Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Herc Holdings' Fourth Quarter and Full Year 2022 Earnings Conference. All lines have been placed on mute to prevent any background noise. After today's speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Leslie Hunziker, Senior Vice President of IR Communications, you may begin your conference

Thank you, operator, and good morning everyone. Welcome to Herc Rentals' fourth quarter 2022 earnings conference call and webcast. Earlier today, our press release, presentation slides, and 10-K were filed with the SEC and are all posted to the Events page of our IR website at ir.hercrentals.com. Today we’re reviewing our fourth quarter and full year 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 your Safe Harbor and GAAP reconciliation on slide three. 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 of our Annual Report on the Form 10-K for the year-ended December 31st, 2022. 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. And a replay of this call can be accessed via dial-in or through 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 meetings and presentations at three conferences this quarter. We'll be participating in the Barclays' Industrial Conference in Miami on February 23rd, J.P. Morgan's High Yield Conference on March 6th also in Miami, and Bank of America's Industrial Conference in London on March 22nd. With that, let me introduce you to our speakers. This morning I’m joined by Larry Silber, President and Chief Executive Officer; Aaron Birnbaum, Senior Vice President and Chief Operating Officer; and Mark Irion, 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 start on slide number four. There's no question that 2022 was another exceptional year for Herc. We delivered record level financial performance across the board. Equipment rental revenue growth was 34% on top of 24% growth in 2021. In support of the rising demand, we invested $1 billion in net fleet purchases, while improving fleet productivity as evidenced by an annual increase in dollar utilization year-over-year. We also invested in expanding our branch network by completing 18 strategic acquisitions and opening 21 greenfield locations in key markets in 2022. And focusing on rate growth and operating efficiencies, we've more than offset inflationary pressures as we delivered 160 basis points of adjusted EBITDA margin, improvement and 120 basis points of higher ROIC. We're operating from a much stronger position today than at any time in our history with better systems and processes, more diverse end markets, a broader portfolio of products, a growing branch network, economies of scale and a solid balance sheet. As one of the largest equipment rental providers with a national reach, our size, resources and operational excellence are giving us a significant advantage in the marketplace. Moving on to slide five. From a macro standpoint, the North American equipment rental market generated 11% growth in 2022 on robust infrastructure, industrial, and other non-residential construction spending. Tailwinds came from a ramp-up in domestic manufacturing after years of inadequate investment, the beginnings of allocation of federal funding for construction projects, and the ongoing shift that is now taking place in specialty categories from equipment ownership to equipment rental. Contractors understand better than ever the economic, environmental, and logistical benefits of running equipment across categories. In 2022, Herc grew three times faster than the industry and gained a full point of share…

Thanks Larry and good morning everyone. Our record fourth quarter results for revenue and profitability served as a great conclusion to a year marked by strong execution, geographic expansion, and new account wins. I'm really proud of the way our team continues to focus on delivering superior products and services for our customers, while executing well against our strategic growth initiatives. Execution starts with safety. And of course, safety is always at the core of everything we do. As you know, from slide nine, our major internal safety program focuses on perfect days, that are days with no OSHA reportable incidents, no at-fault motor vehicle accidents, and no DOT violations. And we strive for 100%perfect days throughout the organization. In the fourth quarter on our branch-by-branch measurement, all of our branch operations achieved at least 98% of days as perfect. Equally notable, our TRIR improved to 0.52, a best-in-class result. On slide 10, our fourth quarter results reflect the market opportunity we seized by accelerating our investment in equipment with average OEC fleet up 31% over last year's comparable period. Equipment rental revenue also increased 31% compared with the prior year fourth quarter. Our regional leaders and their teams are doing an excellent job placing our expanded fleet offering into new locations and with larger projects to incrementally drive the topline. Our core business benefited from the continued strong demand for equipment across all of our regions and our ProSolutions business delivered double-digit growth year-over-year again in the fourth quarter. As you know, ProSolutions includes our specialty categories of mobile power and distribution, climate control, remediation, and pump equipment to see a fast-growing high-margin segment of the market. We are capturing shares here by capitalizing on cross-selling opportunities with new and existing core business customers and leveraging the increasing density…

