Herc Holdings Inc

NYSE:HRI

Earnings Call Analysis

Strong Revenue Growth in Q3 2023

In the third quarter of 2023, the company reported a remarkable 13.2% increase in rental revenue, reaching a total of $446 million. This growth was driven by successful execution by sales, fleet teams, and branch operators, alongside a diversification of business and fleet offerings. The rental revenue growth outpaced the industry average, indicating effective market strategies and solid demand across various sectors.

Record Adjusted EBITDA and Margin Expansion

Adjusted EBITDA increased by 8.8% year-over-year, contributing to a strong EBITDA margin of nearly 50%. This success reflects favorable management of selling, general, and administrative expenses combined with higher revenues from disposals of fleet equipment. Although there were challenges tied to higher interest expenses and amortization from acquisitions, operating leverage from stringent cost control helped maintain healthy margins.

Positive Organic Growth Amidst Market Challenges

The rental revenue growth was primarily attributed to organic growth (7.3 points) while recent acquisitions contributed an additional 4.6 points. Notably, the national account business, which focuses on mega projects, recorded double-digit growth in line with projections. Meanwhile, the local rental market is showing organic growth despite a slowdown in project starts, primarily due to current interest rate pressures.

Improving Fleet Efficiency and Strategic Investments

The company is seeing improvements in fleet efficiency, particularly as newly acquired fleets are integrated and aged equipment is refreshed. Despite current inefficiencies from acquisitions, the company anticipates that operational improvements in these areas will bolster future revenue growth. The trailing 12-month return on invested capital (ROIC) saw a slight decline, but there’s confidence that efficiencies will rise as new operations mature.

Outlook for the Remainder of 2023 and 2024 Guidance

For the fourth quarter of 2023, the company expects continued revenue growth due to the anticipated acceleration of mega projects and recovery efforts related to recent natural disasters. The updated guidance for full-year revenue growth has been raised to a range of 9.5% to 11%, originally positioned higher than prior expectations. Adjusted EBITDA guidance remains unchanged at $1.55 billion to $1.6 billion, reflecting ongoing commitment to sustainable growth.

Dividends and Capital Management

The company remains committed to shareholder returns with a declared quarterly dividend of $0.66 per share, aggregating to $2.66 annually. The capital management strategy supports growth aspirations while maintaining a leverage ratio within the targeted range of 2 to 3x, ensuring ample liquidity for future investments. In the quarter, free cash flow was reported at $218 million year-to-date.

Market Demand and Strategic Positioning

Overall, the demand for rental equipment is projected to remain robust, particularly driven by mega project opportunities within infrastructure, clean energy, and technology sectors. The company's diversified market positioning and expansion of its fleet capabilities position it well to capitalize on upcoming industry growth, reinforcing its market leadership.

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by. My name is John, and I'll be your conference operator for today. At this time, I would like to welcome everyone to the Herc Holdings Third Quarter 2024 Earnings Call and Webcast. [Operator Instructions]

I would now like to turn the call over to Leslie Hunziker, Head of Investor Relations. Please go ahead.

[Leslie Hunziker, executive]

Thank you, operator, and good morning, everyone. Welcome to Herc Holdings Third Quarter 2021 Earnings Conference 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.

Today, we're reviewing our third quarter 2021 results with comments on operations and our financials, including our view of the industry and our strategic outlook. The prepared remarks will follow by an open Q&A.

Now let's move to our safe harbor and GAAP reconciliation 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 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, 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 material. 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've not given permission for any other recording of this call and do not approve or sanction any transcribing of the call.

Finally, please mark your calendars to join our management meetings at the Baird Global Industrial Conference in Chicago on November 12 and North Coast Research's virtual Management Access Forum on November 13, Redburn Atlantic's Virtual CEO Conference on December 3 and the Melius Research Conference in New York on December 11. We hope to see you there.

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. Let's turn to Slide #4. In the third quarter, we continued to deliver on our long-term growth strategies, focusing on the fundamentals of increasing market share and geographic density for scale, optimizing fleet mix with greater penetration of our specialty equipment and leveraging proprietary and industry data and technologies to enhance our competitive position and customer satisfaction.

We're continuing to make good progress on all of these initiatives. Year-to-date, we've acquired 26 locations and opened 16 greenfield branches that will drive market share and revenue efficiencies in key metropolitan areas in line with our urban market growth strategy. In addition to desirable locations, the acquisitions bring complementary fleet categories, valuable new team members with a strong cultural fit and new local account opportunities.

