Herc Holdings Inc. (HRI) Earnings Call Transcript & Summary

Great. Okay. We'll get started. Good to see everybody. My name is [ Joe Kistler ] with Morgan Stanley. I'm joined with Larry Silber, President and CEO of Herc Rentals; Mark Humphrey, CFO; and Aaron Birnbaum, the COO. Gentlemen, thanks for being here. Larry, you want to start with a few opening comments?

Yes. Great. Thanks, Joe, and thanks, everybody, for joining us today. Glad to see everybody. A little bit quickly about Herc Rentals for those of you that don't know us. We've been in business, this is our 60th anniversary as a company in the equipment rental industry, so the oldest public company in the equipment rental industry. We've been an independent public company now for over 9 years. We're now a team of over 10,000 employees, over 625 locations across 46 states and 5 Canadian provinces. And we're serving an addressable market of about $87 billion and growing in North America. And of course, the industry does have long-term attractive dynamics with the continued switch from ownership to rental -- secular switch from the ownership of equipment to rental. We're investing to sustain a profitable growth trend that we've been on and executing a very strong growth strategy. We've had above-market growth through both investments in fleet, new greenfield openings, a movement into the specialty marketplace and ultimately, with M&A transactions, completing over 50 transactions in the last 4.5 years, adding up until the most recent one, 113 locations and with the most recent transaction that we closed on, which was H&E equipment. In June, we added about 165 locations to our business. We operate primarily in the top 100 MSAs in North America and we certainly know how to allocate capital to drive value in our business and how to successfully integrate acquisitions. This most recent one, I think being #53 on our acquisition trial. So we're leveraging a very proven playbook to integrate the H&E acquisition of June 2. At the end of this weekend, we will be completely integrated all 165 locations, will be on the Herc platform as of this coming Monday morning and operating as one company. So we do have a very diverse and flexible business model with diverse end markets. No one customer represents more than 3% of our business. And with our focus on top MSAs with 1 million people or more, reduces the risk, we become less recession activity. We're more recession-resilient in terms of what we do. We have a very flexible fleet management model, provides opportunity for organic growth and the growth of new businesses and new products and new specialty businesses within that. And our specialty business has become an expertise for us. We're recognized in the marketplace as 1 of the leaders in the specialty platform, and we're looking to continue to grow that and the H&E acquisition will give us the ability to grow that without adding a lot more really bricks and mortar and any more fixed cost capital. So we are disciplined in our investment approach, and we're looking to make sure that we're returning value to shareholders and being profitable as we go along. So with that as an opening, maybe I'll let ...

Yes. Excellent. Thank you, Larry. Why don't we start a bit on the macro side of things. It seems like we've got a little bit of a tale of 2 cities out there. Local markets are soft, but national accounts, mega projects remain pretty resilient. Can you share a bit on what you guys are seeing specifically in your own business in your own markets?

Yes. I would say, look, I think we -- what you said is exactly right. Local markets have been soft. I don't think they're getting any softer. I think they have stabilized at whatever level we're operating now. And those are primarily driven in those local markets by commercial activity that's driven by interest rates with the prospect of some pending interest rate cuts over the course of the balance of the year, that should begin to spur on some of that activity. Most of that activity is going to have a gestation period of minimum of 6 to 12 to 18 months depending upon where they are in the planning and preparation of that project. But the market on a local basis is stable at the moment. We're not seeing any deterioration. And at the same time, I wouldn't say that there's anything other than the Dodge Momentum Index, that's telling us that there's activity about to spur on and that we should see some improvement there. On the opposite side of that, our big national account business, the mega project business is going very strong. We have a great position in the mega project markets. We have said that we want to participate in about 10% to 15% of those projects, we are doing that. And the acquisition of H&E certainly gives us more scale and more capability to address those mega projects that we've been very successful to date on. So with that, we're moving along. Specialty business is a growing portion, as I mentioned earlier, and allowing us to penetrate those large mega projects as well.

Is there anything specifically as it relates to geographies where you're seeing outsized strength? Any areas where there's softness that has to do with some of the recent trade policies or any of the other sort of atmospherics out there that are impacting the business or market negatively?

Well, with the overall market is kind of moderating at the local level, the activity is definitely strongest where there's less regulation, less restrictions to develop projects. For example, the mega project arena, or you see whether it's data centers or LNG plants or stadiums, it used to be like all the EV auto manufacturing, battery-type work. There's really we're going into markets where the restrictions, the regulations were a little bit more friendly. These days, you see those projects, the private kind of funding going towards Texas and the Gulf and the Southeast. So markets such as the West Coast having a little bit more trouble with those garnering those type of projects. So therefore, they're really relying more on the local market activity. And although it's moderated, I mean, you drive around, you see projects everywhere. It's not as robust as some of those markets that are getting those big mega projects. And with those projects, you get a whole influx of infrastructure activity. So that's really what you're seeing. So it's not like geography-wise, there's -- you see differences along the way.

