Good day, and welcome to the Herc Holdings Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Elizabeth Higashi, Vice President of Investor Relations. Please go ahead.

Thank you, Cole, and thank you all for joining us this morning, and welcome everyone to our second quarter 2021 earnings conference call. Earlier today, our press release, presentation slides, and 10-Q were filed with the SEC, and are all posted on our IR website. This morning, I'm joined by Larry Silber, President and Chief Executive Officer; Aaron Birnbaum, Senior Vice President and Chief Operating Officer; and Mark Irion, Senior Vice President and Chief Financial Officer. We'll review the second quarter, our view of the industry and our strategic outlook. The prepared remarks will be followed by an open Q&A. Before I turn the call over to Larry, there are a few items I'd like to cover. First, today's conference 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. Please refer to slide 3 of the presentation for our complete safe harbor statement, as well as the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2020. 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. Finally, a replay of this call can be accessed via dial-in or through a 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. I'll now turn the call over to Larry.

Thank you, Elizabeth, and good morning everyone. Our quarter results continued to demonstrate outstanding operational execution. Our industry-leading rate management delivered strong results in a favorable operating environment, which benefited from tight equipment supply and steady rental demand. Given the current operating environment, we also decided to invest an additional fleet before the end of the year and have raised our 2021 net fleet capital expenditure guidance by $100 million to $500 million to $550 million. Our year-to-date momentum is expected to drive a year of record performance. Given the indications for the rest of the year, we've raised full year adjusted EBITDA guidance for the second time this year to $840 million to $870 million. Now, please turn to slide number 5. We recently celebrated our fifth anniversary as a public company on July 1. With a history of over 56 years in the equipment rental industry, our 4,800-plus member team works hard to ensure our customers achieve optimal performance safely, efficiently and effectively every day. Our employees spoke of our vision, values and mission in our recently produced 50-year anniversary video, which is posted on our corporate website. Everything we do is built on our promise and commitment to help our customers and communities build a brighter future. In the fall, on September 20, we are hosting an in-person Investor Meeting in New York City. We'll be sending out more details closer to the event date, but please mark your calendars to attend either in person or virtually. Now that we have successfully executed our first five years, we'll be sharing with you the next stages of our journey at that event. We integrated six branches via acquisitions and opened three greenfield locations in our network this year. As of today, we are now operating 280 locations across the United States and Canada in 39 states and five Canadian provinces. We're excited about the momentum we are generating and in developing our M&A pipeline. Now, please turn to slide number 6 for a brief overview of our second quarter financial results. Given the unusual performance in 2020 due to the impact of COVID-19, we share here a comparison with not only 2020 but 2019. As you can see, our performance in 2021 clearly returned to a trajectory of growth over the last two years. Equipment rental revenue was $448 million in the second quarter, an increase of 36.8%, or $120.4 million compared to the prior year and 9.9% over 2019. This increase was driven by solid performance in our core business, growing market share from our ProSolutions business, and investments in our Entertainment business, which are now outpacing our pre-pandemic performance in 2019. Adjusted EBITDA grew by 39% over the prior year and 18.8% over 2019. Our focus on operating leverage improved year-over-year adjusted EBITDA margin 170 basis points to 42.3% in the second quarter of 2021. We reported net income of $47.1 million or $1.55 per diluted share in the second quarter compared with $2 million or $0.07 per diluted share last year. As you can see from our results, we are indeed off to a strong start in 2021. This is an exciting time for team Herc, and we look forward to breaking more records as the year progresses. Now please turn to slide number 7. We recently published our 2021 corporate citizen report which aligns to the global reporting initiative standards for the first time. Located on our Investor Relations website, we hope you find the additional transparency of interest. We established three major goals for 2030 using 2019 as a base year. First, reducing our greenhouse gas emissions intensity by 20% to 25%; second, reducing our non-toxic waste to landfill by 25%; and finally, continuing to improve our safety annually with a target TRIR of 0.49 or lower. We intend to report annually on our progress and look forward to discussing our ESG program with you. Now for more about the details of our operations in the quarter, here is Aaron Birnbaum, our Chief Operating Officer. Aaron?

