Herc Holdings Inc

NYSE:HRI

Earnings Call Analysis

Strong Q3 and Optimistic Guidance for 2023

In Q3, the company achieved record total revenue and adjusted EBITDA, propelled by a 6.9% rental rate increase and robust volume growth. Despite lower margins from elevated fleet sales, rental EBITDA margins improved significantly. Disruptions from industry labor strikes and strategic sales of fleet due to OEM shipment timings were factors. Capital allocation favored growth investments and incremental ROIC gains. The company's expansion through acquisitions and greenfield locations is ongoing. Full-year guidance for 2023 narrows adjusted EBITDA to $1.45-$1.5 billion, up 18-22% year-over-year, with net fleet CapEx now estimated at $1.0-$1.1 billion. Leverage ratio expectations remain on target, and shareholder value increases via dividends and share repurchases.

Strategic Growth via Expansion and Optimized Fleet Management

The company has moved strategically to expand its presence through a mix of greenfield locations and acquisitions, adding eight new locations in the third quarter. These efforts are part of a broader urban market growth initiative, tailored to complement the existing network and bolster the company's strategic footprint. Concurrently, the management team skillfully managed a sizable fleet delivery received earlier in the year, significantly syncing fleet growth with revenue growth. Despite facing challenges with supply tightness in high demand equipment classes, the company managed to achieve sales of $124 million in used fleet, a testament to its ability to adjust rapidly to the shifting supply chain dynamics.

Robust Financial Performance with Record Margins

Financially, the company reported a powerhouse quarter, highlighted by a record adjusted REBITDA margin of 49.3% and an impressive 18% growth in diluted EPS at $3.96 per share. They've seen a commendable organic growth in rental revenue and have improved operational efficiency, as evidenced by a 250 basis point improvement in DOE and SG&A as a percentage of rental revenue. Notably, fleet on rent increased by 11.5%, while rental rate grew by 6.9%. Fleet disposal has been leveraged to optimize the fleet size and composition, adjusting for the inflow of new equipment and market demands.

Capital Management and Dividend Growth

From a capital management standpoint, the company is positioned well with no near-term debt maturities and ample liquidity to fund growth. They've declared a quarterly dividend of $0.6325, equating to $2.53 annually per share. The current leverage ratio is steady at 2.5 times, staying within the target range of 2 to 3 times, and is indicative of a sustained investment in growth while maintaining financial prudence.

Continued Market Outperformance and Adjusted Guidance

Looking ahead, the company expects to continue exceeding market growth, fine-tuning its guidance for 2023 with an adjusted EBITDA forecast range of $1.45 billion to $1.5 billion. This reflects an anticipated growth of 18% to 22% on top of the 37% growth achieved in 2022. The company has narrowed this guidance considering the mixed results from M&A activities, the impact from Studio Entertainment declines, and the absence of anticipated weather events. With dollar utilization expected to be slightly down sequentially from Q3, the company remains agile in navigating the short-term challenges while keeping its eyes fixed on long-term growth trajectories.

Market Dynamics and Industry Tailwinds

The primary end markets for the company exhibit robust growth projections. The North American rental industry revenue is estimated at $76 billion for 2023, with forecasts suggesting a 4% CAGR over the next three years. Two key end markets, industrial and nonresidential construction, continue to project strength and are expected to perform well. Significant infrastructure projects buoyed by federal investments and manufacturing reshoring are offering structural tailwinds, providing an optimistic outlook for the company's operations. These industries favor larger rental companies holding diverse fleets, a space where the company firmly stands.

Fine-Tuning Capital Expenditure and Fleet Priority Shifts

Though some capital expenditure plans for '24 are being brought into sharper focus ahead of November's investor day, there is an expectation of reverting to a more standardized seasonal inflow of new equipment. However, popular equipment like aerial and platform access units continue to face supply delays into 2024, which the company is eager to acquire as soon as available. The eventual goal is to match the material flow with demand requirements, optimizing both the size and diversity of the company's fleet to meet ongoing and forecasted industry needs.

Emphasis on Retail Wholesale Channel for Higher Margins

A strategic decision has been made to prioritize retail and wholesale channels for fleet disposals moving forward, aiming to boost sales margins. Significant progress has been made over recent quarters to pivot in this direction, enhancing the company's transactional efficiency and profitability.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to remind everyone -- I would like to welcome everyone to the Herc Holdings, Inc. Third Quarter 2023 Earnings Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Leslie Hunziker, Senior Vice President, Investor Relations. Please go ahead.

[Leslie Hunziker, executive]

Thank you, operator, and good morning, everyone. Welcome to Herc Rentals Third Quarter 2023 Earnings Call and Webcast. Earlier today, our press release and presentation slides were furnished and our 10-Q was filed with the SEC. All are posted on the events page of our IR website at ir.hercrentals.com.

