Herc Holdings Inc. (NYSE:HRI) Q2 2023 Earnings Call Transcript

Herc Holdings Inc. (NYSE:HRI) Q2 2023 Earnings Call Transcript July 25, 2023

Herc Holdings Inc. misses on earnings expectations. Reported EPS is $2.69 EPS, expectations were $3.13.

Operator: 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. Second 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 of Investor Relations. Please go ahead.

Leslie Hunziker: Thank you, operator, and good morning, everyone. Welcome to Herc Rentals’ second quarter 2023 earnings conference call and webcast. Earlier today, our press release, presentation slides and 10-Q were filed with the SEC, and all are posted to the Events page of our IR website at ir.hercrentals.com. Today, we’re reviewing our second 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 June 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 are 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.

Larry Silber: Thank you, Leslie, and good morning everyone. Please turn to Slide number 4. We had a strong first half for 2023. Total revenue and adjusted EBITDA were second quarter records driven by a 7.8% increase in rental rate and above market volume growth. Additionally, we ramped up fleet dispositions in the quarter to adjust to higher OEM shipments and to take advantage of the still strong used equipment market. Continued disruptions in the studio entertainment end markets related to labor strikes in the film and TV industry, as well as the sale of three times more fleet year-over-year weighed on EBITDA margin in the quarter. Excluding studio entertainment margin and flow through significantly improved year-over-year.

You can also see on this slide that our capital allocation strategy focused on profitable growth investments supported an increase of 40 basis points in ROIC in the second quarter compared with last year. On Slide number 5, it’s clear that we continue to significantly outperform the equipment rental industry. ARA estimates the industry grew 8% in the second quarter compared with our rental revenue growth of 16%. Revenue from non-residential, industrial and infrastructure work remains strong and the largest rental companies with fleet capacity and the best branch network coverage are winning an outsized portion of the construction starts. Our year-over-year increase in revenue is two times greater than the industry despite continuing challenges of the studio entertainment business with the Actors Guild recently joining the screenwriters on strike, we now are prudently planning for studio shutdowns to continue through the third quarter and possibly through year end.

Aaron will give you more color into the adjustments we’re making to our fleet plan as a result, and Mark will give you insight into the financial impact. Total revenues got an incremental boost in the quarter as we opportunistically increased our rate of fleet sales, allowing us to begin addressing the pent-up rotations from the last two years while leveraging the ongoing strength of the used equipment market. We are in a great position for continued growth through the balance of the year. Team Herc is advancing the key initiatives of our strategic plan. We continue to execute well while remaining flexible to be able to quickly pivot to capitalize on areas of growth. Now, if you turn to Slide number 6, in addition to leveraging our scale as a market leader, the successful execution of our growth strategies also contributed to our outsized performance relative to the overall industry.

We are increasing revenue in our core categories through fleet investments as well as acquisitions and new greenfield facilities that support branch network optimization. Revenue from our high margin ProSolutions specialty business grew double digits again in the second quarter, incrementally benefiting from new products, new locations, and cross-selling synergies. And our innovative customer-facing digital capability called ProControl NextGen continues as a catalyst to new project wins, especially at the national account level. As always, we’re committed to responsible operating practices built on a strong cultural foundation, a safety-first protocol and a pledge to continue to work hard to do more for our employees, customers and suppliers.

In the second quarter, we released our comprehensive environmental and social responsibility report. Our corporate citizenship report describes our approach to integrating sustainability and social responsibility into our decision making and operations. I encourage you to check it out on the Investor Relations page of our website. Also, during the quarter, we were recognized as one of America’s Climate Leaders by USA Today and we received an upgrade to our MSCI rating. We are now recognized as a company leading its industry in managing the most significant ESG risks and opportunities. Finally, between fleet investments, strategic M&A, dividend growth and opportunistic share repurchases, we strategically allocated capital to drive long-term growth and higher returns.

With that, I’ll turn it over to Aaron to share the high level operational drivers in the second quarter, and then Mark is going to walk you through the second quarter financial metrics and some of our assumptions for the back half of the year. Aaron?

Aaron Birnbaum: Thanks, Larry, and good morning everyone. The solid performance of our operations and field support teams, combined with steady demand in our end markets have traded 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 as strategic network and a customer first mindset. Turning to Slide 8. 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 reportable incidents, no at-fault motor vehicle accidents, and no DOT violations. We strive for 100% perfect days throughout the organization.

In the second quarter, on a branch-by-branch measure, all of our branch operations achieved at least 97% of days as perfect. Equally notable, our total recordable incident rate represents best-in-class performance that showcases our commitment to our people and our customers. On Slide 9, 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 second quarter, we added 10 locations to our network, six greenfield locations, and four locations from three new acquisitions. As you know, we focus on acquisition opportunities in high growth markets that complement our current branch network and fit our strategic financial and cultural filters.

