All right. Good morning, everyone. Thank you for joining us. My name is Mig Dobre. I am the Baird analyst covering machinery and equipment rental. It is my pleasure to introduce to you today Herc Holdings. Joining us from the company, we have Aaron Birnbaum, President, but incoming CEO, as well as Mark Humphrey, Chief Financial Officer. Aaron, I know you have some quick remarks, then we are going to do some Q&A. The floor is yours.
Thank you, Mig, and thank you, Baird, for having us today. Just some material to make sure everybody that is maybe not familiar with Herc Rentals knows a little bit more about us. Here is our safe harbor statement. Everybody is familiar with that. Herc Rentals has been around for over 60 years. We have over 10,000 employees, and we have got a good-sized network of over 600 locations. Our addressable market that we participate in is about $90 billion and growing, and our share in that market is about 5.5%, so a lot more opportunities for growth in the coming years. We view these as our key strengths.
We are really focused on growing outsize of the market, disciplined capital management. Technology is kind of a table stakes for the business, but the way you use it with your customers is really a differentiator, and we are continuously investing in our technology platform.
Diversification is key. We will probably talk about that today. Markets, products, very key to this business model, and we are clearly a market consolidator. We have done over 50 acquisitions since 2020, and the biggest one we did was last year, a company called H&E Equipment Services. They were based in Baton Rouge. They had 160 locations. At the time, they were the fourth-largest national equipment rental company. A big acquisition for us. It took our scale to about 30% bigger than it was previously. They had, as I mentioned, 160 locations, and now we have 615. The integrations began last summer in June in 2025, and as we went through the back half of last year, it was really about optimizing the fleet, the culture shaping, the systems. We got all that done.
As we rolled into the first half of this year, we knew it was going to be a year of transformation with the new foundation as we were much larger. As we exited Q1, the integration was officially done from our eyes. The sales, the fleet optimization was done, and we knew that the second half would be our opportunity to show the true value of the acquisition, and that really shone through in Q3 with our results, as our dollar utilization, our revenue growth, our fleet efficiency all were exposed from all the integration work we had done as an enterprise. How do we win going forward, right? We have an urban market strategy, so that is where the biggest part of this industry is the urban markets. We wanted to grow that core, and H&E was part of that story.
Specialty business, the specialty products is very important to be a standout top-tier national player, so we expand our specialty portfolio. I mentioned technology is very key. We continually invest in our technology to be cutting edge, and we like to execute at the highest level. That is really how you retain customers is the way you respond to the services they need. Our operating business model is called E3OS, and we call it easy, expert, and efficient. That is how we want our customers to view us. Lastly, the way we allocate capital. We did a big acquisition. We are very focused on as we exit 2027, we get our leverage down to this high end of the 2-3x leverage that Mark will, I am sure, take some questions on, and we feel like we are in a real good position to execute on that.
With that, Mig, I will give it back to you.
You really did not lie. It was three minutes. I appreciate that.
Yeah.
If you would like to contribute questions, you can email session1@rwbaird.com. Maybe the place to start here is with the H&E acquisition. You had a good slide, maybe three slides back, that was showing sort of the footprint. That transaction was not just big for you, it was big for the industry. In fact, it was the largest transaction that occurred in the industry. I would be curious to hear from you, beyond cost synergies, just the strategic rationale, why does it make sense to combine these two businesses, and what H&E brought you that maybe would have been either hard or impossible to build organically?
Yeah, it was a transformational acquisition. That location footprint kind of accelerated our growth six years. We were doing tuck-in M&A, we were doing greenfields, but that allowed us to accelerate that six years. In this industry, scale is very important because the customers want to know you can handle the needs that they have, whatever type of project they're operating with, especially the large general contractors. In that aspect, it was very, very important. As you mentioned, it was the largest transaction ever done in this industry, and it was a pretty bold move on our part, I would say. We intentionally leaned into the integration activities from systems to sales teams to fleet. As we kind of knew what the value was with the transaction, it was about revenue synergies. H&E was a business that was very general rental-esque.
