Herc Holdings Inc. (HRI) Earnings Call Transcript

Thank you for joining us, and welcome to Herc Holdings Third Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Leslie Hunziker, Investor Relations. Leslie, please go ahead.

Thank you, operator, and good morning, everyone. Today, we're reviewing our third quarter 2026 results with comments on operations and our financials, including our view of the industry and our strategic outlook. The prepared remarks will be followed by Q&A. Let me remind you that today's call will include forward-looking statements. These statements are based on the environment as we see it today and are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the press release, our Form 10-Q and our most recent annual report on Form 10-K as well as other filings with the SEC. In addition, we'll be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials. Finally, please mark your calendars to join our management meetings at BNP Paribas' Virtual Global Group Call on November 3, the Baird Global Industrials Conference in Chicago on November 10, Rothschild & Co Redburn's Virtual CEO Conference on December 1 and the Melius Research Conference in New York on December 9. This morning, I'm joined by Larry Silber, Chief Executive Officer; Aaron Birnbaum, President; and Mark Humphrey, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Larry.

Thank you, Leslie, and good morning, everyone. Before we turn to the quarter, I want to take a moment to address the announcement we made yesterday. Leading this company has been an honor and a highlight of my career. And after more than a decade as CEO, I've decided the time is right to transition to Executive Chairman at the start of next year. I'm thrilled that Aaron Birnbaum will step in as Herc Rentals next Chief Executive Officer on January 1. This transition reflects the strength of our succession planning and my complete confidence in Aaron and the entire leadership team. Aaron has been with Herc for more than 35 years. Over that time, he has served in key roles across branch operations, sales, regional field management and executive leadership, and he understands this business as well as anyone in the industry. As our Chief Operating Officer and most recently as President, Aaron has been instrumental in shaping our strategy and driving our operational excellence. There is no one better prepared to lead Herc into its next chapter. In my role as Executive Chairman, I will remain actively engaged working closely with Aaron and the Board on strategy, capital allocation and continuing to build on the strong foundation we've established together. I could not be prouder of what this team has accomplished or more excited about where it's headed. And this quarter is a great example of why. The third quarter was an outstanding period for Herc Rentals, and it reflects the strategic positioning we've built over the past year. As a reminder, in 2025, we closed the largest acquisition in our industry's history. And just 9 months later, we completed the integration of H&E Equipment Services, which Aaron quarterbacked from start to finish. That work is now firmly behind us, and it has positioned us with a stronger and larger sales force, expanded scale and increased fleet availability to capture a greater share of wallet across the robust mega project pipeline. The third quarter is our first full quarter of comparable year-over-year combined results, and the underlying performance is clear. Equipment rental revenue increased nearly 12% on an average OEC fleet growth of less than 2%. That relationship, strong revenue growth on modest fleet growth is the direct result of being good stewards of capital. We've managed our fleet assets tightly, aligned the right equipment to the right markets and driving meaningful improvement in fleet efficiency with dollar utilization up 360 basis points in the quarter. This is exactly the kind of disciplined execution that defines Team Herc. Now turning to Slide 5. We continue to follow our proven playbook, executing against our long-term growth strategies. First, we are growing the core. Our top line growth continues to be led by national accounts, fueled by the robust mega project activity across data centers, infrastructure, manufacturing and energy. Our increased scale and broader fleet capacity allow us to take on more of these large complex projects and elevate our role with major contractors. Second, we are expanding specialty. Specialty revenues grew double digits year-over-year in the quarter, and specialty once again represents 20% of our total fleet at OEC, up from 17% a year ago. Specialty is a higher margin, higher return category, and we continue to disproportionately invest here to support mega projects, our new specialty branches and the cross-selling opportunities our larger customer base provides. Third, we are elevating technology. As an industry leader, our proprietary ProControl platform remains a true differentiator, giving customers the insights and controls they need to track, measure and manage their fleet for a safer, more efficient job site. And finally, we continue to invest responsibly in our fleet to support highly visible customer demand while maintaining capital discipline and managing our balance sheet for the long term. Now moving on to Slide 6. Our performance also reflects a culture built on accountability, collaboration and shared commitment to our customers. As our organization has grown, that culture has kept our teams aligned and focused on consistent execution. Above all, safety remains our first priority. Our responsibility is to ensure our people have the training, tools and well-maintained equipment to work safely and help our customers do the same. That commitment underpins everything we accomplish. With that, let me turn it over to Aaron to walk you through our fleet performance and our operating initiatives. Aaron?

