Conference

May 15, 2020

Slides

Summary

Cost and capital discipline continued as activity began a gradual recovery after an April trough. Specialty services remained resilient, while fleet was expected to stay flattish into 2021 and the recovery outlook remained U-shaped.

Good afternoon, everyone. Welcome to the fireside chat with Herc Holdings. I'm Jerry Revich from Goldman Sachs, and I'm pleased to have with me Larry Silber, President Chief Executive Officer, and Mark Irion, Senior Vice President and Chief Financial Officer, and Elizabeth Higashi, Investor Relations Officer. Larry, Mark, Elizabeth, thank you so much for joining us. Thanks, Jerry. Thanks, Jerry, and thanks for inviting us to participate. Our hope is to continue to stay connected with our investors virtually, as we'd certainly love to see all of you in person. Hopefully, that'll happen someday in the near future. Before I get started, let me point out that our investor presentation is posted on our IR website under the Goldman Sachs event, and provides all of our latest financial information, and contains a safe harbor related to what we're going to discuss today. As many of you know and have seen us, our senior team has been in this industry for an average of 30 years and have experienced several recessionary environments, though none quite as drastic as what we've recently experienced with the COVID-19 pandemic. Our business model is generally a simple model. In good times, we add fleet, and we generate revenue growth. In recessionary times, as we're seeing now, we reduce our costs, we reduce our capital spending, we age our fleet, and we maximize the cash flow in the business. Our strategy going into last year and 2020 has been focused on margin improvement and cost initiatives, and our improvements in margin and flow through last year and through the first quarter, as you saw in our first quarter results, demonstrated that we made excellent progress in continuing on that pathway. We've also been investing heavily in our ProSolutions business, and this is where we have expertise in climate control, power generation, and related specialty areas that have given us great growth opportunities and have actually provided us opportunities through the COVID pandemic as we've responded to projects in healthcare and government-related facilities. There's still plenty of opportunity for us to continue to close the gap with our industry peers in terms of margin and dollar utilization, and we're continuing to focus on those improvements. Although the plan may now have to be a bit stretched out as we go through this period in time and approach a period in which we'll see some improvement in the business climate. This spring, as the volume dropped in certain of our markets, our response was immediate. We had the playbook on the shelf. We knew what to do. We focused on cutting costs, canceling purchase orders that we had in place for capital equipment to add to our fleet, and really put in place efforts to protect our employees' health as well as the health and safety of our customers. We'll continue to maintain that focus as we operate here and focus on enhancing our free cash flow as the business recovers. Perfect. Thank you, Larry. My first question is, you folks as a management team have really made outstanding progress turning around the business over the past four years. I'm wondering if you could talk about how your strategic priorities or tactics have shifted in this recession and any pivot in the strategy compared to the time of expansion that we have seen up until this point. Well, as I just said, Jerry Revich, we've maintained that focus on cost reduction as well as improving our margin, and we're continuing on that effort. We haven't really backed off of that at all through the pandemic. We've certainly more aggressively addressed the cost side of the business as well as the capital inputs into the business. What we've really focused on is the enhancement of our specialty business, and that's provided us some great visibility and opportunity through the pandemic. But remember, our business, as we mentioned in our first quarter call, was only off around in that 15%-18% in terms of volume. We still have plenty of equipment on rent, plenty of gear on rent. We're still operating our facilities, although some of them at reduced work schedules. But we're still serving our customers every day, doing what we've been doing with a heavier focus on the cost side of the business and safety for our employees and our customers. Larry, your service levels have really improved over the past couple of years. I know that was a big focus for you when you came into the role. I'm wondering if you could talk about how you're balancing the cost reduction efforts that are necessary that you outlined on the last call and today here compared to measuring and ensuring that customer service momentum continues to track in the right direction. Yeah, I'll let Mark handle that. He's been really focused with the operations team on that side. Yeah. So Jerry, we've always provided a high level of service and take pride in the service we provide to our customers. Our team's experienced and an important part of our success and part of our mission is to be the employer of choice in our industry. While focused on cost control in this downturn, we've maintained most of our workforce. In branches where volume is down significantly, we've put staff on furlough if necessary, in order to be able to provide the ultimate service to our customers when activity resumes. We've maintained all health benefits for our furloughed employees and invested in training, taking advantage of the slowdown to accelerate some of our training initiatives. We've also continued to invest in enhancing our technology solutions, which will also enhance our customer service and our ability to efficiently manage our assets on the way out of this downturn. Mark, can you expand more on the technology point? Anything interesting coming out of the efforts here? Any initiatives that are accelerating on that last point? Sure. The initial sort