They didn't have a specialty portfolio to their business, which is really the juice to get you those higher dollar utes and better margins. We believed that we could take that business and make it better and weave our specialty capabilities into it, and that's where we pegged a lot of the revenue synergies. We had a three-year go-get on the revenue synergies that we publicly told everybody was going to be like, round up like $375 million. As we exit this year, we had mentioned that we will do two things. One, when we get into February and we report our full-year earnings, we'll tell everybody what the actual revenue synergies were, but we said we would probably be between $100 million and $120 million of revenue synergies in 2026, and we're right there. That's going to happen.
Then, as you look at the flywheel going in 2027, it's another year of synergies that we'll build into the business. But our teams have leaned into it, and it's exactly the way we thought it would be once we closed the transaction.
Revenue synergies obviously are one thing, but there's also a cost synergy element to this. Maybe give us a little background on what you've realized thus far, or what you expect, I should say, for 2026, and what's incremental still to come in 2027?
Yeah. No, great question. We had said somewhere in the $120 million cost synergy range. Walking out of 2025, we did about $30 million of cost synergy, and we said that that incremental 90 would flow into 2026. That is the expectation. We are actually starting to cross over some of that synergy. Some of the earliest synergy of Q3 of 2025 was crossed over in Q3 of 2026. The expectation is it will all be in by the end of the year.
Okay. Going back to your Q3 report, one of the things that looked quite good, at least to us, we saw pretty strong growth in rental revenues, right? About 12%, I believe. On fleet, that was a little better than flat, maybe up 2%, give or take, on a year-over-year basis. So, higher revenue growth relative to fleet growth. Two questions here. What is it that I think changed over the past few months to allow this dynamic to start to emerge, and how does that inform your view as to what 2027 might bring?
Well, we call that fleet efficiency, and that is something that we talk about often on our earnings calls and to our teams. It is part of how our teams kind of manage the business. The 12 over two was a function of the activities we did to get the fleet right, so that fleet optimization through integration to get that mixture right. We benefited on the top line revenue by growing our revenue synergies, getting our mix more balanced towards the specialty business we wanted, and catching some of the opportunities that were in the marketplace, such as the mega opportunities, and also with our scale in the local market, just more goodness for the organization. That 12 over two is a factor of just a lot of discipline and right-sizing the fleet, as I said.
It is not something that we are going to be able to operate the business always going forward, but we will always focus on revenue outgrowing the fleet growth.
That's right.
That's the proxy that we're always looking at. By doing that while the healthy business, we won't get over-fleeted, and that'll help with the dollar utilization continue to go the direction we want it to go.
What you guys have experienced, to one degree or another, your peers have experienced as well in terms of rental revenues coming in maybe better than a lot of folks in my seat would have anticipated. Once again, it seems like mega projects are the things that are driving it, but when you double-click within the mega projects, what is it that has been emerging this year? Because if we look at the past couple years, let's face it, the industry has been in a much tougher spot than the past few months. Something has changed for the better. What is it?
Yeah, I think the non-res construction, which a lot of the mega projects sit in, has been bifurcated. The local markets have been stable. The mega projects have been robust, very robust. It's only I showed a slide about the size of the addressable market at $90 billion. The way we view it, the mega project opportunity is about 15% of that. So, most of this market is not mega. When you look at our portfolio of where the revenue is coming from, you got your non-res construction, but you also have government activities, that infrastructure investment that's been going through the economy. There's a big industrial piece to revenue opportunities in that addressable market. There's a lot of MRO activities from advanced manufacturing plants.
So, as I mentioned, diversification is the key, and so we feel like we're getting it all from different areas, but the mega story has been a nice story. You got the AI trade, but you also have a lot of LNG, a lot of renewables, the reshoring, chip manufacturing. So, there's a lot of areas where there's a lot of private investment that has been kind of wind behind the sails for all of us, I think, going through this year. And that really helped with the supply and demand dynamics of the fleet, right? So, with balanced fleet, tighter fleet, good discipline in the industry, you can find opportunities to find pricing. For us, we had to get through integration, and then we started to get the flywheel going, I'd say this back half of this year on that.