Thank you, Larry. Our second quarter results reflect the exceptional professionalism and commitment of our entire Herc Rentals team. The team deserves a huge thank you and congratulations for a job well done coming off a really tough 2020. We greatly appreciate the contributions of each and every one of our team members, and I would like to personally thank all of you. Congratulations, team Herc. Now please turn to slide 9. Our Q2 results showed exceptional performance compared to 2020, but also compared to the strong second quarter of 2019. Business activity was solid and all of our end markets are showing positive momentum. The strategic investments we made to diversify our customer base and our industry verticals provide a solid foundation for growth as we successfully built upon our urban market strategy and deepened and widened our market segments throughout North America. Our ProSolutions business increased year-over-year by approximately 30% in the second quarter of 2021 as we continue to expand our market share. Our focus on the power generation, climate control, and remediation needs of our customers has contributed to the double-digit annual revenue growth in ProSolutions over the last four years. In the second quarter, our Entertainment business continued to benefit from the tailwind of demand for entertainment content and the investments we made in 2020. Our Entertainment business was practically zero in last year's second quarter, so the return to production activity contributed meaningfully to this year's results. Our entertainment strategy and operating leverage will continue to contribute to rental activity this summer and fall, particularly as activity from live music and sporting events continues to recover. Our core business showed the normal upturn of demand in the second quarter, and we benefited from solid operating performance in our regional operations. The integration of our acquisitions is on track, and we are developing an M&A pipeline. Our Herc operating model continued to drive operational performance in fleet efficiencies and margin improvement, offsetting increases in year-over-year personnel-related costs in the quarter. Our scale and leverage will support further margin improvement during the year, as our revenue growth remains robust. Now please turn to slide 10. As a provider of essential services, our most important commitment focuses on health and safety. We will continue to enhance the well-being of our team by investing in training and operating a safe environment for our employees, customers, and communities. We have also implemented a new Health & Safety Management System this year, which will help contribute to our ability to work safely. The new management system helps us improve the way we approach working safely by providing a solid and easy-to-understand foundation of our system programs and processes. It also provides a methodology to correct any safety issues and streamlines our external reviews and safety audits. As you've heard us talk in the past about various safety initiatives, one of our major internal safety programs focuses on Perfect Days. That is days with no OSHA reportable incidents, no at-fault motor vehicle accidents, and no DOT violations. In the second quarter, on a branch-by-branch measurement, our branch operations achieved 98% of days as perfect. We are always striving for 100% perfect days, and our commitment to safety means continuous focus through communications and training. It also means applying a team with the equipment that will help them perform efficiently and safely, particularly in their driving and daily equipment servicing and maintenance activities at all of our branches. Our rental days are best when they're done safely seven days a week. Now, please turn to Slide 11. Our fleet composition at OEC is on the left-hand side of this slide, total fleet was $3.76 billion, as of the end of the second quarter, about 0.3% higher than OEC at the end of Q2 2020. We continue to invest in our specialty fleet, which includes ProSolutions and ProContractor, and now accounts for about 24% of our total fleet as of the end of Q2 2021. On the right-hand chart, you can see OEC fleet expenditures in Q2 2021 were $188 million, an increase from our second quarter in 2020. Fleet disposals were $71 million in the second quarter, compared to the $83 million of OEC sold in last year's comparable period. Our fleet department has done a great job getting in front of what looks to be a tight supply market for new construction equipment from the OEMs. We have added $100 million to our 2021 net fleet CapEx and have not experienced any material increases in costs this year. The average age of our disposals was 86 months in the second quarter. Equipment sales proceeds as a percentage of OEC returned to pre-pandemic levels at approximately 41%. We benefited from tight supplies of equipment and higher pricing for used equipment, as well as a higher percentage contribution of the total from retail and wholesale channels of disposal. Now, please turn to Slide 12. Our diverse customer mix, with our base of large national customers operating in essential business sectors and our expanded specialty business, continues to drive our sales strategy. Specialty continues to be the growth driver in Q2. Our other verticals and major industrial customers and utilities and energy, healthcare, warehousing and manufacturing, and general construction are gearing up and look to support growth in the upcoming quarter, where we experienced strong seasonal demand. We are also focused on high-growth segments of the economy, and our end markets are showing the momentum to generate a strong recovery in 2021. We expect to drive additional fleet efficiencies and operate a lean cost structure to continue margin expansion. Now I'll pass the call on to Mark.

