Herc Holdings Inc. ($HRI)

Good morning, everyone. Thanks for joining us here today. I'm Sherif El-Sabbahy from the machinery team here at BofA. I'm happy to have with us Herc Rentals, Larry Silber, CEO; and Mark Humphrey, CFO today. So with that, I'm going to pass it off to Larry and Mark to introduce themselves and give a few opening remarks

Great. Thank you, and good afternoon, everybody. Thanks for joining us. I'm Larry Silber. I'm the CEO of Herc Rentals. Mark Humphrey is to my left here, and he is our Senior VP and CFO. And Leslie Hunziker is right in front of me, who is our Investor Relations person. Before we get started, of course, I want to talk about our safe harbor statement about information around non-GAAP information that we might be discussing today. So I want to make sure we covered that and have all the legalities covered before we begin. Little bit about Herc Rentals on this slide, for those of you that are either new to our company or remember, we're one of the leading full-line equipment rental companies in North America. And we have a mission, vision, values that we've not deviated from for the last 11 years that I've been associated with the company. And we support a purpose-driven company where we pledged to service our customers and communities to build a brighter future. A little bit about our company. We've been in business for over 60 years. Today, we have approximately 10,000 team members that work for Herc Rentals across North America, where in the 5 Western Canadian provinces, and 46 states in the Lower 48 and Hawaii. We service an addressable market -- equipment rental market, that's about $90 billion, with significant long-term growth opportunities, particularly as you're hearing around mega projects and certainly, the local markets that we expect to continue to serve where we're focused on the top 100 MSAs in North America. From an investment standpoint, we operate around 5 key areas that really differentiate us in a highly fragmented market in which we operate in. We're an industry leader, and we've generated above-market growth over the last 10 years that we've been functioning as an independent public company through fleet investment, greenfield, store openings as well as M&A activity. We've been very disciplined in terms of our capital and really consistent around being a steward of capital input into the business, and we're investing in the industry where really scale matters in this industry. And we've been driving that growth over the last 5 or 6 years through a combination of M&A as well as greenfield strategies. We've continued to make investments in technology over the last 10 years. We believe we are market leaders in technology. And technology is really sort of table stakes today in the industry. And we've been able to leverage our platform for our customers to create stickiness and connectivity to our customer base that's helping us win more and more projects in the marketplace. We're executing on a multifaceted diversification strategy to improve operating results and ensure resiliency across all markets and all kinds of conditions that we operate in. No one industry represents more than 10% of our business. So we're well diversified across our business. And finally, we are a market consolidator, having completed more than 50 acquisitions over the past 6 years in our business, and we intend to continue to do that. which leads us to our most recent acquisition, which was H&E that we acquired June 2 of last year. was the single largest acquisition in the history of the industry and was the fourth largest rental company at the time in North America. It had 162 locations that gave us significant market presence in 11 of the top 20 markets. And if you think about where were they strong, if you draw a smile around the United States, starting in the Carolinas, came down across the Southern Coast and up through Southern California, that would kind of be where they were, as you can see depicted in this map here. The combination increases our network, our customer reach and certainly the efficiencies that come with scale. And the transaction accelerated our growth by about a 5 to maybe 6-year time frame over that period. So we now -- if you look at what it's done for us, we now have a 30% larger business than what we had a year ago, more fleet, more locations, more specialty capabilities and a larger maturing sales force, and that's really the foundation. And the first half of this year is really about converting that foundation into performance. And we've seen that really take hold, and we're really happy with the progress that we've made and what we've seen to play out over the last 9 months or 10 months that we've owned the business, which is driving accelerated growth into the back half of this year. The progress that we've mapped out in the first half is really building the foundation that will flow into the back half and create the flywheel for 2027 and beyond. So it's really about higher revenue, expanding our margins and increasing our capability to deleverage and capture the synergy that we said we would capture. So the path that we've laid out, we're on, and we're very happy with the progress that we've made and to deliver the full value of the acquisition that we committed to our stakeholders in the business. From a strategy standpoint, we really are focused around these core areas. So it's really growing the core, our branch network of scale, our broad fleet mix, including a growing and expanding specialty business, our technology leadership. We believe we have a leading-edge technology platform that we operate from. And our capital and spending discipline that we've incorporated in our business. And we differentiate ourselves by superior customer service that allows us to manage across the life cycle, generate sustainable growth over the long term. And with that, we are committed to becoming the supplier, the employer and the investment of choice in our industry. So with that, I'll turn it over to Sherif.