I'll come back to pricing because I think that's an important point. But I've heard from some of your peers, including one here at the conference, that they've sized some of the exposure that they have to the broader data center build-out anywhere between 18%-20% of the fleet. And I'm curious if you'd be willing to share that as well. And we understand that growth in that vertical is quite good right now. How do you think about managing your business in the context of this investment wave, who knows, potentially starting to moderate as we look towards 2028, 2029?
Well, as we mentioned, we've been in this business for 60 years, and we've been a public company for 10 years, so we always really tried to stay very diversified. That number you recounted as how much is deployed to the data center, that's not our number. We're not that high of a number by any stretch. So, we like where we are. We don't want to be so dependent on one component that if it falls off, that we're having to find other avenues. Now, AI, you got to go where the things are hot too. But that number's not a number that we disclose, but I'll tell you, we're not that high of a number that you just recounted.
And maybe tackling the mega projects more broadly, I think you have publicly talked about targeting, I think, 20% share?
Yeah.
Give us a little bit of context of what that would mean for your business if you were able to attain that goal. Maybe, I don't know, Mark, maybe this is a question for you in terms of what are the incremental revenues that you think we would have to model out if you can actually deliver on that?
Well, I think a couple of points there, Mig. I think one, that is a longer-term goal. I think inside of the construct of the gross CapEx one that we put to work in 2026, it will certainly be a part of that equation and looking to sort of expand our market share inside of that. But I think that thinking about that necessarily short term, I think it's probably easier to sort of model that through the growth CapEx as we provide guidance for 2027. Obviously, you've seen the results through Q3, and then I think as you sort of watch that, the effectiveness of that fleet going in will sort of tell us where and how quickly we're clipping off that 20%. Because I think when we moved that, we were at the upper end of the 10%-15%.
There's a lot of runway between 13%, 14%, and 20%, just as you're talking about a growing marketplace. We're not going to sort of over-commit there. We've been very sort of conscientious about the investments that we're making into projects and not being speculative, and that sort of mindset will continue into 2027 and even into 2028.
I think I missed this nuance because the way I understood you saying it, the new goal, the 20% goal, is a function of you essentially coming close or delivering on the prior one. My interpretation was that the goal kind of changed with H&E and with specialty and the other, almost as if you're expanding the TAM as opposed to you haven't achieved your prior goal. I think that I want to make sure that I get that correct.
Yeah, that is right. The mega project TAM was something that started, call it 2022. We did not have an H&E business at the time, and we said at 10%-15%, that is where we think we could play because we had a 5% market share. So we thought, well, with our capabilities, we can out-bat that. We should be able to do 10%-15%. But with H&E coming in and our network growing 30%, what it did was it made us a more credible solution for the large national general contractors that are doing nearly all these large projects. There are 30 large national general contractors doing most of this work, and the fact that we have the scale we have today and the capabilities we have today, there is more trust, more understanding, and we are getting pulled into more opportunities. Therefore, we are touching, kissing that 15%.
We are like, "It is time to move the needle." I think we will get to 20 just with our normal CapEx rhythm that we go through over the next three or four years. It will take several years to get there. It will not be like 2027 or 2028. It will take several years to get there.
Maybe we can go back a little bit and readdress rental rates. This is one of the things that I think has helped your business quite a bit, rental rates getting a little bit better. I am curious if there is a way to maybe separate out market effects, just in general, in terms of supply and demand of equipment versus the things that you have been doing internally. Just based on my own personal checks in the industry, I have heard that you have done a lot to restructure and improve the pricing in H&E's legacy business. So how do we think about those things, and what is left still ahead of us to come in 2027 on that front?
Yeah, maybe we both could take that one. I will take the first part. When we bought H&E, I mentioned it was a very general rental business. It did not have the scale Herc had, so that kind of put you at a disadvantage, and their pricing was several hundred basis points below ours. We had always felt as though we had a very disciplined pricing strategy. We had tools that were in our sales team's hands that was algorithm-based, that they would guide them to the pricing to use for every transaction, for every SIC code they were talking to. When we brought in the H&E business, it took six months to get that team trained up on it, and that is why we feel optimistic about pricing as we went through the middle of this year and going into the back half into the next year.