Thank you, Larry, for your leadership and mentorship over the years. I am honored to step into the CEO role in January, and I look forward to continuing the great work we started together. I'm also excited to have the privilege of leading the best team in the industry. The expertise, resilience and dedication Team Herc brings to our branches and our customers' job sites every day are truly what sets us apart. And in the third quarter, that dedication showed up in our results. Our expanded network, maturing specialty branches, broader fleet access and stronger sales force are working together to serve more customer needs. The investments and integration work of the past year are translating into more effective execution across the organization and contributing to the second half momentum we anticipated. Turning to Slide 8. Our fleet management approach is about more than deciding what to buy and what to sell. It's about understanding customer requirements, coordinating equipment across our network and getting the most productive use from the capital we already have invested. Our larger footprint gives us more flexibility to meet those requirements. We could draw on our broader equipment base, coordinate fleet across nearby branches and support large projects without treating every new opportunity as a separate fleet purchase. That expert fleet management is central to the efficiency Larry highlighted. At the same time, we are making targeted investments where customer demand supports attractive returns. We added approximately $580 million of fleet at original equipment cost in the third quarter or about $1.2 billion year-to-date supporting life cycle replacement, mega project demand and our expanding specialty offering. We also disposed of approximately $200 million of fleet at OEC versus $375 million in last year's third quarter. The lower level of dispositions reflect a different operating priority. In the third quarter of 2025, we were actively rightsizing and aligning the acquired fleet. Today, our focus is ongoing life cycle management and refining the mix to match demand. A key part of refining that mix is our specialty offering. As Larry noted, specialty equipment now represents 20% of our total fleet at OEC. That matches our pre-acquisition mix. When we acquired H&E, which was weighted toward general rental equipment, our specialty share initially declined to 17%. Returning to 20% this quickly reflects our targeted investment in specialty equipment to meet customer demand and intentional cross-selling activities to achieve our revenue synergy goals. These assets generate higher dollar utilization and higher margins, but the value we bring goes beyond the equipment itself. Our specialty teams provide the expertise to help customers solve complex job site challenges, enabling us to address more of their needs and deepen those relationships. We continue to direct investment towards specialty and mega project requirements while carefully managing general rental capacity in stable local markets. Ultimately, the goal is not simply a larger fleet. It's the right fleet deployed productively with returns guiding our decisions. On Slide 9, the demand environment continues to be bifurcated and our diversification continues to serve us well. Local market activity remains stable overall. Infrastructure, government and maintenance-related demand continue to help offset softness in interest rate-sensitive commercial construction. National accounts, meanwhile, continue to lead our expansion. Our increased scale matters here. With greater branch density and a broader specialty offering, our sales teams can serve more of the customers' requirements across multiple projects and locations and strengthen relationships with major contractors. Our long-term diversification strategy remains focused on a balance of local and national accounts. The current strength of national account demand is an opportunity we are equipped to serve while maintaining the local presence and customer relationships that support resilience across the cycle. Slide 10 shows the breadth of that customer base. We serve contractors, industrial customers, infrastructure and government agencies, commercial facilities and customers with the event-driven requirements. Those end markets have different demand cycles, equipment needs and service expectations. Our advantage is combining that breadth with sector expertise. A manufacturing facility, a utility project and a data center may all need general rental equipment, but their specialty requirements and operating schedules can be very different. Our sales professionals and product specialists work together to build the right solution for each customer. The larger specialty network gives those teams more to offer. It also creates opportunities to introduce specialty solutions to customers who previously rented only general rental equipment from us. That is how diversification translates into business development, more ways to serve existing customers and more entry points into new accounts and less dependence on any single market. Turning to Slide 11. The external forecast provide context for the opportunities our teams are pursuing. Dodge's updated projection is for nearly $723 billion of U.S. mega project starts in 2026, well above the level we saw in 2025. For 2027, Dodge is currently reporting about $776 billion of mega project starts with trillions of dollars more still working through the planning stages. As we discussed last quarter, we are targeting a 20% share of the mega project rental opportunity over time, counting only our revenue from projects where Herc is a designated primary or secondary supplier. The pipeline we are pursuing continues to expand across project types and end markets. Our focus is converting those opportunities into rental activity through strategic project selection, coordinated fleet deployment and reliable execution for customers. Turning to Slide 12. This is the progression we outlined at the beginning of the year. The third quarter demonstrates how that preparation is translating into performance. Revenue synergies were an increasing contributor in the quarter, consistent with the second half weighting we previously outlined. That momentum is a direct result of our operational progress. Our newer specialty locations are maturing. Our sales teams are successfully cross-selling the broader offering, and our larger network is enabling deeper penetration into national accounts. Beyond the acquisition synergies, we continue to focus on operating efficiencies at our larger scale. The logistics transformation initiative we discussed last quarter is a multiyear effort to improve routing, process rigor, cost recovery and consistency across the network. Those priorities remain important, especially in an environment of elevated fuel and freight costs. As we move through the fourth quarter, our operating agenda is straightforward: serve the expanding project pipeline, maintain efficient fleet deployment and keep improving execution across the network. The team has done the work to build this platform. Now we're putting it to work for our customers and shareholders. Mark will now take you through the financial results and our updated outlook. Mark?