Today, we're reviewing our third quarter 2023 results with comments on operations and our financials, including a view of the industry and our strategic outlook. The prepared remarks will be followed by an open Q&A. Now let's move to our safe harbor and GAAP reconciliations on Slide 3. Today's call will include forward-looking statements. These statements are based on the environment as we see it today and therefore, involve risks and uncertainties.

I would caution you that our actual results could differ materially from the forward-looking statements made on this call. You should also refer to the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2022, and our quarterly report on Form 10-Q for the period ended September 30, 2023. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance.

Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials. A replay of this call can be accessed via dial-in or through the webcast on our website. Replay instructions were included in our earnings release this morning.

We have not given permission for any other recording of this call and do not approve or sanction any transcribing of the call.

This morning, I'm joined by Larry Silber, President and Chief Executive Officer; Aaron Birnbaum, Senior Vice President and Chief Operating Officer; and Mark Humphrey, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Larry.

[Lawrence Silber, executive]

Thank you, Leslie, and good morning, everyone. Please turn to Slide #4. Our third quarter results were driven by our strong business base, improved operating leverage and continued M&A initiatives. Total revenue and adjusted EBITDA were a third quarter record, driven by a 6.9% increase in rental rate and above-market volume growth.

Additionally, we ramped up fleet dispositions in the quarter to adjust to higher OEM shipments in the first half of the year and to take advantage of the healthy used equipment market. Used fleet sales carry a lower margin than rental revenue -- but if we exclude fleet sales from the equation, rental EBITDA or REBITDA, as we call it, generated a significant margin and flow-through improvement in the quarter.

Of course, as expected, and as noted on the slide, EBITDA margin in the quarter was impacted by the sale of nearly 3x more fleet at OEC and continued disruptions from labor strikes in the studio entertainment industry. In the third quarter, our capital allocation strategy focused on profitable growth investments, supported an incremental increase in ROIC compared with last year.

On Slide #5, we're working in a favorable operating environment as the equipment rental market continues to benefit from strong demand across a variety of end markets and geographies. And we continue to outpace market growth as a result of our premium assets, national footprint, broad-based capabilities and expert services.

Our third quarter rental revenue grew another 8% on top of the 35% growth last year. Excluding Studio Entertainment, rental revenues increased 13% over the prior year quarter. The studio shutdowns continued into the fall as the actors guild joined the screen writers on strike, making the first time in 63 years that the Hollywood writers and actors were striking at the same time. While the writers finally resolved their dispute, the actors remain on strike, keeping most productions idle. Total revenue got a boost in the latest quarter as we significantly increased sales of used fleet.

The supply chain's recovery in certain equipment categories allowed us to begin addressing the pent-up rotations from the last 2 years. We headed into the fourth quarter with our fleet better matched to demand after successfully managing through a wave of equipment deliveries in the first half of the year. If you turn to Slide #6, in addition to leveraging our scale as a market leader, the successful execution of our growth strategies also contributed to our outsized performance relative to the overall industry.

We are increasing revenue in our core categories through fleet investments as well as acquisitions and new greenfield facilities that support branch network optimization. Revenue from our high-margin ProSolutions specialty business grew double digits again in third quarter, incrementally benefiting from cross-selling synergies customer wins and expanding fleet and new products like [indiscernible].

And our innovative customer-facing digital capability called ProControl, NextGen, continues as a catalyst to new project wins especially at the national account level. As always, we're committed to responsible operating practices built on a strong cultural foundation, a safety-first protocol and a pledge to continue to work hard to do more for our employees, customers and suppliers.

In the third quarter, we were a recipient of the 2023 HIRE vets Medallion award that recognizes employers to successfully recruit, hire and retained veterans. We were also named among the best and brightest companies to work for by the National Association for Business Resources. We're honored to be recognized for these awards as they stand as a testament to our unwavering dedication to our team members and the importance we place on having a best-in-class culture.

Finally, between fleet investments strategic M&A, dividends and opportunistic share repurchases, we are strategically allocating capital to drive long-term growth and higher returns. Now before I turn it over to Aaron, let's move on to Slide #7, where I'll give you some background on our plans to explore strategic alternatives for our Studio Entertainment business, which we announced in the press release. Let me start by clarifying that our studio management and lighting and grip offering branded in the TV and film industry as Cinelease.

In January 2012, we acquired Cinelease to expand our product offering and our footprint in another fast-growing specialty rental market. Cinelease is one of the largest lighting and grip rental companies in the United States with a scale studio platform. Over the past few years, the industry for renting, lighting and grip equipment to studios has evolved as investment firms began purchasing sound stages and physical studios as attractive ways to diversify their real estate portfolios.

