All right. Good afternoon, everyone. Thank you for joining us here. My name is Mircrea Dobre. I'm the Baird analyst covering machinery, diversified industrials, and equipment rental companies. It is my pleasure to host today Herc Rentals. You might know this, but Herc is one of the largest, in fact, the third largest equipment rental company in North America. Joining us today for an update on the company, we have Larry Silber, CEO; Mark Humphrey, CFO; as well as Aaron Birnbaum, Chief Operating Officer. Larry, I know you want to run through a couple of slides real quick, so I'll let you do that, and then we'll do Q&A.
Good afternoon, everybody. I'm Larry Silber, as Mircea said, President and CEO of Herc Rentals. I'd like to just begin, of course, with our Safe Harbor statements. It's a little bit of an eye test, but I'm not going to actually go through it. Just reference the fact that we have that. I'd like to begin with a little bit about our company and our values, our purpose, and our vision, and of course, what we like to consider ourselves in the industry that we're at. We equip our customers and communities to build a brighter future. This has been a core part of our entire sort of 10-year history since we've been a public company, and something we're very proud of in terms of what we do. A little bit about Herc.
This is our 60th anniversary of being in business, and we're in our 10th year of being a public company, independent public company. We have over 9,900 team members as part of Herc. We have about 612 locations across North America. We're a North American-only company. We're operating in 46 states and the five western Canadian provinces. We operate in a market that's valued about $89 billion of addressable market. From the standpoint of what we are, as Mircea mentioned, we're a leading equipment rental solutions company. We're one of the top three companies, not only in North America but in the world, and we really have been delivering above market growth for our recent history. We focus on sort of a platform of disciplined capital management, investing for profitable growth, and providing acceptable returns to shareholders.
We have a technology enablement, and that's a platform of our company, something that we're very proud of, that creates values not only for us but for our customers as well. We have a multifaceted diversification approach focused on the top 100 metropolitan markets, and we really focus on these key areas primarily because of the resiliency and the differentiation and the strength of a top MSA. In June, we acquired the largest acquisition made in the history of the industry. We acquired a company by the name of H&E Equipment Services on June the 2nd. It was a company that had over 160 locations, which we added to our 460 locations, and it gave us a top presence, a leading presence in 11 of the top 20 rental regions, and improved our urban density in 7 of the top 10 markets in North America.
Combined, we have a fleet at original equipment cost of over $9.6 billion, and we have approximately 5% market share and growing in this very large market that we participate in. We've been successfully integrating against our roadmap for this acquisition, and we've completed a number of key things. Most importantly, we've completed the IT integration across the entire organization, so all 165 branches, as well as their headquarter back office operators, now consolidated onto one platform. We've realigned our field with key leadership positions filled by executives from both companies, and we've completed a sales optimization strategy. We're beginning and ongoing over the next maybe five or six months a continuation of training and cultural cross-training, as well as safety training across the organizations, and most importantly, a breadth of equipment training that we have to do.
Finally, in that same vein, we have a lot of new technology that we're training the existing and as well as the new team members on around Salesforce automation, around use of pricing technology, pricing tools, as well as understanding the new fleet that they'll have an opportunity to rent over the next period of time. We have a clear sign of light. We said we'd have about $300 million of incremental EBITDA go get. About $175 million of that will come from revenue synergies, which we're already beginning to see the initial fruits of that labor, and then about $125 million of estimated cost synergies, which we're well on our way to achieving about half of that by the end of 2025. We are well down the road. The next part is really how we go to market and how we win.
It's by growing our core fleet and spreading that fleet across this new organization, both general rental as well as expanding the specialty fleet into this new business that we've acquired. They were very limited in terms of their exposure to the specialty business, so we're expanding that quite quickly. Also, elevating the technology for this organization that we've acquired, making sure we bring them onto our technology platform, as well as continue to enhance our own technology as time goes on. Allocating capital has been really important. We intend to get our leverage ratio by the end of 2027 back into that 2-3 times leverage range, and we'll do that through a combination of paying down debt as well as growing EBITDA over that period.
We expect to continue to deliver superior customer service and excellence to our customer base, of which we think has been pretty outstanding to this point, and bringing a new level of expectations to the acquired business. With that, I'll turn it back over to Mircea.
No, thank you. Thank you for that. Maybe we can go back a few slides just to kind of have, this is the one that I'm looking for. Slide number eight, please. We'll just come back to this slide. The way I was thinking we'd approach the conversation, you guys have been through a lot this year. Let me just say this, right? This H&E acquisition happened at sort of an interesting time for the industry because demand was getting rockier, and it added a degree of complexity to the business. It added leverage to the balance sheet. In my mind, we've been getting a lot of spinach and none of the candy, but hopefully the candy is what lies ahead. I'm thinking we should be talking about demand.