Thanks, Aaron, and good morning, everyone. I'm on Slide 14 with a summary of our key financial metrics. Equipment rental revenue increased approximately 12% in the third quarter, reflecting growth in both our general rental and specialty solutions offerings, driven by higher mega project volume, pricing improvement and improved fleet mix. This is our first full quarter with H&E included in both reporting periods. Last year's third quarter was still an active integration period, including fleet realignment, sales territory reallocation and systems migration. So this quarter's results reflect the operating benefits of that early work. Total revenue increased approximately 5% in the quarter. The difference between rental revenue growth and total revenue growth primarily reflects lower revenue from equipment sales following the elevated dispositions associated with fleet optimization last year. Adjusted EBITDA increased about 9% and adjusted EBITDA margin expanded 190 basis points to 44.2%. I want to distinguish the consolidated margin result from the performance of the rental business itself. With equipment sales lower year-over-year, rental revenue represented a larger proportion of total revenue, which benefited the adjusted EBITDA margin. REBITDA, which measures contribution from our core rental business, excluding equipment sales, increased roughly 10% and REBITDA margin was 45.2%. While this was down 70 basis points year-over-year, the headline understates the underlying strength of the rental business. Higher rental volume, pricing improvement and H&E revenue and cost synergies all benefited margin. However, this quarter, those benefits were more than offset by core operating cost inflation, higher field incentive compensation tied to operational outperformance, particularly in fleet efficiency and fuel and freight inflation. On fuel and freight, specifically, these pressures, including the related ancillary revenue mix effect accounted for approximately 100 basis points of year-over-year REBITDA margin pressure. That compares with 170 basis points of pressure in the second quarter. So even with diesel costs higher sequentially, we delivered significantly improved recovery quarter-over-quarter. And while we continue to focus on improving delivery economics and transportation efficiency across our network, including through the logistics transformation initiative Aaron discussed. Adjusted net income was $131 million or $3.91 per diluted share. Turning to Slide 15. We generated $133 million of free cash flow through the first 9 months of the year. We ended the quarter with ample liquidity of $2.1 billion and net leverage of 3.9x, down from 3.95x at the end of June. We also paid our regular quarterly dividend of $0.70 per share. Our capital allocation priorities remain consistent: invest where we see attractive returns, maintain financial flexibility and reduce leverage as the earnings contribution from our larger platform builds. That brings me to our updated outlook on Slide 16, which reflects the expanding mega project portfolio in front of us. You can see the new guidance ranges here. At the midpoint, we now expect full year equipment rental revenue of $4.513 billion and adjusted EBITDA of $2.13 billion, up about 2% from the previous guidance. We are also increasing our net fleet CapEx to approximately $1.05 billion at the midpoint, driven by an increase in gross purchases that will be partially funded by higher fleet dispositions. This additional investment is primarily for specialty equipment to support newly won or expanded mega project assignments in the fourth quarter. It is tied to identified customer requirements, not a speculative fleet build or an assumption of a broader market recovery. These are multiyear projects and the equipment we add in the fourth quarter will be in place to serve customers for the entirety of 2027 and beyond. Because of this, we view this roughly $150 million of incremental net fleet CapEx as effectively being pulled forward from our 2027 fleet budget. These assets also help us maintain manageable time utilization and availability needed to deliver reliable service. We're balancing the productive use of our fleet with the capacity to respond to customers rather than maximizing utilization at the expense of availability. Importantly, the updated guidance continues to reflect substantial fleet efficiency. At the new midpoint, we expect second half equipment rental revenue growth of approximately 14% on average OEC fleet growth of approximately 4%, culminating in full year pro forma rental revenue growth of about 8% on roughly 2% average OEC growth. We're generating meaningfully more revenue from our asset base while selectively adding equipment where customer demand supports attractive returns. So what does this CapEx increase mean for our free cash flow and deleveraging path? First, our 2026 free cash flow guidance remains unchanged at $250 million to $350 million. Second, and more importantly, because this equipment is tied to immediate mega project demand, it will go on rent and begin contributing to EBITDA right away in the fourth quarter. But the real power of the investment is in 2027 and beyond when we capture the full year EBITDA benefit of these high-margin specialty assets. As a reminder, growing EBITDA is the single most powerful lever we have for reducing our leverage ratio. By securing this fleet now for committed projects, we are rapidly growing the denominator of that ratio. This investment doesn't delay our deleveraging path, it actively supports it. It gives us a higher EBITDA baseline entering next year and will be evaluated as 2027 capital as we build out next year's fleet plan. Deleveraging is a top priority, and we remain focused on returning to the top of our targeted leverage range by the end of 2027. The bottom line, demand continues to exceed our expectations, and our team is capturing that opportunity through active asset management and targeted deployment. As a result, we're raising our earnings outlook and strengthening the setup for 2027. Now let's open it up for questions. Operator?

