit more about our current operating trends, and then Mark will take you through the core business performance and more specific puts and takes that support our full-year guidance range. Aaron?

Thanks, Larry, and good morning, everyone. As we navigate the transition into a normalizing operating environment, our teams across the organization are staying focused on serving our customers, capitalizing on macro trends, and driving fleet efficiencies and productivity initiatives to support growth momentum long-term. And as an industry consolidator, market leader, and agile operator, we're well positioned to continue to drive profit expansion in 2024, despite some softer local markets. Execution starts with safety, and of course safety is always at the core of everything we do. As you can see on Slide eight, our major internal safety program focuses on perfect days, and we strive for 100% perfect days throughout the organization. In the second quarter, on our branch-by-branch measurement, all of our operations achieved at least 97% of days as perfect. Equally notable, our total recordable incident rate remains better than the industry's benchmark of 1.0, reflecting our high standards and commitment to the safety of our people and our customers. On Slide nine, you can see that we're making great progress on our urban market growth strategy by expanding through greenfield locations and acquisitions in the top 100 metropolitan markets. In the second quarter, we spent $142 million in net cash on two acquisitions in the northeast and southeast regions, adding a total of 10 locations to our network. We also opened seven Greenfield locations in the quarter, bringing our total over the last 12 months to 23, which is nearly a 15% increase in greenfield openings over the comparable trailing 12-month period. As you know, we are focused on opportunities in high growth markets that complement our current branch network and fit our strategic financial and cultural filters. Moreover, many of the mega industrial manufacturing reshoring projects being announced are in the geographies where we have targeted our acquisitions in greenfield additions, like Texas, Ohio, Arizona, and along the eastern seaboard of the United States. Along those lines, last week we completed our largest acquisition to date, with four locations serving construction and industrial customers in Phoenix and Yuma, Arizona, and San Diego, California. These locations are classic gen rent businesses, providing us with a significant opportunity to cross-sell our specialty products and services. The multiple for this transaction was at the higher end of our average for gen rent acquisitions due to the desirable locations and leading market share. While Arizona is a top 10 market and mega project hotspot, the two San Diego locations substantially expand our share and now position us as a leader in this top 25 market. We have successfully integrated 49 businesses with 112 locations into the Herc network since initiating our M&A strategy in late 2020 as a result of revenue efficiencies, we've been generating synergized multiples of approximately 3.5x to 4.5x. New acquisition opportunities remain robust, and we are actively focused on those that make the most strategic sense for our business. On Slide 10, in addition to acquisitions, growing our core and specialty fleet through new equipment investments is a key strategy to expanding our share and keeping up with the increasing demand opportunities. Our fleet composition at OEC is on the right side of the page. Total fleet is now a record $6.7 billion as of June 30, 2024. Cinelease fleet represents about 5% of the total. So, when you exclude the Cinelease assets held for sale, our base fleet is about $6.4 billion. You'll note that higher margin specialty fleet represents approximately 23% of the total today. Excluding the Cinelease fleet, specialty makes up about 20% of the total, with plenty of room to continue to grow. When it comes to fleet investments, you can see we've slowed our intake to a more seasonal level this year versus last year when the recovery in the supply chain meant we were onboarding a high level of backorder deliveries of 2021 and 2022 fleet out of season. For the full year, we still expect to spend in the range of $750 million to $1 billion on new fleet purchases. That gross amount, along with last year's growth fleet purchases, should support the incremental demand from general market expansion in the peak season, new greenfields, and the mega projects that are either underway or that we have high probability line of sight to. Our level of fleet investment this year also reflects our goal to improve fleet efficiency. Finally, as we've mentioned, we are planning for a lower level of replacement fleet compared to last year when we worked aggressively to get caught up on deferred fleet disposals as the supply chain recovered. In the 2024 second quarter, fleet disposals at OEC were 25% lower than last year. This is in keeping with our plan for about $550 million to $650 million of fleet disposals at OEC in 2024. This year, you'll also see a more normal seasonal cadence of dispositions. In the second quarter, we continued to gain traction on our retail channel capabilities, utilizing technology training and sales force incentives to participate more in this higher return channel. The amount of fleet at OEC that we sold to retail and wholesale customers increased 300 basis points from last year. Proceeds of 48% of OEC were even with last year, with the successful channel shift offsetting lower residuals as the used market moderates from peak levels. We still have a nice opportunity ahead as we continue to execute on our more profitable channel shift strategy. Turning to Slide 11, after redeploying existing fleet to our highest growth regions and ensuring that new equipment is delivered where it's needed most, we're well positioned to address the needs of large national accounts and local contractors operating in North America heading into the peak season. Local accounts, which represented 56% of rental revenue in the second quarter, are growing due to same-store growth in select regions where infrastructure, education, local utilities, and facility maintenance and repair projects are underway, as well as Herc’s penetration through our acquisition and greenfield strategy. Based on what we're hearing, we view this more pronounced slowdown in local project starts as a timing issue. The view is that once lending rates ease, project funding can be put in place and then new construction projects should pick up again. Of course, our national accounts are capitalizing on continued government and private funding for new projects in areas like battery storage, utility projects and maintenance, renewables, semiconductor, LNG plants, and data centers. Long-term, we'll continue to target a 60/40 revenue split between local and national accounts. Turning to Slide 12, overall, we're continuing to see solid demand across a variety of end markets, customer segments, and geographies in 2024. This diversification provides for growth and resiliency. And the secular trend of renting over ownership provides for incremental industry growth long-term. Based on the timing of mega projects this year, revenue growth accelerates into the third and fourth quarters. And our disciplined fleet onboarding, which started building late in the second quarter, is aligned with the expected seasonal ramp in demand to October's peak. Team Herc is already gearing up, and I want to thank them for their commitment to operational excellence and safety. Their professionalism shows up in execution of our services to our customers every single day. It's a big reason for the long tenure of our national account customers and for the new business we're winning on local and mega projects. Now, I'll pass the call on to Mark.