You talked a little bit about the local kind of weakness in the local markets and maybe there'll be some stimulation if rates decrease. What is the primary sort of like function in the local markets? Is it a resi issue? Or how would you describe it?

No, I don't -- certainly, it will apply to resi, but we don't participate really in resi too much at all. I think it's really around commercial projects, whether it's strip malls, whether it's hotels, whether it's local things that spur out of some of these mega projects that create the need for additional infrastructure in a market, whether they have to add banks or hospitals or things like that. But certainly on the commercial side, it requires some interest rate reduction where those investors can get an acceptable rate of return once they build that project so they can rent it out at a cap rate that makes sense, right? And that's really where it's happening.

Obviously, a lot to talk about from an M&A perspective. H&E closed in Q2, and I think you said?

June 2.

Yes, June 2, your initial comments that you guys have flipped the switch or will flip the switch at the end of this weekend on the final sort of ERP transition and implementation. Talk a little bit about first few months, how is it going? What has sort of worked out well versus the underwrite? What's been more challenging?

Yes. Look, what we inherited, we had a period from the time early January when United Rentals was the initial suitor. We came in 35 days later, and then we didn't close until June 2. So during that period, we had some attrition in the business in terms of people and customers. And I think -- so we got down the road and we had to make sure we put a stop to that. We got everything done once we closed recapture that business and put programs in place to recapture that. So we've been pleasantly surprised with the people, with the facilities, with the customer base that we inherited and Aaron can talk more about some of that customer base that we've actually learned from and some things that we're going to be able to pick up.

Yes. The most attractive thing about the acquisition was the scale that we picked up because all of a sudden, we got 30% bigger with the 160-plus locations. The other thing that was super interesting is the opportunity is that is the specialty component at Herc. We had 20% of our fleet dedicated to specialty, which drives a premium dollar utilization end margin kind of profile. At -- on the H&E side, it was only about 3% of their fleet. So that's really where a lot of the synergies will come. And the other piece was kind of talking back to scale. When you talk to whether it's the H&E historical customers or the Herc customers. On both sides, they were pleased with the transaction because it gives them more opportunities to use either H&E if that was the preferred vendor or Herc with our new scale. So we've had many instances on the H&E customer side where they'll call their H&E traditional sales rep and ask, "hey, you got bought by Herc Rentals. You have this product now and they can say yes." So it's been pretty powerful. We've seen a lot of opportunities with synergy through the third quarter. We're measuring all that. And now that we're all going to be on one system as of Monday the whole organization, we anticipate that to really accelerate.

Can you spend a little bit more time, Aaron, on the synergy point, both from a revenue synergy, which you talked to -- you gave the 1 example there, but also a cost synergy, capital efficiency standpoint, how are you guys trending relative to what you said on announcement, and what's your sort of ultimate expectation there?

Yes. I mean I think from a cost synergy perspective, right, I mean, we had published publicized $125 million of cost synergies effectively over a 2-year period. And I think that sort of the run rate now is looking more like will probably be 50% of the way there on a run rate basis as we exit this year. And then so I think that has been fast forwarded to some extent, right? You think about people, public company costs, contracts and the like. Some of that just takes some time to work its way through. But we feel really good about sort of where we're tracking and how that is laying into the financial statements as we work our way into 2026. The capital efficiency side of this really runs to the scale. Going from scaling to scale in these markets allows for efficiency across the board, which ultimately lands in a capital efficiency play. So you think about the revenue synergies accomplished, cost synergies accomplished, fleet efficiency accomplished just being able to say yes more often in these scaled marketplaces leads to a much more efficient capital structure as you work your way forward. And again, we've given ourselves and giving a high-level guide over a 3-year period, and that's our expectation.

Mark, on the point of capital, obviously, this transaction adds a lot of leverage to the balance sheet. How do you think about the near-term deleveraging trajectory and how does that impact your overall capital allocation strategy over the next 12 to 24 months?