Of the acquisitions in the quarter, all were general rental companies in the top 50 MSAs, one in Salt Lake City, another in Denver, a top 20 market, and a third in Phoenix, the top 10 markets. These acquisitions support our strategic goals of increased density and urban markets. Moreover, many of the mega projects being announced during the geographies where we have focused our acquisitions and greenfield additions like Phoenix, Houston, Austin, Detroit, and the Midwest. Through June 30th, we’ve invested $272 million in net cash on acquisitions. Multiples remain steady as we pay a little less for general rental companies and a little more for specialty rental companies. We’ve targeted up to $500 million for acquisitions again this year and have a strong pipeline of opportunities.

In fact, this month we closed on another acquisition in a top five market. Our M&A team is working hard and it’s paying off by increasing the density of our urban branch networks. Our acquisition process is now a core competency for us. We’re quickly integrating these new bolt-on businesses and are excited to welcome their teams to Herc while creating value for our people and our customers. 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. On Slide 10, let me start with demand. Revenue growth from both local and national accounts was strong in the 2023 first half. Opportunities across end markets continue to increase.

We are seeing it across our network and it’s supported by third party data. The exception is studio entertainment. You’ll recall studio productions started slowing late last year in anticipation of the writers’ field contract renewal on May 1. Since we last spoke, the writers have gone on strike is essentially shut down that business. Studio entertainment represented about 2% of our rental revenue in the second quarter compared with about 5% a year ago. While the only fleet truly dedicated to those type of projects, especially lighting and grip equipment, they also use power generation, some HVAC equipment and material handling and aerial equipment such as painted black booms that blend into the background on sets. Based on history, we were expecting a relatively quick resolution to the strike and as a result, hadn’t moved much fleet off location or out of studios until just recently.

Today, the writers’ union marks 85 days out of work and the Actors Guild just started it strike negotiations. So we’re now prudently managing for a much longer work stoppage and are reallocating some of the aerial specialty fleet and other resources. Moving on to fleet investments. While our second quarter results reflect an imbalance between growth and average OEC fleet and rental revenue growth year over year, this is primarily a timing issue. As we talked about previously, late last year, we made the decision to accept new fleet whenever it became available. For the OEMs, matching order fulfillment to our seasonal fleet needs was challenging given their significant production constraints. Fleet times had more than tripled and delivery dates continued getting pushed out, causing our fleet utilization in many categories to run extremely high through 2021 and 2022 with limited visibility to order fulfillment, timing, and equipment rental opportunities on the rise, we’ve been taking what we can get when we can get it.

Now we are in this interim period where the unpredictability of supply chain deliveries from both an equipment mix and a timing standpoint has been even more challenging. The OEMs are getting healthier and more catch up fleets coming in including 2021 and 2022 backordered equipment, but it’s not necessarily when and what we need in a given quarter, especially as demand seasonality has normalized. I’ll give you an example. Pickup trucks were very difficult to get in 2021 and 2022. Our utilization on these was running extremely high last year. In the first quarter of 2023, we received our entire 2022 truck order, which ideally would’ve come in more staggered throughout the year. As you can imagine, it’s impossible to absorb that hole at once, especially in the softer season.

We’ve been able to resolve that excess capacity in the first half and truck utilization is running strong once again. This is one example, but we’re experiencing the same situation other equipment categories as well. Our fleet management teams are continuing to work on getting all of the new fleet on rent as seasonal demand increases and it’s going well. We expect to have supply and demand realigned by the end of the third quarter. As we grow our network of locations, diversify the fleet mix of our acquisitions and continue to grow our market share in this dynamic industry, this core fleet will support mega projects, infrastructure and manufacturing projects. On Slide 11, you can see how fleet expenditures and disposals have been trending.

Our fleet expenditures at OEC totaled $400 million in the second quarter, about 22% higher compared with last year. On the flip side, we disposed of $186 million fleet at OEC almost three times more than in last year’s similar period. This more aggressive approach to dispositions paid off as proceeds across channels remain near historical highs and we improved selling margin by 620 basis points in the latest quarter. We are accelerating plans to rotate aged equipment now that new fleet deliveries have arrived. Proceeds from sales of used equipment are still very favorable as you can see here, and not having been able to rotate much fleet over the last two years because of the supply chain constraints means we have pent up used inventory. So that’s an easy solution where we originally planned for fleet rotation of about $600 million at OEC, we’re probably going to be able to increase that to about $700 million or more by year end based on the amount of new fleet deliveries we’ve received year-to-date.

Between higher fleet sales and seasonally moderating Q4 fleet deliveries, we now expect net fleet CapEx will move toward the lower end of guidance. Mark will talk more about that later. From our 2024 fleet planning discussions with vendors, we believe deliveries will return for a more normal seasonal schedule now that it’s seen supply chain inventories and capabilities are improving. In addition to building a best-in-class fleet, you can see on Slide 12 that we have a diverse, well-balanced customer mix made up of large national accounts and local contractors operating in North America with a wide range of equipment needs across a variety of end markets. Local accounts which represented 56% of rental revenue in the second quarter are growing due to Herc’s penetration through our acquisitions and greenfield strategy, as well as regional growth and infrastructure, education, maintenance and repair, and local utilities.