These new owners want to offer a single point of contact for studios, studio management and light and grip equipment, thereby making it less of a rental model and more a permanent part of their in-house business. As a result, in order for us to continue to grow the Cinelease Studio management and lighting and grip business, Herc would need to add fixed cost studio real estate to our portfolio offering and that capital requirement will be a departure from our core rental business model.

So at the beginning of the year, we began discussing strategic options facilities that will enable it to continue to maximize its potential either with Herc or on its own. We determined that exploring external opportunities was prudent, and so that process has begun. As you can see on this slide, our Herc Entertainment Services business will continue to rent our rolling stock equipment to both on-location studios, off-location productions for TV and film and live entertainment venues.

Mark will share with you our financial performance year-to-date, excluding Cinelease, to give you some perspective on the very strong performance of the go-forward business base. Finally, I'll just say that Cinelease has been a great business for us. It's a high-margin, seasonally steady growing platform business with a loyal team of product and service experts. And it has opened doors for Herc Entertainment Services, to continue to flourish in this robust and exciting end market.

We are confident that the strategic actions we are announcing today will help ensure that Cinelease and the incredibly strong and dedicated group of colleagues that comprise it are on the best possible trajectory moving forward, and that hurts resources and focus remain on its core strategies for profitable long-term growth. With that, I'll turn it over to Aaron to share the high-level operational drivers in the third quarter. Aaron?

[Aaron Birnbaum, executive]

Thanks, Larry, and good morning, everyone. The solid performance of our operations and field support teams, combined with steady demand across our end markets continue to provide a favorable environment for us. Thanks to the hard work of Team Herc, we have demonstrated continued progress in our journey to build scale and market leadership through flexibility, efficiency, strategic network and a customer-first mindset.

Turning to Slide 9. Our day starts with safety, which is at the core of everything we do. As you know, our major internal safety program focuses on perfect days. That is days with no OSHA recordable incidents, no at fault motor vehicle accidents and no DOT violations. We strive for 100% perfect days throughout the organization. In the third quarter, on a branch-by-branch measure, all our branch operations achieved at least 97% of days as perfect.

Equally notable, our total recordable incident rate remains better than the industry benchmark of 1.0, reflecting our high standards and commitment to the safety of our people and customers. On Slide 10, let me shift to a progress update on our growth strategies. One of the key initiatives of our urban market growth strategy is expansion through greenfield locations and acquisitions.

In the third quarter, we added 8 locations to our network, 4 greenfield locations and 4 locations from 2 new acquisitions. As you know, we focus on acquisition opportunities in high-growth markets that complement our current branch network and fit our strategic, financial and cultural filters. Of the acquisitions in the quarter, both were general rental companies, 1 was in Southern California, which includes the largest metropolitan markets in the U.S. and the other was Houston, a top 10 market.

These acquisitions support our strategic goal of increased density and resilient urban markets, Moreover, many of the mega projects being announced are in the geographies where we have focused our acquisitions in greenfield additions like Phoenix, Houston, Austin, Detroit and the Midwest. Through September 30, we've invested $332 million in net cash on acquisitions. Multiples remain steady as we pay a little less for general rental companies and a little more for specialty rental companies.

We targeted up to $500 million of poor acquisitions this year and have a strong pipeline of prospects. As always, we're being disciplined to ensure acquisitions meet our criteria and can add strategic and cultural value. Our acquisition process is now a core competency for us. We are quickly integrating these new businesses and are excited to welcome their teams to her while creating value for our people and our customers. On Slide 11, in addition to acquisitions, growing our core and specialty fleet through new equipment investments is a key strategy to expanding our share and keeping up with the increasing demand opportunities.

Let me start with demand drivers. Revenue growth from both local and national accounts remained strong in the first 3 quarters of 2023. Opportunities to -- across end markets continue to increase. We are seeing it throughout our network, and it's supported by third-party data. The exception, of course, is Cinelease where the duration of the labor strikes couldn't have been predicted.

This weighed on our performance masking the underlying strength of our core business this year. Studio Entertainment represented just 1% of our rental revenue in the third quarter compared with about 5% a year ago. While the only fleet truly dedicated to those types of projects, especially lighting and grip equipment, we also rent power generation, some HVAC equipment and material handling and Aerial equipment. In July, we started moving that fungible fleet from the studio operations to other local customers.

Although the rider strike is over, we don't expect that to move the needle much in the fourth quarter since the actor strike is ongoing. Moving on to fleet investments. As we told you on our call in July, our goal for the third quarter was to absorb the unusual wave of fleet deliveries we received in the fourth quarter of 2022 and the first half of this year. I couldn't be more proud of what the team delivered -- by the end of September, we significantly closed the gap between fleet growth and revenue growth by capitalizing on seasonal volume and generating $124 million in sales of used fleet.