Yes. No, good question. I think from a leverage perspective, we thought we would come out at 3.8, which is where it came out at. I think that our opinion has not changed. I think as we sort of work our way through, one, the stabilization of the historical customer base that was H&E, plus the revenue synergies plus the cost synergy attainment that we just talked about, the expectation is, is that we will be inside of our former 2 to 3x leverage profile by 2027. And so I think between now and then, the things that we had historically done, which was sort of tuck-in acquisitions and greenfields, those things will be set to the side as we work our way through this. I think that there's enough opportunity inside of the 165 branches that we acquired that it will take our efforts and energies to get that right over this next couple of years. And then I think once inside that 2 to 3x leverage ratio target, then I think we would go back to a similar structure where it's greenfields and tuck-ins and those sorts of things. But until then, it's all hands on deck to accomplish what we've set out to accomplish.

Sure. Let's talk about ops quickly and maybe to dovetail a bit off of what you said, Mark. Maybe talk a bit about the fleet. You guys obviously inherited a lot of OEC with the H&E transaction, suspect there'll be a handful of dispositions that will happen as you rightsize the fleet in the markets that you're in. Talk a little bit about the fleet footprint going forward, gen rent, specialty, how you're thinking about it and what you think the portfolio looks like a year from now?

At the moment, going through Q3 since June 2 and then through Q4, our focus is getting the fleet efficient. So it's balancing the fleet with the 2 entities. Some of the fleet they had, it prevented us from having to spend our capital on the Herc side, knowing it was coming in. So we kind of reposition that capital we would have used on specialty fleet. As we go through into you look forward, we got some real opportunities when we announced the deal, we said we had roughly 150 specialty locations in the U.S. And with the 160-plus H&E coming in, we're going to be able to accelerate that 150 count closer to 200 as we push more of our specialty businesses into those new markets or in some markets, we'd have 2 or 3 specialty operations of the same type without having to add fixed cost to the business. So we're super excited about that. It will help fuel kind of the margin expansion and the other thing we realized. We suspected, but once we got hold of the fleet and could benchmark the purchasing power that we had going forward, we saw that we had even more purchasing power than we would have assumed beforehand. So when we have to replace that fleet, we'll replace it at a cost point that is more advantageous to us, which will continue to help kind of our dollar utilization story going forward.

So the combined fleet is around 20% specialty, maybe a touch below that. How do you think about that going forward, both from an overall percentage of the total fleet within the specialty categories, where you're focused, where you guys have the right to win? Can you spend a minute there?

Yes. So going into the transaction, about 20% of the Herc fleet was what we would call Specialty. And we talk about Specialty, we'll talk about it in the terms of the types of products. So power generation, industrial pumps, climate control, flooring products, trench transfer products and then what we call ProControl tools, which are smaller tools and industrial tools. Once the transaction closed, our 20% went to 16% just because that wasn't something that H&E really had developed. I think I mentioned their profile is about 3% of their fleet. So we'll continue to walk that -- walk that back up to 20%. Longer term, the number is 25% for us. And as we move that along, that will continue to help our dollar utilization and our margin profile.

Great. So this transaction was obviously important to help bridge the gap to kind of #1, #2 in the sector. And there's sort of a dichotomy when you get beyond the top couple of names in the sector. How do you think about your 2 top competitors today? Obviously, the H&E deal was a transaction that allows you guys to achieve a lot of scale to get closer from just a market share standpoint. What else do you think if you fast forward in the future, Herc needs to do over the next, call it, 5 years to gain more share, become more relevant with the important -- most important customers in the market. So you guys can continue to be in that sort of position where you are today and maybe become the #2 in the years ahead?

Yes. Look, I don't know that we need to become #2. It's okay being big #3 and continuing to grow in terms of what we're doing. Remember, I think our strategy is a bit different than maybe #1 or #2. We want to primarily focus on the top 100 MSAs, population centers, 1 million people or more and really build out our portfolio of businesses within that market. So there's plenty of white space within those top 100 MSAs to continue to grow share, particularly as we add specialty opportunities and we're only in a handful of specialty categories today. So there's a whole bunch of other specialty categories that are either in early stages or embryonic stages of moving, having that secular change that general rental has done over the last 10 years, that will move from ownership to rental. So it's a significant opportunity to continue to grow there and continue to grow share as we grow the fleet around our specialty portfolio and build out those top 100 markets.

What categories within specialty really excites you guys? And where are you hearing from your customers? You need to have this asset category and you don't have it today.

Well, what the customers want is solutions, right? And they want late model equipment that performs well and then you can solve their problems. Some of the newest products that we've been introducing would be battery storage power as opposed to diesel power. It's more fuel-efficient. There's no fuel cost, and it's better on the environment. So it's also very quiet. So we've been deploying that pretty rapidly. A lot of these larger projects, they want that type of technology. Another one we've been investing in quite a bit for the last couple of years and accelerating at the right time is load banks, which is a product that goes into the data center world to commission a data center when they're done building it. It's a really interesting product. And every data center that gets built needs load banks to test and commission. So these are specialty products that we're excited about.