Our enhanced fleet mix allows us to cross-sell our specialty products to these typically GenRent customers. We've increased our specialty fleet CapEx this year to support share of wallet opportunities as well as the incremental demand from mega projects and potential business with customers in newer end market verticals where we're capturing greater penetration.

Now moving to Slide 5. This is our year-to-date financial scorecard, which includes the Cinelease business. With the softness in the local market continuing as developers await further interest rate cuts, this year's operating performance really emphasizes the advantage of Herc's mega project participation, customer project and geographic diversity, specialty equipment and services strategic acquisitions and, of course, pricing discipline.

Rental rate was up 2.3% year-over-year in the quarter and 3.5% year-to-date. That's on top of a tough comp of 7.2% over the same 9-month period last year and a 5.4% rate increase in the first 3 quarters of 2022. Further pricing is improving on a sequential basis, reflecting our leadership as well as ongoing industry discipline.

And based on benchmark data, Herc volume continues to significantly outpace overall rental market growth on both an organic and total revenue basis. Adjusted EBITDA margin is running slightly ahead of last year-to-date results despite an unfavorable trade-off and profitability as 2024 acquisitions and greenfields initially generate lower incremental margins than our established local account business.

Ultimately, over an 18- to 24-month period, these new locations will become fully accretive and will further help drive scale efficiencies that make them a valuable component of our long-term profitability plan. Year-to-date, ROIC is being impacted by some near-term inefficiencies, including those from new locations, which will improve over time.

Mark will walk you through the year-over-year comparison in detail in just a minute. But on a favorable note, flat efficiency on an organic basis is positive for the 9 months year-to-date, and that's due to a strong execution by our fleet, sales and operations team. In such a dynamic market, they have stayed focused on fleet productivity and it's paid off.

As we think about the remainder of the year, let me jump to Slide #6 to share some thoughts. We expect, once again, generate record rental revenue in the fourth quarter as mega projects accelerate, new acquisitions provide incremental contributions and revenue related to our support of the recovery efforts for the 2 recent hurricanes are captured.

When it comes to margin, we're going to continually to carefully manage the cost structure and fleet utilization to address this near-term disparity of demand we're seeing between certain regions, customer and project types. We'll also continue our efforts to pull synergies from recent acquisitions as quickly as possible to enhance profitability. Experience, agility and discipline will help navigate this timing issue in the local market.

For net fleet CapEx, we've taken in most of our new fleet at this point, and we'll ramp up seasonal dispositions over the next few months. Our fleet group has done an excellent job in managing the timing and allocation of investments in new equipment and adjusting the amount of new fleet against fleet dispositions based on regional demand trends. From what we're continuing to see in the industry data, the overall market is being equally disciplined when it comes to fleet growth.

As always, we'll manage our costs and assets carefully while we continue to support the growth of our business. Aaron will talk a little bit more about current operating trends, and then Mark will take you through the core business performance and more specific puts and takes that support our full year guidance range. Aaron?

[Aaron Birnbaum, executive]

Thanks, Larry, and good morning, everyone. The underlying long-term fundamentals supporting equipment rental demand remains strong. The trends of rental over ownership, reshoring manufacturing fortifying North America's infrastructure, modernizing the electrical grid, rapid growth in AI and data centers and the move towards clean energy, all represent significant future opportunities for Herc as a leading equipment rental company with a full suite of capabilities, products and best-in-class services.

While the current period of transition from the post-COVID peak to a more normal local operating environment was challenged this year with the higher interest rates and some macroeconomic uncertainty our much more diversified position today provides the resiliency to continue to drive revenue growth and deliver strong operating margins. Of course, the secret sauce is team hurts unwavering dedication to the success of our customers in their critical projects.

Success starts with safety, and safety is at the core of everything we do. As you can see on Slide 8, our major internal safety program focuses on perfect days, and we strive for 100% perfect days throughout the organization. In the third quarter, on a branch-by-branch measurement, all of our operations achieved at least 97% of days is perfect.

Equally notable, our total recordable incident rate remains better than the industry's benchmark of 1.0, reflecting our high standards and commitment to the safety of our people and our customers. On Slide 9, you can see that we are making great progress on our urban market growth strategy by expanding through greenfield locations and acquisitions of the top 100 metropolitan markets.

In the third quarter, we spent $277 million in net cash on 2 acquisitions, adding a total of 5 locations to our networks in Florida, Arizona and California. The acquisition of West was our largest since launching our M&A strategy at the end of 2020. We completed the transaction in July. And as I mentioned on our last call, this premium business brings 4 locations serving construction and industrial customers in Phoenix and San Diego.