Thanks Aaron and good morning everyone. The steady execution of our growth strategies that we just heard about from Larry and Aaron provided strengthen momentum in our results throughout 2022 and into 2023. Slide 16 summarizes some of the excellent results we achieved in 2022. Fourth quarter equipment rental revenue increased to a record $713 million from $542 million in the fourth quarter of 2021, a 31% increase, primarily due to continued volume and pricing momentum. As you've heard, we're pushing hard on both our organic growth and acquisition strategies with great success. Taking a closer look at the 31% rental revenue growth for the fourth quarter, about two-thirds of the growth was organic, and a third came from acquisitions. This validates our ability to continue to grow our established core business organically, and our organic growth is approximately two times that of the overall rental market. Our smart acquisition strategy provides a nice growth supplement by allowing us to quickly bring on key rental talent, fleet, and customers to bolster our position in the strategic market. And our ongoing focus on operating leverage, continues to drive improved profitability and expanding margins. Adjusted net income in the fourth quarter of 2022 increased 37% to $103 million or $3.44 per diluted share compared with adjusted net income of $75 million or $2.46 per diluted share in the fourth quarter of 2021. Adjusted EBITDA increased 41% year-over-year to a record fourth quarter $361 million and our adjusted -- and we expanded our adjusted EBITDA margin by 160 basis points to 46% in Q4 2022. All-in-all, an excellent quarter and an excellent year. You can see we made progress across every metric on this slide and are especially pleased with our margin expansion and EBITDA flow-through of 54%. Our business model drives fast…

Thanks Mark. And everyone, please turn to slide 21. 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 and we're in this together. We take responsibility, we achieve results, and we prove ourselves every day. So, now operator, please open the lines for questions.

[Operator Instructions] Your first question comes from the line of Jerry Revich from Goldman Sachs. Your line is open.

Yes hi. Good morning everyone.

Hey Jerry.

Good morning Jerry.

Hi. I'm wondering if you folks can expand on the M&A pipeline this year, Mark, is there an opportunity for that to be over $500 million as we look at the impact of higher rates on a lot of the smaller players that are ABL funded. To what extent could this be an outsized year of M&A relative to the $500 million target?

I mean I'm not sure. I mean, I think we're comfortable with the pipeline and yes, sort of guided. Our goal is that sort of $500 million range. If something opportunistic was to come up bigger than the kind of deals that we've been doing, we certainly look at that. But that's the sort of level that we're comfortable with and that's the level that we're sort of looking to achieve this year.

Okay. And then I'm wondering if you could just expand on the time utilization discussion. So, you mentioned just the timing of year deliveries means lower time utilization in the first quarter. Are you expecting an outsized pickup in time utilization versus normal seasonality in 2Q to where we can return to time utilization we saw during the construction season in 2022? Or is that just running time new hot, that's not optimal for the business?

I think -- I mean, we -- the construction season typically gets you into that sort of peak time utilization zone. So, we do expect to get back into sort of 2022 levels in Q2 and Q3. It's Q4 and Q1 that we're highlighting with the sort of return to a more normal seasonal slowdown plus just taking a lot more fleet than we typically would have had some impacts over the winter.

Got it. And lastly, on the rate outlook, just considering the carryover effect at the start of the year, it sounds like you're going to be exiting with rate up in the, call it, maybe 3% range, but considering costs are slowing as well? Are you expecting year-over-year margin expansion in the back half of the year at that lower comp-driven rate number market?

I think you can see we've got a bit of traction in the flow-through in the back half of 2022. So, we're continuing that momentum through into 2023, and we look to sort of see that range moved from low 50s into that sort of mid-50 to 60 range, typically picks up in the back half of the year, similar to what you saw this year just as you roll over the previous year's costs and headcount increases.

Super. Thank you.

Thanks Jerry.

Thanks Jerry.

Your next question comes from the line of Rob Wertheimer from Melius Research. Your line is open.

Good morning Rob.'

Good morning everybody. Hey. So, I had a question on acquisitions also. You guys have obviously had a lot of margin increase over the last two years, but including this year. And I'm wondering if your targets are becoming talker or having similar margin gain and less willing to sell. If you have any commentary on how the industry feels and whether people are still willing to come to the table with you?

Well, look, yes, I think the pipeline that we already have for 2023 is pretty robust. We still see that there is ample opportunity for some further consolidation in the industry. And we think we're in an excellent position to continue what we've been doing. So, we really don't see much of a change from last year or the year before.

There's a big opportunity out there, Rob, in the smaller deals, which we kind of feel that there's a bit more of an advantage for us. We are adding to a district where we need scale and being new to the M&A sort of gain. So, we feel that we've got a sort of advantage on these smaller type deals and that's where the volume of the opportunities are in the current market.