Thanks, Aaron, and good morning, everyone. I'm starting on Slide 14 with a summary of our key metrics for the second quarter. For clarification, these are our GAAP results. I'll just make a couple of quick points here before turning the focus to the core results. In the second quarter, rental revenue increased 9%, and adjusted EBITDA increased 2.3%. These results include Cinelease, which rebounded over last year from both the film and TV writers and actors who were on strike and essentially shut down production studios. One year later, that industry continues to recover and we expect full acceleration now that the last of the union contract negotiations, this one for crew members, is being finalized. As you know, Cinelease is currently an asset held for sale and we still anticipate a transaction within the year. Let's move to Slide 15. Here, we outline our core financial results, which exclude Studio Entertainment from both periods in order to give you a better sense of how the base business performed in the quarter. A full reconciliation of quarterly performance metrics, excluding Studio Entertainment, can be found on Slides 26 and 27 in the appendix of our presentation. The bottom line is that the moderation in local market growth in the quarter versus our plan impacted the P&L from a revenue growth perspective, thereby impacting margins and flow-through. We were already planning for the second quarter to be our slowest revenue growth period this year, and therefore we were prepared to weather the short-term impact of the fixed cost base on margins and flow-through as we looked ahead to a more robust back half of 2024. But in May when the local markets slowdown started to become a bit more pronounced than we expected, it further exacerbated the profit impact, even as mega projects remained on track. We took actions in the most impacted markets in the quarter to right-size our cost structure and also moved less efficient fleet out of slower growth regions and into regions with stronger demand and more diverse end markets. Our fleet actions, which also included deliveries of new fleet into high demand markets, had the desired effect of improving fleet efficiency on a sequential monthly basis, such that June was positive. Likewise, dollar utilization, which was flat compared with the year ago, trended up through the second quarter as fleet utilization improved. But repositioning the fleet came at a cost, with higher transportation expenses for the internal fleet transfers. Additionally, prior to right-sizing our variable expenses, the inefficiencies in the cost structure from slowing same-store revenue growth, represented another headwind in the quarter. On top of that, insurance expense increased year-over-year, primarily related to increased self-insurance reserves due to claims development attributable to unsettled cases. All of that represented roughly $14 million of incremental expense headwind that reduced our expected flow-through of 40% in the quarter to 14.5%. The good news is that the cost actions and fleet redeployment initiatives we took in the second quarter, set us up well to leverage the accelerating demand in the back half. As a result, we expect to return to stronger margins and flow-through in the third and fourth quarters. Net income was also impacted by higher interest expense year-over-year from slightly higher interest rates and increased borrowings on our ABL revolver to fund acquisitions. Trailing 12-month ROIC for the core business declined 100 basis points to 10.3% at the end of the quarter. Our prudent onboarding of fleet this year and the benefits of rising fleet efficiency will support improving ROIC as we exit 2024. Let's turn to Slide 16, and I'll walk you through the rental revenue and adjusted EBITDA bridges from second quarter 2023, to second quarter 2024, to give you a visual reconciliation. In the revenue chart, the roughly 8% increase year-over-year was made up of a 3.5% increase in rates and a 6.4% increase in OEC fleet on rent. Mix was an offset of 2.2%, reflecting the net of higher equipment inflation and a more favorable mix of equipment on rent. For clarification, when it comes to revenue, fleet inflation is in the mix to adjust the volume measured at OEC dollars to a unit metric. 