Thank you very much for that. Just to start us off, the biggest to at the forefront of investors' minds has, of course, been the H&E deal. You've given kind of an overview of the integration and the process that you expect to see with it. But just to begin, can you sort of outline some of the bright spots, what's gone better than you expected? What -- may be some of the challenges and how you've addressed some of those?

Yes, great question. So what's gone maybe as well as could be expected and perhaps even better than what we expected was certainly the technology stack integration of the business. Really a flawless integration of a technology stack within a 90-day period. I'm really pleased with that progress. I think the other thing that we're really pleased with is the people and the cultural acceptance of the business. We were just named for the third year in a row. Great Places to Work in America. And that's from incorporating 2,500 new people or about 30% of our total population into the surveys that were independently made. And we had over 87% of the people respond, and we passed with flying colors, which calls us that the culture has been accepted. The people are enjoying the work environment that they're in, and we're really happy about that. I'd say, additionally, we found ourselves positioned in 11 of the top 20 markets, where we're marketplace leaders. We have incremental fleet capability. And certainly, we're really pleased with the footprint of the properties that we acquired. 162 Locations really all purposely built -- or, for the most part, purposely built locations that give us ample opportunity for growth and expansion and incorporation of our specialty business without adding any additional overhead. So the overhead was already existing in the business, and now we're able to just put new businesses into those facilities and leverage that existing overhead. So really, those are the things that we're really happy about.

And one thing you've spoken about with H&E is just the opportunity to leverage specialty rental. I believe H&E only had about 500 cat classes of equipment versus the 6,000 or so classes that Herc has. But you've talked about sort of assimilating the sales force and then maturing in the second half of the year. My understanding is the sales process for specialty and a lot of support network for that is very unique versus general rental. So with that sort of cross training, how does that look like? What is the support network been built -- how has that been built in? And how long does it take for those salespeople to truly mature and be able to kind of leverage a lot of the equipment you're layering in?

Yes. Great question. Do you want to take it?

Yes. I mean I think just taking a quick step back, right? Larry mentioned we did -- or we purchased 162 branches with this acquisition. And I think that what we were able to do through branch optimization to sort of convert, call it, 50 of those 160 into specialty locations, which is sort of the ramp and the guide for the synergy lift over this next 3-year period. I think as it relates to the sales force, the sales force doesn't need to understand or know how to sell specialty. And I think that's an important point. The way that we've layered these specialty branches into the markets, there is existing subject matter experts inside these markets. So when we set up these 50 new locations, they're already -- they're fleeted and there -- we have the employees for the specialty side. So it's really just having the understanding and the wherewithal to tap your subject matter expert on the shoulder and bring them with you to that sales call. You don't need to be the expert in order to sell that specialty solution.

Understood. So you mentioned 50 to 162 are specialty. So is it fair to say it's kind of taking like a hub-and-spoke model where specialty locations can kind of see throughout the broader footprint? And my understanding is that mechanics for generators, for example, are more specific versus maybe some of the general rental. So having that sort of centralized support network to be part of the synergies that you're realizing [indiscernible]?

Well, we haven't really converted 50 of the 162 to specialty only. What we've done is we put specialty into those locations. So those locations were already general rental. In some cases, we might have consolidated their general rental with our general rental, and then taking our location, and turn that into a specialty. But for the most part, the vast majority of the 50 were branch within a branch. So they had a facility that was very large. Our typical branches are about 2.5 to 3 acres. Their branches were anywhere from 5 to 7, in some cases, more big facilities, lots of capability. We were able -- because of the size of that, we were able to put a specialty facility within to that location and able to grow it using that existing structure of mechanics and overhead around that. So it wasn't necessarily sort of starting from scratch. You're starting with an existing workforce there.

Understood. And just as we think about the broader focus on specialty, I think Herc's known for having a really good power business, in particular, for specialty. What other product categories are you kind of focusing on as you look to layer it in across the H&E footprint other than earlier focus?