[Operator Instructions] Your first question is from Rob Wertheimer with Melius Research.

Congratulations, Larry. So I think you kind of touched on some of the headwinds to margin in the quarter. I mean you have, obviously, the fuel and some other things. Do you think that you're getting as much rate as you need to offset natural inflation? And do you think that we see higher incrementals as you kind of roll through the next quarter with the full kind of entity operating as a unified whole?

Yes. I mean it's a great question. I think that, obviously, rate is always a focus. I think when we evaluated sort of Q3, it performed about where we thought it would. But at the same time, I would say that from a 1-year view, rate is not sort of at the same level as inflation, particularly in mind of the fuel and the freight impacts. But that's always a focus for us, and we'll continue to focus on that as we sort of round into 2027.

Your next question comes from the line of Tami Zakaria with JPMorgan.

Very nice quarter. So I know it's probably a little too early, but as you think about next year, any preliminary thoughts on whether rental revenue growth can outpace OEC growth to the same degree we saw in 3Q and what you're expecting for 4Q?

Yes. I mean I think if you look at Q3, right, that was a 12% over a 2%. I think if you look at the midpoint, as I said, you're kind of looking at 16% at mid-point rev growth on fleet growth of 5%. I think some of that continues into the front half of next year, Tami, but begins to normalize a bit more as you get into 3Q and 4Q of 2027. I think I would say fleet efficiency is always our mantra. It will continue to be something that we focus on. And I think that in this environment, the good news is, is that the fleet adds aren't necessarily speculative. We sort of know what we're buying, and we know that, that fleet is going on rent, which certainly helps this fleet efficiency. And I think we'll continue to do that as we walk into 2027. .

Understood. That's very helpful. And then quickly, could you remind us how much incremental synergies in terms of revenues and cost you have left or you are expecting in 2027.

Yes. I mean we said we were going to get $90 million incremental on the cost side and $110 million to $120 million incremental on the rev side. I would say, as we sit here today, both of those are on track. I have said that we will give sort of a full report out come February of sort of how both of those things performed. But I think the message today is both are on track.

Your next question comes from the line of Mig Dobre with Baird.

Aaron and Larry, congrats to both of you. My first question is on dollar utilization. That looked quite good this quarter. And unless I'm wrong in my model here, I got to go back to 2022 to find a Q3 that looks similar to this one. So I guess my question, as we sort of think about especially the forward outlook, right, Q4, but even into 2027, how should we think about dollar utilization maybe relative to a strong year like 2022? Is it possible that we're going to see on a seasonally adjusted basis, obviously, but similar performances to what we have there? And what are some of the moving pieces that you'd encourage us to consider here in terms of what you can physically get in terms of physical utilization from the equipment relative to rental rates or mix or anything else?