2024 acquisitions contributed 160 basis points of the rental revenue growth in the quarter, and roughly 100 basis points year-to-date. Adjusted EBITDA was essentially flat, primarily as a result of the incremental $14 million of expense incurred in the quarter. Shifting to capital management on Slide 17, you can see we have no near-term maturities and ample liquidity to fund our growth goals as we continue to allocate capital to invest in our business and drive fleet growth into this cycle. Higher operating cash flow and net capital expenditures resulted in $148 million of free cash flow in the first half. Our current leverage ratio at 2.6x, is well within our 2x to 3x target range, and in line with our expectations as we invest in growth. We remain confident in our business model and are committed to increasing shareholder value. In the second quarter, we declared a quarterly dividend of $0.665, which represents $2.66 per share for the year. Finally, in early June, we completed an upsized offering of $800 million of new senior unsecured notes that mature in 2029, and increased our fixed to floating mix. Nearly all of the net proceeds were used to repay a portion of our ABL, increasing optionality for acquisition funding. The notes were favorably priced at 6.625%, for total estimated annual savings of $3 million. On Slide 18, you can see the continued strength in our primary end markets. In the upper left is the ARA estimate for 2024 North American rental industry revenue. We operate in a growing industry with a total addressable market of $85 billion today. On the bottom left is the Architectural Billings Index that reported a score of 42.4 in the May release. According to AIA’s chief economist, elevated construction costs, coupled with prolonged high interest rates, continue to discourage new project activity. Overall, the survey shows that the majority of architecture firms reporting have little experience with mega projects as a lever to offset regional weakness. Taking a look at the updated industrial spending forecast in the top right, Industrial Info Resources is projecting 2024 to be the highest level on record at $372 billion, on top of last year's elevated $368 billion spend. In the lower right quadrant is Dodge's forecast for non-residential construction starts. 2024 starts are estimated to increase approximately 7% to $449 billion. The dotted line on both of these charts reflects growth over pre-pandemic peak levels. You can see that last year and the next three years are projected to be the strongest periods of activity that the industry has ever seen. Additionally, there's another $347 billion in infrastructure projects slated for 2024. That's a 15% increase over 2023. Two of our key end markets are industrial and non-residential construction. Combined, these end markets reflect about two thirds of our customer base and are both likely to outperform our consumer-driven end markets due to incremental rental penetration, new mega project construction, and as the reshoring of US manufacturing capacity continues to gather steam. If you flip to Slide 19, you can see that we are reaffirming the 2024 guidance that was set in February. As noted, our guidance excludes the performance of Cinelease, which is held for sale. We still feel good about the 7% to 10% rental revenue growth range for the full year based on current visibility, more experience with the pace of the mega project rollout, and the contribution from acquisitions offsetting the more pronounced slowdown in the local market. With the bulk of our net fleet investment in the second and third quarters driving higher sequential year-over-year revenue growth in the third and fourth quarters, we still expect to exit the year above the average rental revenue growth rate for 2024. With our improving fleet efficiency, benefits from adjustments to the cost structure and operating leverage in the back half, we estimate full-year adjusted EBITDA will be between $1.55 billion and $1.6 billion, representing another year of profitable growth ranging from 6% to 9%. When comparing the projected adjusted EBITDA growth rate with the equipment rental revenue growth rate, the roughly 100 basis point difference is our expectation for the lower amount of used equipment sales versus 2023. Now, before we open it up to Q&A, let me leave you with this. While the broader macro environment is clearly transitioning in 2024 from the outsized growth of the last three years, today's demand drivers are multi-dimensional for the largest, most diversified companies. Even in the challenging second quarter, Herc outpace market growth by capitalizing on our increasing market share, pricing leadership, broad product and services portfolio, and expanding branch network. And as we continue to gain a foothold in the fast-growing mega project environment, roll out our E3OS continuous improvement program, and improve our fleet efficiency, we are further elevating our competitive advantages, solidifying our path for sustainable long-term growth. With that, Operator, we'll take our first question.