of technology, we lifted and shifted the technology from Hertz. Initially, that all got done by the back end of 2018, and now we're upgrading most of those systems to more modern and better management tools for us to run the business. We're upgrading HR systems. We're looking to implement a BI tool, integrating up. We're analyzing an upgrade to our back office and ERP. The whole technology platform is being reviewed and will be replaced over the next couple of years. From a demand environment standpoint, in a number of states, the construction industry is leading the back-to-work charge. I'm wondering if you could update us on your footprint. Have you seen restrictions eased or lifted in May or about to be lifted? Can you talk about what you're seeing? Yeah, for sure, Jerry. I'll take this. For the whole period, there's been different levels of construction activity across North America, depending upon the metropolitan area or state. Certainly, we've all heard about cities such as New York, Las Vegas, Boston, Seattle, and others that have been completely shelter in place, locked down, and there was no activity going on. That said, there's still been plenty of construction activity that's been allowed to continue, and we have had the pleasure of serving those markets and customers. All of our markets were impacted, certainly to some degree. As you said, some states are in the early stages of reopening. We're beginning to see that activity. There hasn't been anything dramatic as of yet in terms of uptick. It's going to be a gradual recovery as the states and cities work out how they can comply with social distancing on the job site. On the first quarter call, you folks spoke about some areas you've opted to leave the gear on customer sites. Are you starting to see that equipment go back on rent? Can you talk about what proportion of your fleet that is, and if that's one area where you're starting to see the improvement that you just alluded to? Yeah, look, as we said, we thought we saw the bottom around mid-April, and that sort of played out as we continue to see a gradual improvement since then. Mark, can you talk about the fleet that we had out in the marketplace and how that's being handled today? Yeah. About one-third of the fleet that came off rent remained on the job site, and that amounts to about 5% of our fleet overall. Mark, are the lights starting to turn back on, if you will, on that fleet? Yeah. So we're seeing sort of steady incremental improvement. It's clear that we sort of troughed in the middle of April, and there's been steady incremental improvement in most of the markets since then. In terms of what's normal seasonality is we're supposed to see utilization building into May and into June. Is the level of steady improvement that you're seeing, how does that compare to normal seasonality in terms of growth and Fleet On Rent? Is it coming off harder off of a low base? Any context that you folks can share on that front? Well, look, I think we're on what I would call a new normal, right? Normal seasonality, I don't think we're anywhere near close to normal seasonality that we would see this time of the year. We would be normally entering our peak season here, May, June, July, August. We are seeing an uptick on a daily basis, gradual uptick, but there's too many of our customers in the construction industry in particular and in some of the surrounding industries that we serve that are still operating at reduced capacity or diminished capacity. And we haven't seen that full contingent of workforce go back in place. And some of the projects and some of our industrial accounts have obviously been delayed because of the nature of the pandemic that's across. I think our customer base is extremely diversified, as you know, from contractors to remediation, climate control, industrial government infrastructure, agriculture, healthcare, warehousing, and entertainment. All of those are coming back, with the exception of entertainment, at varying degrees and varying paces. We are responding daily to each of those opportunities to serve our customers. Obviously, some of the customers that had left gear in place, they are the quickest to start up and get moving once they have been given clearance by either their local governments or federal governments. We expect that we will continue to see improvement over the next couple of months as we go through the summer here. This is such an unusual recession because you have the initial wave that is driven by stay-in-place orders. Then we have damage to the private non-residential construction investment outlook, beyond the near term. How do you think that will all translate into your business? It is nice to hear that we are on a way towards utilization recovery. Is there a risk that once private non-res activity slows from here, what is the risk of a double dip for the industry from a utilization standpoint, as you see it? It is still unclear, I think, Jerry. There is going to be a pick-up, or there is likely to be a pick-up from here, just as the activity that was committed and the jobs that were financed and underway prior to the shelter-in-place. They need to be completed. We are going to see a pretty normal level of activity, I suspect, for the back end of 2020, once things get going again. Then there is just a big question mark into 2021 on those type of construction projects that you referenced. Is there going to be a lot of new projects green-lighted over the next couple of quarters? That is sort of the question mark. Again, it is a piece of our business. It is not all of our business. We have got the national accounts footprint, the industrial footprint, all sorts of other end markets that we can rely on, even if the non-residential construction segment is running slow in 2021. In terms of as we think about pricing, in the Great Recession, after the housing downturn, industry pricing corrected sharply. I am wondering if you could talk about how much of a difference do you expect the data availability in a more consolidated market? How much do you think those factors play into pricing