For national accounts, we expanded our professional sales organization to capitalize on what we see as a booming large project pipeline such as the federal and privately funded mega projects, large infrastructure jobs and manufacturing of EV, renewables, semiconductor, petrochem, and LNG facilities. These mega projects represent the beginning of a multi-year flow of dollars into the industrial and infrastructure space. As one of the largest players in the rental industry, our fleet capacity, digital capabilities, onsite management expertise and broad location network sets us up to win substantially more than our fair share of the market’s growth. I want to thank team Herc for their commitment to operational excellence and safety. Their professionalism shows up in the execution of our services to our customers every single day.

It’s a valuable differentiator for Herc. Now, I’ll pass the call on to Mark.

Mark Humphrey: Thanks, Aaron, and good morning, everyone. I’m starting on Slide 14 with a summary of our key metrics for the second 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 about a third came from acquisitions. Our organic growth alone continues to outpace that of the rental market. For total revenue, benefits are coming from the still strong used equipment market as well as our sales channel shift to wholesale and retail, which delivered incremental growth. Earnings per share in the second quarter of 2023 increased 12%. Adjusted EBITDA increased 24% over the prior year to a second quarter record $352 million, and our adjusted EBITDA margin was 43.9% in Q2 2023.

Let’s walk through the margin drivers on Slide 15. Here you can see the rental revenue and adjusted EBITDA walks year-over-year. In the revenue chart, rental rate was up 7.8%. Fleet on rent increased 17.3% and mix was unfavorable by approximately 9% compared with the second quarter a year ago. Strong overall pricing benefited from continued improvement in both spot and contract pricing. In the second quarter, we saw stable double-digit rate increases in the spot market while contract rates continued to be favorably renegotiated. Continued rate growth comes from utilizing our proven and effective pricing tools, the discipline and professionalism of our sales team, and the rollover benefits from the contract rate increases we began securing last year.

With pricing up 7.4% through year-to-date through June, we now expect rate growth in the second half of the year to be in the mid-single digit range. Our average fleet on rent at OEC in the second quarter was lower than our average fleet growth. As Aaron discussed, we placed orders almost a year out and have been taking receipt whenever our vendors can deliver the equipment, out of season and unpredictable catchup orders impacted average fleet and dollar utilization in the first half of 2023, but taking the new fleet ahead of the construction season insurers we’ll be able to respond to our customer’s increasing equipment needs, especially now through the October peak. The higher rate and volume were partially offset by a 9% negative mix impact.

The decline in studio entertainment revenue is accounted for in mix as is inflation, which together accounted for approximately three quarters of the mix impact. Lower re-rent revenue primarily reflected better fleet availability, which positively impacted adjusted EBITDA and REBITDA margins. While studio entertainment has been a niche business for us, it has provided a nice tailwind to our performance over the years. However, given the significant slowdown in that end market due to strikes in 2023, we thought it might help to exclude it from overall results so you could better see the strength of the base business, which delivered double-digit revenue growth, adjusted REBITDA margin improvement and flow through improvement in the second quarter.

A reconciliation of performance metrics excluding studio entertainment can be found on Slide 26 in the appendix of our presentation. Early fleet deliveries, the mix of fleet received and the drop off in studio entertainment revenue resulted in dollar utilization of 40.3% in the second quarter versus 42.5% last year. For the second half of 2023 dollar utilization will continue to be impacted by the catch-up fleet received in the first half, the continued effect of the decline in studio entertainment business and a tough time utilization comp versus 2022 when many CAT [ph] classes were sold out. Moving to the adjusted EBITDA waterfall chart on the right profit benefited from a decline in operating expenses as a percentage of revenue, but the used equipment sales activity put some pressure on adjusted EBITDA margin growth.

As we tripled dispositions at OEC compared with second quarter 2022. Used equipment sales margins increased 620 basis points year-over-year to approximately 33% on higher proceeds. REBITDA margin, which excludes fleet sales, was up 40 basis points in the quarter at 45.4%. Excluding the impact of studio entertainment business from both years, REBITDA margin would’ve been 46.6% in the quarter, a 130 basis point improvement over the prior year. REBITDA flow through in the second quarter was strong. If we exclude the studio entertainment business from that calculation in both years, REBITDA flow through would’ve been 53.2%, a 350 basis point improvement compared with last year’s second quarter. We continue to target full year 2023 REBITDA flow through of 50% to 60%, which represents continued operating improvement and leverage year-over-year.

On Slide 16, you can see we have no near term maturities and ample liquidity to fund our growth goals for 2023 and into the future. As we continue to allocate capital to invest in our business and drive fleet growth into this cycle. We remain confident in our business model and are committed to increasing shareholder value. In the second quarter, we declared a quarterly dividend of $0.6325 or $2.53 per share for the year, and we opportunistically repurchase just over a 0.5 million shares of our common stock at an average price of $104 per share. Net capital expenditures exceeded cash flow from operations in the first half with cash outflows of $142 million before acquisitions. Our goal is to be free cash flow neutral at the end of 2023. Our current leverage ratio at 2.5 times as well within our two to three times target range and in line with our expectations as we invest in growth.

