Herc Holdings Inc. ($HRI)

Good afternoon, everyone. This is Tami Zakaria, Head of Machinery, Engineering Construction and Waste Equity Research at JPMorgan. We are delighted to have with us today the Herc Holdings team. We have with us Mark Humphrey, CFO; and Aaron Birnbaum, President. I'm going to pass it on to Aaron. I think he has a prepared presentation for you.

All right. Thank you, Tami, and we're happy to be here today. As always, the first slide here serves to remind you of our safe harbor statement and information regarding non-GAAP financial measures. This slide, for those of you new to our company, Herc Rentals is one of the leading full-line equipment rental suppliers in North America. Our vision, mission and value statement support our purpose-driven company, where we pledged to equip our customers and communities to build a brighter future. Herc has been serving customers for more than 60 years. We have more than 9,500 team members, and we work out of 600 physical locations in North America, in 46 states and 5 Canadian provinces. We serve an addressable equipment rental market of nearly $90 billion with attractive long-term industry growth dynamics. We operate from a set of core strength that differentiates us in a highly fragmented industry and puts us in a much stronger position today man at any other time in our history. We are an industry leader that has been generating above-market growth through investments in fleet, new greenfield locations and M&A. We are disciplined stewards of capital. We're investing to win in an industry where scale matters and secular trends, infrastructure funding and industrial mega projects are setting up the largest players to continue to gain share and generate profitable growth. Our investments in technology are paying off as we leverage data and digital tools for better customer experiences and increased productivity. And we're executing on a multifaceted diversification strategy to improve operating results and ensure resiliency in uncertain times. Finally, we are a market consolidator having completed more than 50 strategic acquisitions since launching our M&A strategy in December 2020. In fact, last summer, we completed the industry's largest acquisition to date. H&E Equipment Services was the fourth U.S. largest player with 162 branches and desirable locations across the important Southeast, Gulf Coast, Midwest and Mountain West regions. The combination increases our branch network, customer reach and the efficiencies that come with scale. This transaction accelerates our growth plan by 4 to 5 years. I'm pleased, really pleased with the progress we're making on the integration. And we remain confident in our ability to deliver the full value of this acquisition, both in terms of cost efficiencies and accelerated growth while continuing to deliver on our long-term growth strategies. Since closing the transaction has made swift progress on our integration. We expanded our field operating structure, completing a comprehensive sales territory optimization exercise, finalize the full systems integration in record time and finish the fleet optimization, which ensures we have the right fleet in the right markets. This quarter, we will complete our branch network optimization, which allows us to expand specialty solution capabilities across our combined network to support the cross-selling opportunities created by the acquisition. By the end of March, through general rental location consolidations and branch-in-branch openings, we will have increased our number of stand-alone or co-located specialty branches by approximately 25% without adding any brick-and-mortar. This work positions us to ramp into the peak season from a new stronger foundation, allowing us to execute more effectively on our strategic plan and drive accelerated growth in the back half of this year. As a reminder, our strategic plan includes leveraging our branch network scale, our broad fleet mix, technology leadership, capital and operating discipline and superior customer service, to position us to maintain across the cycle and generate sustainable growth over the long term. We are committed to our goal of becoming the supplier, employer and investment of choice for the industry in which we serve. With that, I'll turn it over to Tami for questions, and I'll have a seat.

Perfect. And that was super helpful. [Operator Instructions]. So with that, let me start off on U.S. mega projects, which have been theme for quite a few -- the last few years. Where do you believe we are in that mega project investment cycle?

Yes, Tami, I'll take that one. I would call it the early to mid innings. It's a really robust space. On our last earnings call, we mentioned there was roughly $600 billion of new projects starting that we saw in 2026. But the pipeline is in the trillions of other projects that are being planned, but haven't been given a start date yet. So it's a great space. And manufacturing is an area that we've seen a lot of activity such in the pharma space. LNG plants along the coast. You see like the next wave of chip plant investment going on. And then the data center space, as we'll probably read a lot about is very, very robust and expanding rapidly.

So related to that, I think this acquisition of H&E came at a very opportune time. Post the acquisition, I think HRI is expected to control about mid- to high single-digit percent of the rental market. In your view, how do you see this changing your competitive advantage or dynamics within the industry? Can HRI become a powerhouse over time in both general rent and specialty rent?