in this cycle? How would you compare and contrast, and what is the pricing path that you expect? It is really hard to sort of say at this stage. Like you said, this cycle has just been dramatically different than previous cycles with just a real short, sharp contraction in demand, or just activity shut down. So there was no real opportunity for a pricing conversation to take place. We do not have a lot of visibility as to what it is going to be like on the way out. We are sort of in the early stages of turning it around and putting the fleet back out. So there is no real visibility as to where rates are going to go. We will have more clarity once the markets reopen and the equipment gets back out on rent. But without a doubt, we have got better pricing tools and access to industry data that we ever had in prior downturns. So I would expect that pricing is going to be more rational in this one. Okay. Mark, on the conference call, you mentioned pricing pressure in oil and gas applications for reasons that we all know. At which point would you further reduce your oil and gas exposure? I know it is at a low base now given your actions over the past couple of years. But maybe you could just put into perspective the economics for us, because oil patch equipment is now seeing pricing pressure. At the same time, it is equipment that is run the hardest, so it depreciates the most when it is out on rent. So how do you think about whether you are getting paid enough, essentially, for this higher wear and tear, given where spot market economics are? I think the oil and gas business is cyclical. We've reduced our exposure dramatically there from the last go-round. So we're kind of underweight, I would say, in upstream oil and gas. We're committed to our key relationships there with core customers, and we'll adjust our fleet as necessary to meet demand in these markets. The fleet's not oil and gas specific, so it can be relocated to other markets if there's a long-term drop in activity, and we'll just manage it like any other market. The fleet's been well-maintained. There's none of the same issues that we had in the last sort of oil and gas cycle with overweight upstream and a lot of equipment that needed maintenance. That's just not a situation for us to have to deal with this time around. Yeah, Jerry Revich, we've been much more selective in recent history in the customers we serve and the type of markets that we're covering there, and their usage and maintenance of our equipment as we go along. So we're pretty well positioned and pretty comfortable with what we're doing in that market and with the type of fleet we have allocated to it. Can you talk about the relative attractiveness of putting equipment to work in oil and gas applications versus elsewhere? So in the past, the premium's been there. But can you comment on the part of the question whether the wear and tear on the equipment at current market pricing levels is less attractive compared to other applications? No, the market's, well, it's been through a dramatic downturn, and there's a lot of pressure on it over the last couple of months. But up until that, it was an attractive market for us. The premium that was taking place in the previous upcycle with oil and gas wasn't there in this last sort of cycle, so it was just managing rates and customer relationships. And we were getting compensated for the wear and tear on the equipment. But I think critically maintaining that equipment, so the equipment coming out of there, if it needs to, over the next couple of quarters, is not in a shape that's not going to be able to be usable somewhere else. It's all equipment that is standard equipment that fits in our rental fleet and can be transferred to other markets if necessary. Can you remind us what your oil and gas exposure today, and what was it back in 2015, 2016, when you folks essentially started the turnaround? Yeah. Our upstream oil and gas exposure is less than 5%. I think, you can remind me, Larry, I think it was 24%, 25% in the last- Thirty-four. Okay. 34% in the last downturn when I got here. So it's quite a bit different in terms of the makeup of our customer base and our exposure to that market and the growth of our other markets, which help counterbalance the cyclical activity. Keep in mind, I think maybe we just went over it too quick. As we adjusted in the oil and gas market, Jerry, we really adjusted our customer base as well, and we really focused on customers that really work well with our equipment, treat our equipment well, pay on time, and really work with us as true partners. We've shed a lot of the activity where we felt we had problems in that upstream oil and gas market. So we're much more selective around the customer base today. A much smaller part of the business for you today. What about for the rest of the industry? Because say, in 2015 and 2016, relocating the equipment took a toll on the global or the U.S. rental market as a whole. What's the carryover effect from the equipment relocating in this cycle for the industry in totality, realizing it's not a big part of your relocation needs? Not really sure that we can sort of answer for the rest of the industry. It's a small part for us, and I don't think it's the biggest problem that we've got out there today. It was its own cycle in a strong economy in that sort of '15, '16 period. There's much bigger issues in this cycle than that period for the industry. Okay. Mark, on the conference call, you spoke about really oil and gas was the only area where there had been pricing pressure. Has that trend continued? Are you seeing your other applications generally resilient, or are customers starting to go back and ask for price concessions the way they are in oil and gas? Each customer and each end market has their own relationships and their own pricing dynamics, and we manage each relationship separately. We're in an environment where a lot of customers and a lot of end markets are seeing impacts to their business, and we'll deal with them as necessary. Certainly, it would be naive, I think, to suggest that this is