The team did an expanding job of rapidly adjusting to the supply chain recovery. On Slide 12, you can see how fleet expenditures and disposals have been trending. Our fleet expenditures at OEC totaled $274 million in the third quarter, about 12% lower compared to last year. Most of that had to do with the fact that supply is still extremely tight for the highest demand equipment classes like aerial and reach forklifts, for example, which caused our suppliers to push out some of those 2023 orders into 2024. On the flip side, we disposed of $309 million fleet at OEC.

From an OEC standpoint, that's almost 3x more than in last year's similar period. The substantial amount of dispositions in a single quarter had us utilizing the auction channels more than we typically would, and that's reflected in the proceeds of sales margin. At the same time, the amount of fleet at OEC that was sold to retail and wholesale customers was a quarterly record for the company. So we are continuing to gain traction on our capabilities in those channels.

Where we originally planned for fleet rotation of about $600 million at OEC for this year, -- we will probably sell about $800 million by year-end based on the amount of new fleet deliveries we received year-to-date and the typical seasonal depleting will be able to do in the fourth quarter. From our 2024 fleet planning discussions with vendors, we believe deliveries will return to our more normal seasonal schedule now that supply chain inventories and capabilities are improving. But I will reiterate that the tightest category classes for supply continue to be those with the highest customer demand.

So while availability in many cat classes has improved, it's clear where you're going to have another challenging year getting all the gear we'd like for certain categories. Fleet planning considerations for 2024 CapEx include incremental demand for mega projects, infrastructure and manufacturing reshoring as well as local market growth and replacement fleet needs.

In addition to building a best-in-class fleet, you can see on Slide 13 that we have a diverse, well-balanced customer mix made up of large national accounts and local contractors operating in North America with a wide range of equipment needs across a variety of end markets. About 36% of our revenue is tied to nonresidential construction with 26% related to our industrial customers and 15% coming from infrastructure and municipal projects.

Local accounts, which represented 58% of rental revenue in the third quarter are growing due to Herc penetration through our acquisition and greenfield strategy as well as regional growth in infrastructure, education, payments and repair and local utilities. For national accounts, we are capitalizing on what we see as a booming large project pipeline with the federal funded mega projects, large infrastructure jobs and manufacturing facilities.

These mega projects represent the beginning of a multiyear flow of dollars into the industrial infrastructure space. As 1 of the largest players in the rental industry, our fleet capacity, digital capabilities, on-site management expertise and broad location network sets us up to win substantially more than our fair share of the market's growth. I want to thank team for their commitment to operational excellence and safety. Their professionalism shows up in the execution of our services to our customers every single day. It's a valuable differentiator for Herc.

Now I'll pass the call on to Mark.

[W. Humphrey, executive]

Thanks, Aaron, and good morning, everyone. I'm starting on Slide 15 with a summary of our key metrics for the third quarter. Larry and Aaron touched on many of these line items, so I'm just going to provide some additional color. For rental revenue, about 2/3 of the growth was organic and 1/3 came from acquisitions. DOE and SG&A as a percent of rental revenue improved 250 basis points in the quarter, supporting improvements in adjusted REBITDA margin and flow-through of more than 76%. The adjusted REBITDA margin of 49.3% was a record, exceeding our previous peak margin by 200 basis points.

Additionally, net income grew 12% while diluted EPS grew 18% to $3.96 per share. Let's walk through some of the other performance drivers on Slide 16. Here, you can see the rental revenue and adjusted EBITDA walk year-over-year. In the revenue chart, rental rate was up 6.9%. Fleet on rent increased 11.5% and mix and lower re-rent revenue was unfavorable by 9.9% compared with the third quarter a year ago.

The decline in studio entertainment revenue is calculated in mix as is inflation, which together accounted for approximately 90% of the mix impact. Additionally, ancillary revenue was impacted by reduced re-rent revenue in the quarter, primarily reflecting better fleet availability, which positively impacts adjusted EBITDA and REBITDA margins. The catch-up in supply deliveries and the out of season mix of fleet received in the first half, combined with the drop-off in Studio Entertainment revenue resulted in dollar utilization of 42.1% in the third quarter versus 45.3% last year.

As Aaron mentioned, we worked through the quarter to rightsize the fleet and feel good about where we are heading into the fourth quarter. Additionally, we saw sequential improvement in dollar utilization every month this quarter, following the seasonal demand trend.

Moving to the adjusted EBITDA waterfall chart on the right, profit benefited from higher rental revenue and significant leverage from lower operating expenses as a percent of revenue but the studio entertainment's top line weakness on its fixed cost base was a partial offset. Adjusted EBITDA margin was impacted by the higher sales of used equipment at OEC and the higher use of the Auction sales channel in the recent quarter.