Mig, thank you. And I'll take that question. The input to dollar used for us in the quarter were definitely our specialty business getting back to 20% of our fleet, right? With the premium nature of that type of fleet and the returns you get, that really helped us get that dollar UT to that level in Q3. Timing was strong. That's the other input. I wouldn't call it a record, and we still have work to do on certain categories as we kind of invest in the fourth quarter and going into next year. But those are the 2 inputs. Pricing was starting to improve as we went through the rest of the year. We really had to kind of get through the integration and start to harmonize our business in a lot of ways. And so those are the 3 inputs. When we look at where do we go from here, we're happy with where we were in Q3 with that dollar UT. We think that our first goal is to get back to where we were pre-acquisition, which is like a 42% annual run rate. And then we'll continue to build annually on top of that. The more you can get your specialty business as a part of your business, it's going to give some fuel to that overall dollar UT. And that's our mission as we go out beyond just '27.

All right. That's helpful. My follow-up, since you brought up the mix and that specialty is now 20% of the overall OEC, I also heard you say that some of the increased CapEx is almost kind of like a pull forward relative to 2027. I understand you're not providing guidance today, but I'm sort of curious as to what the right general framework is to think about CapEx and frankly, to think about free cash flow here as well as we think about the path for delevering, hopefully by year-end 2027.

No, it's certainly a fair question, Mig. I think it will be a combination of those 2. I think in my prepared remarks, I mean, I think in order to delever coming out of '27 to the top end of that, EBITDA growth will be paramount in that. It doesn't mean we're turning our back on free cash flow. But we will provide the growth capital necessary to continue to support our customers. And with that, I think it's, first and foremost, EBITDA growth, free cash flow in terms of the mix to get you to the top end of that guide as we walk out of 2027.

Your next question comes from the line of Jerry Revich with Wells Fargo.

Larry, Aaron, congratulations. Larry, I was just looking back when you took over, the business was EPS breakeven, dollar UT was about 10 points lower. So congratulations on the fantastic improvement in the profile of the operations. I wanted to ask on the outlook for pricing that Aaron and Mark, you spoke to. So typically, time UT leads pricing, and it sounds like pricing for you folks improved over the course of the quarter. So is it fair to think about pricing accelerating into year 2 of the recovery as we typically see for your business? Or is there anything we need to keep in mind compared to that normal cyclical pattern where you folks had a time UT acceleration this year and pricing acceleration should hopefully follow.

Yes. Jerry, thanks for the kind words. Much appreciated. And as you know, pricing has always been top of mind for me and for Herc since I got here, and we're focused on it. We are operating in a very rational and constructive pricing environment right now. Supply dynamics are healthy. Cost inflation, including fuel and freight is an incremental incentive to raise rate. However, the magnitude of the inflection will depend on the spot market recovery going forward.

Okay. And can I ask in terms of where you folks are delivering more equipment, the semi fab CapEx outlook is for roughly a doubling '27 versus '26. Can you just talk about the magnitude of deliveries that you've already made to these sites? They're well positioned relative to your footprint. So just curious what you folks are seeing in the planned delivery on to those sites over the next couple of quarters based on what your visibility looks like.

Jerry, it sounds like you're specifically asking about chip plants. Is that right?

That's right. That's right. Yes, that's right. Given your footprint, that's exactly right.

Yes. We feel like we're well positioned there. There was an initial wave, I guess, maybe it was 2021, 2022 with a lot of chip plant activity. And we didn't have the footprint we have today then. But we were able to secure a fair amount of activity from those plants that came online at that time. And now there's another wave, that's what you're referring to. So yes, this is something we're monitoring. We feel like we're well positioned. Those are great projects. They have very long project time line. They last several years. And some of the ones we've seen in the news are extremely large projects. So we're excited about that. And I think it's helpful just for the overall diversification of the mega landscape that those big projects are coming out again in different parts of the U.S. So we feel like we're well positioned for that.

Your next question comes from the line of Ken Newman with KeyBanc Capital Markets.