Herc Holdings Inc. (NYSE:HRI), a leading equipment rental supplier in North America, has reported its second quarter 2024 financial results, showcasing resilience in the face of a challenging macroeconomic environment. The company's diversified business model, strategic acquisitions, and focus on operational efficiency have enabled it to navigate the evolving market landscape.

Financials

For the second quarter of 2024, Herc Holdings reported revenue of $848 million, a 5.7% increase from the same period in the prior year. This top-line growth was driven by a 9% increase in equipment rental revenue, which reached $765 million. The company's sales of rental equipment, new equipment, parts, and supplies contributed an additional $75 million in revenue. Service and other revenue rounded out the quarter at $8 million.

Despite the revenue growth, Herc Holdings' net income for the quarter came in at $70 million, down from $76 million in the same period last year. This decline was primarily attributable to a $14 million increase in expenses, including higher personnel-related costs, delivery expenses, self-insurance reserves, and insurance expenses. The company's adjusted EBITDA for the quarter was $185 million, a 2.3% increase year-over-year.

Looking at the company's year-to-date performance, Herc Holdings reported annual revenue of $3.28 billion and net income of $347 million for the fiscal year 2023. The company's annual operating cash flow was a robust $1.09 billion, while its free cash flow was negative $390 million as it continued to invest in its rental fleet and strategic acquisitions.

Geographic and Revenue Breakdown

Herc Holdings' geographic footprint is predominantly in the United States, which accounted for 92.4% of total revenue in the second quarter of 2024 and 92.5% for the first half of the year. This geographic concentration reflects the company's focus on the North American market, where it has established a strong presence and continues to expand its reach.

The company's revenue breakdown by product and service category provides further insights into its business mix. Equipment rental revenue, which includes revenue generated from renting equipment to customers, represented 90.2% of total revenue in the second quarter. Sales of rental equipment, new equipment, parts, and supplies contributed 8.8% of revenue, while service and other revenue made up the remaining 1.0%.

Management Actions and Guidance

Herc Holdings' management team has taken actions to address the evolving market conditions. In response to a more pronounced slowdown in local market growth, the company implemented measures in the second quarter to right-size its cost structure and optimize its fleet deployment. These measures, which included redeploying less efficient fleet to regions with stronger demand, had the desired effect of improving fleet efficiency on a sequential monthly basis, with June turning positive.

Looking ahead, Herc Holdings has reaffirmed its full-year 2024 guidance. The company expects rental revenue growth in the range of 7% to 10% for the year, driven by continued strength in mega projects and contributions from recent acquisitions, which are expected to offset the more pronounced slowdown in local market growth. Adjusted EBITDA is projected to be between $1.55 billion and $1.60 billion, representing a year-over-year increase of 6% to 9%.

Liquidity

The company's liquidity position remains strong, with $70 million in cash and cash equivalents and $2.0 billion in available capacity under its ABL Credit Facility and AR Facility as of June 30, 2024. This ample liquidity provides Herc Holdings with the flexibility to fund its growth initiatives, including strategic acquisitions and fleet investments, while maintaining a prudent capital structure.

Herc Holdings' balance sheet reflects its disciplined approach to capital management. As of June 30, 2024, the company's total debt stood at $3.9 billion, with a leverage ratio of 2.6x, well within its target range of 2x to 3x. The company's recent issuance of $800 million in senior unsecured notes due 2029 further strengthened its financial position and provided additional flexibility for future growth opportunities.

Industry Outlook

The equipment rental industry in which Herc Holdings operates is poised for continued growth, with the North American rental market estimated to be $85 billion in 2024. The company's diversified end-market exposure, with a focus on industrial and non-residential construction, positions it well to capitalize on the robust demand environment. Industry forecasts project record levels of industrial spending and non-residential construction starts in 2024, driven by factors such as the reshoring of U.S. manufacturing capacity and ongoing infrastructure investments.

Recent Developments

Herc Holdings' strategic acquisitions have also been a key driver of its growth. In the second quarter of 2024, the company completed two acquisitions, adding a total of 10 locations to its network. Subsequent to the quarter, Herc Holdings announced the acquisition of Otay Mesa Sales, a full-service general equipment rental company with four locations in Arizona and California. These acquisitions are expected to contribute to the company's revenue and profitability in the coming quarters.

The company's commitment to operational excellence is evident in its focus on safety, with all of its operations achieving at least 97% of "perfect days" in the second quarter. Additionally, Herc Holdings' proprietary E3OS continuous improvement program and its efforts to enhance fleet efficiency have been instrumental in driving sustainable growth and profitability.

Conclusion

Despite the near-term challenges posed by the macroeconomic environment, Herc Holdings remains well-positioned to navigate the evolving market landscape. The company's diversified business model, strategic acquisitions, and focus on operational efficiency have enabled it to outpace the industry's growth, solidifying its position as a leading player in the equipment rental market.