Of course, Arizona is a top 10 market in a mega project hotspot and the San Diego locations substantially expand our share and now position us as a leader in this top 25 market. We also opened 5 greenfield locations in the quarter bringing our total over the last 12 months to 24, which is nearly a 41% increase in greenfield openings over the comparable trailing 12-month period.

As you know, we are focused on opportunities in high-growth markets that complement our current branch network and fit our strategic, financial and cultural filters. Moreover, many of the mega industrial manufacturing projects being announced are in the geographies where we have targeted our acquisitions in greenfield additions like Texas, Southern California, Arizona and along the Eastern Seaboard.

We have successfully integrated 51 businesses with 115 locations into the HERC network since late 2020. As a result of revenue efficiencies, we've been generating synergized multiples at maturity of approximately 3.5 to 4.5x. While new acquisition opportunities remain robust. In fact, we just closed on another last week, we are equally focused on ensuring we are capturing the cross-selling and fleet productivity synergies from acquisitions completed over the last 24 months.

On Slide 10, 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 our increasing demand opportunities. Our fleet composition at OEC is on the right side of the page.

Total fleet is now a record $7.1 billion as of September 30, 2024. Cinelease fleet represents roughly 4% of the total. So when you exclude the Cinelease assets held for sale, our base fleet is about $6.8 billion. You'll note that higher-margin specialty fleet represents approximately 23% of the total today. Excluding Cinelease, specialty makes up about 20% of the total, with plenty of room to continue to grow.

When it comes to fleet investments in the quarter, the 34% increase year-over-year is more reflective of a return to normal seasonal delivery patterns this year with the supply chain recovery. In fact, year-to-date, fleet investments at OEC are down about 14%. It was -- we manage our fleet efficiency while supporting the incremental demand from general market expansion in the peak season, new greenfields in the mega projects that significantly accelerated into the back half of the year.

For the full year, we expect to spend roughly $1 billion on new fleet purchases. In the 2024 third quarter, fleet disposals at OEC were 36% lower than last year. Again, this is in keeping with our plan for a more normal seasonal cadence of dispositions this year. Year-to-date, disposals at OEC are down 24% compared with the year earlier when we were both rightsizing and refreshing our fleet.

For the full year, we've increased our planned OEC dispositions to approximately $700 million to update some of the acquisition fleet and to adjust for the lower local market demand in certain regions for transportation cost to move existing fleet are less economically efficient. In the third quarter, we continued to gain traction on improving our used fleet sales capabilities, utilizing technology, training and sales force incentives to participate more in the higher-return retail and wholesale channels.

As a result of our now more favorable channel mix and despite the used equipment market moderating from peak levels, our proceeds at 42% of OEC in the quarter or 300 basis points higher than last year.

Turning to Slide 11, we are successfully addressing the needs of both large national accounts and local contractors. Local accounts represented 56% of rental revenue in the third quarter and are expanding through share gains from acquisition and greenfield locations as well as organic growth in select regions where infrastructure, education, local utilities and facility maintenance repair projects are underway.

We continue to view the slowdown in local project starts primarily as an interest rate timing issue based on everything we're hearing. On the national account side, we're capitalizing on continued government and private funding for new projects in areas like battery storage, energy, infrastructure, semiconductor, LNG plants and data centers. We'll continue to target a 60/40 revenue split between local and national accounts. This diversification provides for growth and resiliency.

Turning to Slide 12. Overall, we're continuing to see solid demand across a variety of end markets, geographies and project types in 2024. We Mega projects continue to represent incremental new opportunities for us as our specialty offering, expanded market coverage, technology advancements and service and logistics expertise distinguishes us as a top resolutions provider from most any end market vertical.

And team Herc is already gearing up. Their professionalism shows up in execution of our services to our customers every single day. Our growth is attributable to our people and our culture. They are the reason for the long tenure of our national account customers and for the new business we're winning on local and mega projects. Now I'll pass the call on to Mark.

[W. Humphrey, executive]

Thanks, Aaron, and good morning, everyone. I'm starting on Slide 14 with a summary of our key metrics for the third quarter. For clarification, these are our GAAP results that include the Cinelease Studio Entertainment business, which as we've discussed previously, is classified as assets held for sale. I'll just make a couple of quick points here before turning the focus to the core results.

In the third quarter, rental revenue increased 13.2% and adjusted EBITDA increased 8.8% to a record $446 million. EBITDA margin expanded 100 basis points and dollar utilization was up slightly.