Yes. Our share is roughly 5% market share in a really fragmented industry. So there's a lot of opportunity. The H&E acquisition gave us a 30% bigger footprint with 160-plus locations. And in our customers' eyes, the ones that we had strong relationships or others that we are building relationships with because of our capability and things such as specialty, it put us on a new level of confidence that we can execute for them. And we've seen that from the moment we closed that transaction in our conversations with our customers. So yes, we see ourselves strengthening and over time, get more scale.

Staying on that theme, cross-sell is a big opportunity in general rental and specialty rental. Could you help us frame what kind of investments in the fleet, people back in operations you need to make before you see a major inflection in specialty growth? Or do you think you already have the infrastructure in place to reap the benefits of specialty cross-selling?

Yes. It's a great question. I think -- and I reference Aaron's opening comments. With the branch optimization, we'll be opening or have opened 50 new locations without really increasing fixed cost structure. And so really, that will all be completed by the end of Q1 2026. So then it's really about sort of taking at the middle of to the back end of 2025, we invested about $100 million in synergy fleet, which we'll execute on and have that become more efficient as we work our way through 2026. And then we will feed that incremental network of specialty locations as we work our way through sort of creating a tailwind into 2027. I think just as a reminder, we have -- we recognize about $40 million in rev synergies in the back half of 2025 with the anticipation expectation of an incremental $100 million to $120 million as we work our way through 2026.

Super helpful. Thank you. I wanted to touch on the leverage topic. Since the H&E acquisition, our leverage is in the high 3 turns now. You said your goal is to bring it to the high end of 2 to 3 turns by the end of next year. Help us understand how that will be achieved. Is it going to be through EBITDA growth or pay down or a combination of both?

Yes. It will be -- we'll ride the coattails of the EBITDA growth over the next couple of years to round ourselves into the top end of this 2x to 3x. I think additionally, free cash flow generation in both '26 and '27 will also play a role there as well. We're looking to invest in growth CapEx. We won't be doing M&A activity and really very minimal greenfield activity here over the next couple of years with a sole focus of getting back inside of that 2x to 3x range.

Perfect. So let's turn to macro. Since September 2025 -- actually 2024, we've had 6 Fed rate cuts. Related to that, are you seeing any signs of improvement in demand at the local market level? What do your customers on the ground say about the current interest rate environment? Is there more room to come down? Or this is enough to spur activity?

No. I think it's a little bit of a nuanced conversation. I think while we've seen the Fed rate cuts, it really hasn't worked its way in and through the 10-year which I think from our perspective, I think that when you're talking about this commercial construction, that's probably the most important point there. And I think from stable, not necessarily a headwind, not necessarily a tailwind as we sort of walk our way through 2026, and that's really the expectation.

Understood. Turning back to H&E. This was bigger than any of your prior acquisitions. What were the initial challenges that you hadn't anticipated, but you had to face. And on the flip side, sitting here today, what are the most immediate opportunities that you see from that acquisition?

Yes, I'll take that one. We had done over 50 acquisitions since we started our current strategy in 2020. This was the first one that was a public entity that we bought in H&E. So it's a longer process, right? By the time we announced it, it was 5 months before closing. And before we announced we were going to be purchasing it, there was another suitor. So there was a fair amount of anxiety, I would say, in the H&E team, which had been a family. A public company, but kind of run by a family entity, had that kind of culture there. And so there's 5 or 6 months of this period before we could close. And through that, there was some exodus to the sales team. Once we did close and we began the integration process, which we plan really well for, we started to connect with the teams, and that sales turnover slowed down dramatically. And by the time we got to the fourth quarter, we had not only slowed down the turnover to what was Herc historical levels, but we had put the entire H&E's team and the business on our system. So we integrated the H&E 160-plus locations in 90 days on to all of our CRM, our back office, front office, functions which gave both sides a lot of visibility. When you look forward, we're super excited because our scale got 30% bigger. The value creation that we see in the business is the synergy play and the expansion of the general rental fleet that Herc had roughly 6,000 different cat classes, and H&E business had 600 cat classes. So kind of a narrow product lineup. And in this industry, the things that are important is scale and diversity of product, diversity of customers. So it's -- I think the goodness of Herc can bring to those rich H&E customer bases. And I think we have several years of great kind of value creation ahead of us.