Moving on to Slide 17, as you can see, the continued strength in our primary end markets. In the upper left, the ARA estimate for 2023 North American rental industry revenue is $65 billion. That’s approximately 7% over 2022. As we’ve discussed, our rental revenue growth is substantially eclipsing the broader industry growth rate. We expect this outperformance to continue. In this environment, the advantages of scale are magnified and the big rental companies that are focused on diversified end markets and have the ability to service the current strength in mega projects will continue to get bigger faster. On the bottom left is the architectural billing index, which registered at second consecutive month of 50 plus in June, indicating expansion.

ABI is viewed as leading indicator for non-residential construction. Two of our key end markets are industrial and non-residential construction, both continue to show strength for 2023 combined these end markets reflect about two-thirds of our customer base and both are likely to outperform other consumer driven end markets this year due to new mega project construction of chip, EV, battery and LNG plants as the onshoring of U.S. manufacturing capacity continues to gather steam. Taking a look at the industrial spending forecast on the top right, Industrial Info Resources is projecting $399 billion of spending 2023, the highest level on record, and a 13% increase over 2023 [ph] spending. In the lower right quadrant is Dodge’s forecast for nonresidential construction starts, you can see in 2023 starts are estimated to be another $436 billion on top of last year’s record, $442 billion.

Of course, these are just starts of new projects of multi-year construction builds that will continue into 2024 and 2025. The dotted line on both of these charts reflects growth over pre-pandemic levels. You can see that last year in the next four years our projected to be the strongest periods of activity that this industry has ever seen. Additionally, there’s another $295 billion in nonresidential, nonbuilding or infrastructure projects slated for 2023. That’s a 17% increase over 2022. These projects are supported by federal funds approved in the infrastructure package, the CHIPS and Sciences Act and the Inflation Reduction Act. The current strength in mega project and infrastructure activity is not particularly sensitive to short-term interest rates and clearly has a structural tailwind.

These large projects benefit rental companies of scale with larger, more diverse rental fleets, and as one of the leading North American rental companies, Herc stands to benefit more favorably from this trend, and we’re only in the early innings. Therefore, along with another year of pricing power and strong demand, we are reiterating our plan for outsized growth again in 2023. This is on Slide 18. We continue to forecast adjusted EBITDA we’ll be in the range of $1.45 billion to $1.55 billion, which represents growth of 18% to 26%. We believe the strong demand we’re experiencing across the manufacturing, industrial, and infrastructure markets, along with the contributions from acquisitions will make up for the impact of a more prolonged shutdown of studio entertainment on our EBITDA guidance.

Our plan for net fleet CapEx of $1 billion to $1.2 billion also remains intact. However, based on a roughly 15% increase in our original plan for used equipment sales and the fact that some of our planned 2023 growth CapEx was pushed into 2024 to account for OEM supply constraints in certain categories, we now expect net fleet CapEx will likely come in toward the lower end of the guidance. Interest expenses expected was 116% in the second quarter year-over-year reflecting the accumulation of fed rate increases in our M&A funding. We expect our leverage ratio to be at the lower end of the two times to three times target range by year end, we are experiencing all the trends consistent with an industry in an up-cycle and continue – and continue to address the needs of our customers as we execute on our growth strategy.

With that, I’ll turn the call back over to Larry.

Larry Silber: Thanks, Mark. Now please turn the Slide number 19. Everything we do 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. We’re in this together. We take responsibility, we achieve results, and we prove ourselves every day. Now, before moving on to Q&A, I want to let you know that we’ll be hosting our next Investor Day on November 7 – November 2nd, November 2, mark your calendars. The event will take place at the New York Stock Exchange and will be available via webcast with market opportunities market significantly growing for Herc and having already achieved nearly all of the three year targets that we set in 2021. This will be an opportunity to set new guideposts for our future growth trajectory. I hope you’ll be able to join us in New York City. With that operator, we’ll take our first question.

Q&A Session

Operator: Thank you. [Operator Instructions] We’ll take our first question from Jerry Revich at Goldman Sachs.

Larry Silber: Good morning, Jerry.

Mark Humphrey: Good morning, Jerry.

Jerry Revich: Hey, Larry. Good morning everyone. Aaron, I’m wondering if we just expand on your comments on utilization rates improving in the third quarter, so normally seasonally, I think the business improves by three points to four points 3Q versus 2Q. It sounds like you expect above the normal improvement, in utilization based on your comments on trucks, but I’m wondering if you just expand on that comment just to make sure I got it right.

Aaron Birnbaum: Yes, typically, Jerry, as you roll into the third quarter, the business seasonally kind of peaks as you build up into October, and we started seeing that as soon as July began. The uptick in activity and all the segments, especially the construction activity picking up and still in the way that we expected it to go, as we start the third quarter.

Jerry Revich: And just so we’re on the same page, Aaron, so in line with normal seasonality is what you’re seeing in line with that, a point or so sequential build in capital utilization?

Aaron Birnbaum: Yes, Jerry, it’s in line with normal seasonality and uptick in utilization as we build through the quarter.