On Slide 17, we've added a summary P&L to the deck that excludes Studio Entertainment in order to give you a better sense of how well the base business has performed in the recent quarter and year-to-date. From this table, you can see the strength of our core rental business when we exclude studio entertainment from both periods.

For example, rental revenue growth would have been approximately 500 basis points higher in the third quarter at 13.2% and adjusted EBITDA would have grown 26.2% at a margin of 46.5%, a 130 basis point improvement. Also, our already record level REBITDA margin was stronger by another 170 basis points at 51%, with flow-through at 73% a more than 2,000 basis point increase over the prior year.

The base business results reflect strong demand, favorable pricing, benefits from operating leverage and record margin performance. A full reconciliation of performance metrics, excluding Studio Entertainment, can be found on Slide 28 and 29 in the appendix of our presentation.

Shifting to capital management on Slide 18, you can see we have no near-term maturities and ample liquidity to fund our growth goals as we continue to allocate capital to invest in our business and drive fleet growth into this cycle. We remain confident in our business model and are committed to increasing shareholder value. In the third quarter, we declared a quarterly dividend of $0.6325, which represents $2.53 per share for the year.

Net capital expenditures exceeded cash flow from operations in the 9 months ended September 30, with cash outflows of $196 million before acquisitions. Our current leverage ratio at 2.5x is well within our 2x to 3x target range and in line with our expectations as we invest in growth.

Moving on to Slide 19, you can see the continued strength in our primary end markets. In the upper left, the ARA estimate for 2023 North American rental industry revenue is growing to $76 billion based on ARA's recently revised estimates and is forecasted to grow at a 4% CAGR and over the next 3 years due to its diversified end markets.

On the bottom left is the Architectural Billing Index, which reported below 50 in September, it's not unusual to see the billing index along with its counterparts, inquiries and design contracts be choppy in the back half of the year. We saw a similar trend in 2022. ABI is just one indicator of future construction activity. We will continue to monitor it in conjunction with other data points over the next 12 months.

Two of our key end markets are industrial and nonresidential construction both continue to show strength for 2023. Combined, these end markets reflect about 2/3 of our customer base and both are likely to outperform other consumer-driven end markets due to new mega project construction as the reshoring of U.S. manufacturing capacity continues to gather steam.

Taking a look at the industrial spending forecast on the top right, Industrial Info Resources is projecting $409 billion of spend in 2023, the highest level on record and a 16% increase over 2022. In the lower right quadrant is Dodge's forecast for nonresidential construction starts, you can see in 2023, Dodge estimated to be another $429 billion on top of last year's peak $445 billion.

Of course, these are also just starts of new projects of multiyear construction builds that will continue into '24, '25 and beyond. The dotted line on these charts reflects growth over pre-pandemic levels. You can see that last year and the next 3 years are projected to be the strongest periods of activity that this industry has ever seen.

Additionally, there's another $306 billion in nonresidential nonbuildings or infrastructure projects slated for 2023. That's a 20% increase over 2022. These projects are supported by federal funds approved in the infrastructure package, the CHIPS and Sciences Act and the Inflation Reduction Act. The current strength in mega projects and infrastructure activity is not particularly sensitive to short-term interest rates and clearly has a structural tailwind.

These large projects benefit rental companies of scale with larger, more diverse rental fleet and is one of the leading North American rental companies, Herc stands to benefit more favorably from this trend.

We expect to continue to outpace market growth at a rate greater than 2x. As we head into the last quarter of the year, we are fine-tuning our guidance for 2023. This is on Slide 20. We've narrowed our adjusted EBITDA forecast range to $1.45 billion to $1.5 billion, which represents growth of 18% to 22%. This is on top of 37% growth in 2022.

We assume the incremental benefits from opportunistic M&A this year would help offset the significant impact from Studio Entertainment and fewer weather events than originally projected. However, while the pipeline for M&A remains robust, the cadence of the closing activity is extending into Q4 and Q1 of 2024. Dollar utilization in the last quarter 2023 is expected to be slightly down sequentially from Q3 as the benefits of our realigned fleet are offset by the Studio Entertainment impact and the probability that we won't see a big weather event this year compared with incremental volume from Hurricane Ian in last year's fourth quarter.

And our target for full year 2023 REBITDA flow-through tightens to the mid-50s, which represents continued benefits from operating leverage year-over-year. We've also tightened our net fleet CapEx range to $1 billion to $1.1 billion to reflect the lower end of our original guidance, as noted last quarter.

The revision is based on a roughly 33% increase in our original plan for used equipment sales at OEC and the fact that some of our planned 2023 growth CapEx was pushed into 2024 to account for OEM supply constraints in certain categories.

Interest expense was up 82% in the third quarter year-over-year, reflecting the accumulation of Fed rate increases in our M&A funding. Finally, we expect our leverage ratio to be at the midpoint of our 2x to 3x target range at year-end, we are experiencing all the trends consistent with an industry in an up cycle and intend to continue to address the needs of our customers as we execute on our growth strategy. With that, I'll turn the call back to Larry.