Yes. I mean, really, we took a market approach to where and how we set of these specialty locations. So we evaluated the market and said, "What else do our customers need inside in this marketplace?" And so where we have specialty -- new specialty into these market places, right, it's full suite of specialty product. But I would tell you that, by and large, it's pump power and HVAC primarily.

Understood. Just the H&E deal, I feel, like, it's taken up a lot of the focus. Outside of H&E, what do you think shifted for Herc that investors might not be fully appreciating or considering?

Well, look, Herc, since becoming an independent public company, we've remained really focused on increasing our scale and geographic reach through both greenfield development and strategic acquisitions. So this acquisition really accelerates our strategy, call it, 5 years, 6 years, 7 years depending upon how you look at it. And it enables us to continue to develop market-leading growth and superior value creation as we go forward. So we've been able to expand that increased density in economies of scale and geographic areas as well as customer diversification with a much larger file. Now that the integration really is complete, we're really focused on branch optimization, continued training and development systems transfer is all complete, and we're looking at how we take that to all of the H&E customers now. So that's something that we've been really focused on, and we're really pleased with the progress that we've made. So it's really around execution. So we're going to continue to execute the playbook that we've played in the past, focusing on customers and growth opportunities that present themselves right now. Obviously, we're seeing a lot of mega project opportunity. I mean Herc's been in business for over 60 years, has relationships with these large national contractors that go back 30 years. So they have confidence in us. They know we can do this, and they're taking us to new areas. So we're capitalizing on preferred access with customer relationships, 2 mega projects. And right now, in 2026, there's about $800 billion of mega projects that are in the pipeline with several trillion more that are yet to be announced that have been talked about, that we'll see in the future. And we're really targeting about 10% to 15% of that opportunity. And H&E has given us the capability to move towards the upper end of that range. And we're really looking at this incremental scale and capability to bring us to the top end of our target there.

And on the top end of your target there, you mentioned H&E has kind of driven you to be able to do that. Is that the scale the H&E brings? Or is it also just opening up geographies with existing customers to be able to address more of the footprint of projects that they're taking on?

I would say both. I would say certainly brought us scale in terms of size, in terms of people. You bring 2,500 more people, vast majority of those are mechanics and drivers, right? Because that's what we brought into the business. And so that gives you greater capability and greater scale, and that's what's put us. Also, obviously, they were very strong, and that map was still up there in what I would call a smile part of the map, which increased our capability in some of those markets that we weren't in and in some markets gave us capability we had no presence at all. So yes, that's what I would say both.

And mega projects, of course, have been an ongoing source of growth in the downturn in local markets. I know your approach has been to be more targeted, that 10% to 15%, as you say. But Herc's focus has been to serve top MSAs. A lot of these projects are typically maybe out -- somewhere -- more distant from population centers. Has that changed the demographics of the projects you target? Or have you changed the way you operate to kind of be able to address some of these larger projects outside of these top population centers?

No, I wouldn't say so, not necessarily. I mean I think when you think about sort of the breadth and depth of the mega project activity today, I think when you think about the manufacturing the LNG-type projects, those are generally located in or around your top 100 MSAs, give or take, I think where the data center activity has certainly been more rural. And so you get stretched there a little bit because you generally don't have branches in the middle of corn fields, as an example, right? And so really, what happens there is they're providing you on sites and you're looking for either temporary laydown yards or other sort of temporary locations where you can sort of have your fleet housed before it's going to those on-site locations.

Understood. Obviously, with the growth in megas, a lot of that has been driven by data centers. Would you say that's sort of the bulk of the opportunities in front of you? Is that sort of where a lot of this growth is that we see going forward? And again, does that mean you kind of have to shift to some of those more temporary sort of basis to be able to serve some product?

I wouldn't say it's the vast majority of the opportunity. I would say it's certainly a significant amount and something that we're going to pay attention to. We're going to address in whatever way we need to when a customer gives us that privilege and we're asked to fulfill that need. But there's a lot of other mega project opportunity around L&D opportunities, stem opportunity, bigger markets where you're seeing hospitals built, things that we would consider. Remember, our size of a mega project is really something that's about $250 million and bigger. So a lot of that is really happening around these top 100 MSAs in North America. And so I would say it's something that exclusively is focused to data centers. Certainly, it is, but there's a lot of others in these other areas. Chip plants are still being built, not necessarily in rural areas. The only thing you're really seeing in these rural areas is data centers.