We think it's a little bit of a flywheel going into next year. That's one part.
That should help you in the first half of 2027, the reset in pricing.
We think it will. Yeah.
Okay.
We do. We analyze it, right? We're going through and we're making adjustments. We know the other thing that's been a benefit is the supply and demand in the industry, so that when anybody that's in economics knows if the demand's high and there's so much supply, there's opportunity. So we're paying attention to that. Then Mark had mentioned kind of the contract point of view with H&E. Any other color you wanted to add.
I think when you think about the H&E component of this, I think it provides a bit of a tailwind really for the next couple of years. Our premise here was we weren't going to go acquire these customer lists and all of these contracts and then raise their rates without necessarily showing our service value to them. We're thinking about that over a three-year trek, and I think that one-third of that, if you will, ish, has been clipped off. But that's a flywheel into 2027 and quite honestly into 2028.
I think the other piece here, and Aaron mentioned it, is just the overall industry time-use component here where fleet is We're in a very healthy spot where I think if you look at 2026 over 2025, time-use as an industry has gone up. I think if you think about that going into 2027, I think we're all positioned rightly to take advantage of opportunity in 2027.
As it relates to all of that, I know you've talked about dollar utilization.
Yeah
Which it might be worth explaining this concept for folks who might not be familiar. But dollar utilization as a goal for you, getting it back into 42%-43% range, what's the timeline for that? Can we see that as early as 2027?
Dollar utilization is just your overall annualized revenues over your average fleet for the year. That is running toward probably something that looks like 40, if you were to take the annual guide of 2026. Historically, Herc ran at something 42-ish. That is the first step in this journey. One, getting the mix back to this 20% contribution of the overall fleet, which we landed there in Q3. The first step here is to get us back to 42, pre-acquisition levels. I am not in a position yet to say whether that happens in 2027. We will give some more color on that in February. That is goal one.
But I think even taking that a step further, it is really about continuing to expand that specialty construct in our fleet and take that from 20% to 25% so that you are really running your dollar utilization up to something that is more in that mid-40s range on an annualized basis. That is really the longer term goal here. One, 42, and then two, run your specialty, improve that mix so that you are running to the mid-40s in the next several years.
Could I add something to that?
Yeah, please, Mig.
On this slide right here, number two, expand specialty. We were at 20% of our fleet pre-acquisition, and after we did the H&E transaction, it dropped all the way down to 17% because the business, as I said, was very general rental. Over the last 18 months, we moved it back to 20%. That was intentional. The reason you do that is because the specialty business delivers a premium dollar utilization and a premium margin.
In our view, for us, it is about 800 basis points premium. The more we can turn the clicks on specialty, the more it helps with our mix, more it helps with our overall dollar utilization profile, and therefore it flows down to margin. We are early in our, I think, our journey to keep turning that dial. We believe we can, our next threshold milestone will be 25%. We will keep building that, and I think it is a great opportunity for Herc Rentals.
Sure
Just to be more efficient and drive more margin.
That is fair. I am going to pivot the conversation here, a question from the audience, as you probably suspected at the beginning, on the path to delevering. You have got your target here, targeting net leverage below three. You talked about getting there exiting 2027. I guess this question has a few parts. First, how do we think about the balance between EBITDA growth versus actual debt paydown? When you guys think about what you can do effectively within your control to reduce debt.
Yeah
What can we expect in 2027? Related to this is a CapEx question, because I think one of the things that has taken some of us, myself included, by surprise, were the repeated CapEx guidance raises that we had in 2027. You talked about a pull forward, right, of $150 million, which to me would imply that that's CapEx that would have been spent in 2027 that's being spent this year. Maybe I should adjust my forward expectations of what CapEx looks like.
Yeah.
Debt paydown, delevering, and CapEx.
Debt paydown. Okay, let's start there. Debt paydown and the delever, there's a very disciplined approach to walk this line. Make no mistake about that, right? I think when you look at the why we did this transaction, as Aaron said, a lot of incremental scale, a lot of incremental earned confidence from the largest GCs comes along with this as long as you execute. Those relationships and being able to take that relationship from job to job, and sometimes those are happening all at the same time, those are really good problems to have in that you never want to say no to that customer that you've built scale and trust with. That's the fine line we're walking here.