[Operator Instructions] Our first question comes from the line of Rob Wertheimer with Melius Research. Please go ahead.

Thanks, and good morning, everybody. So, I appreciate the color you gave around the actions you took in the quarter, and I just wanted to understand it slightly better. You saw weakening in June. I think you moved fleet strategically at a onetime small cost. Is that fleet kind of spoken for? You mentioned in your comments, it's going to good places, but is it spoken for? Is it positioned in anticipation of getting business? And then, I guess if things weaken more towards the latter half of the quarter, do you know if that process of moving fleet around is over? Do you have more to do if things weaken further? And I'll stop there for now.

Hi, Rob, it's Aaron. So, we moved the fleet as normal course of business as we focused on our fleet efficiencies, as we talked about before. We're moving the fleet to the markets and the opportunities where and get on rent the quickest, and also filtering any new CapEx that's coming in the same way, but that that's kind of a normal course of business. We did more of that through Q2 just to really focus on getting our fleet efficient. And going forward, I'd say that's something we'll continue to do. We just did a lot more of it probably through the March, April, May period, to kind of get things balanced. And as we mentioned in the comments, as we exited June, we were fleet-efficient, which is a goal for us to continue that the rest of 2024 for sure.

And then how do you think about CapEx if the smaller stuff stays weak? I understand the industry pretty well just because of the megas and so forth, but would you do less organic CapEx? Would you do more small acquisitions? And how do your small potential acquisition targets, for lack of a better word, how are they feeling in this environment? And I'll end there. Thank you.

Yes, Rob, it’s Mark. It is a good question. I think that essentially if you sort of break it into first half, second half, you have about $250 million to $500 million of gross CapEx sort of to play here from the guide. And so, I think what it really does is it aligns us and gives us a ton of optionality as we work our way through the back half of the year, and we'll sort of - and given the health of the OEMs, sort of that adds to that optionality. And so, we'll just play it - we'll play it as it comes. I think, like we said, we reiterated that, reaffirmed that guidance. And so, I think we’ll just take it as it comes, given the optionality and availability of the fleet going forward.

Thank you.

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

Good morning. Wanted to hear a bit more flowing local markets and if that is making mega projects more competitive. Are you shifting fleet from more local projects to the more mega projects? And then is that reducing or pressuring KPIs on the mega projects?

Yes, thanks, Steve. Good morning. This is Larry. Look, the local market slowdown that we saw through the second quarter was primarily in our western regions. The balance of our markets remain sort of intact, and that slowdown in growth really from mid-single digits to low single digits is sort of like a five to a three or a five to a two. So, it's not that type of a situation. So, we're not seeing an impact per se relative to pricing either in a local market or on mega projects. I think those are operating as they've been. The market has been disciplined, and we'll continue to try and push price in the third and fourth quarter and continue to be a price leader where we can.

That's helpful. And then thinking about the non-Studio Entertainment vertical that you play in, can you talk about results there in the quarter and maybe how it compared to the construction and industrial markets?

Yes, the entertainment piece that's not Cinelease, we call that Herc Entertainment Services. That popped pretty good in the quarter. There's still more room there because there was the hangover of some pending negotiations in the industry. But no, we saw a good pop there. The industrial side is pretty steady. Usually, the big activity and industrial activity is kind of in the fourth quarter, but that's been pretty steady. And then you see new projects kind of in the LNG space, in the industrial side, happening as well. So, industrial's growing. Herc Entertainment is growing through the quarter of the second quarter. So, did you ask about one other market there, Steven, besides those two?