[Lawrence Silber, executive]

Thanks, Mark. Now please turn to Slide 21. Everything we do starts with our vision, mission and values and a purpose statement that focuses on equipping our customers and communities to build a brighter future. We do what's right, we're together, we take responsibility, we achieve results, and we prove ourselves every day.

Now before moving on to Q&A, I want to remind you that we'll be hosting our next Investor Day on November 2. The event will take place here in Bonita Springs, Florida and will be available via webcast. With market opportunities significantly growing for Herc and having already achieved nearly all of our 3-year targets that we set back in 2021, this will be an opportunity to set new guideposts for the future of our growth trajectory. I hope you'll be able to join us.

With that, operator, we'll take our first question.

[Operator]

[Operator Instructions] We'll take our first question from Rob Wertheimer with Melius Research.

[Robert Wertheimer, analyst]

So my question is really on demand. And I think you're pretty clear on the big picture outlook. But I want to narrow it down into, I guess, this quarter and last, where you sort of saw rental revenue grow at a slower pace than the fleet. And I wanted to ask if that's because you didn't see the pockets of demand you thought you would have for the fleet that was coming in or whether it's largely an effect of the fact that you've got more fleet transition as you're selling more and bringing more in a seasonal patterns. So really, is it -- didn't quite up like you thought? Or is it just transitional cost?

[Aaron Birnbaum, executive]

Yes, Rob, demand landscape is still really good. And even as we look out over the next couple of quarters, it looks good. The fleet revenue balance and what we did in Q3 really was to kind of reset that balance because of the fleet, as I put in my remarks, they came in last year and then the first part of this year with the disjointment of the supply chain that got corrected. And so we wanted to correct our balance and that's what we did in Q3. But the demand outlook is still good.

[Robert Wertheimer, analyst]

I think you're pretty on that excuse. So does that imply then that as you get to a more normal season or a more normal pattern of fleet coming in and fleet going out that rag of transitional drag goes away and you kind of revert or on some of the time.

[Aaron Birnbaum, executive]

Yes, precisely. And we'll continue to get the operating leverage of the business as that equation with fleet of revenue stays balanced. And that's how we'll plan for next year's fleet adds. And that's the visibility we see going forward for the next several quarters.

[Operator]

We'll go next to Jerry Revich at Goldman Sachs.

[Jerry Revich, analyst]

I'm wondering if you could just talk about the pricing environment into October. It's nice to see a positive variance in pricing in the quarter, I think versus most expectations even with utilization softer. Would you attribute that to the interest rate environment? And any context that you can provide on how the leading edge is tracking in October, if you don't mind?

[W. Humphrey, executive]

Yes. I mean I think the way I would answer that, Jerry, is one, I think that the industry has remained extremely disciplined throughout the first 3 quarters of this year. And then I think secondarily, right, it's also an extremely healthy environment. And so I think we've posted 7.2% through the first 9 months of the year. And I think that I would direct you as you sort of look into October and fourth quarter, that would be a mid-single-digit sort of pricing lift for fourth quarter.

[Jerry Revich, analyst]

And Mark, maybe just to put a final point on that. I mean, normally, seasonally, pricing is up 50 basis points sequentially, October verses September? Are we on the pace with that normal Seasonality?

[W. Humphrey, executive]

Yes. I would say that all seasonal trends are being followed.

[Jerry Revich, analyst]

Okay, super. And then, Larry, in your prepared remarks you spoke to just the cadence of CapEx this year versus normal seasonality as we think about that cadence continuing into the early part of '24, is it fair to expect CapEx to be down year-over-year in that 15% to 20% range in the first half, just given the timing of the deliveries? Or any comments that you would make about the capital budget for '24, please?

[Lawrence Silber, executive]

Yes. Well, look, in total, we're still fine-tuning the capital plans for '24. I think we'll have a better look on November 2 for the next 3 years in terms of what our CapEx spend will look like and better be prepared to give you a better guidance and more guidance on that. But I think you'll see us revert to a normal seasonal inflow pattern as the manufacturers continue to improve.

And I would say we'll revert to that with the exception of the couple of categories that we mentioned. Look [indiscernible] platform access related manufacturers are still struggling and not achieving their promise dates and their deliveries as we would like to see them. And as our requirements continue to grow in those areas. So we'll take that equipment when it becomes available. But outside of that, you'll see us revert to a more seasonal flow of material coming in to match our demand requirements.

[Operator]

We'll move next to Ken Newman at KeyBanc Capital Markets.