We should be talking about the H&E integration, and at the very end, talk a little bit about technology because at the end of the day, that's hopefully what's going to make your business better through the cycle. Let's start with demand. When you look back at 2025, what has played out differently than maybe you initially anticipated? Where are we in terms of demand as, and I understand you're not going to provide guidance for 2026, but what are some of the early signs that you've seen when you're trying to assess what 2026 might look like?
Yeah, let me take the first part of that, and then maybe Aaron can comment on the back half of that. Obviously, we were a bit surprised and a bit disappointed, which is sort of the bad side of the demand side coming into the acquisition. We made this acquisition announced at the end of February. We did not get to close for another several months, June 2. During that period, while the Herc business remained stable, during that period and achieving some modest growth during that period, the H&E business experienced a fair amount of deterioration, and we experienced some negative synergies, if you will, coming into the closing date. That was sort of the negative side of that, where it was off pretty significantly. Their business year over year was down in the neighborhood of 15%.
That was a bit of a surprise that we had to overcome as we acquired the business and moved forward. From there, I'll let maybe Aaron talk about what we've seen since then.
Can we separate out the synergies in the way you sort of framed that it lost business, for lack of a better term, in the transition versus the end markets outright getting softer? Because one of the things that just making sure that the audience is aware of, H&E's business is different than yours in that it's a general rental equipment, gen rent business, no specialty, and that's where a lot of the pressure was. Let's try to tease that out maybe.
Yeah, as you kind of look at what happened the back end of last year with the H&E business, they're a publicly traded company too. You could see the pressure of the local markets kind of moderating as we went into 2025 and knowing we were going to do this acquisition. The macro environment, the macro local markets really are behaving the way we expected them to with H&E's business. The opportunity was to use our specialty business and kind of push that into that customer base and get those synergies over the course of this three-year period. You could see that they were very tied to the local market, which had kind of moderated, so there was more pressure on that side. At this point, the local markets are still really stable.
The mega market opportunity, those big projects have been robust, as we've talked about, and we've been able to use this new scale we have with H&E to move the fleet into the right spot, to take care of those opportunities where we've been assigned as a primary or secondary supplier for a mega project. Now that we're through the heavy integration period that we went through in Q3, for everybody's information, this transaction closed at the beginning in June. As we went through Q3, it was really a focus on the integration. Larry talked about the IT integration. We're all on one platform now. From an operator point of view, we can see the P&L on one platform. We can motivate our sales organization, the direction we want to go with our go-to-market strategies.
We have kind of moved from Q3 integration to Q4, okay, let's go grab all these synergistic opportunities we saw and move back to performance management and also the management of the variable expenses like we normally do in our business. We got good visibility now, whereas Q3 was kind of cloudy, focused on heavy integration.
I want to come back to this in talking about the integration itself, but I'm wondering more from a demand standpoint in terms of, I guess that was the second part of my question, as you guys are obviously looking towards 2026, what are some of the indicators in your business, either positive or negative, that you're seeing out there?
I'll give you a few. We had pretty good visibility on what's going on in the industry with fleet coming in, right, utilization across the industry. You could tell that the large rental suppliers are behaving with discipline, right? We know what happens when the industry gets overfleeted or nobody's doing that. There's enough big project opportunity to go use your fleet to go kind of manage that opportunity while you're keeping your ground game on the local market pretty stable. It is a decent operating environment. If you get a couple more clicks on interest rates clicking down, I think that'll be some sentiment shift and you see the local market kind of pick up a bit. That might not happen until mid next year. Until then, we still view 2026 as being stable with good robust mega market opportunity. Of course, the synergies, right?
That's what we're focused on, using our specialty business and leveraging our entire new scale to kind of benefit that P&L profile that we're going after.
Your competitor, a larger competitor, talked about mega projects essentially picking up. They've increased CapEx for their business as a result. Do you see something similar, not in terms of CapEx need, but in terms of mega projects in your footprint that you're bidding on as well? Do you see that acceleration into 2026?
Yeah, look, we had said that we wanted to target about 10-15% of the mega project opportunities out there, and we're operating right at that level. We do have visibility to continued demand in mega projects going into 2026, particularly around data centers, LNG, and related type of activity. Yeah, there's been a little bit of falloff on the EV area and maybe even solar to a lesser degree. We see enough shift on some of those projects into sort of converting those to hybrid opportunities on the EV side. Certainly data centers, LNG plants, and things that support that are robust, and we see strong going into 2026. We feel good about that opportunity. We think furthermore that the H&E size and the H&E footprint has given us incremental capability to service that type of customer base.
Right. I mean, if we go back one slide showing the footprint, because I think it is an interesting, well, maybe two.
There you go.
It is an interesting slide in that there's a lot of dots in the areas where there seems to be a lot of investment.