Yes, the multiples have been great on that. And then just a small question, but I know you're trying to handle all the growth that's out there and all that you can. But if you had the opportunity, would you rather be doing a bit more replacement CapEx? Do you have a catch-up to do if growth ever slows? Or do you feel kind of comfortable with where fleet age is despite the COVID back and forth? And I'll stop there. Thanks.

We started to, Rob, in the fourth quarter, obviously selling more fleet for replacement CapEx. And we believe as we go through 2023 as long as the supply chain cooperates, we'll get back to a more normal cadence. But we feel good about where we are right now. We're glad we started firing it back up in the fourth quarter and feel good about the flow of new and replacement in 2023.

That said, we're still concerned about supply constraints in the year. While we've managed to develop a fairly normal cadence, there's still supply constraints from the OEM level that we're concerned about.

Yes, thank you.

Your next question comes from the line of Neil Tyler from Redburn. Your line is open.

Hey good morning everyone. Thanks. Larry, your answer to the previous question actually sort of brings us neatly to the topic I wanted to ask about, which was in terms of that supply and the growth CapEx number, I guess, if we see a similar pattern to the demand side of things, as we've seen over the last 12 months, namely the initial forecasts end up being raised during the year, and that translates into greater demand. Is there scope for you at this stage to add much more to your gross CapEx number? Or do you see that demand manifesting either in terms of you matching it with accelerated M&A or through rate? And which order do you think those things are likely to stack up in a better demand environment? Thank you.

Yes. Look, great question and a number of things to sort of unpack there. But we're pretty much have on order of the fleet that we expect and hope to be able to get in with a fairly normal cadence over the course of the year. Remember, our fleet is fungible, right? So, certain markets might have some softness, and we'll be able to move fleet to those high demand areas where those projects materialize and where we can capitalize on that business. We still have some room in our CapEx. If we choose to go after it, but the constraint there is the availability and ability to get it from the OEMs and their sort of limited capacity as we go through the year. Certainly, they've improved, but not to the level where we have assurances of what we're going to get every month. We're still sort of -- we're still expecting certain amounts of material, but there's still a fair amount of delays and rollover going on today. So, I think supply is more of the constraint rather than demand. But fortunately, as I said, our gear is fungible and we can move it.

Okay. Thank you. And is there any constraint on your sort of things? I mean, landing $1.5 billion of fleet into your business is obviously very different to the situation a year or even a year ago or two years ago, certainly, and how are the branches sort of able to cope with that and deploy it?

Neil, it's Aaron again. The branches are doing a great job absorbing the fleet. We've really spent a lot of time in the past 18 months developing our teams, expanding our teams. The network is bigger through greenfields and acquisitions. And our sales force has been really developed very nicely to take that fleet, find new customers. And then over the top of that, you've got our national account team, which really has done a great job developing and nurturing the relationships we have on some of the larger projects in North America. So, we feel like all of our branches can continue to take fleet without any absorption issues in 2023.

Got it. Okay, thank you very much.

Thanks Neil

Your next question comes from the line of Ken Newman from KeyBanc Capital Markets. Your line is open.

Hey good morning guys.

Good morning.

Hi Ken.

So, obviously, it sounds like demand visibility is very strong for 2023, it's driven by these large mega projects that we've all been talking about. I'm curious Larry or Mark, is there any way that you can kind of help us quantify just how much of that visibility can be framed by the new guidance? What's the guide kind of implying in terms of incremental infrastructure activity or opportunities versus reshoring activity?

I mean, I think it's -- our visibility and our revenue mix is in that really specific. So, we're just factoring in continued strong demand. These projects do take up big chunks of fleet when you get on them. So, there's a certain amount of visibility around that. But overall, there's quite a bit of variability to the revenues and where they're coming from, and we're not specifically targeting growth in specific end markets. But you sort of look at that pie, there's growth all across those end markets. So, we'll be targeting that and we'll be looking to get our unfair share.

Yes, I think, Ken, we sort of -- or I look at the mega projects as sort of like the icing on the cake. The overall general markets that we cover are all very strong, and the mega projects are just sort of additive to what we're doing. So, I don't view that as necessarily driving this improved demand. I think the base level of demand is very strong.

Right. I guess, maybe to clarify then. I mean just given how large these projects are still a huge competitive advantage. Is it fair to assume that you're going to punch well above your weight relative to your market share for these larger projects?

Yes, I think that's accurate, Ken. There's certain things that these large projects want, right? They want a lot of fleet. They want a high level of service almost always an on-site type operation. They want technology solutions to manage the fleet and account management. And there's really only so many national large players in the rental space, they can provide all that. So, we do think we will, as others that are similar to us or big national players will be able to get outsized success on those big projects.