Jerry Revich: Okay, super. And then can I ask in terms of the supply chain constraints easing, can you expand on that point? So in addition to trucks, what other categories has supply eased and you know, presumably there are some categories where industry supply is, might be rising to levels that are too high at this point. Can you just talk about the variability by CAT class, if you don’t mind?

Aaron Birnbaum: Well, I would describe it as that some, some types of product OEM manufacturing has improved their delivery and some hasn’t. It’s still very delayed. For example, some product types, typically some smaller equipment that we would purchase. You can get under six months or under three months of lead time depending on what type of equipment you’re looking at. Remember we’re look, we carry over 2,000 different skews of equipment. On the other end of the spectrum equipment types such as most aerial product categories and what we call telehandlers or reach forklifts are really extended still, 12 month fleet lead time on those type of products. So we’re seeing normalization and improvement, but it is not across all fleet sites.

Jerry Revich: And lastly Mark, can I ask if pricing was really strong in the quarter, are you expecting the same sequential price builds that we would see under normal seasonality or is the entertainment business keeping a lid on things for you? Can you just talk about the cadence? Because if it is normal seasonality, it looks like pricing would be closer to 6% plus in the back half versus the mid-single digits that we spoke about.

Mark Humphrey: Yes, I think that’s right. I mean, I think Jerry, right we posted a seven four in the front half of the year and as you sort of pull that apart, both the contract and spot sort of behaved like we thought it would. And I think as you sort of take that to the back half, our guide is sort of a mid-single-digit back half again, our contracts are performing like we anticipated and there is a tough comp in the back half from a spot perspective.

Jerry Revich: Thank you.

Larry Silber: Thanks, Jerry.

Operator: We’ll take our next question from Neil Tyler at Redburn.

Larry Silber: Hey, good morning Neil, or good afternoon to you, Neil.

Neil Tyler: Yeah, good afternoon. Morning. Two, please, firstly the comment on the sort of phasing of growth CapEx into 2024 and pulling forward some of the fleet disposals. I don’t know if you are willing to, at this point, just give us a sort of shape of the net fleet CapEx from 2023 into 2024, whether that, whether as we stand today, you expect that 2024 number to be at sort of similar level or, higher or lower. That’s the first question please. I’ll come onto the second one in a second.

Mark Humphrey: Yes, Neil, I think at this point we haven’t yet sort of determined what our 2024 CapEx level is going to be. I think we’re, we want to wait a little more to see how the year plays out and how we progress. What we’re seeing now is towards the lower end of the guidance for 2023 CapEx. That’s primarily made up of, some increase in disposals, about a $100 million more of disposals at OEC and the fact that, some of the categories, the vendors that Aaron just mentioned are pushing deliveries into Q4 and we really don’t want them in Q4. We want to normalize our fleet receipts for next year into, Q2 and Q3. So if a vendor’s going to be late and not be able to get us equipment in Q3 and they want to push it into Q4, we’re most likely to push them out into Q1 or Q2.

Neil Tyler: Yes. Got it. And are you able to sort of give us the shape of what the sort of ticket price impact of fees sort of delayed purchases is, now if you are – if you’re receiving sort of 2021 orders, in 2023 and 2022 orders in 2023, year-on-year into next year, are you currently, I suppose with the question I’m really asking is are you currently benefiting from sort of well below market prices that, might sort of correct into next year?

Mark Humphrey: Well, look, I think, we took a vast majority of those price adjustments in the back half of 2022 and through into 2023 fleet planning. So yes, there’s probably some minor amount left from 2022 and the first half of – and the back half of 2021 where we benefited from pricing that was locked in on those orders. But I don’t think it’ll have a material impact on our 2024. In fact, we’d probably be looking since supply – supply chain constraints are improving and the cost of freight and logistics and the fact that these manufacturers don’t have to air freight stuff over, we’re probably looking for some price relief going into our 2024 fleet planning.

Neil Tyler: Okay. That, that’s very helpful. And then final question around, the film and TV business. I suppose the, within your planning is that, are you assuming that the rider strike could have influenced that business for the remainder of this financial year is that, what sort of baked in? And then within the guidance, therefore presumably the offset, your ability to maintain EBITDA guidance, part of that comes from, a bit more M&A in the quarter, but the rest is coming from where, please.

Larry Silber: Yes, Neil, great question. So look I would say as we went into the beginning of the strike, we weren’t anticipating it going on, but now that, the actors have joined hands with the screenwriters we are planning for it to, really go through the end of the year. And if it ends sooner, if the bonus, if it doesn’t end, that’s baked into our plan, the improvements, you’re right where we’ll be able to maintain that guidance is coming from two areas, primarily a tailwind from our national account business, which has been very strong, as we’re benefiting from the startup of some of these mega projects, onshoring and other activity, and also benefiting, as well from our M&A activity that you mentioned.

Neil Tyler: Got it. That’s very helpful. Thank you.

Larry Silber: Thanks, Neil.

Operator: We’ll move next to Rob Wertheimer at Melius Research.

Larry Silber: Hey, good morning, Rob.

Rob Wertheimer: Yes, hi

Mark Humphrey: Hi Rob.