Understood. And just with the type of mega projects [indiscernible] some of these larger ones, does that change the way you've approached [ seeding ] the specialty? Is power, for example, something that these types of projects demand early on and kind of gets foot in the door? How should we think about that evolution?

Yes. I mean I think as you develop your relationships with these large GCs and you prove yourself right you become more of a solutions provider as opposed to just a gear provider, right? And so as we've been able to do that, the front side of these projects now, we're providing solutions for them primarily in this power sort of realm. And so you're then providing them cost savings. They're not running diesel, in some cases, right, we're powering that with battery. And so yes, I mean, that has been a focus of ours, and it's also -- it's an incredible opportunity to be able to get to the front side of these larger projects and power them sometimes over a 2 to maybe even 3-year sort of time frame until they're attached to a grid.

And you've touched on attaching to a grid. Utilities, renewable energy, a lot of these other fields have also been growing just with demand for power. How do you serve the energy infrastructure and power markets outside of LNG and sort of the end uses, like data centers? are you doing work with the utilities and the build-out of energy infrastructure?

Well, how we service them is through temporary power, right? And we provide either a combination of of diesel power and/or battery power or a combination of both together, depending upon where that project is located and what the requirements. You get into -- if there's a project that's happening in a community or nearby community, as we've seen recently, sometimes you need to have quiet power, so you're not allowed to run your diesel generators at night. So we provide battery technology. We charge them during the day. They run and power those facilities at night. Because they're working 24 hours around the clock, building these data centers and getting them ready. So we put in long-term power capability for as long as it takes to get the grid to these locations. And then obviously, in the more densely populated markets, power might be available, but not in the certain capacity levels that they need. So you might have the grid working at a part of the time, and we're providing backup. We're temporary power when the grid can supply what they need, mostly through diesel capability, but also in some cases, through battery power.

And then changing gears a little bit. You reported earnings a little over 2 weeks ago. And on the call, you sort of noted that May and June will be the key months, Q2 is sort of a defining period for driving that growth that you expect the ramp in the back half. I understand we're very early into May here, just about mid-May. But have the signs you've seen so far kind of been in place to see that ramp everything we moving as expected?

Yes. I mean, I think what we said a couple of weeks ago was that we were anticipating an inflection point, on a pro forma basis, at some point in time, inside of Q2. And I think that's still the anticipation. Obviously, it's still early, and we just gave this update a couple of weeks ago. And so I'll leave that there, given the fact we're in the middle of the quarter.

Understood. And pulling back a bit, rental has been a really fragmented industry for a long time. That said, there's been a few new public entrants and a few sort of existing entrants that are put a focus on rental and growing in rental. Have you seen a shift in the last 5 years when it comes to competition, a bit more consolidation among some of the -- maybe not top 3, but other players in the space kind of coming in, in a larger way?

Yes. Look, we're still operating in a very fragmented business, even the top 3 players have only about 1/3 of the market. So there's plenty of market opportunity out there. That said, the industry has really professionalized over the last 10 years, with professional management, IT and systems capability, platforms that improve that capability. And there have been some -- I wouldn't call them new entrants. There have been some growing entrants. There have been folks that have been out there for 10 or more years that seemed to want to get on the growth track, no different than we have for the last 10 years. I mean, 10 years ago or 11 years ago, when I got to Herc, we had about 230 locations. We shared a number of those, and then built back up. To now, we're over 600 locations across North America. So we've been on a growth track. But look, there will continue to be consolidation in this industry because it's still fragmented. And you have the whole area that's really, what I would call, in the [indiscernible] stages of consolidation, which is the specialty businesses. What happened on the general rental side, has been moving into the specialty rental side, and you'll continue to see that. You might have some specialty players that decide to add general rental into their mix. But that's kind of been the change, and you'll continue to see movement towards rental as the secular change keeps moving. I don't think it will ever get to be where the U.K. or Japan is, where the whole market is rental first. But there is a significant amount of movement towards rental.