No, it was really just trying to get a sense for how the entertainment vertical, if it was driving any better performance for the quarter results.

Okay. So, I covered it. Thank you.

You did.

Our next question comes from the line of Neil Tyler with Redburn Atlantic. Please go ahead.

Thank you. Yes, good morning. A couple for me, please. Just going back to the pricing, Larry, you started to answer my question, but I had wanted to sort of pick apart the pricing dynamic a little bit. In the past, I think you've helped us understand the different dynamics in the local market versus the rolling over of longer term to the contract-like pricing. So, within the 3.5%, can you shed any more light on whether there are varying dynamics within that number? And then secondly, in the local market, have you had to, or are you prepared to kind of cede volume to lead on prices, as you just mentioned, that you would try to? Has that started to happen yet or things haven't become that aggressive? Thank you.

Yes, Neil, all good questions. I think from a pricing perspective, I would tell you that sort of the contract versus the non-contract has sort of behaved exactly like we thought they would. I think that the spot market had a really tough comp in the front half of the year, and I would also say that contract negotiations and renegotiations are also going as we would've expected them to. I think that we had about 60 basis points of sequential price improvement in the quarter fairly reasonably mirroring that of Q1. The expectation is that as we move through the back half of the year, we'll continue to gain sequential pricing improvement. On your second question, I don't think we necessarily think about it the way that you asked the question. I think that we think about it as fleet efficiency and our differentiation in the marketplace is a better strategy to provide disciplined revenue growth, and so not to get into pricing wars.

Okay, that's understood. Thank you.

Our next question comes from the line of Jerry Revich with Goldman Sachs. Please go ahead.

Yes. Hi. Good morning, everyone. Larry, I wonder if I could just trouble you to provide an update on expected timing on the Cinelease sale, how's the process going, and any parameters that you'd be willing to share on what the realization might look like?

Yes, look, it's an ongoing process. It's continuing, and we still expect that we'll be able to have a transaction completed this year.

Okay. And then I'm wondering if we just go back to the rental rate discussion. Mark, thank you for sharing the sequential performance. That's pretty good performance considering the utilization headwind that the industry is seeing. Can you talk about - you continue to see rental momentum into July, and the other part of it that's interesting is the momentum that you're seeing in rental rate is - even net of losing what I think is some of your higher rental rate business when you're talking about the local business. So, I'm wondering if you can comment what price would've been like on a like for like basis if that 60 basis point comment was on a net basis?

Yes. No comment on the like for like basis. I actually think you summed it up pretty well, right? I mean, I think our focus has and will always be to be a pricing leader. And so, I think gaining 60 basis points on top of somewhere in that same vicinity in Q1 is the goal as we work our way through the back half of the year, sequentially improving price.

Terrific. Thanks.

Our next question comes from a line of Sherif El-Sabbahy with Bank of America. Please go ahead.

Good morning. So, I just wanted to touch on the mega projects. Given just your line of sight on those projects, what is that like currently? Are they starting to get underway, at least for what you have planned for the second half? I've heard some commentary from others around delays or pushing out of some of the mega projects. So, if you could speak to that pipeline and how confident you are that they break ground in the second half.

Yes, confident. We view the tailwind for us going in through the rest of the year, and we saw several that were planning on being part of startup in the second quarter. These projects are big. Once they start breaking ground, that's when the momentum starts to get going, and there's a lot of phases of construction going on in those projects, but those have been pretty constant for us in our viewpoint, really as we exited last year and going through this whole year. And we knew that the second half of this year would be stronger than the first half, but we're certainly happy with how we performed on the mega project activity in the first half as well.

Yes, you're right, Sherif. There has been some announcements of some projects either slowed or delayed. And in fact, there was really only one that we were on that had been delayed, but that has since restarted. So, some of the other ones, we were not on and not part of. Remember, we said we're only going to get and participate in about 10% to 15% of the mega projects, and we're very selective on the ones that we go after. So, we haven't felt anything from any kind of delays or slowdowns.