Rob Wertheimer: Good morning, guys. I wonder if you could just give us a little bit more exposition on mega projects and just what you’re seeing currently flowing into revenue, if it’s anything material yet. I know things are sort of kicking off what you’re seeing on win rates, if those are still in the future, whether you have a better sense now than last quarter and, what your guess is on timing and when that really helps your financials.

Aaron Birnbaum: Yes, Rob it’s a really exciting space. The mega projects, it’s really occurring. It’s happening. The projects are coming online, say they really started coming online about a year and a half ago, and you can see the additional planned mega projects that are going to carry forward for the next several years. It’s interesting when you get involved in these, it’s really important to have the network, the scale so that you can service these jobs and be close to the projects because they’re not all, a RFP bid environment. A lot of them are just negotiated locally and there’s a lot of subcontractors involved and, a lot of volume of equipment that gets deployed to these big mega projects. So we think it’s going to be, a catalyst for our business for the next couple years and beyond.

And really if there’s any other issues going on in the local market, it seems to be covering for a lot of that activity. And as we get through the rest of – as we get the visibility into the rest of this year for mega projects, we track all these and we have communication with the subcontractors and the general contractors, and we are getting better sight into the type of fleet they’re going to need. So that all goes into our fleet planning model as we progress even into 2024 planning.

Rob Wertheimer: Can you quantify how big a portion of your revenue it’s come up to be? Is that something you’re willing to share?

Aaron Birnbaum: No, it’s not. Sorry.

Rob Wertheimer: No, I understand. Fair enough. And are you seeing actual revenue growth from it right now? Or is that still mostly ahead and I’ll stop there?

Aaron Birnbaum: No, very much revenue growth and as Larry mentioned, our national account sales team, we bolstered that team with more resources, more sales professionals and to capture these opportunities and build strong relationships. And that’s really paying off for us. So, we’re seeing that continually build and good success in that arena for us.

Rob Wertheimer: Thank you.

Aaron Birnbaum: Thank you.

Operator: Next, we’ll go to Mig Dobre at Baird.

Mig Dobre: Yes. Thank you and good morning everyone.

Larry Silber: Morning.

Aaron Birnbaum: Good morning, Mig.

Mig Dobre: One of the things that stood out to me was your fleet age at 46 months, and you were talking about stepping up some of the older equipment disposals. So just kind of looking for a little bit of context around where you see fleet ages exiting 2023, looks like we’re back to pre-COVID levels kind of how you think about this dynamic, maybe even beyond 2023 in terms of your fleet?

Larry Silber: Yes, Mig this is Larry. Good morning. Most of the fleet that we’re trying to dispose of is coming from two years of pent-up demand where we did not have a large volume of fleet. Same quarter last year, I think we sold less than $20 million worth of fleet. And so we have some age fleet, and the average age of the fleet that we’re selling today is about 90 months. What we’d like to do is bring that down to that sort of mid-to-low 80 months in the future as we sell it. And when you have a younger fleet that you’re selling, you’re going to capitalize on the used equipment market pricing. We’re fortunate today that because there have been so many constraints and so much demand, even with age fleet, we’re benefiting in the used equipment market and on a year-over-year basis, we have greater than 600 basis points improvement on a really old fleet that we’re selling, like I said, in the 90 month age.

So we’d like to get the fleet age that we’re going to sell and dispose of in the future down to mid-to-low 80s. And we think that, by, it’d probably take us still another year or more to get there. So regardless of the average fleet age the disposal age will continue to remain elevated for maybe another year or two until we can bring that down. But look, we said all along in pre-COVID, we’d like to be, mid-40s and we’ll probably be mid-40s by the end of this year. But more importantly, I think you got to look at the fleet age of what we dispose because that drives the used equipment values.

Mig Dobre: Understood. And then maybe picking up on one of Aaron’s comments in terms of the impact of mega projects and the way – and the way you’re kind of thinking about adjusting your fleet. I’m curious, are you contemplating maybe leaning into one equipment category versus another based on where you’re seeing this mega project demand? I mean, obviously, the equipment that one would use for, I don’t know, a chip plant might be different than something for roads and bridges. I mean, you tell me.

Aaron Birnbaum: Yes, well, it’s an interesting question. The way I look at mega projects is they’re just a very, very, very big construction project. They take typically the same type of equipment that a smaller construction project would take. So that’s, rental [ph] equipment, concrete equipment, material handling equipment. And what’s good for us is that we have a diversified fleet mix with specialty fleet of our ProSolutions gears that typically would be HVAC equipment, heating equipment, power generation. So as you get these mega projects built and you go inside, there is some differentiation with what’s going on inside the project, whether they’re doing big conveyor systems or there’s clean rooms, different types of equipment goes into those mega projects in a different way, or take an LNG plant very much different than building a chip plant.

So what’s great about our fleets is fungible and what’s diverse, and with the good demand planning of what type of fleet’s going to be needed, we can order that fleet from our vendor partners and reallocate that fleet where it needs to be to support those projects.

Mig Dobre: Understood. Last question. Larry, you commented that you are looking for some price relief in 2024 from suppliers. Maybe a little more context on that, and I’m curious, is it just surcharges that are rolling off? Or are you engaging in some other type of negotiation there? Thank you.