[Kenneth Newman, analyst]

Maybe just to start with the demand outlook. Obviously, it seems like demand across both our national and local accounts still remains pretty strong here. But I'm curious if you could just -- maybe give a little bit more color from what you're seeing both on project visibility and maybe to tack on to Jerry's question on the pricing, if you've seen a big or a wider divergence in pricing between the local and national accounts.

[Aaron Birnbaum, executive]

The divergence, no, there's still a good appetite for equipment, whether you're in the local or the national landscape. The demand, as I said, is good. The mega project landscape, there's so many projects out there. And many are online, but most of them haven't come online yet, and we see a lot of them coming online over the next 3 quarters. But there's plenty of work out there. And as I mentioned, high demand for the fleets. so we're pretty positive on the entire local and the national project landscape.

[Kenneth Newman, analyst]

Yes. Okay. And then for my follow-up here, just on Cinelease, I think it's interesting that you guys are looking to potentially divest that business. And I know it's early in the negotiations here, but any thought or color on how you think about just how tough environment could be for sale in the near term, if that's even possible, just with the funding rate environment?

And also, just if I think about the prior guide, I think we try to take out all the impact from studio rental revenue and EBITDA from last year, last quarter. So maybe just a little bit more detail on what drove the negative surprise this quarter.

[Lawrence Silber, executive]

Yes. I'll take the first part of that, and then I'll let Mark address the financial side of that, to give you some more detail, Ken. Well, look, this Cinelease business is the premier business in the industry. It's a gold star business that is well recognized, well known for its capability and it's service excellence within the TV and film industry.

We -- while it is early in the process, and we just announced it last evening, we believe the demand for that business will be quite strong. There will be a large appetite for it amongst the real estate consolidators that are developing and continuing to grow in that industry. And we expect a very good and strong process for that business. Like I said, it is the premier business in the industry and something that we are very much feeling like it will be strong for us. Mark, do you want to...

[W. Humphrey, executive]

Yes. And then, Ken, in terms of sort of the midpoint guide moved down, I tried to cover that off in my prepared remarks. But really, there was sort of 3 driving factors there. One, we said in Q2, right, that we anticipated that M&A activity would help fill that impact that we were feeling from Cinelease.

And I think that the reality is that the M&A is opportunistic. And just from the cadence of the closes particularly year-over-year, those have been pushed out further into Q3, really the activity that we had in Q3 was done 3 days before quarter end. And so that activity is pushing out into Q4 and then even possibly into Q1. So that was a big driver there.

I think that the cuts and the impact from Cinelease is deep. And I think lastly, no storm activity in '23, particularly comped up against '22 is also an impact that we had to take into consideration, and we've got visibility now here in October that it's not going to happen.

[Operator]

We'll take our next question from Seth Weber at Wells Fargo.

[Seth Weber, analyst]

I just -- I wanted to just clarify, make sure I'm understanding the CapEx message for this year, was there a -- has there been any change to your gross CapEx number for 2023? Or is it just -- I think I heard some comments about some growth CapEx getting pushed to '24 million versus '23. I'm just trying to understand your new CapEx range, does that incorporate any changes on the -- what you were planning to buy side or taken for 2023?

[W. Humphrey, executive]

Seth, it's Mark. Good question. I think really, we tried to put this in prepared remarks. But really, it's an impact and a combination of 2 things, right? We had some 2023 orders pushed out. And then obviously, we're disposing of a bit more gear than we had originally guided to. And we mentioned that in the prepared remarks as well.

I think the only other thing I would say to you is that in Q2, right, we guided to the low end of the range. And so really, this is just us tightening that range up for you, but there's no difference or variance to really our messaging from Q2.

[Seth Weber, analyst]

Okay. And is the push out something that happened during this that you observed during the third quarter? Because I think -- I feel like you had sort of -- in the second quarter, you had talked about some deliveries and stuff moving around as well. Is this an incremental update where more stuff is getting pushed into 2024 or it's kind of improving?

[Aaron Birnbaum, executive]

Yes. In the remarks, and Larry mentioned some of the product types like access equipment, which is we call them some material handling and some aerial booms, they're getting pushed out just like they did in '22 and kind of rolled into '23. Some of the stuff we wanted in '23 rolling into '24.

Now we're getting some of that product, but we're not getting as much of the product as we desire to have. So that's really the sequence that's happening. The other parts of the supply chain are working better than they have in the last 3 years. But there are the access equipment that is kind of rolling over into the next year.

And as I mentioned also, some of those product types and access equipment part of the type of equipment that are the highest demand in the marketplace. So we'd like to get more of it, but we're not able to -- some of our expectations of receiving it this year is kind of rolling over to '24.

[Seth Weber, analyst]

Got it. Okay. So it's not -- you wouldn't characterize it as a change in your demand for the equipment?

[Aaron Birnbaum, executive]

No. If we could get more access equipment, we would take it as soon as you get it.