Thank you.

Our next question comes from the line of Ken Newman with KeyBanc Capital Markets. Please go ahead.

Hey, good morning, guys. First question for me, just thinking about the seasonality, obviously a little bit more of a back halfway to guide now. When I look historically, I think the normal seasonality for equipment rental revenues are up, call it low double digits, maybe mid-teens 2Q to 3Q sequentially. Just given all the moving pieces around local accounts, the timing of the mega projects and these recent acquisitions you've made, is it fair to think that you expect to see a similar seasonality from the second quarter into the third quarter? And then also just curious if you are still expecting core dollar utilization to be up sequentially through the back half.

Yes, Ken, I think the answer would be, yes, that's the goal, and that's sort of what - and I think what you said about two into three, agree with. And then I think your expectation on dollar utilization is also accurate, right? You've got a rising tide into Q3 and then sort of a normalizing three into four. But yes, I mean, that would be the expectation from our perspective.

And as far as the local markets go, Ken, we expect that the benefit from our 2024 acquisitions will fill that deficit that we're experiencing on the slowdown in the local markets.

Right. So, you're not expecting that timing issue to be an impact here in the back half more, so maybe a 2025 impact

Not prepared to comment on 2025 yet. Not prepared to comment on 2025, but we - yes.

Fair enough. Yes. Maybe one more for me. Just the negative impacts from the insurance and freight expenses this quarter. Is there any way to quantify what you expect not to repeat here into the second half?

Well, I mean, I think it was impactful to us in a quarter, where you're only sort of growing in this 7.5% to 8%. So, it was about $14 million all that sort of drove your 40% expected flow-through down to 14.5. I think, as Aaron said, on the freight side we think we've got the freight in the right places now, fleet efficiency obtained in June. And so, wouldn't expect that to recur. There probably is some lift on the expense side in the back half of the year probably to the tune of $1.5 million or so a quarter in the back half, just given where and how those cases are ultimately settling out. But we've baked that all into our sort of updated projections and it’s sitting inside the guide.

That's helpful. Thanks, guys.

Our next question comes from the line of Tami

Hey, good morning. Thank you so much. So, my first question is, I think you mentioned the fleet age now is about 47 months. Is that where you want it to be, or do you need this to come down further? So, any thoughts on how you're thinking about the fleet age?

Yes, no, look, the fleet age is perfect where we have it. We can fluctuate between 45, 46, up to 48, 49, as a normal operating cadence. And then if we had to, during a downturn, we can run the fleet up to 55, 60 months, with very minimal incremental repair and maintenance. But that mid-40s is where we like to keep it, and that's appropriate for us. Remember, we sell the fleet when it gets into that 81, 82, 83-month age. So, we're in very good shape, and the fleet age is right where we expect it to be.

Got it. That's very helpful. And then another quick one for me. Can you talk to the expected accretion in terms of sales and EBITDA from the acquisition you made in July? I think you did an acquisition, Otay. Any comments on the amount of sales and EBITDA expected from that?

Yes, Tami, that's a good question. I think it should be in our results for five full months in the back half of the year, which would essentially equate to sort of a 2% revenue lift on the back half. And then I think a reasonable flow-through thought would be somewhere in the overall corporate consolidated margin range. And so, that's sort of the expectation as we sort of get our arms around this thing knowing that we just acquired it last week.

Got it. That's very helpful. Thank you.

Our next question comes from the line of Brian Sponheimer with Gabelli. Please go ahead.

Hi, good morning, everyone. Just curious on your acquisitions, how long does it typically take for you to get those acquisitions up to corporate average EBITDA?

Yes, generally, we're looking in that 18-to-24-month range, Brian, and they will be at corporate average. Some of them come up a little bit quicker, some a little bit slower, depending upon what type of work, what market they're in, what the fleet looks like when we acquire it, and how quickly we can rotate that fleet out. So, it all depends. I think what Mark just mentioned on the most recent one, we expect that to be probably quicker, closer to the 12-month cycle, maybe even a little less.

So, what essentially are you doing when you're - so a larger acquisition like this, you probably have a little bit less to do since it seems like it's a really quality asset. And I guess a better way to ask that question is, if you're thinking about your yards right now being fully integrated within the system, how much higher is your EBITDA margin than where the margins are right now?