Larry Silber: Well, absolutely engaging. Well, we will be engaging in negotiation where we’re about that, but we fully expect that prices will be rolled back in many categories where there were supply constraints that added to the cost that weren’t necessarily affected by surcharges. Surcharges primarily came, related to transportation and logistics. But we experienced many other price increases around just a general supply constraint around raw material and labor. And that’s sort of leveled off at this point. And so we’re believing that that there’ll be an opportunity to roll back some of those prices and benefit and get some relief where we supported our vendor partners in the past. It’ll be their time to now support us.

Mig Dobre: Understood. Thank you.

Operator: Next, we’ll go to Sherif El-Sabbahy with Bank of America.

Sherif El-Sabbahy: Hi. Good morning. So in the past you’ve guided to neutral free cash flow, ex-M&A [ph]. Has your free cash flow outlook changed for the year and what do you expect from the second half?

Mark Humphrey: Yes, I mean, I think Sherif, we used about $140 million of cash in the front half of the year. And so, the guide is free cash flow neutral ex-M&A for the year, which means we’ll produce somewhere between $140 million, $150 million of cash in the back half of the year.

Sherif El-Sabbahy: Got it. Thank you.

Operator: And next, we’ll go to Seth Weber at Wells Fargo Securities.

Larry Silber: Good morning, Seth.

Seth Weber: Hey guys. Hey, good morning. Hi, thank you for taking the question. I guess I wanted to go back to the [indiscernible] CapEx discussion for a second. This kind of idea of not accepting deliveries, if the OEMs are trying to push them into the fourth quarter. I guess it’s a two part question; would you have taken those orders if they had occurred in the third quarter? And does that effectively show up as a cancellation for you guys and then you have to reset it next year? That’s two part question, I guess. I’m just trying to understand if your appetite for new equipment is lower than it was three months ago, basically.

Aaron Birnbaum: Seth, no, our appetite’s the same. Our net fleet CapEx will be at the low end of the guidance as we mentioned, for the past couple years with supply chain constraints, we’ve been taking fleet whenever we could get our hands on it, and sometimes that was in the wrong time of the year. Maybe it was seasonal equipment or before the normal activity would ramp up. But we’re really kind of moving now towards taking the equipment when we need it to meet demand. And so we’re not canceling orders, but we’re shifting our balance load of when the fleet’s coming in and when we need it. And that’s really the way we’ve always historically operated our business, and we’re going back to that model now.

Seth Weber: Okay. So if they – if it could have come to you in the third quarter, you would’ve taken it, is what you’re saying, Aaron?

Aaron Birnbaum: Yes.

Seth Weber: Okay. Okay. Thank you. And then just, on the entertainment business, I just want to make sure I’m understanding, does the guidance, the REBITDA margin guide, the $50 million to $60 million, and well does that include – does that include the specialty, the entertainment business? And then I guess my next question is, do you expect dollar utilization to be up year-over-year, even with this issue with this – with the entertainment business for the back half of the year dollar utilization?

Mark Humphrey: Hey, Seth, this is Mark. First question that $50 million to $60 million was a flow through guide and that does include the impacts of the studio entertainment business for 2023. And then the second part of your question was on dollar utilization. And no, we do not anticipate dollar utilizations getting back to 2022 levels when you think about it from a perspective of studio entertainment impacting you probably somewhere around a basis point of dollar U and then, time utilization all in year-over-year. We won’t be running as hot in 2023 as we did in 2022.

Seth Weber: Got it. Okay. Thank you guys. I appreciate it.

Larry Silber: Thanks.

Operator: We’ll go next to Ken Newman at KeyBanc Capital Markets.

Ken Newman: Hey, good morning guys.

Larry Silber: Good morning.

Mark Humphrey: Good morning.

Ken Newman: My first question is on pricing. I think you talked about rates being up double digits in the spot market. Larry, is the mid-single digit expectation more just a function of tough comps in the spot market from last year? Or how should we think about in that mid-single digit number in the back half, the difference between local and national account pricing for the next six months?

Larry Silber: Yes, look, the national account pricing has been performing very well. And we’ve been able to – it’s better than perhaps what we even expected at that level. And I think that’s sort of driving it. The spot market has been better than expected, but we are going to have tougher comps in the back half on the spot market. And I think that’s sort of driving the guide towards mid-single digit rates for the back half of the year.

Ken Newman: Got it. Makes sense. And then for my next question, I know there has been a lot of questions already on just some of the visibility from the mega projects here. Maybe just looking at the infrastructure side specifically, I think it seems like there we’re seeing a bit more acceleration in that – in those starts tied to federal funding. Just any color or commentary on what you’re seeing there in terms of accelerating activity and just your expectations for that specific market going into the back half?