I want to touch on that synergy comment. Can you walk us through the thought process behind the $240 million of revenue synergy target you put out there from the H&E acquisition. How much of that is specialty versus gen rent or any way to break down the buckets?

Yes. I'll take that one. I think $240 million, I think it's probably easier just given the dis-synergy that sort of hit us on the front side of this. I think it's probably better to think about it in terms of sort of the gross revenue synergy opportunity. We see that over the 3-year period as being somewhere in this $380 million, $390 million opportunity. I think what we accomplished in '25 was about $40 million. We're looking to sort of have an incremental lift of $100 million to $120 million by the end of 2026. And so I think there's a fleet infusion, growth fleet CapEx infusion component here that will play a big role here. I think overall, though, it's sort of a CapEx light synergy play because we're able to take advantage, as Aaron mentioned, we've got so many more categories of fleet to sell into this very robust H&E customer base. And so when I think about sort of that split, if you will, pricing obviously is included in that $390 million. But when you think about and want to sort of split that apart, it's probably gen rent and other about haves of that and specialty, the other half.

How about the same question but on the cost synergy side? What makes up the $125 million cost synergy?

The big buckets there are really people sort of first order of business would sort of take out the duplicative headquarters and everything on that front. So that would run to the G&A side of the house. You think about people duplicative resources in the field as well operationally. And so people was about 40-ish percent of this bucket, and then you start bringing in other elements like contract consolidations and the like. And then there are some self-help initiatives that are in there as well, just think maintenance, logistics and those types of things that Aaron talked about from a tools perspective that we bring and that rounds out to this $125 million.

Just as a follow-up, within that $125 million, is there any purchasing synergies embedded in terms of now you're a bigger customer of your equipment, right? So I'm guessing what H&E used to buy, you would probably get a bigger discount now. So is something like that embedded in that $125 million? If so, how big?

Yes. I think there's absolutely a buying benefit that we bring to the table. I didn't necessarily reference there or it's not really included inside of the $125 million because the $125 million was really an EBITDA contribution. But we certainly will buy better than H&E did, which will ultimately come through your dollar utilization and other metrics.

Understood. We got a question online. [Operator Instructions]. So the question we got is, please describe your equipment financing strategy. And please elaborate on off-balance sheet arrangements exposures, if any?

Yes. I'll take that one. We utilize our $4 billion ABL. Cost of capital is the primary focus for us. And so today, that's the most efficient method and manner for us to handle our equipment financing. And obviously, we'll evaluate any and all potential opportunities. But today, that's the cheapest cost of capital for us to utilize.

So looking back at H&E, we get that question -- get that question a lot. When H&E was its own public company, they talked about negative rental rates for a few quarters, along with utilization rates down what opportunity do you see to align H&E legacy contracts with HRI, how far are you in that integration/of great opportunity?

Yes. No, great question. I think from a pricing perspective, and again, I'll reference what Aaron said, right, we've put our optimist to pricing tool into the hands of all of our sales folks. And so really, that was -- all of that technology lift was completed inside of the third quarter of 2025. And so the lift begins really now. It began then realistically. But I think the way that I'm sort of thinking about that price lift, I mean, they were several hundred basis points behind us from a pricing perspective. But I think what we're going to do is show our value to customers and we would anticipate seeing the benefits of that pricing lift over probably this 3-year period. But I also think, too, right, when you think about you really have two different buckets of pricing. You've got contract pricing and then you've got spot pricing. And so we've already renegotiated at least for the first year, the contracts that were underneath the H&E business, and we'll continue to sort of evaluate that and move that along over the 3-year journey. I think the other side of the equation from a spot rate perspective, I think that the sort of tepid muted local environment, I think you'll see price lift as sort of the tightening and the demand profile inside of the local market changes.

So this is more of a long-term question or medium- to long-term question. How do you think about the mix of specialty versus gen rent over time. The reason I ask that, I think anecdotally, we know specialty penetration in the industry is a lot lower than general rent. So maybe there's more growth opportunity there in the initial years. what is the optimal mix for HRA? And what does that mean for HR's margin profile when you reach that level?