Thanks, Aaron, and good morning everyone. We continue to be really pleased with our performance and delivered another excellent quarter in Q2. We took a positive handoff from Q1 and built momentum and volume and rate throughout Q2. The seasonality of the business is such that Q3 is better than Q2 in almost all circumstances. So the positive momentum out of Q2 into the back half of 2021 sets us up for a record year, and we have raised guidance for the second time this year. We continue to expand our margins and our fleet utilization, and we're executing on our strategy to provide excellent customer service and premium equipment to our customers throughout North America for both large and small projects. As we continue to progress through the next step in the economic cycle, we have the capital available to accelerate growth and have a track record of utilizing operating leverage to accelerate profitability. Slide 14 shows a summary of our second quarter results, compared with 2020 and 2019. The comps to 2020 are obviously impacted by a weak base quarter, with Q2 2020 being the depth of the COVID economic shutdown. I'll refer to them occasionally, but the real comparison and the real measurement of our success in Q2 of 2021 are the comparisons to the second quarter of 2019. 2019 was the peak of the last cycle in our previous record year and decent comparisons. The fact that we are beating all of our Q2 2019 comps in Q2 2021, only a couple of quarters away from COVID shutdowns, speaks to the resilience of our business model and our ability to adapt and execute in all sorts of operating environments. Equipment rental revenue increased 36.8% from $327.6 million in 2020 to $448 million in the second quarter of 2021, primarily due to improved volume and continued momentum in pricing. Compared with 2019, equipment rental revenue increased 9.9%. We continue to deliver solid profitability with adjusted net income in the second quarter of 2021 of $47.6 million or $1.57 per diluted share, compared with adjusted net income of $16 million or $0.55 per diluted share in 2019. Adjusted EBITDA increased 39% in comparison to Q2 2020 and was up by 18.8% in comparison to our previous cycle peak second quarter in 2019. Adjusted EBITDA margins were also a record for the second quarter at 42.3% in 2021, improving from 40.6% in 2020 and by 550 basis points from 36.8% in 2019. As we have previously discussed, rolling over the low base effect of the cost side of the business and the COVID-impacted quarters of 2020, it was likely to impact our ability to maintain our historic flow-through and would slow down our margin expansion. REBITDA margins for Q2 2021 remained strong at 44%, down by 20 basis points from 2020, but up by 240 basis points from 41.6% in 2019. Flow-through of 43.4% was in line with our expectations and should return to a targeted range of 60% to 70% in 2022. On slide 15, we highlight pricing and utilization trends by quarter. The graph on the upper left illustrates our 2021 year-over-year pricing with the latest quarter, reflecting average rates up 190 basis points compared to last year. We continue to be happy with our rate execution and have decent momentum building for 2021. The current market environment of tight equipment supplies and steady demand has supported our focus on rate, and our team continues to deliver rate lift. We believe we are leading the market as we continue to benefit from our excellent pricing tools and the discipline and professionalism of our sales team. We have got momentum back into our pricing, and you can see from our 2019 results the performance we can deliver in a favorable environment. Dollar utilization was a post-spin record 42.1% in the second quarter, a solid improvement of 410 basis points from pre-pandemic 2019. You can see from the chart that we have real momentum in dollar utilization in Q1 and Q2, and this positive momentum changes our fleet efficiency going forward and sets up a record year in terms of fleet utilization and returns. Fleet size remains down year-over-year and in comparison to 2019. We have our 2021 purchases rolling in and should begin to see fleet growth in the third quarter. Compared to 2020, rental volume was up by 19.7%, and rates were up by 1.9%. Rental revenue grew 36.8%. So we had a big contribution from the mix of 12.7% in the quarter. Approximately three-quarters of this mix change came from the Entertainment business, which has a lot of bulk fleet assets as part of the rental mix. The risk came from improved fleet mix in customer mix, which have also improved from the depths of COVID shutdowns. In addition, we've got a 2.5% revenue growth from improved ancillary revenues. This outsized contribution to revenue growth from mix will reduce in Q3 and Q4 as we roll over the rest of the COVID-impacted quarters from 2020. Please turn to slide 16. Adjusted EBITDA for the second quarter was $207.7 million, an increase of 39% to $58.3 million compared to $149.4 million in 2020, and an increase of 18.8% compared with 2019. A keen focus on operating leverage and improved profits on the sale of rental equipment contributed to the improvement. Adjusted EBITDA margin was a record for the second quarter of 42.3%, an increase of 170 basis points year-over-year. DOE increased $58.3 million compared with the second quarter of 2020; increases in personnel-related expenses, freight and delivery, maintenance and