Aaron, you used the word solution. So I want to ask a question about that. And you see that from sort of everyone in the sector, much more, I'd say, technical solutions-oriented sale, complete package for the project at hand. What do you think the sector looks like 5 years, 10 years in the future? Are there a lot more services that are going to be provided from the equipment rental providers? Are there different business models that you think will evolve out of the large providers in this space?

Yes. I think where it's going to go, there's obviously more room on the market share play, right? So between the 3 largest providers, 35% of the market. So the industry is growing. The secular trend is for more rental, less ownership, and so we got a nice little runway. But I think the current -- the customer is what they're going to want, the larger the customer, the more solutions they want. They want technology, they want efficiency. Managing fleet is not their core competency. So the more you can bring to the table to manage their fleet, keep the uptime on the rental fleet and sometimes their own fleet that they might have in that environment is becoming more and more important to them. So we're exploring other solutions in that environment, but I think that's where the industry is moving towards.

You made the comment that H&E deal is going to give you guys more purchasing power. And that's sort of a consistent theme we've seen when large transactions have happened in the space. Talk a little bit about your guys' relationship with your suppliers and the OEMs. Like how is that relationship because that sort of comes out of their pocket, obviously, and you guys have become and your peers around you have become such a large part of the market and the biggest buyers. Maybe spend some time on how you guys keep that relationship healthy given the dynamics.

Yes. I don't think that it's going to as much come out of the pocket of our current suppliers because when you're as big as we are and as big as our 2 larger peers are, you're already pretty much at or near the bottom of their tolerance level. So it's really going to come from where we're going to transition H&E buys from to our current suppliers. They -- a vast majority of their at least most recent purchases in the past couple of years have been from suppliers that wouldn't traditionally be our suppliers. So the opportunity is the OEC cost that they were paying, we're going to roll them into our OEC cost. There may be some marginal or incremental benefits, but generally, if you're adding another 100 units of something or even another 1,000 units of something, you're not going to pick up a lot of significant buying power from our current suppliers. It's going to be the transition from what their supply base was to our supply base where we're going to pick up, in many cases, 500 basis points or more of improvement in OEC cost along that.

That makes sense.

And then the other benefits around that is we consolidate purchases, our people understand how to repair that equipment. We have better technical support, better product support, better parts availability, quicker turnaround and a more standardized fleet that's more fungible across all of our locations.

Yes. That makes good sense. Maybe one more question, Mark, and I'm sort of looking in your direction. Maybe remind the group of the 2025 full year guidance, realizing a lot going on in the financials as you guys integrate a very large transaction. How do you think about just where the guide is, the achievability of the guide where we sit in the year, given the operating environment we're in and sort of where you guys have made progress from an integration standpoint.

Yes. No. I mean I think you summed it up well, there's a lot going on, right? And I think that as you look through the second quarter and then the guide into the back half of the year, I think a couple of things stand out to me. One, market stable. Integration is going as well as we could have anticipated to go at this point in time. But I think that this 6 months, if you will, this July to December period, is extremely important for us to be able to get line of sight into integration continuing to come along the way that we wanted it to. I think that the view on the macro and the clarity that, that provides here as we work our way into the back half of the year is also extremely important. And I think taking all of that into consideration, we'll be able to provide a much better view as we walk into 2026 with some better answers as we sort of work our way through this back 6 months.

Great. Thank you. Maybe look to the crowd if anybody has got any questions in the last few minutes?

You have a private competitor that is growing very fastly and making some noise that they want to achieve $20 billion in fleet. How do you see -- are you seeing them in the field? What kind of pricing pressure do you see from those guys?

I assume you're referring to EquipmentShare that you're referring to?

Yes.

Yes. Look, they're another regional player. We see a lot of regional players out there. They are just one of a handful of growing companies that are of that size or about that size that want to continue to grow. As I think either Aaron or Mark mentioned, the top 3 players represent about 35% of the rental market, which -- North American rental market, which is a growing market. So that means there's 65%. It's a big market. Plenty of opportunity for everybody to participate. The market continues to grow. It will grow more as we move specialty equipment into the North American market. So look, they're just another big regional player that has big ambitions, no different than I'm sure we have or United has or Sunbelt has or any of the other big regional players.

Do you see them impacting prices in some regions or not much?