I think the secular trends in the industry are in our favor overall because more users of equipment, are choosing rental over ownership, the general rental side is a little bit more penetrated than the specialty side. And when you look at specialty, the penetration is very, very low. So call it, 10%. And it's not that customers had their own gears that they're finding solutions to problems from the top rental companies that have that competency. So when we purchased H&E, our specialty business was about 20% of our fleet. After the acquisition, it went down to 16% because -- he didn't have much of a specialty business. And we know that our specialty business drives about 800 basis points higher dollar utilization than general rentals. So financially, it's a premium business. So our goal now is to get it back to 20%. We did that with some of the capital investments last year back half of last year to get some of the low-hanging fruit, an outsized part of our capital spend for '26 will be in specialty. And we'll keep that back up here until we get to 20%. Long term, we see it as 25% to 30%. Again, it helps with the financial economics of what we're trying to do with dollar yield and margin.

Understood. Let's stay with the CapEx theme. You mentioned it. I think your growth gross CapEx outlook for this year is down about double-digit percent. At the midpoint, net CapEx is flattish to slightly down. When can we -- two-pronged question. First, when can we expect HRI to return to CapEx growth? And related to that, of this year's CapEx how much is replacement versus new or growth? How much is specialty versus gen rent?

Yes. No, great questions. I think from a -- just an overall CapEx plan for 2026, this was sort of a planned year in that the fleet that we acquired from H&E was significantly younger than ours. And so what that enabled us to do is sort of cut back on the gen rent CapEx spend, age that fleet out. We sat at about 45 months at the end of December. And so normal for us is probably in that 47-month sort of age range. And so that's the expectation. There isn't a read through there in anything other than we're going to take advantage of the opportunity that we acquired. Your second part of your question is a little nuanced. I don't necessarily like talking about replacement versus -- because there's constantly in this industry, the replacement CapEx is mix shifting into different sorts of categories. You're going to replace an excavator with three lifts and lighting and on and on and on. And so I can tell you that from a sort of execution perspective, there will be an outsized growth attachment to the specialty business for 2026.

Perfect. So I think we should let the audience here to ask questions. If anybody has any question, raise your hand and we'll get the mic to you. I think we have one there.

For the equipment categories that did overlap between HERC and H&E, was there a difference in rate, generally speaking?

Rental rate? Like that we would charge?

Yes. Yes.

Yes. And Mark had mentioned there was -- we had a sophisticated algorithm, kind of pricing tool that our sales team used developed 10 years ago, and it really became our platform to drive the proper pricing in different situations, H&E didn't have that. They had more of a kind of decentralized approach. So when we looked at contracts, when we look at the spot market opportunities, we were performing 300 bps higher rate. So some of that will happen pretty quickly because over half of H&E's business was in the spot market. And then the rest of it will be contract work that, as Mark said, we'll take 3 years to go get.

Any more questions? I'll keep going. Again, feel free to raise your hand if you have a question. [Operator Instructions]. Question we get asked a lot data centers. How big is data centers as a percentage of your end markets now? And do you service that end market mostly through power? Or there's other categories involved as well?

Yes. As I mentioned earlier, it's really important to have a diversified customer base. So none of our customers are more than like 2.5% of our revenue. We don't really disclose what data centers are of our business. As I said, it's a growing part of like the mega arena. If anybody flew in here yesterday, you flew over a lot of data centers. It's incredible. This is kind of like the epicenter of data center building. It started over a decade ago. But it's growing rapidly. We deploy our fleet in many ways. So most of these projects are $3 billion, $4 billion, $5 billion. They used to be $300 million or $400 million, $500 million and some over $10 billion, they usually do buildings in sequence. They finish one they do the next. So if they have a long-range plan to build multiple buildings, they'll often request a premium rental company to come on-site often so that you have a kind of a captive environment to provide the gear. And it really is all the equipment that we have in our portfolio of products. So could be a lot of power. If they're not connected to the grid. It could be cooling, if they don't have connection to the grid, they need cooling. But before you get to that point, you have to do the civil work, you have to put up the concrete panels, you need material handling. You just need a lot of different types of gears. So -- but they're balanced jobs. So usually, you get a nice chunk of specialty with general rental on the same project. And what's great about data centers or other mega projects as we call them, is that they're long-term projects. So you get good utilization on your product if you execute well, you can support all the subcontractors are on the project. And then as I mentioned, the specialty business kind of weaves in there. So the returns are similar to what we get on our regular business.