re-rent costs related to higher volume were the primary contributors. The cost comparisons are obviously skewed by the cost controls in place during the COVID shutdowns, such as furloughs and overtime controls. Our 2021 DOE are at a more normal level for the volume of the business we are currently transacting and should run at a similar percentage of rental revenues in the next couple of quarters to what we ran in the back half of 2019. Second quarter SG&A expenses increased by $17.2 million compared with 2020, primarily due to higher sales expense, including commissions and bonus incentives, management stock incentives, and travel expenses, offset by lower bad debt related to improved collections. Similarly to DOE, SG&A comps to 2020 are skewed by COVID, and back half 2019 percentages of rental revenues are a better way to think about how these costs will run out for the rest of 2021. This chart highlights an impressive change to our margin profile over the last few years. We made big strides in terms of margin in 2020 during COVID and holding on to those margins in 2021, despite the base effect comparisons from the unusual level of cost controls in place last year. On slide 17, we generated $141 million of free cash flow with net rental CapEx of $168 million in the first half. We are guiding to $500 million to $550 million of net fleet CapEx for the full year. So the second quarter is not fully reflective of the cash expenditures that we will incur in the third and fourth quarters, when we pay for much of the fleet received in Q2. Strong results from operations also contributed to the reduction in net leverage, which decreased to 1.9 times, as of June 30, 2021, compared with 2.6 times a year ago. We are now below our targeted net leverage range of two times to three times. Total debt was $1.5 billion as of June 30, 2021, a reduction of about $114 million from December 31, 2020. We had total liquidity of over $1.5 billion as of June 30, 2021, comprised primarily of availability on our ABL credit facility and cash and cash equivalents of $34.6 million. With no near-term maturities, we have ample liquidity for 2021 and into the future, and ample capital to invest in our business to support future fleet growth into the new cycle. On slide 18, we show the latest industry forecasts. Looking at the macro market forecasts, there has not been a lot of change year-to-date. ARA is still forecasting the North American rental market to grow by only 4.1% in 2021 and does not forecast to return to 2019 levels until 2023. Now our actual rental revenues are up year-to-date on 2020 by 18.8%, and are up year-to-date on 2019 by 8%. Our growth rates imply we are either gaining share or the forecasts are off. And I think it's likely to be a combination of the two. This is consistent with past experience. Rental companies of scale with broad rental fleets and a well-diversified customer base have consistently grown faster than the rental industry in general. And as we have seen in 2021, Herc is a company of scale with a well-diversified mix of customers. We are clearly in the early stages of the next construction up cycle, with steady demand even before we get into any potential benefit from any future boost to infrastructure spending. Equipment suppliers are tight, with our OEMs struggling to manufacture and deliver new equipment due to worldwide supply chain bottlenecks. This is a very favorable environment to own $3.8 billion of rental fleet as our customers really appreciate our fleet availability and commitments to service. It should also remain a favorable environment for increasing rates, as everyone is facing cost inflation to a certain extent. In addition, the majority of our business is not directly connected to non-residential construction. Our ProSolutions business is a real strategic benefit, and we will look to continue to gain share and grow that business. Entertainment looks to be a growth engine for at least the next couple of years with our investments in supporting content production, paying dividends in the live event business likely to rebound later this year. There is pent-up demand for maintenance and turnarounds, and a lot of our industrial plants in this segment should also rebound in 2021. There is plenty of demand in most of our end markets to support growth for the remainder of 2021 and into 2022, and we have the balance sheet and liquidity to be able to fuel that growth by investing in our fleet and our market share, and that is what we intend to do. Turning to slide 19 for our updated guidance, the Herc team continues to execute on our strategy and to exceed our own expectations. With strong momentum out of Q2 heading into the seasonally strongest demand quarter in Q3, we are now forecasting a record year and are taking our guidance for fiscal year 2021, adjusted EBITDA up to a range of $840 million to $870 million. Our purchasing department continues to excel and has been able to source additional fleet in an incredibly tight market for new equipment. As a result, we're taking up our net rental equipment CapEx guidance to $500 million to $550 million. We are pleased with the performance we have reported for the quarter and are excited about the performance we anticipate over the next couple of years. And as we take advantage of a hot start into what looks to be an exciting new industry up cycle. With that, I'll turn the call back to Larry.