going to be a positive environment for rates. We'll just negotiate each contract individually and work it out with the customers. It's certainly not being driven by oil and gas. It's a pretty historic time in terms of some of these end markets, in terms of what they're going through. So we'll just manage them each individually. Yeah. In general, we haven't seen sort of a wholesale across-the-board sort of request. There have been particular customers that have asked for some support and help, and we'll respond, as Mark said, on an individual basis. In general, the markets are 85% of our volume out there is still continuing in customers that rely on the type of service and the type of equipment that we provide day in and day out. They understand that there's rates associated with that we provide service as a result of the rates that we get for that type of equipment. So our customers tend to understand that. There are, as Mark said, a few select that we'll address, but it's not an across-the-board issue for us. That's nice to hear. In terms of the fleet size as we enter next year, your fleet size should be down in the low single-digit range year-on-year, based on the CapEx budget. Obviously, construction spending looks to be down more than that. As we think about what cash flow and capital spending plans for you folks look like next year, is it fair to say that in a base case standpoint, we should be looking at a fleet size that's the same or smaller as we have through 2021, based on the information that we have today? Yeah, look, as we enter next year, I would say our fleet will probably be flattish to where it is right now. As we discussed during the last quarter, the used equipment market more or less dried up. In particular, the auction channels dried up unless you wanted to fire sell your fleet at ridiculously low returns. So we've opted, as we discussed, to hold off on our sale of used equipment, age that fleet a little bit over the course of the balance of this year until there is an economic viability returns in terms of the end markets and the channels that we use to de-fleet. Right now, we haven't seen much change from what we talked about several weeks ago. The dust is settling, and we're very good at managing our fleet and managing the maintenance of our fleet. We'll adjust that in the back half of 2020 as we see used equipment markets return to whatever the new normal will be. We'll make those decisions based upon the residual value of that equipment in the marketplace as we check and monitor the sales through various different channels. Plan on us going into 2021 on a flattish basis, unless of course, we see really good activity and results in the back half of the year. Okay. In terms of fleet inflation, so the equipment that's coming in, can you talk about what level of inflation you're seeing? We've had the new regulatory standards obviously kicking in and contributing to the inflation. If you could comment on what level of fleet inflation you expect going forward. Any chance you could pass on some of the pockets of pricing pressure that you might be seeing in terms of your reducing procurement cost? Right. Yeah, we're not seeing really any impact in inflation or from any new regulatory standards. We kind of expect inflation in 2020 and 2021 to be similar to what we've been seeing for the last couple of years, which is in the sort of 1%-2% range. Mark, I was referring to the new ACI standards. That has not played out in terms of impacting inflation, it sounds like. Right. Yeah, no, that's not adding a significant cost to the machine. So we were in that sort of 1%-2% zone, probably heading towards the lower end of that range in 2021, I'd say, given the amount of tight CapEx spend that we'd be anticipating. Your shift towards specialty has been a big part of the story. Can you talk about to what extent Fleet On Rent is more resilient in your tools and other specialty products compared to gen rentals? Yeah, look, we've been quite fortunate that we've been building that business over the last four years, and it's becoming more and more a significant part of our business. It's been extremely resilient through this pandemic. In fact, we probably increased our business fairly significantly over the last couple of months as we participated in the setup of temporary hospitals, of testing centers, providing power generation, HVAC-related clean air purification, cleaning materials, and others to support the hospitals, temporary hospitals, and other government installations that are being put in place. So we've enjoyed some pretty good success over the last four years and exceptional success over the last couple of months. So we're continuing our investment in our ProSolutions businesses, and it's quite a good engine for us, quite frankly. In terms of cold starts, you folks spoke about essentially moving to the offensive side, given the progress on service levels and pricing. Can you just update us on your cold start plans for this year? How many sites are we thinking about, and how have those plans evolved over the past couple of weeks, if at all? Well, we originally said that this year would be in the neighborhood of 6 to 10 cold starts, and we are well on track to have 6 in place during the back half of the year. We'll continue to look for opportunities to add others. But we have 6 cold starts, and then we also are adding some specialty businesses within our business, some new locations, our climate control and remediation centers, which are businesses within businesses. We're going to add in the neighborhood of 8 of those this year as well to our portfolio. So we're moving along with that activity. Look, this is a different type of a downturn than what may have happened over the last couple of downturns. This is, as we all know, an effect of a certain thing. The business climate was still good. The markets were still strong. We still believe in that. We're pretty optimistic about how we're going to come out of it. I don't think this will be a V-shaped recovery. I think it'll be more of a U-shaped or a Nike swoosh recovery. We're