Yes. And then just for my follow-up question here. it seems like you are tracking much closer to that 5%market share target that you put out in your Analyst Day, I think, back in 2021. Obviously, the fleet still feels pretty tight from an industry perspective. Do you have any updated views on what you think market share gain capture could be relative to 2022? Or how do you think about longer term market share?

Yes, I mean we're really happy to be moving that needle. Finally, that's been a long process for the company, and there's a lot of pride for us to be picking up another point in 2022. So, we'll continue along. We're obviously committing fleet and capital to growing as fast as we can and that should lead to market share gains, and we're happy -- very happy about that.

Your next question comes from the line of Sherif El-Sabbahy from Bank of America. Your line is open.

Hi, good morning.

Good morning.

So, I just wanted to ask, 2023 will be another year of large CapEx spend. Do you be able -- do you expect to be able to draw and inflect free cash flow positively? And if not, what's the pathway to get there?

Right. Yes. No, we're looking at neutral free cash flow, I guess, at this level of fleet growth with our current level of EBITDA expectations before M&A. While we're growing fleet in the high 20s that is a commitment of capital to growth and that does put a challenge on free cash flow. So, the trade-off is really how fast do you want to grow the fleet versus free cash flow. So, we are bidding on fleet growth and market share growth, and we're doing that with improved margins and improved utilization and creating shareholder value at this stage and that's the way we're executing on the strategy. But it should be free cash flow neutral in 2023 before M&A.

thank you.

Your next question comes from the line of Steven Ramsey from Thompson Research Group. Your line is open.

Hey, good morning. I wanted to think about these mega projects some more. Are you able to cross-sell better just by the nature of these projects combined with your own internal improvements? Or do you have any initiatives there that maybe step up your -- what you're already doing?

These big mega projects, they pop-up in different types of markets, sometimes they're a little bit more rural than urban. But with our footprint that we have nationally, we're able to support them, and they typically always want a full suite of types of products. So, the core fleet, which we're investing heavily in. And then as they build those up, they do need a lot of climate and especially solutions because a lot of their -- often they don't have short power or permanent power inside the plant until it's further down the road of being developed. And they also -- depending on what they're their operation is what they're doing inside the plant, they often need a lot of climate key to our air conditioning de-munification until they get their permanent equipment installed. So, it's a great project for the whole suite of services that we offer.

Great. And then do these mega projects support greater growth in your national accounts versus local? And then to capture more of this mega project opportunity, do you feel like you could invest more in branches greenfield or acquisitions closer to where these projects are happening?

The first question is, yes. Usually, it's the big national type mechanically, electrical general contractors to go in to do these projects. But there's always an element of local contractors that are supporting the project as well. So, it's a great opportunity when you're on those projects to work with that -- all that customer base. And you often see the local customers get much, much larger and get more projects in the general area. These -- as far as us -- I believe your second part of your question, Steve, was are we focused on new locations in some of these metropolitan area where these big projects are? And I would say the answer to that is definitely yes. We invested -- we did a lot of greenfield, a lot of acquisition activity in Texas, where we see a lot of this activity going on for one. So, we continue to strategically look at those opportunities for our footprint as it maps out with reshoring or big projects coming online.

Yes. And also Steve, if a project is out in a rural market, we wouldn't necessarily look to open a branch or do an acquisition in a rural market. What we would do is an on-site which would be for the duration of the project during its construction phase and operate from that type of a perspective. So, we're not going to chase flagpoles and chase customers to open facilities that would be permanent overhead. We would look to have temporary overhead in those locations.

Makes sense. Thanks guys.

Thank you.

Your next question comes from the line of Seth Weber from Wells Fargo. Your line is open.

Hi guys, this is Larry Stavitski on for Seth this morning. Thanks for taking my question. I just wanted to ask about quarter-over-quarter, any evidence of cancellations or pushouts related to rising interest rates or macro concerns? You guys talked a lot about increased activity from infrastructure and construction and some of these mega projects. So, just wondering if any evidence of project cancellations that you've been seeing?

Larry, this is Aaron. By the nature of my job, I'm out in the field, at least 15 -- or the half the month every single month to envision the branches, customers, and our sales team. And my ears are open to see if I hear any anecdotal concerns along those lines. And I have yet to hear that every market I go to in North America, a very robust activity, no cancellations, no postponements, no cancellation due to interest rates. Most of these jobs are big planned investment jobs, strategic, reshoring, some public funding, and these projects are ploughing through as scheduled.