Thanks, Mark. Now everyone, please turn to slide number 20. This slide shows how far we've come over the last five years in closing the gap with our industry peers. Our latest 12 months results show adjusted EBITDA margin has increased to 40.8% for the period ending June 30, 2021. And our second quarter adjusted EBITDA margin was 42.3% in 2021 with expectations for improvement in Q3. Diversity of customers, geographic regions, and end markets will drive solid market opportunities. We're focused on increased scale in high-growth urban markets through new greenfields and M&A opportunities. Operating leverage is expected to improve margins longer term. 2021 is likely to be a record year in revenues and net income as implied by our updated adjusted EBITDA guidance. And our strong free cash flow provides liquidity for long-term growth initiatives and the foundation for a review of our capital allocation plan over the long term. We plan to discuss those future plans with you at our upcoming investor meeting on September 20. So again, please mark your calendars. And now operator, please open the lines.

Thank you. Our first question today will come from Ross Gilardi with Bank of America. Please go ahead.

Good morning.

Good morning, Ross. How are you?

Doing good, thank you. I don’t want to take away from what you’ll discuss on September 20, but you mentioned some shifts in your approach to capital allocation. Herc has focused on turning the company around over the past five years, maintaining the fleet on OEC, and reducing debt. Now that you're below your leverage target, should we anticipate that the company will align fleet growth more closely with market trends going forward? Additionally, what are your views on mergers and acquisitions and the potential for a larger transaction if an opportunity arises that makes sense?

Yeah. Great question, Ross. I'll answer as much of that as I can again, without stealing thunder from September. We are in discussions with our Board about what we do considering where we are relative to our performance and our liquidity and our balance sheet that exists today. Obviously, we'll continue with our first priority as investments in the business, investments in fleet, investments in greenfield, investments in our people, in training and technology. And then we'll certainly continue to look and we are developing a fairly strong M&A pipeline which will be a greater focus certainly than it's been in the past, but we've been on that track now for better than six or seven months beginning with our acquisition in late December. And we'll then meet with our Board and discuss what we might do around either a dividend or buybacks or other things relative to capital allocation.

Thank you. Can you provide details on the 1.9% rate breakdown between your general rent and specialty business? If possible, could you quantify which area had a greater impact?

I think Ross, it was pretty much across the board. So it's coming from all layers of the business. We had obviously strong sequential momentum in the stock market and the spot rates. That tends to be a little bit more volatile than the contract rate. So getting really good results in spot and working on the contract rates to sort of build momentum up through that channel.

Okay. Just lastly, Mark, if you consider the usual seasonal trends for the rest of the year, you appeared quite confident that the interest rate environment will remain favorable for the foreseeable future. What do you anticipate the year-on-year exit rate to be by the end of the year?

It should continue to build. So, it's a favorable environment. As I mentioned tight equipment supply and steady demand. We're running at high utilization levels. So everything is in place for a favorable rate environment, and we'll continue to stay focused and look to continue to build on the momentum that we've got going in the first half of the year. Thanks, Ross.

And our next question will come from Jerry Revich with Goldman Sachs. Please go ahead.

Good morning, Jerry.

Yes. Hi good morning everyone. I'm wondering if you could just talk about how you're thinking about your pricing philosophy at this point between long-term customers and relative to short-term opportunities. I mean this is the strongest rate environment that you folks as a management team have seen. And I'm wondering what's your approach going to be over the next couple of quarters and how that might differ versus the way your predecessors ran the business previously? Can you give us a bit of context how you're making the decision that you just alluded to Mark a moment ago on the difference between spot versus longer-term work? Thanks.

Yes. I mean I think it's the same or a similar response there, Jerry. So I mean contracts come up annually. They provided us with protection last year less volatile than the local spot market and I think protected us from rate decreases last year. And this year it takes a little bit more time in this environment to get them turned around and start getting lift. So, we're working in the spot market as aggressively as we can. We've got the tools in place to really take advantage and get pricing as we sort of face this tight sort of equipment supply environment and we're executing on that and also focused on just managing our contracts and getting the lift that we need out of that segment of the business also.