Let's move to Slide 15. The Here, we outline our core financial results, which exclude Cinelease from both periods in order to give you a better sense of how the base business performed in the quarter. A full reconciliation of quarterly performance metrics, excluding Cinelease can be found on Slides 26 and 27 in the appendix of our presentation.

For the third quarter at nearly 12%, our rental revenue significantly outpaced the overall industry's performance. Rental revenue came from a variety of sources, which speaks to the strong execution of our sales force, fleet team and branch operators as well as the diversification of our business and fleet offerings, reinforcing that our capital allocation strategy is working.

Mega projects led the national account business at double-digit growth in line with our expectations, while our local rental business also grew as a result of contributions from recent acquisitions as well as organic growth from health care, education, municipal and MRO projects.

Pricing came in at 2.3% in the quarter and pricing discipline across the industry is evident as companies continue working to align fleet with demand trends, especially in the local markets. For Herc, in addition to moving or disposing of fleet in softer regions of the country, we're also working through the newly acquired fleet to upgrade quality, refresh for age or rightsize where necessary.

While acquisition fleet weighs on fleet efficiency and dollar utilization, we have seen improvements in both metrics sequentially versus the second quarter of this year and we expect to continue to see improvement as acquisitions mature under our ownership. Organic fleet efficiency was positive in the quarter.

Net income was impacted by higher interest expense related to increased borrowings to fund acquisitions and invest in rental equipment and higher nonrental amortization expense associated with acquisition intangibles. Partially offsetting these impacts was operating leverage gained in our SG&A from our cost discipline as revenues expand.

REBITDA during the third quarter was a record and margin was strong at nearly 50%. REBITDA flow-through at 40% was a bit lower than the 45% we expected when we updated in Q2, but for perspective, only $5 million of additional REBITDA in the quarter would have gotten us to our expectations. We are still being impacted on the revenue side by the slowdown in the local market project starts, as Aaron mentioned, which also creates a short-term imbalance with gaining full leverage on our fixed direct operating costs, particularly as we bring on acquisition and greenfield locations.

We believe these investments are necessary to gain scale through expanding our branch network during this growth phase and positions us for long-term success. Trailing 12-month ROIC on the core business declined 160 basis points to 10% at the end of the quarter. The prior year period benefited from accelerated fleet dispositions driving an approximate 50 basis point impact.

The remaining 100 basis point variance relates to the impact associated with the acquisitions in greenfields and as new locations mature and our prudent onboarding of new fleet supports fleet efficiency, we expect to drive ROIC improvement.

Let's turn to Slide 16, and I'll walk you through the rental revenue and adjusted EBITDA bridges from third quarter 2023 to third quarter 2024 to give you a visual reconciliation. In the revenue chart, the roughly 12% increase year-over-year was made up of 2.3% increase in rate and a 10.7% increase in OEC fleet on rent.

Mix was an offset of 1.2%, reflecting the net of higher equipment inflation and a more favorable mix of equipment on rent. For clarification, when it comes to revenue, fleet inflation is in the mix to adjust the volume measured at OEC dollars to a unit metric.

Of the 12% growth in the quarter, 7.3 points came from organic rental revenue and 4.6 points came from 2024 acquisitions. Of the 9.5% rental revenue growth year-to-date, the contributing split was roughly 7.2 points of organic growth and 2.3 points from 2024 acquisitions.

Adjusted EBITDA increased 6.2% year-over-year, benefiting from higher overall rental revenue. Adjusted EBITDA margin was strong in the quarter, primarily due to favorable SG&A expense management and higher proceeds at OEC on fleet disposals year-over-year as we shift our mix of sales channel to retail and wholesale and reduce our exposure to lower-margin auction sales.

Shifting to capital management on Slide 17. 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. Higher operating cash flow and disciplined net capital expenditures resulted in $218 million of free cash flow year-to-date. Our current leverage ratio at 2.7x and is well within our 2 to 3x target range and in line with our expectations as we invest in growth.

We remain confident in our business model and are committed to increasing shareholder value. In the third quarter, we declared a quarterly dividend of $0.66, which represents $2.66 per share for the year.

On Slide 18, you can see the continued strength in our primary end markets. In the upper left is the ARA estimate for 2024 North American rental industry revenue. We operate in a growing industry with a total addressable market of $84 billion today.

On the bottom left is the Architectural Billing Index that recorded a score of 45.7% in the August release. Surveyed respondents agreed that prolonged high interest rates continue to discourage new project activity. Also, the survey showed that the majority of architecture firms reported having little experience with mega projects as a lever to offset regional weakness.