Yes. I mean, I think, right, like when we bring in these acquisitions, Brian, and really sort of throughout that 18-to-24-month period that Larry mentioned, they sort of start at or around consolidated margins, right? And so, you're kind of thinking about this 45 to 47-ish sort of consolidated. But when you think about sort of a branch margin profile, that's something that starts with a five, generally speaking. It could be upwards - it could be in the upper fives. And so, that's really the lift that you're looking for as you sort of integrate and cross-sell into, sell the Pro Solutions gear and the like, because the reality is these acquisitions all in aren't cost savings acquisitions. It’s really revenue synergies that we're after, and that's how we do that.

Okay, I got you. One last one. You mentioned construction cost as being an inhibitor to local markets, at least through the first half and expected for the back half. How much is political environment weighing on local customers’ thoughts and any thoughts as it relates to megaprojects there?

Yes, look, I think it's really interest rates, Brian, that are affecting the local market starts like strip malls and related area, things in the local markets. Remember, we're really not in housing. So, the slowdown in housing doesn't impact as much, except for the fact that if there's a large housing community being built, there's going to be schools, there's going to be hospitals, there's going to be strip malls, and that's what's being impacted, and that's where the effect is seen. Certainly, I think the political environment right now, we are in probably the most tumultuous political environment that I can recollect in my career. And I think it is certainly having an impact, and we've heard a fair amount of customers in those markets taking a wait and see until the election results come in.

Okay. Yep, as expected. All right. Thank you very much.

Our next question comes from the line of Steven Fisher with UBS. Please go ahead.

Thanks. Good morning. I wanted to follow up on the interest rate commentary, more of an opinion question. How long do you think it would take for the local markets to react to interest rate cuts? And how big do you think the cuts need to be to get more of that local market activity to pick up?

Yes, good question, Steve. Generally, what we've seen in the past is that the interest rate environment just needs to show that it’s trending in the right direction and people will become a little more risk-taking. And we generally see that to have like a six-month lag or thereabouts. From the time the federal signal that it's going to cut and then implement a cut, I think you're looking at a six-month lag for projects to - shovels to go in the ground. I'm sure there's a lot of projects that are what would be called shovel-ready, but people need to see that the marketplace and the environment is going to be one that they can rent these stores in these strip malls and people are willing to start up businesses and do that kind of activity. So, short answer, about six months.

Perfect. And then in terms of overall supply-demand, you mentioned seeing discipline in the market based on some of the industry data. How balanced do you think the market is right now? I mean, I imagine if you expect sequential price for the rest of the year, it can't be much out of balance, but curious what you think.

Yes, Aaron, you want to - go ahead.

Yes, that's something we look at regularly, because we're really comparing ourselves to what's going on in the market, but we see the market tightening. As the volume has - the demand has kind of moderated to that low single-digit level, we've seen the fleet levels of the industry come down as well. So, I think the industry is in a good fleet situation right now.

Yes. Reviewing the data that we get, the Rouse data, we can see what the fleet level is in the industry, and we think it’s, as Aaron said, a good discipline level, and as we're going into the peak season.

Thanks for taking the questions.

Our next question comes from a line of Eli Lapp with BMO Capital Markets. Please go ahead.

Thank you. So, you guys mentioned in your commentary an impact of interest rates, and I was wondering if you could offer some sensitivity analysis to that. So, perhaps if you view a 50 basis points or 100 basis points, whatever you think is appropriate, and how that impacts the business on a revenue and ideally on an EBITDA level as well.

Yes, that would be kind of very hard to sort of give you that kind of metric. What we really operate more is on sentiment in the market, and as sentiment in the market feels that interest rates are going to make it more affordable and more responsive to demand for the type of activity that we participate in, that's where it is. I think interest rates are more around mentality and sensitivity to what's going to happen in the future. And I think if the indicators show that rates are going to moderate, I think we'll see a more receptive market to construction starts begin.

Okay, thank you.

That concludes our Q&A session. I will now turn the call back over to Leslie Hunziker for closing remarks.

All right, everyone, great. 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.