And in terms of the sequential cadence of pricing can you talk to that? How did pricing evolve over the course of the quarter sequentially and into July?

It was up sequentially throughout the quarter. So that's what we'd expect and that's what we'd expect to see going through into Q3 and Q4.

And in terms of the 60% to 70% incremental margin targets Mark that you spoke about can you just expand on the drivers of that level of operating leverage. Because looking at our own estimates and consensus estimates we're all well below those numbers for 2022. So can you just build our comfort level of what's driving that level of operating leverage in terms of existing investments any way you could build on that for us?

I mean, I think we've been very consistent in terms of the operating leverage and we've exceeded that range pretty consistently for the last couple of years. 2021 as we expected is a bit weird just given the COVID base effect in the comps. But as we run into 2022 and gear off of that, just the growth of rental revenues it becomes easier to flow through the more volume you've got and the more growth and the sort of actual dollars of rental revenue flow through. So, kind of becomes a little bit easier into 2022 than it was back in 2019 and 2018, when we weren't dealing with the same level of rental revenue growth that we anticipate in 2022.

So it sounds like you're comfortable with that range even if CapEx flexes to the high end of expectations in '22 and you have greater allocation of growth driven by volume versus price? You're still comfortable being well within that range it sounds like.

Yes. No. I mean CapEx is almost neutral in terms of the flow through, right? It's not reflected in EBITDA. But you get 60% to 70% from fleet growth and time utilization improvement. Obviously, rates a lot higher than that, but that's not really been the key driver here in 2021, and we'll be able to run 60% to 70% in 2022 with fleet growth and utilization improvement.

Appreciate the session. Thanks.

Sure. Thanks Jerry.

And our next question will come from Steven Ramsey with Thompson Research Group. Please go ahead.

Good morning, Steve.

Good morning everyone. I have some questions focused around CapEx. You talked about the equipment shortage, seen that in channel checks. And you're able to raise your net CapEx guide significantly. How are you able to do this, given the manufacturing challenges and equipment makers? And would you prefer to take it up even higher than this, if you could?

Hi Steven, this is Aaron. We got our fleet plan set for this year towards the end of last year, anticipating some supply chain delays. As we progressed through the first and second quarters, our business remained strong and we were pleased with our revenue trends. We sought additional capital, as mentioned in the call, and we are quite confident in our current net CapEx. The equipment is arriving a bit later than usual, potentially up to two months late, but we are maintaining a solid rhythm of new equipment deliveries every day in our business, and we expect this to continue for the remainder of the year.

Yeah. And our fleet department has done an excellent job in communicating with our key vendors on availability of manufacturing slots. And that's really what's enabled our decision to add additional capital for this year and working very closely with our vendors, so kudos to our fleet department for excellent work in generating the opportunities for us.

Okay. And then, thinking about this CapEx raise in the delayed lead times versus normal. Does this signal a positive outlook on 2022 both demand and the fleet shortage lasting to that time and you guys investing behind the ongoing opportunity beyond this calendar year?

Yeah. It does signal our confidence going into 2022 on the supply and demand dynamics in the business. And our ability to capture more share in the marketplace.

Thanks, Steven.

Thank you.

And our next question will come from Mig Dobre with Baird. Please go ahead.

Good morning. Hi. How are you?

Yeah. Good morning, everyone. So, on this CapEx point, it's a material increase. And it's coming halfway through the year. I know we had this discussion last quarter as well relative to what some of your peers were doing they were I think a little more aggressive in raising CapEx earlier in the year. So I guess from my perspective, I'm trying to understand, what changed in terms of what you're seeing in the market or how you're thinking about the business through the year to lead to a decision to increase CapEx. Is it that you are trying to manage this pricing dynamic more carefully maybe than in prior cycles? Is it that you've simply seen the end markets progressed differently than maybe your original planning assumptions were? I mean something is different, right? So I want to make sure that we understand exactly kind of how your strategy has evolved through the year.

Thank you. This is Aaron again. I think we have a mix of factors at play. We operate in a variety of end markets and segments, all of which are performing well. Even in the industrial segment, which has remained relatively steady compared to last year, we expect to see improvements in the latter half of this year and into the first half of next year due to scheduled turnarounds. Additionally, the equipment marketplace is tight, so we need to ensure that we have the fleet available for our customers as our sales strategy develops and we strengthen our relationships and reach more customers. We are very confident in our approach to net fleet CapEx.