Taking a look at the updated industrial spending forecast on the top right, Industrial Info resources is projecting 2024 to be the highest level on record at $372 billion on top of last year's elevated $368 billion spend. In the lower right quadrant is Dodge's forecast for nonresidential construction starts.

2024 starts are estimated to increase 6% to $442 billion. The dotted line on both of these charts reflects growth over pre-pandemic peak levels. You can see that this year in the next 3 years are projected to be some of the strongest periods of activity that this industry has ever seen. Additionally, there's another $342 billion in infrastructure project slated for 2024. That's a 13% increase over 2023.

If you flip to Slide 19, you can see that we're updating the 2024 guidance that was set in February. As noted, our guidance excludes the performance of Cinelease Studio Entertainment, which is held for sale. We are now expecting rental revenue growth of 9.5% to 11% for the full year based on organic growth continuing to significantly outpace the overall industry's performance which includes our outsized share of mega project activity and the contribution from the 2024 acquisitions.

Our full year adjusted EBITDA guidance range is unchanged at $1.55 billion, to $1.6 billion, reflecting another year of profitable growth, ranging from 6% to 9% over prior year. Rental equipment CapEx is expected to come in near the high end of both our net and gross CapEx ranges.

Now before we open it up for Q&A, let me leave you with this. While the broader macro environment is clearly transitioning in 2024 from the outsized growth of the last 3 years. Today's demand drivers are multidimensional for the largest, most diversified companies.

Herc continues to outpace market growth by capitalizing on our increasing market share, pricing leadership, broad product and services portfolio, expanding branch network and team members dedicated to our company's purpose. And as we continue to gain a foothold in the fast-growing mega project environment, roll out our operating system called Herc3OS and improve our fleet efficiency, we are further elevating our competitive advantages, solidifying our path for sustainable long-term growth.

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

[Operator]

[Operator Instructions] Your first question comes from the line of Jerry Revich from Goldman Sachs.

[Jerry Revich, analyst]

I hope you're doing well, too, Larry and team. I want to ask the performance that you guys had in terms of fleet on rent was generally in line with OEC growth, so essentially time utilization flattish year-over-year. Can you just talk about with the dynamic of the hurricane that you mentioned in the fourth quarter? Are we at a point where time utilization should be improving year-over-year in 4Q and entering '25 just given that cadence mark?

[Lawrence Silber, executive]

Good question, Jerry. I mean there's a lot to unpack there. There's a lot to impact really in the quarter and even as we sort of roll into 4Q. I think that we certainly will expect some uplift from the hurricane. But I also think it's probably too early to sort of begin to pinpoint what that impact is in the quarter. And that's not necessarily avoiding your question, but the reality is, we know where we are today, but the storms impacted 3 of our regions. And additionally, the duration, there were 2 different storms really involved here, and they were very different. And so I think as we sort of unpack and work our way through, we'll have a better feel for sort of the impacts on the uplift of timeout. And the mix, really, there's a large specialty component to that as well. But I think your first part of your question was reasonably in line. I think from a core perspective, we achieved fleet efficiency. It's really the overhang from the M&A activity, which was heavily weighted into the back end of Q2 and really into the front side of -- and so that was weighing on us in the quarter where about half the fleet growth in the quarter came from M&A.

[Jerry Revich, analyst]

Super. Appreciate the color. And then from a rate standpoint, it looks like normally, you folks have pricing that's up 4Q versus 3Q. So should we be thinking about the exit rate for pricing essentially in that low to range and at that level of pricing. I'm wondering if you folks are in a position given the cost structure to deliver stable margins as we think about what that means heading into $25 million.

[Lawrence Silber, executive]

Yes. I mean, again, I think it's sort of a marketplace that's sort of performing as we would expect it to. I think the sequential improvement that we gained in was right in line with where we thought it was going to be, and that sort of aligned to Q2 sequential. As you work your way through that movement generally historically speaking, has been a bit less than 3 and 2, really, respectively. But I don't think directionally, Jerry, not trying to get too pinpointing here. directionally, I don't think you're too far off in terms of the exit point out of 4Q and into Q1 of 2025.

[Jerry Revich, analyst]

Sorry, Mark. The cost part of that conversation? Is that level of rate enough to get you to stable to up margins given the inflationary picture?

[W. Humphrey, executive]

Yes. I mean, again, right, I mean, everything is sort of driven by the demand side of this, right, sort of driving into the fixed cost structure of our business. But again, all else being equal, that's accurate. Thank you.

[Operator]

Your next question comes from the line of Robert Wertheimer Heimer from Melius Research.

