Herc Rentals Reports Decreased Revenues and Profits in Q2

Herc Holdings Inc. has reported financial results for the quarter ended June 30, 2016. Total revenues in the second quarter of 2016 were $380.4 million compared with $422.7 million in the same period in 2015, a decline of $42.3 million or 10.0%.

HERC 57b473fbb3af6
HERC 57b473d7122bb

Herc Holdings Inc. has reported financial results for the quarter ended June 30, 2016. Total revenues in the second quarter of 2016 were $380.4 million compared with $422.7 million in the same period in 2015, a decline of $42.3 million or 10.0%. The Company reported a net loss in the second quarter of 2016 of $8.0 million, or $0.28 per diluted share, compared to net income of $10.6 million, or $0.35 per diluted share, during the same period last year.

Second quarter total revenues declined 5.9% in 2016 compared with 2015, excluding operations in France and Spain, which were sold in October 2015, and the impact of foreign currency translation. The quarter was negatively affected by lower sales of revenue earning equipment and planned changes in low margin new equipment sales programs, including the elimination of certain equipment dealerships. Strong equipment rental revenue growth in the Company’s key markets, defined as those outside of upstream oil and gas, offset continued weakness in upstream oil and gas markets in the second quarter compared to the prior year.

“We continued to execute our long-term strategy to diversify our fleet and broaden our customer mix while successfully accomplishing our separation from the Hertz car rental business on June 30, 2016,” said Larry Silber, president and chief executive officer. “In our key markets, which represented 84% of our business in the second quarter, rental revenue improved 8.1% over the prior year.

“In addition, we are making good progress on our growth initiatives. Our ProSolutions services, which focus on providing customized solutions using specialty equipment such as climate control, pump and power generation gear, are gaining momentum with customers. Also, we increased pricing on a worldwide basis, achieving a 0.5% increase in the quarter year-over-year.

“While we are encouraged by these positive developments, we are managing through continuing weak upstream oil and gas markets and lower than projected volume in the second half. Despite these headwinds, we remain confident that our initiatives are creating a strong foundation for our continuing transformation and positioning us well for the long term,” Silber added.

Second quarter highlights

Equipment rental revenue in the second quarter of 2016 was $327.9 million compared to $347.7 million in the prior year quarter, a decline of 5.7%. Excluding the divested operations in France and Spain and foreign currency translation, equipment rental revenue was flat in the same period over the prior year. Equipment rental revenue in key markets increased 8.1%, offsetting a 27.3% decline in upstream oil and gas markets in the second quarter compared to the prior year.

Sales of revenue earning equipment declined $16.0 million in the second quarter of 2016 compared with the prior year quarter, reflecting fewer disposals as part of the Company’s equipment rotation program. Net losses on the sale of revenue earning equipment totaled $7.1 million for the quarter compared to a $5.7 million gain in the same period in 2015, reflecting the impact of a higher proportion of auction sales of equipment used in upstream oil and gas markets and certain non-premium brands. In addition, sales of new equipment, parts and supplies declined $5.5 million in the quarter due to planned changes in low margin sales programs, including the elimination of certain equipment dealerships.

Second quarter spin-off costs totaled $17.7 million in 2016 compared with $6.4 million in 2015. Combined restructuring and related charges in the quarter were flat compared with the same period in the previous year.

The Company reported a net loss for the second quarter of 2016 of $8.0 million compared with net income of $10.6 million in the comparable period in 2015.

Adjusted EBITDA for the second quarter of 2016 was $130.6 million, a decline of $16.7 million or 11.3%, versus the second quarter of 2015. The decline was caused by losses related to the sale of revenue earning equipment, the absence of operations in France and Spain and the impact of foreign currency translation. Declines in upstream oil and gas markets were offset by gains in key markets. See page S-4 for a description of the items excluded in calculating adjusted EBITDA.

Continued improvement in branch operating efficiencies reduced fleet unavailable for rent (“FUR”), which declined to 12.6% compared with 13.3% in the first quarter of 2016. Dollar utilization was 33.5% in the second quarter of 2016 compared with 34.0% in 2015, impacted by lower results in upstream oil and gas markets.

First half highlights

Total revenues for the first half of 2016 were $746.0 million compared with $824.0 million in the comparable period in 2015, a decline of $78.0 million, or 9.5%. The Company reported a net loss of $9.5 million, or $0.34 per diluted share for the first half of 2016, compared to net income of $12.3 million, or $0.40 per diluted share, for the comparable period in 2015.

First half total revenues declined 3.9% in 2016 compared with 2015, excluding divested operations in France and Spain and the impact of currency translation. The first half was also negatively affected by lower sales of revenue earning equipment and planned changes in low margin new equipment sales programs, including the elimination of certain equipment dealerships. Continued weakness in upstream oil and gas markets was substantially offset by revenue growth in the Company’s key markets in the first half.

Equipment rental revenue in the first half of 2016 was $635.7 million compared with $679.3 million in the comparable period in 2015. Excluding the divested operations inFrance and Spain and foreign currency translation, equipment rental revenue was nearly flat compared to 2015. Key markets produced 82.2% of total equipment rental revenue in the first half and increased 9.9% compared to the same period in 2015. These gains largely offset a 30.3% decline in upstream oil and gas markets, excluding the impact of the same items. Worldwide pricing in the first half of 2016 was flat compared to the first half of 2015.

Sales of revenue earning equipment declined $25.0 million in the first half of 2016 compared with the comparable period in 2015, reflecting fewer disposals as part of the Company’s equipment rotation program. Net losses on the sale of revenue earning equipment totaled $15.0 million compared with a $12.4 million gain in the first half of 2015, reflecting the impact of a higher proportion of auction sales of equipment used in our upstream oil and gas markets and certain non-premium brands. Sales of new equipment, parts and supplies in the first half of 2016 declined $7.7 million because of planned changes in low margin sales programs, including the elimination of certain equipment dealerships.

Spin-off costs were $26.9 million in the first half of 2016 compared with $15.7 million in 2015. Combined restructuring and restructuring related charges were $6.1 million in the 2016 six-month period compared to $7.7 million in the same period in 2015.

Adjusted EBITDA was $238.4 million, a decline of $38.3 million or 13.8% versus the first half of 2015. Declines in upstream oil and gas markets more than offset gains in key markets in the first half. The first half was also negatively impacted by losses related to the sale of revenue earning equipment and the absence of operations in France andSpain. See page S-4 for a description of the special items excluded in calculating adjusted EBITDA.

Acquisition of revenue earning equipment

The Company continued to invest in higher dollar utilization equipment, acquiring revenue earning equipment totaling $305.5 million in the first half of 2016. The Company spent $142.5 million in cash and acquired an additional $163.0 million of revenue earning equipment during the first half of 2016, which is reflected as an increase in accounts payable for revenue earning equipment.

Guidance

Given the continuing weakness in upstream oil and gas markets, lower projected volume in certain key markets, and recent adjustments in economic indicators relevant to our business, the Company has lowered its 2016 guidance range for adjusted EBITDA to be between $520 million and $560 million. As a result, we are managing net fleet capital expenditures, defined as revenue earning equipment expenditures less proceeds from disposals of such equipment, to be between $375 million and $400 million.

Commenting on the Company’s outlook, Silber said, “In the last 12 months we introduced new sales and incentive programs and new productivity and pricing tools, and began adding ProSolutions and ProContractor equipment to our fleet. We expect that these initiatives will continue to gain momentum over time. We will remain focused on our strategic initiatives to improve our fleet and customer mix in order to drive sales growth and improve dollar utilization going forward.”

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