Yeah. I think it's a combination of market demand, Mig, as well as market share gains. And we're feeding those hot hands in our organization to take advantage of both on activity as it develops.

Yeah. So that's what I was trying to get at. I mean, you're not getting the sense that, given that you've been maybe a little more careful with CapEx than some of your peers there would have been some share loss. You're still thinking that you've managed to gain share, and you're going to do so this year?

Yeah. No, I mean look at our growth rate. It's pretty clear that we're growing well in excess of the market and sure that will play out over the next couple of weeks.

I see. And then I'm wondering based on the updated outlook here, how you're thinking about the exit rate on OEC relative to say 2019. So exit rate in 2021 relative to 2019 based on your updated CapEx plan?

I think look generally we're going to grow our fleet over the back half of the year, and we'll have a higher level of fleet exiting 2021 than we did certainly 2020 and 2019. So fleet will grow in the back half of the year.

Okay. Lastly, I’m aware that you're not providing guidance for 2022, but I am curious about the outlook for the year. What is the status of your discussions with suppliers regarding capital expenditures for 2022? Are you locking in production slots at this point? How are things looking in terms of pricing? Are there any constraints on what will be available in 2022? Thank you.

Yeah. A lot of OEMs, Mig this is Aaron again, a lot of OEMs actually are sold out until next year. But we have secured a good portion, call it at least 60%, 70% of our plan buys for 2022. We've already secured those. So they're scheduled to come in next year. And as far as the pricing element, I mentioned that this year in the second quarter not material price increases. But nearly all the OEMs are looking for some price improvement just from what we all know that's going on in the marketplace; pretty much all of them are looking for some price increases next year. So we're negotiating with all of them at the moment. But we have secured our slots.

Thank you. Thanks for the call.

And our next question will come from Neil Tyler with Redburn. Please go ahead.

Good morning, Neil.

Good morning. I have one more question regarding capital allocation, specifically about the M&A pipeline you mentioned earlier. Is the current tight market making it more challenging to convert that pipeline into completed deals, or do you remain optimistic about what is coming up and your ability to secure those opportunities?

Yeah. Look I think the tight supply actually has probably helped encourage some M&A activity because some of the smaller regional players or geographic players may not have the ability as we do to go out and secure fleet well in advance, and they may not want to make those investments coming off of a difficult COVID year. So in fact, I think what it's done is it's probably encouraged a few players to consider teaming up with someone like Herc to carry out their strategy and their business plans and invest in their business going forward.

Thank you. In terms of the comparison between the second half and the first half, as well as 2022 versus 2021, while M&A activity can be unpredictable, we anticipate seeing those numbers increase as we progress through the latter part of this year and into next year.

Yeah. That's our expectation. And, obviously, as you said, M&A is unpredictable and generally takes some time to consummate a deal and does come in lumps. But we are certainly optimistic about it stepping up.

And our next question will come from Ken Newman with KeyBanc Capital Markets. Please go ahead.

Good morning, everyone.

Good morning, everyone. I'm interested in your thoughts on how you anticipate dollar utilization progressing in the second half of the year. I believe you mentioned expecting a more normal mix in the third quarter, and I assume you're still planning to acquire a substantial amount of fleet based on your capital expenditure plans. Considering all of that, do you foresee a similar level of seasonal increase from the second quarter to the third quarter?

Yes, I think you'll see the usual sequential improvement. Q3 is typically the strongest quarter for us and we're entering it with tight utilization. Everything is positioned for a solid third quarter. The improvements you've observed in dollar utilization are already accounted for. So just because we've had excellent performance in the first two quarters doesn't mean we won't maintain that momentum moving forward. Therefore, we can expect the usual seasonal patterns to hold.

I understand you don't want to provide guidance for 2022 just yet, but it's clear that dollar utilization in the fleet has steadily improved since you became a standalone company. How do you anticipate fleet utilization will look in 2022 and beyond? Do you think a utilization rate in the low 40s could be a reasonable expectation moving forward if the market and industry evolve as you expect?

Since we've been a standalone company, we've been chasing mid-40s in dollar utilization, and that's still our goal.