[Robert Wertheimer, analyst]

There's a lot of cross currents here. Progress on margin, fleet efficiency seems improving and better. The thing that surprised me a bit was the CapEx increase, where I know you guys can grow and I know you've got greenfield, when you've got acquisitions and I know there's opportunity there. But I'm wondering, is that a signal that the mega projects are rising enough to really absorb the fleet? Is that a signal that you see the industry being constrained by cost, cost and can't raise CapEx? I'm just a little bit curious about that because I might have guessed a slight trim as opposed to an increase.

[Aaron Birnbaum, executive]

Rob, yes, good question. This is Aaron. As you saw, we raised the guidance on the revenue. So our revenue view for the year is stronger than it was. 2 or 3 quarters, we actually bought less fleet than we did a year ago, and that will be the case when we finished the year. But it's really matching up the fleet mix, the needs of our customers, primarily in the mega arena where we need to kind of go to the high end of that guidance. And that's kind of what our view is on our CapEx from the end of the year. So it's really a fleet that's still going to come in the remaining of the year, but it's really revenue that will be generated as we go through the quarter and into the first part of next year.

[W. Humphrey, executive]

And I think, Rob, maybe just to add on to that, right, I think we'd be having a different conversation if we hadn't achieved fleet efficiency through the first 9 months of the year. I don't think we'd be having the conversation. So I think at the end of the day, right, if customer demand is sort of driving this, and we're meeting those demands.

[Robert Wertheimer, analyst]

Okay. That's helpful. And I'm sorry for this basic question. But could you just give us the exact definition on fleet efficiency. I'm not sure where Cinelease or anything else falls out of that.

[Lawrence Silber, executive]

Yes. No, completely fair. It's really just our challenge to get revenue growth ahead of fleet growth. Accidentally, right? So you unpack that in the quarter, top level, it looks like you were fleet inefficient, right, because you grew versus fleet growth of 12.3%. If you unpack that to the M&A piece, the M&A piece was inefficient while the organic piece was efficient.

[Operator]

Your next question comes from the line of Steven Ramsey from Thompson Research Group.

[Steven Ramsey, analyst]

On the mega projects, as you make progress capturing that opportunity with market share that's well above your total rental market share. What have you learned as you've gotten into this as far as the competitive nature of these jobs as they ramp activity, it seems like more fleet types are being used at this point in the opportunity as they mature. Just curious your learnings and if you think the market share you've achieved if there's even upside to that?

[Aaron Birnbaum, executive]

The market share that we achieves kind of what we set out to achieve, a multiple of our current market share of 3 or 4 times. So we're happy where we are. It remains to be seen if that expands, but that's kind of how we've strategically gone after the opportunities. In the mega arena, what you find is that they end up going into a variety of markets. And the local players, they get pieces of that because they're there, they've got available fleet. But what the contractors really want is they want companies that have scale enough to deliver large volumes of fleet. They want technology, they want a young fleet, and they want safety program so that our employees and their employees are in a safe environment. So those are the 3 or 4 critical pieces that is required by the large customers.

[Lawrence Silber, executive]

Yes. Additionally, I think to be it's important for any of the people that are really sort of in the mix in a big way to have a strong specialty offering of fleet that they can supplement the core fleet with. And I think that is certainly helping us in maximizing our capability and our penetration with these accounts.

[Steven Ramsey, analyst]

Okay. That's helpful. And then on the improved used channel sales mix, what inning are we in on volume moving through these channels? And then secondly, what inning are you in on the operating efficiency of this activity just as you learn how to operate better in a scale?

[Aaron Birnbaum, executive]

Yes, we're definitely in the early innings of kind of transitioning to the retail wholesale channel mix for us. It's really -- this is the first full year we've been delivering on that. And we're getting the -- our team's focused on it from our sales force and our marketing team. So it's early for us. And we think that over the next 2 or 3 years, that mix of used equipment sales will just continue to come in higher. And we like that because we know that will give us the higher proceeds as we exit each quarter.

[Operator]

Next question comes from the line of Neil Tyler from Redburn Atlantic.

[Neil Tyler, analyst]

First question, just on the rate increase. I think previously, once or twice, you've given us a bit of a sort of breakout of differing trends within the number that you report between some of the short-term rate trends and longer term or sort of local and national. And so I wonder if you could do that. And within that, perhaps, discuss how the change in mix, i.e., the growth in Mega has impacted that 2.3% number. And then I may have missed this earlier, but on fleet efficiency, when you're describing the sort of outlook there -- can you help us in the context of your medium-term targets and medium-term sort of CapEx guide that you presented at the investor event last year. Where are we on that path given the CapEx guidance you've given today, for sort of '25 and '26. And is it the right assumption from your comments that fleet efficiency improves sort of year-on-year-on-year over the next 2 years as well as into the back of this year?