Understood. And the local markets have stabilized. I think there's been a lot of focus on that and how they have shifted. Within that, have there been some areas that have been growing a bit offset by weakness in others? Has it been more broadly stable across the board? Any areas of strength or weakness?

Yes. I mean, I don't think there's necessarily anything I would call out. I think, that muted and stable has sort of been our descriptor now for several quarters. And I don't think that, at least as we sit here today, we're experiencing anything too different from that, right? I think that our our tailwinds remain the mega project growth, the synergistic opportunity to cross-sell from the acquisition. And then I think that would be sort of layered into that is this very stable and muted sort of local market.

And are you seeing some of your end customers on the local side to sort of pivot to some of these larger projects attempt to help serve some of that build-out where possible? And then just as we think about it, when local markets start to come back, is that something where they kind of shift, do you think, re-pivot to their traditional businesses?

I don't think we've seen folks that operate in a local market decide to pick up and move to where these other larger projects are, I think they're focused on what's going on in this market. If you go look around New York City, it's a stable local market environment that they're serving. I don't really see a big shift. What you really have serving the folks these big projects are the big main national contractors that you're aware of and they tend to pick up subs that are around that local market that they're in, not necessarily asking somebody from New York City to come to Iowa and help them build a data center. They're not sort of that transient or that capable of moving. So I don't see a lot of that happening. I think they're just dealing with whatever is in their local market. They've scaled back. They're trying to survive this period until interest rates or such that investment is going to have in the local market and go from there. The folks servicing these mega projects are really the big players. The top 50 contractors in North America [ or ] primaries and they have the big subs that are servicing them because they know how to handle that. It takes a certain level of expertise. It takes a level of scale. It takes a level of safety and operating in those environments. So you just can't sort of call on a local contractor to come and move and do something for you when they don't have that experience level.

And turning to technology. Herc and other professionally managed rental companies have for a long time been investing in technology that differentiates you from the mom and pops. With AI, with some of the development out there, how are you utilizing this? And does it sort of level the playing field to a degree where smaller operators are able to maybe access some of the technology that they wouldn't have been able to beforehand.

Yes. I mean, I actually think it's more of a separator for the top 3 or 4 sort of big players in the industry. I think that looking at H&E as an example, they were the fourth largest player in the industry at the time of acquisition. And yet their technology platform was really nonexistent. And so I think that you do have a separator there, and Larry mentioned it earlier, but this technology platform has almost become table stakes. Like, if you want to play in this large mega project arena technology platform has to come along. It has to be sort of front and center. And I think that that's where and why you have sort of 3 guys playing in this large project space and the more local or regional guys don't have those capabilities from a technology perspective. And therefore, they're not a primary or generally a secondary in those larger projects.

Understood. And just as we close out, pulling back for a moment. There's been a lot of larger peers, [ Sunbelt United ]. With Herc and its shifting footprint, how do you think it fits into the industry? What are you doing similar to others in the space? How are you differentiating yourselves or kind of paving your own way?

Yes. No. Look, I think we have a lot of similarities in terms of scale. They might both have a little larger scale. But our scale is around capability and the products and solutions that we offer in our specialty business. And we have a tremendous amount of experience in handling large customers and large projects of this nature. So similarly, our footprint is pretty good relative to them. We are certainly focused on the top 100 MSAs, where we have every bit as good capability as our 2 peers. We have the scope in terms of products and portfolios, and we have the experience. Where we differ is they might be in some broader ranges of specialty that we're not in, but we have partnered with other companies. An example might be scaffolding or tents. We're not in either of those businesses, but we have partners in those businesses. They happen to be in them. They're just not areas that we feel are -- at this point, part of something that we want to invest in. We'd rather partner with somebody who we're not competing with to handle that broader scope of products. But outside of that, there really is no difference in capability. The other area that we're -- like I said, we're focused on the top 100 MSAs. We're not focused on rural areas. So we really don't want to be in rural markets. I believe that high density, high concentration market areas, give you a greater resistance to any kind of an economic period that you go through because there's always going to be activity in a high concentrated market whereas rural communities are more dependent upon and more susceptible to recession than perhaps the highly populated dense urban market. So I think while there's a difference there, I think our strategy plays better over an extended period of time.

Well, thank you so much for joining us here today, and thank you everyone here.

Thank you.

Thank you.