I think when you think about 2027, it will certainly be an outsized component of this will be EBITDA growth. Cash flow is always a focus, margin expansion, they go hand in hand. But I think if you're just looking at the short term, what's the glide path to getting back to the top end of that 2x-3x range, it is an outsized pace of EBITDA growth than it is to debt paydown. Let's call it that. Now, I think that as you start to normalize and your margins begin to expand again, then that conversation turns a little bit, and then obviously you're looking out at what your demand profile is into 2028, et cetera. But free cash flow is always the focus, margin expansion, pricing, and all of those things that run to that.
Those are very, very in focus for us as well. That was one. What was the second part of that?
It was CapEx related.
CapEx related, yeah. I think in many ways, I've almost viewed 2026 and 2027, in many ways, there was this journey to getting to 3x. Yes, we've got these natural breaks in quarters and years and reporting and the like, but the reality is that I'm almost looking that over, it was almost like a 24-month glide path as opposed to three months or 12 months. The thought process here was that 4Q capital raise, holding free cash flow guidance in line with the Q2 guide, was very important. That 4Q capital will go in, go to work, it's not speculative.
That to me is sort of the best capital that I can deploy because I get it, and it's going to work for me the entirety of the next year when, generally speaking, when you're talking about gross CapEx, you're generally dividing by two because you've got sort of a half-year contribution in that first year. That was a big piece of that. Again, and that goes back to sort of the customers, the scale, and all of that, saying, "Hey, we need more gear. We want more projects," et cetera. Putting that capital to work in a non-speculative way was a no-brainer for us.
All right, with the couple minutes we have left, I want to ask a question on AI that I've asked many of the companies here. It's primarily around how you're using these technologies, right? I'm curious how you're rolling out these tools, if you are, and where do you see the biggest applications? Is it around dispatching and logistics? Is it around pricing? Is it maintenance? Certain corporate functions? Tell us a little bit practically what you're doing and who drives these initiatives? Who's responsible for driving these initiatives within your organization?
Yeah, I think it's a new frontier. We have a team, we've had a team that just focuses on AI technology. Our CIO and his team is really forward-thinking about how we utilize it and who has access to it. But we believe that it's a differentiator. For me, and I get it tested, I play with it all the time for different functions, and there's some of the things we're focused on are productivity. Yes, logistics. We got a big logistics project that we're going through right now. We talk about it on our earnings calls, and we'll give everybody updates as we go along. But that decision matrix that happens every day for every transaction when you're rolling with big heavy tractor trailers and where to go and route optimization.
The way we maintain our fleet, the way we put power, the AI in the hands of our technicians in the field to reduce labor hours and get parts and solve technical issues that they have where they might have to call somebody, we're testing how to do that just with the AI tools that we're building. And one more thing I would provide, and then Mark could talk about some of his functional areas, is I'm really excited about the predictive fleet demand methods we can use with all the data. We have 60 years of history, a lot of rich data. We have a lot of rich data over the last quarter. So using that to predict maybe where we're going with the fleet demands over the next quarter-over-quarter period, I think is going to be super powerful.
We're bolting on our back office systems into AI right now, and we're playing with it to see what kind of outputs we're getting.
So really quick before we finish, how do you manage the budget aspect of this and the cost inflation? Because this is something we've been hearing more and more about.
Yeah, I mean, again, I think everything that Aaron has mentioned there, it has to be viewed through a lens of return on invested capital. Really no different than the fleet decisions that we're making. And so everything is looked at and viewed through that lens. Now, the question about how quickly do you begin to see those returns is something that I am looking at and sort of challenging very closely. But I think all of the areas that Aaron mentioned, we certainly see into the horizon efficiency gains that should come from these investments, and I think that's sort of where making the customer experience on the other side of this a better experience with doing business with Herc Rentals. And so, I think we'll leave it there, but that's sort of the thought process.
That's a perfect place to end. We're going to continue the conversation in the breakout room if you want to join us. But until then, thank you, gentlemen.
Thank you.
Thank you, Mig.