[Lawrence Silber, executive]

Let me take the rate question first. Sort of the -- so let's talk about noncontract versus contract. I would tell you that both of them are performing as expected. I think that the spot market is stable. The break between those will pass on sort of giving that. But I would tell you sort of big picture performing as expected. And like I said, we got sort of a sequential price lift in line with Q2's 60 points. And so I think it's performing as we would intend, remember, right, we're trying to cover off inflation and grab a premium for the service that we provide. And that's our goal and that's our intent. As it relates to efficiency, and I'm now blanking on the specifics of what you wanted me to cover there. From an efficiency perspective, right, and then in context of the goals that we laid out at the end of 2023, I think it's too early to sort of align where we are today with where that 3-year mark would have had us. Obviously, even inside of that plan, fleet efficiency was the expectation. I think that the marketplace in and of itself has changed fairly significantly from the time that we rolled that out to what we're operating in today. And so I think there's a bit of a wait and see there as these interest rates take hold, how quickly developers put activity back online into these local markets. And I think as that demand shows, we'll be ready to capitalize on it. So we're not going to speculate there and buy in advance of that, I think the health of certainly supports that play.

[Operator]

Your next question comes from the line of Tami Zakaria from JPMorgan.

[Tami Zakaria, analyst]

So my first question is, are you able to comment on growth in specialty versus general rent you saw in the quarter relative to the overall 7.3% organic growth, I think you said you saw in the quarter for rental revenues. I'm just trying to understand specialty versus rental performance in the quarter.

[Lawrence Silber, executive]

Yes. I mean, we don't specifically break that out. I mean I think generally speaking, specialty grew at double digits, but we won't get any more pointed than that. It's certainly a tailwind for us and performing extremely well as we work our way through the back half of the year.

[Tami Zakaria, analyst]

Got it. That is super helpful. And then my next question is, I think you mentioned local account revenues increased in the quarter due to acquisitions in greenfield. Are you able to quantify or give director commentary around the organic growth in local accounts ex these greenfield and acquisitions, in the quarter. I'm just trying to understand how local markets did in 3Q versus the prior 2 quarters. Is there any stabilization going on or things for? So any color there would be helpful.

[Lawrence Silber, executive]

Certainly. I think no -- I mean, in terms of getting that pointed to local market growth versus national growth. I mean, obviously, we grew organically somewhere in that plus 7% range. I would tell you that the color is, is that sort of the local market behavior coming out of Q2 is really what we experienced in Q3. So I would say to you from a color perspective, stabilized as we worked our way through Q3 as we had anticipated coming out of Q2. .

[Operator]

Your next question comes from the line of Ken Newman from KeyBanc Capital Markets.

[Kenneth Newman, analyst]

I just wanted to touch on the updated guidance this morning. Mark, I think it does imply 4Q core EBITDA rental margins in the low to mid-50% range. Obviously, that's a decent step up from both last year and last quarter. I know there's a lot of moving pieces here, whether it's the hurricane impact or maybe some better volume absorption. But I was curious if you could just help us provide a bridge from 3Q to 4Q on those various buckets on what helps you kind of get to that midpoint.

[W. Humphrey, executive]

Well, I mean, I think, generally speaking, if you look at sort of 3Q, 4Q historically, those have performed at reasonably the same levels, give or take, sometimes 3 outperforms a 4 and sometimes a 4 outperforms 3. But I think as we walk into 4Q, you're not wrong. There's going to be a bit of hurricane lift there to be determined. But I think it's more around sort of the cost actions that we've taken that we talked about in Q2. And then obviously, the demand components that we've talked about, there's a lot of moving parts underneath that. But I think that sort of gives us the sort of confidence to talk through it in the way that we have. I think the other piece of this is that if you look at 4Q 2023 a bit of an easier comp than 3Q 2023. So I think all of that sort of relative put all of that into the mix, and that's sort of where you fall out.

[Kenneth Newman, analyst]

Okay. Got it. So is it fair to say that just levels of magnitude from a higher 30,000-foot type of view. It's more so the cost actions, maybe levering SG&A more so than a mix benefit from hurricanes at this point?

[W. Humphrey, executive]

To be determined. I think we had to put this together with a bit of 1 arm tied behind our back, right, because we're halfway through the first month of a significant amount of of hurricane disruption. But I think all else being equal, you're not wrong.