Right. And then one more for me. Similarly for equipment rental gross margins, I mean just help us think about the cadence of margin expansion into the back half of the year? And I think you mentioned the 60% to 70% incremental margin target into 2022. Any puts and takes here as we kind of think about just segment gross margins in the back half that we should be aware of?

So, I mean I think that flow-through guide is for 2022 not for 2021. So, back half of 2021 was still hampered by the base effects of 2020. So, we're looking for EBITDA margin and EBITDA margin growth for the full year of 2021 over 2020, but that's going to be less than what we've seen in previous years just given that base effect. But we should see an increase at the end of the year over 2020 nonetheless.

Got it. Thanks.

Thank you.

Our next question is a follow-up from Ross Gilardi with Bank of America. Please go ahead.

Thanks guys for squeezing us in. I just want to get your perspective on this terrible building collapse that happened in Florida and potential for much stricter building codes and just the whole sorts of regulation on the back of that. Like what's your take and could that be a driver in any particular parts of your business?

Yes, Ross, I live in a condominium in South Florida, so I appreciate your question. I believe building codes have improved since that building was constructed in the 1980s. There was a significant increase in standards in South Florida, particularly after Hurricane Andrew in 1992. Overall, there has been a steady advancement in building codes throughout Florida, and even Northern Florida saw improvements after experiencing some storms in recent years. Over the past 30 years, there has been a consistent focus on enhancing structural integrity and safety. As a result, I expect a renewed emphasis on older buildings regarding engineering and the 40-year certifications. However, the recent construction projects we are involved with have shown considerable improvement compared to those earlier years.

Yes. Since the early 1990s and through the 2000s, as hurricanes became more common in the Gulf region, there have been significant improvements in building codes related to hurricane protection. These codes now dictate the types of structures and requirements necessary to properly build any type of building, whether it's a high-rise condominium, a commercial facility, or residential housing, to withstand winds of 170 miles per hour.

What about the drought and the forest fires in California? Your specialty rental business focuses on disaster relief. While these are unfortunate events, they appear to be generating sustainable business opportunities for you.

Yes, this is Aaron. Before I moved to Florida, I lived in California, where the frequency of wildfires has certainly increased. We are always ready to respond whenever they occur. Our industry is on hand to assist, whether it’s contractual work or urgent equipment needs, which has become a routine part of our business. Looking ahead, as their infrastructure evolves, some of those large power lines in forested areas may need to be relocated underground. If that happens, it will likely lead to greater demand for rental equipment. Along the West Coast, we have many locations in our network, allowing us to respond effectively to these forest fires regularly.

In fact, PG&E yesterday announced that they're going to be spending over the next 10 years $30 billion to bury power lines along the California coast.

Yes. You need a lot of digging and trenching and a lot of other stuff equipment to carry that task out. So it's really interesting. But thanks very much. Appreciate it guys.

Yes.

Thank you.

Thanks, Ross.

And our next question will come from David Raso with Evercore ISI. Please go ahead.

Hi. Thank you for squeezing me in. Can you clarify again what percent of your next year equipment needs that you've secured? I think you stated that earlier and maybe compare that percentage versus normally where you were this time of the year for next year's equipment needs?

I'd say it about 60% and it's about normal with a normal year.

That's about normal. Okay.

Yes.

And then on the used equipment channel selling, the channels that you're going through given the strength in used equipment can you give us a sense of how you see that mix going forward just thinking about the strength of the market and maybe lack of need to use auction versus other channels?

Strategically, we want to increase our sales through the retail wholesale channel, which we have successfully done over the past 12 to 15 months. We plan to keep focusing on these channels. We will consider using our auction only if there are significant changes in the fundamentals of the marketplace. However, our primary emphasis will be on the retail wholesale sector.

Well, today we're probably close to 80% of our activity through our wholesale and retail channels and 20% through auction. I would say if you go back 12 months to 18 months we're probably in excess of 60% through auction and 40% through the wholesale and retail channels more or less.

Okay. Very helpful. Thank you so much for the time.

Thanks.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Elizabeth for any closing remarks.

Thank you, Cole and thank you all for joining us today. We'll be sending out details of our investor meeting to you all shortly. But obviously, if you have any further questions as always please don't hesitate to reach out, and we look forward to seeing you in person very soon. Thanks a lot. Bye-bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.