Okay. Thank you. I'll leave it there. Thanks guys.

Thank you.

Thank you.

Your next question comes from the line of Mig Dobre from Baird. Your line is open.

Good morning. Thanks for taking my question. I want to follow up on that last comment about really not seeing any cancellation and momentum remains strong. What do you make of the ABI index being below 50? I mean obviously, you have that as a key indicator for your business. And I recognize that the mega projects are there, but what about the sort of regular mom-and-pop for lack of a better term of construction business?

Yes, I mean, you can see on the chart that it's been below 50 since October. I mean it's obviously coming off extraordinarily high readings before that. It's maybe an indication of activity 12 months to 18 months out. And we're focused on the activity that's in front of us. So, there's strong demand now. There's going to be strong demand in the next couple of quarters, and that's what we're focusing on. And we'll adjust this as necessary to what the ABI might not be telling us for the 2024.

Understood. And then a clarification. I don't know if I missed this. How are you thinking about gross CapEx? And maybe can you help us understand in your current outlook, what the planned fleet disposals might look like in 2023?

Right. So, yes, we're definitely going to return to a normalized level of fleet disposals. So, that will sort of pickup into that 2019-ish sort of range. We've been running maybe in the $200 million to $300 million zone of OEC for the last couple of years, and that will sort of pick up to the $500 million to the $600 million zone we expect. And the CapEx, the gross CapEx is rolling in faster than it was at the beginning of the year. And we expect to sort of see improvements throughout this year, but we're getting a steady supply. It's not as predictable as it is in a normal environment, but the supply is coming in and we expect to be able to get enough fleet to execute on the plan.

Understood. And then maybe the last question. This is kind of going back to the answer that you provided to my first question that I understand that you guys are focused on the opportunity at hand here. But if conditions do change, right, if the ABI is actually telling us something valuable here, what are the things that you're looking for in your day-to-day business to make adjustments to either your CapEx or your cost structure as 2023 progresses?

Yes. Look, I think we monitor on a daily basis, our dollar utilization across our districts and regions. We monitor our time utilization by category. We look at what the seasonality is to make sure that the planned seasonality movement is happening as we expect, whether it's going into the spring construction season, we'll monitor that closely. And then as we proceed into the hot weather to make sure we're seeing that seasonality adjustments happen with our specialty businesses and then rolling into the fall and winter. We have an adjustment there again in terms of seasonality. So, we monitor that and we monitor the things I just mentioned on a daily basis, not only at our level here, but our region executives also monitor that closely down to our branches and districts. So, we're very close to what's happening in activity on a daily basis, Mig, and we make adjustments accordingly.

Very helpful. Thank you so much.

Thanks Mig.

Your next question comes from the line of Brian Sponheimer from GAMCO. Your line is open.

Hey, good morning everyone.

Hey Brian.

Just very curious about the entertainment business. You touched on pretty much everything I wanted to talk about, but this was an exciting vertical for you. I think it's gotten a little bit softer. Anything you can add there as far as whether organic or organic growth is something you might be looking at?

Yes. I mean it's obviously an important piece of the business for us. It's sort of been through some real cycles in the last couple of years. So, a real big driver of growth and mix in 2021 and less of a contributor in 2022, just as some of that -- the growth rate slowed down. But we'll remain committed, and we're excited to the various parts of that business, both the sort of studio space and the entertainment space and it's an important part of our mix that we'll remain focused on.

All right. And if we were to think about your current level of revenue and what may be a normalized CapEx, steady-state growth would look like for the business of this size. What do you think that would be somewhere in the -- what do you think that would be?

Well, I mean, I think we're in a -- we're certainly looking to catch up in terms of market share and grow faster than the overall market. It's an opportunity for us as the strategy that we outlined in 2021 just to get in front of the cycle and really take advantage of the early growth opportunities. That's worked out even better than we could have imagined. Growing at 30% is not sustainable over the whole lifecycle of this company if it was to sort of slow down to maybe 10% sort of 15% at the end of the cycle, that would probably be more normalized level and that would create a lot more free cash flow than what we're currently throwing off.

All right. Terrific. Well, congratulations on another great year. I look forward to seeing what the 2023 hold.

Thanks Brian.

And there are no further questions at this time. Ms. Leslie Hunziker, I'll turn the call back over to you for some final closing comments.

Great. Thank you everyone 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.

This concludes today's conference call. Thank you for your participation. You may now disconnect.