[Lawrence Silber, executive]

Yes. A little too early to tell on the hurricane. 2 different types of hurricanes, different fleet mix for the 2 hurricanes, depends on the length or duration of gear on rent for that. And I think what we've done is use our best estimates based upon the past. But again, too early to tell.

[Kenneth Newman, analyst]

Yes. Got it. And then just quickly, my follow-up here. Look, I know you're not ready to give '25 guidance yet, but I think you are in the process potentially of securing build plots for new equipment for delivery next year. given what you're seeing at this point in time, is it fair to assume that you expect to drive fleet growth beyond replacement at 2025?

[Lawrence Silber, executive]

I think it's a little too early to sort of say that. I think what we are doing is looking at replacement CapEx first and looking at mega project requirements that stem from that and then look at cross-selling opportunities at our acquisitions and where we need to fill and gravitate that towards those -- to make those acquisitions reach the multiples that Aaron talked about. So I think those are our top 3 priorities and our field is working on that together with our fleet team. And -- but it will be a minimum at least at replacement CapEx, which you know we replaced the fleet on a 7- to 8-year average. So sort of take our $6.9 billion or $6.8 billion of core fleet, and that's about 1/7 or 1/8 of that will be a minimum.

[Operator]

Your next question comes from the line of Sherif El-Sabbahy from Bank of America.

[Sherif El-Sabbahy, analyst]

I just wanted to touch on flow through. I understand third quarter is impacted by the local slowdown in M&A and greenfield. Guide seems to imply similar flow-through in Q4 to Q3. But just given the pace of M&A and your current market visibility, how should we think about flowtegoing forward? Particularly if you maintain a similar pace of M&A next year as you have this year?

[W. Humphrey, executive]

Good question. Obviously, Sherif, there's a lot of moving parts here, right? Sort of the larger component of rev growth coming from M&A just sort of making it immature by its very nature and the challenging local market slowdown. I think when you look at '23, right, that was a margin-expanding year, right? We moved EBITDA margin 160 basis points in 2023, which implies extremely heavy flow-throughs or incremental margin, if you will, we're in a different environment now, right? Cost actions are coming through to sort of hold margin. I would tell you that sort of given the comp of 2023 fourth quarter that I would anticipate that the flow-through in 4Q 2024 will be better than 3Q 2024.

[Sherif El-Sabbahy, analyst]

Understood. And are you able to kind of give us an idea of the magnitude of the impact from M&A and greenfield versus the slowdown in the third quarter?

[W. Humphrey, executive]

In the quarter, I mean, no. I mean, again, I mean, it's sort of -- it's just in the cake, right? I mean it's there. It is sort of -- it's just right now, right, the M&A piece of this where that's generally sort of been in the mid-20s to 30 is sort of ranging into that 40% of your rev growth contribution, just given M&A timing.

[Operator]

Your next question comes from the line of Mig Dobre from Baird.

[Mircea Dobre, analyst]

Yes. Larry, maybe just clarification here. Your comment on Slide 19, concerning guidance mentions that there is some contribution from hurricane. Is this -- you essentially baking in sort of an average hurricane or weather event into this guide with your comments earlier in the deck pointing to potential upside. So if these hurricanes are worse than average, then that would be the source of upside? Or is it that the guidance just does not reflect really any contribution at this point because you don't know how to size it. I'm just looking to clarify that.

[Lawrence Silber, executive]

Yes. I would say we've baked in just what has been a historical normal average at this point, nothing more, nothing less. And that -- and it's not the only thing contributing to the upside in Q4. So it's just 1 of the components for Q4 and not significantly impacting the upside.

[Mircea Dobre, analyst]

Okay. because that was going to be my second question. On the revenue guidance raise, what sort of drove that, give or take, $50 million of the raise? And how come, I guess, we're not seeing more of an impact on EBITDA, both from the revenue and also from the incremental M&A that you guys have done this year.

[Lawrence Silber, executive]

I think we talked about why there is an impact on the EBITDA. We do have some drag from acquisitions and greenfield particularly because they are more local market focused and they're not up to get the margins that our existing locations are, and it takes a a 24-month period to do that. So I don't think there's. I'll let Mark comment on the first part of your question.

[W. Humphrey, executive]

Yes. I mean there's a fair number of tailwinds that sort of have worked their way through the back half of the year, Mig. One of those is just the mega project growth as you think about that year-over-year that has performed as we had anticipated -- had anticipated it through the first 3 quarters and that anticipation into 4Q is also 1 of those levers that's being pulled as we think about our growth components for REV in 4Q. .

[Operator]

As there are no further questions at this time, I would like to turn the call over back 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]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.