5 takeaways from Herc’s first-half ‘24 report

Herc Rentals’ conducted its Q2 2024 earnings call on July 23, including a Q&A session that offered a number of insights into the company’s performance in the first half of the year. Analysts peppered executives with questions, and the responses revealed both challenges and opportunities for Herc Rentals moving forward. 

Here are five takeaways from the discussion:

1. Local market slowdown a temporary hiccup, not a long-term threat

A prominent theme throughout the Q&A was the slowdown in local markets, particularly concerning analysts given its potential impact on revenue. Herc Rentals acknowledged this trend, citing a shift from mid-single-digit growth to low single-digit growth, primarily affecting western regions. However, they downplayed concerns about a prolonged slump.

Larry Silber, president and CEO, Herc Rentals. (Photo: Herc Rentals)

Larry Silber, Herc Rentals CEO, attributed the slowdown to rising interest rates. He explained that interest rate hikes make borrowing more expensive, causing a wait-and-see approach from potential customers in certain sectors. While the data wasn’t explicitly shared, the comments suggest a decline of at least 4-5 percentage points in growth compared to previous expectations.

The good news? Herc Rentals expects this to be temporary. In response to a questions about the timeline for recovery, one comment suggested that historically, a six-month lag exists between the Federal Reserve signaling interest rate cuts and a noticeable uptick in local market activity. This means Herc Rentals could see a return to normal growth patterns by early 2025, assuming the Fed acts as anticipated.

Importantly, the slowdown hasn’t dented Herc Rentals’ pricing power in the local market. Silber assured analysts that pricing remains steady, despite the lower growth figures. This indicates that while project volumes might be down, Herc Rentals is maintaining its profitability in the local market segment.

2. Mega projects are the engine driving Herc Rentals’ growth

While the local market presented a headwind, Herc Rentals painted a much rosier picture regarding mega projects. These large-scale ventures are expected to be the primary driver of revenue growth in the latter half of 2024.

There were multiple confirmations from the executives regarding the strength of the mega project pipeline. They revealed that while some projects had experienced delays, these were isolated incidents, and the overall momentum remained positive. This is particularly significant considering one analyst’s query about potential delays impacting Herc Rentals’ plans. The company emphasized its selective approach, participating only in 10-15% of mega projects, ensuring they target those with the highest likelihood of success.

The windfall from mega projects is expected to be substantial. A question was asked about seasonality. The response indicated that Herc Rentals anticipates a similar trend to previous years, with a significant jump in equipment rental revenue from Q2 to Q3, potentially exceeding the typical low double-digit to mid-teen range.

3. Strategic redeployment boosts efficiency in fleet management

Herc Rentals acknowledged the importance of fleet management in navigating the market landscape. The company revealed a proactive strategy of redeploying equipment from areas with a local market slowdown to regions with high mega project activity. This approach, according to executives, has demonstrably improved fleet efficiency.

While no specific figures were mentioned regarding the number of equipment units relocated, the comments suggest Herc Rentals is adept at adapting its fleet distribution to optimize profitability. This strategy ensures they have the necessary equipment readily available to support the surge in mega project activity.

4. Maintaining pricing power momentum despite market shifts

Analysts were curious to understand the dynamics behind the 3.5% year-over-year increase in rental rates. Silber indicated that both contract and spot market pricing behaved as expected. While there were

Herc employs a proactive strategy of redeploying equipment from areas with a local market slowdown to regions with high mega project activity.

headwinds in the spot market due to a tough prior-year comparison, contract negotiations are tracking in line with expectations.

Perhaps the most crucial takeaway was the company’s commitment to maintaining its position as a pricing leader. Despite the local market slowdown, Herc Rentals plans to push for continued price hikes in the coming quarters. A query about potential price wars was met with a firm response emphasizing fleet efficiency and differentiation as the primary strategies for driving revenue growth.

5. Acquisitions and greenfield expansion fuel the future

Herc Rentals continues to view acquisitions as a key pillar of its growth strategy. The very recent acquisition of Otay Mesa Sales is the company’s largest to date and targets the construction and industrial customer segments with four locations serving Phoenix and Yuma, Arizona and San Diego, California. Specific details of the acquisition were not disclosed during the call.

Analysts were also curious about Herc Rentals’ plans for greenfield expansion, and were told Herc is actively pursuing opportunities in several regions experiencing a surge in industrial development. While specific locations weren’t mentioned, it suggests Herc Rentals is looking to broaden its geographic reach to capitalize on these growing markets.

The Q&A session concluded with a sense of cautious optimism from both analysts and Herc Rentals executives. The challenges in the local market are acknowledged, but the focus on mega projects, fleet management strategies, and a commitment to pricing power position Herc Rentals for continued growth in the coming quarters. Acquisitions and greenfield expansion further solidify their position as a leader in the equipment rental industry.