Yes. Look, I don't think that's appropriate for me to comment on any particular competitor's pricing in the market, we just don't comment on competitors' pricing.

A quick question. You mentioned earlier that there's a bifurcation in demand from the smaller, more regional players and the large national accounts. And that some of the difficulties in the local accounts have been driven by interest rates. I know there's a lot of uncertainty as to the cadence and magnitude of rate cuts in the coming years, but by how much do you think the rates need to reset before you see demand really start to pick up in those markets? And then again, in the larger, more national mega projects, is there an upside there as well from lower interest rates in the future?

I'll take the first part of that. I think that prior to the rate cuts that occurred in 2024, we had said that we thought that there needed to be about 150 basis points in total cut to sort of spur that local market growth. We received 75 basis points last year, zeroed up until now. So I think that calculus is just -- I think that there's probably, give or take, another 75 basis points of cut necessary to sort of fuel what looks to be a decent sized momentum sitting underneath it if you look at Dodge Momentum Index and the like, I think that there's activity there waiting for the financial elements of that build to make sense before they hit the green light. And so that would be sort of my take on where in the velocity of the rate cuts that probably need to occur. And then I think -- and I think Larry mentioned this earlier, you're probably then talking at a minimum 6 months and maybe as long as 12 to 18 to get from, okay, rate cut to a shovel in the ground.

On the mega part of the question, it is very robust right now. We've got visibility into the next 36 months of robust mega activity. If interest rates come in, will it stimulate that arena? It wouldn't hurt. But I don't -- it's not needed. That private -- those projects are planned well in advance, and there's -- if anything, it probably would refinance some projects, but it's a robust arena.

Great. Thank you very much.

Thank you. I think the investor community is sort of trying to balance and figure out this dynamic between rate cuts and then less job creation or job losses. It's probably a struggle for you, [ for us ]. I'm curious to get your view because there's so much narrative about rate cuts are good, but maybe they're being cut for a reason that's not so good. How are you thinking about that? Do you see job numbers like we had the other day and get concerned? Or does that filter into your sort of thought process in terms of how you think about the business over the next 12 to 18 months? Or is the primary component is rates are going lower, and that's good if you get the additional 75, that's what we mainly care about. I know it's a little convoluted, but it's kind of a convoluted conversation in the market is happening.

I mean certainly, a thought-provoking question, right? You've got 2 sides of that. And I don't envy the position that the Fed is in. You've got sort of an inflationary pressure discussion on one side, and then you've got a slowing labor market discussion on the other side. And it seems that at least the talk track today is there's more concern over the stalling out on the labor side. And therefore, needing rate cuts to ultimately stimulate. I think from our perspective, we would certainly appreciate that rate cut and that rate cut activity to spur that local growth. And I think there's probably no perfect answer as the marketplace discusses this on the daily, right? But I think from our perspective, we would certainly welcome the rate cut activity and the spurring of growth particularly as we sit here today.

Yes. Where I think the labor challenge is, has been and will continue to be is around skilled workers, whether it's welders or plumbers or electricians or millwrights or things like that. Skilled labor has been the challenge for a long time on these projects, will continue to be a challenge. What I think you'll see happen though, I mean, at least from my perspective, is it will probably -- a rate cut will drive some of that labor back to the local markets and away from the mega projects. So it might be the mega projects have more trouble attracting labor because remember, most of these mega projects are in the middle of nowhere. People are leaving their homes for 3, 6, 9 months, a year at a time, living in the middle of a corn field or living in the middle of a bayou or living somewhere away from home. And they're there primarily because there's nothing in their local market, right? So if there's local market activity, some of that labor might come back to a local market, and then that will put some pressure on probably labor rates for the mega projects.

One more quick one. I was just -- with the mega projects, is there a difference in the duration of the contracts that you have for those? And how much of the fleet do you think when all the mega projects are coming in our peak, like how much of your fleet will be allocated towards it?

It's really not a large percentage of the fleet activity. It's 10% or so. So it's not like we couldn't absorb that if it started to slow down into the local markets. I'd imagine the timing would be right. But as I said, there's a 3-year robust pipeline of mega. So the way I see it is the local markets are going to come back before that occurs for sure with any kind of interest rate cuts, but not over-levered to mega. It's just a nice space to create some activity right now when the local markets are more moderated. It allows us to continue to grow.

Yes. Remember, as these projects age out, that fleet also ages out. And much of that fleet might get sold off when that project finally completes and ages out, and it gives us the opportunity rather than to replace it just to age it out and sell it.

So that brings us the time, gentlemen, thanks for being here. Appreciate it.

Thank you, everybody.

Thank you.