Exactly right.
I do not know if you feel comfortable disclosing this, but I know I would love to learn what percentage of your fleet or your business is at this point associated with mega projects. Maybe for Leslie, as a suggestion here, it would be great to know what the mix of these mega projects are in terms of what fleet is on data centers versus LNG versus other things that are to be called out. I do not know if you can comment at all.
Yeah, no, at this point, we choose not to sort of give that kind of a view of the market. I think that's sort of a competitive differentiator that we sort of keep close to the vest, if you will. I would say we are right at the level of participation at about close to 15% of the mega project opportunities out there that we're participating in in either a primary or secondary supplier relationship at that project and at that site, either through a local branch that may be close to it or a direct onsite activity where we've actually set up a branch on the physical facility of the mega project.
Understood. All right. Let's pivot and talk about the integration itself. As I said, we had a lot of spinach, and the candy seems to be ahead of us in terms of both cost savings.
You don't like spinach?
Sauté, I usually do, but not so much in P&Ls. Jokes aside, I want to hear from you. Looking at this slide, what do you think the opportunity is in terms of managing footprint? I want to talk about fleet as well.
One thing I'd say about this footprint is that when you talk to the customer base that we have now, whether they're H&E legacy customers or Herc, they like our position much more now as we kind of develop these relationships, especially at the national level, because of our scale. We can solve their problems with more rapid pace. The H&E business, what we liked about that business a lot, aside from their 160-plus different locations, was the quality of their locations. Their locations were big. They had a lot of acreage, a lot of square foot on a roof. We can expand that with pushing in more fleet, but also allows us to grow our specialty business even faster without signing new leases and adding more fixed overhead to our business. On the Q3 call, we talked about pre-acquisition.
We had roughly 150 specialty locations across North America. As we went through the integration, we saw we could add 50 more pretty quickly. You will see those come online in Q4 this year, Q1, and next year. We will be done kind of bolting those in as we get through the middle of Q2 next year. That is going to help us accelerate a part of our business called the specialty business, which has premium financial returns. Some of that fleet we were able to deploy in 2025. If you imagine H&E's coming in with this core fleet that was similar to ours, we could slow down the CapEx we were going to use for ourselves because it was coming in from an acquisition and redeploy that to specialty. On the synergy side, we have already got that engine moving the back half of this year.
Now we got these 50 other locations coming in, right? We'll decide how much gross CapEx will go to specialty next year. We've already got the footprint going without the fixed overhead that comes along with real estate.
Yeah. What I'm hearing from you, though, is more we're playing offense as opposed to we're playing defense. To some extent, the performance of H&E, as Larry was pointing out, has looked a little bit different than what you thought when you were acquiring the asset. It sort of begs the question, if the business has deteriorated, shouldn't you look for more cost savings, just pure cost savings side rather than revenue synergies at this point?
Yeah. As I mentioned a moment ago, Meg, right? Now that we're on one platform, we can see the P&L performance of these 620 locations. In our business, 35% is variable cost. You can manage that based on the environment. Now that we have complete visibility, we are doing that right now and get things tightened up.
Related to this question on the fleet, my understanding was that H&E has actually invested nicely in the fleet. They had a relatively young fleet and good fleet. I wonder now that you own the asset, if my perception is correct, maybe you can confirm or deny that. What does that mean for your CapEx intensity going forward? The asset, your overall fleet is not quite to the level of time utilization that I think you'd like it to be.
That's fair.
How are you managing the business? What does ideal time utilization look like? What's the gap right now? Is there room for you to monetize or rationalize the fleet to get to that balance?
Yeah, no, great question. I think when we, I would say that the H&E fleet was exactly what we thought it was going to be when we were inside of due diligence. I think the one thing that has sort of transpired is they did not continue to dispose of fleet really from January through acquisition date in early June. What that has sort of created on our end is sort of a six-month plan to effectively move 12 months of dispositions in. I think as we sit here sort of inside of or reporting it out on Q3, probably half of what we needed to move in this six-month period was sort of obtained inside of Q3. I would tell you probably half of that remains as Q4 disposals.
We've had to utilize the auction market more so than we had done over the last, call it, 18 months. That will, and I think the expectation is we'll have to lean on the auction market here to get this fleet cleaned up. I would say by and large, one, it was a younger fleet, which sort of leans into, as you think about 2026, what that allows us to do is probably dispose of less gear next year. We reported out at Q3 that our age was somewhere between 44 and 45 months. I think what we'll do is age that aspect of the gear such that the entirety of the gear runs back and looks more like a 47-ish as we exit 2026. Less disposals should be expected inside of 2026.
I'm also understanding less CapEx.
