Herc Rentals achieved new records in the first quarter of 2022 in total revenues, rental revenue, net income, dollar utilization, adjusted EBITDA and adjusted EBITDA margin, CEO Larry Silber told a conference call with investors last week.
“Volume and rates contributed to the 32 percent increase in rental revenue over the prior year,” Silber said. “Dollar utilization increased 280 basis points to 41.4 percent. “Outstanding performance by our sales, operations, and field support teams was enhanced by steady demand and a positive operating environment.”
Silber said the increase was driven by solid performance in the company’s core business and growing market share from specialty businesses. “Total revenue grew 25 percent to $567.3 million despite lower sales of rental equipment, a decision we made to continue to meet requirements of our customers in light of tight supply of new equipment related to supply chain issues from our original equipment manufacturers.
Silber said at the end of the quarter, Herc Rentals operated 320 locations in 40 U.S. states and five Canadian provinces and in this past week added four more locations with the Cloverdale equipment acquisition.
Senior vice president and chief operating officer Aaron Birnbaum said Herc’s core business is benefiting from solid operating performance in all its regional operations. “Our ProSolutions business also continued to contribute double-digit growth year over year in the first quarter of 2022 as we continue to expand our market share in the rental of power generation, climate control, remediation and pump equipment,” said Birnbaum. “The integration of the 16 acquisitions we have announced to date is on track and we continue to focus on additional locations in targeted markets through organic growth and acquisitions.”
With strong demand, Herc is growing its fleet. “Our fleet expenditures at OEC totaled $253 million in the first quarter of 2022,” Birnbaum said. “Given current equipment rental demand and our strategic management of fleet in this equipment-constrained environment, we reduced the level of disposals substantially in the first quarter compared with last year. We disposed $64 million of fleet at OEC in the first quarter, which was nearly $50 million less than last year’s first quarter. At this point in time, we expect OEC disposals for the year to be about the same as last year.”
Fleet size multiplies
Birnbaum said total fleet at OEC is $4.6 billion as of March 31, 2022, about 27 percent higher than OEC fleet at the end of Q1 last year.
“We continue to invest in our specialty fleet which includes ProSolutions and ProContractor, and accounted for about 24 percent of our total fleet as of the end of Q1 2022,” Birnbaum said. “As shortages, inflation and labor costs impact the industry, we do anticipate that industry fleet costs will continue to rise in 2022 and next year. Stronger pricing of used equipment and an improvement in our sales channel mix contributed to an increase in equipment sale proceeds as a percentage of OEC, which rose to 45 percent in the quarter, compared with 40 percent last year. The average age of our disposals was 90 months in the first quarter, and fleet age is now about 48 months, the same as it was a year ago at this time.”
Birnbaum said Herc will continue to grow. “We are expanding through the opening of greenfield locations and targeted acquisitions in fast-growing urban markets to drive top line growth. Addition to core and specialty fleet are expected to continue to be growth drivers as we can offer a broader array of premium fleet while the market remains constrained due to supply chain issues.”
Birnbaum outlined the company’s plans for growth in the environmental area, the industrial and growth in local markets.
“We'll continue to focus on the expanding addressable markets of climate control, remediation, pump, and entertainment, as well as other major vertical in industrial customers in utilities and energy, healthcare, warehousing and manufacturing, and commercial construction,” he said. “Our diversification strategy over the last several years targeted new industry verticals to drive healthy and stable growth. As you can see by the strong growth we produced, we are successfully growing across multiple industry verticals and across all regions. New customer growth continues to be a major opportunity. In the first quarter, local rental revenue represented 57 percent of total rental revenue, in line with fourth quarter of 2021, and up from 54 percent in the first quarter of 2021. This growth reflects the impact of additional new local customers added through our recent acquisitions.”
Dealing with rising costs
Chief financial officer Mark Irion talked about the challenges caused by rising fuel prices.
“The cost per gallon of fuel, for example, was up 45 percent year-over-year, which impacts both our external and internal delivery costs,” he said. “We have a model that adjusts for inflation and allows us to recover a significant proportion of these cost increases by way of fuel surcharges and delivery fees. However, late in Q1, these costs moved faster than expected, and our cost recovery mechanisms didn't quite keep up. March over February fuel costs were up 20 percent, which didn't leave a lot of reaction time. Adjustments have been made to fuel charges and delivery fees. We expect to see better cost mitigation through the balance of 2022. We are growing at a fast pace and incurring volume-related cost increases as would be expected. Operating at high utilization and growing the fleet by over 20% in the quarter, also puts pressure on our maintenance team and maintenance experiences. We're building a platform for growth and have added 1,000 new team members this last year, about half to existing locations and about half through acquisitions. All part of our growth strategy, but we will get more leverage on this investment in future quarters than we have in the current quarter."
Also helping to mitigate the rising costs is improved rental rates, Irion said.
“The industry seems to have gotten price momentum back, and we intend to continue leading the industry on price. Our track record of executing on price in all sorts of operating environment is clear. The momentum and our rate growth is clear, and we expect to increase rates year-over-year and sequentially each quarter for the remainder of 2022.”
For a more complete look at Herc Rentals’ first quarter results, go to: https://www.rermag.com/home/article/21239833/herc-rentals-rental-revenue-jumps-316-percent-in-first-quarter