I wanted to ask you about greenfield locations. Two questions. The first one, how many do you plan to open over the next few years? And we know -- you mentioned this year's target. But should we expect an acceleration in greenfield location openings after this year?

We were doing about 20 to 25 a year through the last 4 or 5 years. with the H&E acquisition, there was a lot kind of in play on their side and our side. So we finished those off in '20. Most of those off in 2025. We only have about 5 or 7 planned for this year. And we're really focused on kind of operational execution right now and getting the leverage down to the levels that Mark talked about before we kind of ramp up more greenfields and more M&A. So those are our focus areas.

I think from that perspective, right, when you think about a greenfield generally takes again, sort of macro willing, it's probably 24 to 36 months to maturation such that, that greenfield location begins to look like all of its other brothers and sisters. And so to Aaron's point here, right, we're highly focused on sort of the execution on the H&E acquisition, just brought in last year. And so for that reason and the ramp-up, et cetera, we're going to hold off, we'll get our leverage back down, and then we'll begin to execute probably as we would think about the back half of 2027 and into 2028.

So a follow-up on that. Longer term, what is the white space you see because I've heard you say in the past that you focus on the 100 MSAs. How much room is there for new locations before you reach like an optimal.

Yes, I think you got to -- what's the marker that you want to have, right? I mentioned our share is 5%. We focus on the top 100 markets. And within those top 100, there's multiple locations we can build out in that network market. So it takes the fleet to get absorbed, to get the revenue to grow your position and your share. So we're really focused on being a premium equipment rental company. And our positioning with our customers and this acquisition, we pulled forward like 4 or 5 years of growth by doing the H&E acquisition. So going forward, I feel like a 5% share in a highly fragmented market, there's a lot of room to grow.

Understood. We have a few more minutes. Any more questions in the room? So one question on utilization. Once H&E is fully integrated, do you expect your dollar utilization to revert to your prior low 40% level? Or could it be even higher? So what is the vision for dollarization.

Yes. I mean I think that's fair. As Aaron mentioned, right, we sort of ran at this low 20s sort of specialty mix into the overall fleet. I think it sits at about 17%, 18% today. And so as you roll that forward and execute on the revenue synergies and invest that specialty fleet back into the business, you should anticipate being somewhere in that low 20s again, which if all of that plays out in that manner, then I would expect to see the dollar utilization back to the levels in which Herc Rentals was historically.

Perfect. We did not talk about used equipment. So tell us about that. Are you nearing a stabilization in used equipment recovery rates? And how much of your sales are through auction versus retail now?

Yes. The used equipment markets are stable, just kind of like the rental market is, every month, we can see what's going on in the auction markets. And when you sell wholesale or retail, that's always a premium to the auction markets. So you kind of have to use all channels, but we mentioned several years ago that we are pivoting to kind of a more retail wholesale channel mix that we're going after. When we did the H&E acquisition, we had to kind of rebalance our fleet, optimize our fleet pretty quickly to get things right in Q3 and then by Q4, we got back to our normal channel mix. And we'll continue that going forward, call it, like a 70-30 retail wholesale over time, probably 80-20 but that's what we're after. And -- but the used equipment markets are healthy. You can see the data, things such as large worth moving, compact earth are improving off the trough and then aerial things such as reach forklifts, material handling are kind of bouncing off the trough, but the trough is really back to 2019. So there's a demand for rental and there's demand for used equipment out there.

Perfect. So final question. What is your vision for Herc Holdings in the next 5 years?

Well, the first vision is to get all the value out of the H&E acquisition, right? That's our first order of business. We've got the scale and now it's to drive the efficiencies through that scale, really excited about our opportunities there. Specialty will continue to be something, as I mentioned, long term, 25% to 30% of our business coming from that, continue to develop great relationships with the contractor base in our industry, an amazing industry that we participate in. We went through a big -- two more -- we went through a big digital transformation back in 2020 and technology is becoming more and more of the story in our industry. So we continue to invest in new enhancements in all of our technology every 6 months. We might not talk about it too often, but our customers know that we have terrific digital tools and our sales force uses it to be more efficient in their jobs. And then finally, just to be really good stewards of the capital that our investors us and deploy it so that we can drive our margins and have great culture in our employee base.

Awesome. Thank you. Thank you for joining, and we hope to host you next year as well. Thanks, everyone.

Thank you.

Thank you.