The disposition side is what we just talked about. The gross CapEx component of that, right? We're expecting to grow. We've got to feed specialty, and we have to be able to fund everything that sort of Larry and Aaron just talked about in terms of the branch optimization such that we can begin to walk the path forward on the synergy side. Without getting too pointed as to where that is going to be in terms of goalposts, I think just sort of high level, those three aspects and those three elements will be factored into the 2026 guide. Obviously, on top of that would be sort of where and how we're viewing the macro. Is it still stable as it's sort of been here through 2025, or do we anticipate sort of either an up or down? I think to be determined.
Before we talk about technology, one last question around not only the CapEx side, but really the balance sheet itself. Leverage has been an issue for a lot of investors following this transaction, and you're clear about the fact that you're working to reduce leverage below three times. I guess it's worth talking a little bit about the levers that you have to generate cash in a business. CapEx is one, right? Which is why I was asking about it. Maybe bigger picture, there is a competitor of yours. They're not publicly traded. They are using off-balance sheet financing as a way to untie some of the capital commitments that they have and increase return on invested capital. I do wonder if that's a model that is at all appealing to you and that you see yourself applying at a point in time in the future.
Let me pull that apart a little bit. I think, yes, from a leverage perspective, obviously we're outside of our goalposts at this point in time. We want to get back inside of that 2-3 times by the end of 2027. I think obviously you got two levers, right? You have either grow your EBITDA or pay your debt down. I think we see sort of a path to both. If I think about that over a 24-month period, there will be EBITDA growth sort of built in there. Then free cash flow generation, as you think about that, to pay that debt down as well. I think in terms of the sort of financing structure that we have in place today, I think given where we are in our maturation, we're a double B issuer.
I think that sort of where we are today, we're comfortable with issuing inside of that framework. That's what works for us today.
Yeah. I just maybe go back to 10 years ago when we separated this company from the parent car rental company. This was a broken company in a really strange industry, heavily tied to oil and gas with a lot of, there hadn't been a lot of investment or a lack of investment in the business. We came out with a much higher leverage ratio with a broken company that we had to invest in and fix. We were able to pretty quickly get our leverage down under control into a manageable area. Today, we're not a broken company. We're a very well-run company that's made lots of investments in, and I know your next subject is technology, in technology, in fleet, in leadership, training, education. Yeah, we're a little highly leveraged for this transaction.
As Mark said, over the next two years, that leverage will come down. We feel very confident about that.
Now, those are all fair points. You guys certainly have the track record managing through not only with a lot of leverage, but managing through a pretty nasty oil and gas down cycle back in the 2015, 2016 timeframe. With the couple of minutes we have left, I said I want to talk about technology. Telematics is something that you've talked about for some time now in terms of fleet management tools, but not only internally for you, but what you're providing customers. I'm curious how that's evolving. I think what's different is now you're making sizable acquisitions. You have your telematics and a bunch of new fleet with somebody else's system. How are you dealing with all of that? What do you consider to be competitive advantage that's specific to Herc in providing a holistic solution to the customer?
We rent heavy equipment, right? But we do it with a lot of technology, which I think is interesting. Our foundational technology platform is called ProControl by Herc Rentals. That's our customer-facing tool, but also the tool that our sales professionals use to manage their customer's business. With that tool, yes, you can manage utilization. It's got all the telematics on it. You can manage fuel levels. You can manage depth and things such as battery useful life. What's really interesting about it is that you can manage your POs and you can update purchase orders. The customer can do that. Lately, our ProControl by Herc Rentals can do some other unique features too. You can turn your asset, a forklift or an aerial boom, on and off with your phone, okay, using Bluetooth technology. We developed all this in-house with our IT team.
Another new feature that we've put into ProControl by Herc Rentals is safety. Safety we talk about on every one of our earnings calls. It's very, very important to our industry. It's a dangerous industry. People put themselves in dangerous situations around this equipment. The more we can provide a safety environment to prevent that, the more valuable we become. We have a safety training team of professionals who go out there and train our customers on safe behaviors. Now we could take that training, put it in ProControl by Herc Rentals, and only those that have been trained can now use our Bluetooth to turn on the machine. Some unique things that we've done. We have a lot of other technology we could talk about.
To the telematics, H&E used the same telematics platform as us. Integrating that was very easy. They just did not use all the features that were available in the telematics platform, but same manufacturer of that telematics. It was a very easy integration. For us to turn on all the switches in their gear to give all of that gear the same capability we had in the Herc gear.
Yeah. We can get feeds from any telematics unit into our ProControl. It doesn't have to be just one different specific device.
I'd love to go another 30 minutes, but unfortunately, we are out of time. I mean, my takeaway is that maybe we're going to start getting some candy at a point in time in 2026. I'll just leave it on that hopeful note. Thank you all for being here. We really appreciate it.
Thank you.
Thank you.