[Seth Weber, analyst]

And then just -- just -- and then just a follow-up. The used sales margin, I guess, how would you characterize your channel mix going forward? It sounds like you sold more stuff through auction this quarter, margins were a little bit light year-over-year or sequentially. I mean, is that -- is this the mix that we should contemplate going forward? Or do you think you move more towards real and margins get better going forward?

[Aaron Birnbaum, executive]

No. Our focus going forward is a more heavily weighted retail wholesale channel for disposals. And we were making a lot of progress on that over the last 3 or 4 quarters. Just in this recent quarter in Q3, we wanted to really focus on rebalancing the fleet to the [indiscernible]. And so we had to use auction more than we wanted but mission accomplished, right?

We got done what we needed to get done, and we're back to dispose them through the retail wholesale, which is a bit of a journey for us, right? We have to get that activity going through our entire sales force and marketing efforts. But that's where we're going. That will help drive more proceeds to our bottom line in the subsequent quarters.

[Seth Weber, analyst]

Okay. So you would think fourth quarter used sale margin should more reflect what you guys were putting up prior to third quarter?

[Aaron Birnbaum, executive]

Yes, more of what you saw in our previous quarters this year and Q4 last year.

[Operator]

We'll go next to John Healy at Northcoast Research.

[John Healy, analyst]

Great. Larry, I just want to ask a big picture question. I think the ARA came out this summer, kind of talked about the year being kind of a high single-digit growth year for the industry and next year being, I know somewhere around 3% or 4%, I want to say.

Your big picture thoughts about those forecasts. And as you look at those forecasts, do you find them reasonable and reflective of the market as you see it? And how do you think Herc should perform relative to maybe those industry benchmarks?

[Lawrence Silber, executive]

Yes. Look, I think for the most part, ARA is maybe even a little light on what we think the growth possibly could be. I think the growth in '23 is more like in a half in '24 is going to be mid-single digits. And so I think as we've mentioned in the prepared remarks, we think we're going to outperform the market by maybe a factor of 2.

And I think it's really being driven by the onshoring, the mega projects, the infrastructure projects, as well as our growth in the local market with the M&A and the greenfield activity that we're doing. So we're fairly bullish on what we see going forward.

[John Healy, analyst]

Great. And I just want to ask your thoughts about capital allocation going into next year. I know you guys have taken a balanced approach between the dividend, buyback and M&A. But when I look at the company, I think you have something in your slides today where you talked about acquisition multiples around 5.5% and getting to a synergized multiple around 4% or so. The company itself today is probably trading below those acquisition multiples. So I mean, do you think about you think about pivoting more towards the buyback as you look to next year? Or how do you think about that for going forward?

[Lawrence Silber, executive]

Yes. Look, I think as we've said before, we'll reevaluate our strategy around capital allocation as we go into next year with our board and determine what's in the best interest of the shareholders and continued positioning and growth of this company. So all of those are long-term views that we're going to take on it. So it's really not what I would call a short-term decision around where that is.

[Operator]

And we'll move next to Mig Dobre at Baird.

[Mircea Dobre, analyst]

Yes. Just to follow up on that last statement, Larry. So industry growing maybe mid-single digit, you're aiming for twice that, so call it, high single or maybe 10%. That's obviously great. I'm curious kind of how you think about the moving pieces in terms of what gets you there, pricing versus fleet growth versus utilization, if you can provide some context around that.

[Lawrence Silber, executive]

Yes. Look, I think it's all of that, Mig. I think you'll see a mixture of pricing and fleet growth, the utilization as well as M&A activity that will allow us continue to have that kind of trajectory. We do not see a recession at all, regardless of what the folks in your world might think.

[Mircea Dobre, analyst]

Fair enough. Just to make sure that I -- we clarified this a bit because everybody kind of asked the questions around CapEx. But it seems to me that with higher disposals, if you're talking about fleet growth into 2024, that would necessarily imply higher CapEx. Do I have that right?

[Lawrence Silber, executive]

Well, we're not ready to disclose what we're thinking about CapEx for next year, as Aaron mentioned in the prepared remarks, we've had a fair amount of pent-up demand as a result of COVID and the inadequacies of the supply chain over the last 3 years that allowed us to then have a higher level of disposals going into the fourth quarter of this year. We're still evaluating our CapEx plan for next year and the following 2 years, and we'll be able to share more of that with you on November 2 at our Investor Day.

[Operator]

And at this time, we have no further questions. I'll turn the conference back over to Leslie for closing remarks.

[Leslie Hunziker, executive]

Thank you for joining us on the call today. We look forward to updating you on our progress in the quarters to come. Of course, if you have any further questions, please don't hesitate to reach out to us. Have a great day.

[Operator]

And that does conclude today's conference call. Thank you for your participation. You may now disconnect.