Larry Silber: Yes, the way I would describe the cadence of these was we saw the EV projects really were the first out, whether it’s battery or car manufacturing. Those were the first mega projects out. And those are going pretty strongly right now. The next ones we saw right behind that was the chip activity. Those projects broke around and they’re going strong. The infrastructure was, I would say, one of the last ones to kind of arrive and kind of show its true self and it’s just slowly starting to come online right now. I think that’s going to be a long tail. And that’s where we’ve invested some of our fleet mix to capitalize on that infrastructure really is the last piece of this mega kind of topic to come online.

Ken Newman: Yes. Maybe we could squeeze one more in. On the SG&A, any thoughts or color on how we think about SG&A leverage into the back half of this year? Obviously, we’ve got a couple of moving pieces here on mixed headwinds, maybe some better absorption on higher fleet deliveries. But how should we think about sequentially from 2Q to 3Q and then 3Q to 4Q SG&A margins going forward?

Larry Silber: Yes, I mean, we had some success there in Q2. We gained leverage, sort of 80 bps at the DOE line and about 20 bps at the SG&A line. And I think you’ll continue to see that operational leverage come through in the back half of the year, which is sort of part and parcel to the flow through guide aspect of this as well.

Ken Newman: Got it. Thanks for the time.

Larry Silber: Thank you.

Mark Humphrey: Thank you.

Operator: Next we’ll go to John Healy at Northcoast Research.

John Healy: Thank you. Just one question from me. I just wanted to get your thoughts, Larry on, we talked about mega projects a bunch today. But how that revenue potential may impact metrics of the business and how we look at it? Any thoughts on the type of accretion or headwind that it could be to incremental margins? Or do you offset that with a better utilization and does this type of revenue optically skew pricing and how that might be reported next year? So just, any sort of thoughts and just in terms of how this revenue mix might layer into to what you have? So maybe we can understand how the metrics may kind of evolve next year or the year after.

Aaron Birnbaum: John, this is Aaron. I’ll take that one. We view the mega opportunity and the fleet that goes in there is very positive for our business. Two points. One, the fleet stays on rent for a long time, which means that you’ve got recurring revenues and you don’t have to transport it in and out of the project, and a lot of fleet mix goes into these big projects. So you have an opportunity to kind of yield up on the pricing equation. You got some core fleet in there. You get some specialty fleet supporting the customer and the project. So overall, it’s a very good story for our overall revenue line.

John Healy: Great. Thank you.

Aaron Birnbaum: Thank you.

Operator: We’ll go next to Steven Ramsey at Thompson Research Group.

Steven Ramsey: Hi, good morning.

Larry Silber: Hey, good morning, Steve.

Steven Ramsey: Good morning. Yes. With national accounts growing faster than local in the first two quarters of this year, can you share how much of the national account growth reflects mega projects? How much of it reflects other project activity and how much local participates in mega projects if at all?

Larry Silber: These mega projects affect our national business and our local business, which is great for our business overall. The national story is really just a function of us developing more relationships and penetrating some of the largest contractors in North America to a higher degree. Some of them are participating in mega projects, others are doing normal projects, but our relationships are building with those national accounts and that in order does kind of rain down to a large degree on our local branches. And the subcontractors that operate in these markets where there are mega projects are really benefiting as well. And those are customers of ourselves, the industry as well. So it’s all very positive economic impact, I would say from a mega point of view. And just quite honestly, I think, we’re doing a good job on the national front developing these relationships with these large contractors.

Steven Ramsey: Okay. Helpful. And do you expect then over the next couple of years that national and local become more of an equal mix of rental revenue as mega projects ramp up or maybe that’s topic for the Investor Day?

Larry Silber: Well, optimally, we like it to be about 60% local, 40% national that’s going to move through different quarters of the business. And over time, I think that’s where we’re going to settle in that level because we’re focused on growing our local business with our fleet diversity, our urban market strategy as well as our national account strategies.

Steven Ramsey: Helpful. Thank you.

Larry Silber: Thank you.

Operator: We’ll take our final question from Brian Sponheimer at Gabelli Funds.

Brian Sponheimer: Hi, good morning, everyone.

Larry Silber: Good morning, Brian.

Aaron Birnbaum: Good morning.

Mark Humphrey: Good morning.

Brian Sponheimer: Just curious, given all the good that you all see from end markets, what the M&A environment is shaping up, like whether there are anything that’s beyond the – maybe the one or two yard acquisitions that might be out there that might be a little bit chunkier for you? And what that pipeline looks like?

Larry Silber: Well, look, overall, the pipeline still remains pretty healthy. We have a fair amount of activity that continues to be ongoing. There’s a – there may be some one or two out there that provide more than one or two. We just closed on one a couple of weeks ago in the third quarter. But look, there’s not a lot of big things left out there unless of something you want to send my way. But there’s not a lot of what I would call big ones that are either on the market or coming on the market. I think this is more, one, two, maybe three branch operations over the next several quarters for us.

Brian Sponheimer: Okay. Understood. Thank you very much.

Larry Silber: Get wind of something, let me know, all right.

Brian Sponheimer: I certainly will.

Operator: And that does conclude the question-and-answer session. At this time, I would like to turn the conference back over to Leslie for any closing remarks.

Leslie Hunziker: 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.

Operator: And this concludes today’s conference. Thank you for your participation. You may now disconnect.