still very optimistic and very bullish on the markets that we want to expand in and put more capability in. Okay. We've got a couple of webcast questions coming in. The first one's asking if you could expand on the earlier comments in terms of the industry today compared to the Great Recession. What are the major differences between now and then? I think, certainly with the bigger rental players, a lot better diversified customer mix, much broader offerings, much deeper specialty business, a core base of national account and industrial customers. Much better place to sort of make their way through any type of recession. Certainly, the dramatic sort of slowdown that we've seen. So, well-capitalized, tons of liquidity. We're certainly not the worst industry to be in this type of environment. We've got an opportunity to benefit on the way through. We're going to be well-capitalized. We're going to be able to put fleet and provide service to our customers in a way that a lot of the smaller competitors probably won't be able to. Also, just with the risk that customers have seen over the last couple of months, I think they're going to be more comfortable dealing with a bigger, well-capitalized, known national brand, than maybe some sort of smaller brands they might have done business with in the past. So, we are in place to weather the storm, and we're looking for opportunities in the eye of the storm and just be ready to go as these economies reopen and we get back out there and get focused on taking care of our customers' needs. Mark, a follow-up from me. That's a really interesting point in terms of counterparty risk. Is that starting to manifest itself in your customer conversations? Can you say more about that? What are you folks seeing from your competitors? Any changes in terms of liquidity issues or otherwise in any of your markets for your competitors? Again, it's so short and sharp, Jerry Revich. There's not a lot of time taking place for these things to transpire. There are requests on a normal basis from our larger customers in terms of counterparty risk and the analysis they do in terms of their suppliers. I think just given the shock and the impact on a lot of businesses that people wouldn't have thought would've been affected, it's going to be natural that there'll be a little bit more consideration paid to that on the way out. Okay. In terms of the next question we have here from the webcast, can you talk about if there will be any sustained changes to the way you operate post-COVID-19? Any lessons learned that you're able to apply to structurally improve operations or otherwise? Yeah, look, I think as we operate in this environment, we're learning how to socially distance ourselves quite a bit, from contact relative to delivery of equipment, to maintenance of equipment, and we're picking up new capabilities, new skill sets on which to operate relative to interface with our customer. Some of our technologies that we had in place that may not have been as fully utilized in the past are gaining a tremendous amount of more traction today. We have this on-the-go capability where we can track shipments and advise the customer when it arrives. We have our ProControl capability on monitoring of fleet that's on rent. We're seeing greater utilization by our customers on that, so they keep track of equipment on rent. Internally with our sales organization, using our modules of salesforce.com in terms of connectivity and communications with customers has improved dramatically over the last 60 to 90 days. We're also seeing greater emphasis on electronic transmission relative to receivables and payments from our customers and how that's operating and their willingness to work with us for connectivity capability and improve payment methodology. So, a lot of that is happening. Just in the normal day-to-day business, I've been on numerous, what we call Microsoft Teams or Webex communications with groups of people and customers, where you don't necessarily have to get on an airplane, but you're able to see people face-to-face, and communicate differently than we have on the past. So yeah, there's a number of changes that I think that will be positive as a result of this. Sometimes there is a bit of a silver lining that comes out of a bad situation. Very good. In terms of looking at the situation at Hertz, which has been unfortunately hit by COVID a lot harder than most companies. In the event Hertz does have to file for bankruptcy or has financial difficulties, to what extent could you have exposure? Yeah. It's unfortunate that the travel and related industry has gone through what it's experiencing today. The situation that we're aware of at Hertz is certainly unfortunate. But look, Herc Rentals and Hertz, as you know, were separated through a spinoff on June 30, 2016, and we each began trading as separate public companies on July 1, 2016. There are no material shared services, leases, or other contracts between the two companies. There are a few shared costs remaining regarding a pre-spin litigation, and all of that is outlined and detailed in our Qs and our Ks and other related SEC documents. Those costs have some responsibility that we bear, but primarily related to litigation. As far as that aspect of potential liabilities in case of litigation that's specified, what happens if Hertz is not able to cover it? Would Herc just be liable for the 15% share of the total litigation as specified, or would there be potential bigger payment on, again, that explicit piece that's tied to the litigation that was already in process? Yeah, right, Jerry. The litigation is pursuing clawbacks on some previous Hertz executives. If they couldn't do it in bankruptcy, then that litigation would go away, and we wouldn't have to bear our portion of the cost, which is 15% of those costs. Okay. That's very clear. Perfect. Well, thank you so much for making time and joining us for our fireside chat. Thank you very much, everyone, for dialing in and for sending your questions. Have a nice weekend, everyone. Thanks. Thanks, Jerry. Thanks, Jerry. Thank you. Bye-bye.