HERC HOLDINGS, INC. - BAIRD 2026 GLOBAL INDUSTRIAL CONFERENCE - HERC HOLDINGS INC

All right, good morning, everyone. Thank you for joining us. My name is Mig Dobre. I'm the Baird analyst covering machinery and equipment rental. It is my pleasure to introduce to you today, Kirk 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're going to do some Q&A. So, the floor is yours. Thank you, Meg, and thank you, Barrett, for having us today. Just some material to make sure everybody that's maybe not familiar with Herk Reynolds knows a little bit more about us. Here's our Safe Harbor Statement. Everybody's familiar with that. Herk Rentals has been around for over 60 years. We have over 10,000 employees and 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're really focused on growing outsides 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're continuously investing in our technology platform. Diversification is key. We'll probably talk about that today. You know, markets, products, very key to this business model. And we are clearly a market consolidator. We've done over 50 acquisitions since 2020. And the biggest one we did was last year, a company called H&E Equipment Rentals. They were based in Baton Rouge. They had 160 locations. At the time, they were the fourth largest national equipment rental company. 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 25, 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. So as we entered Q1, the integration was officially done from our eyes. You know, 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 youth, our revenue growth, our fleet efficiency all were exposed from all the integration work we had done as an enterprise. And how did we win going forward, right? We have an urban market strategy. So that's where the biggest part of this industry is, 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's really how you retain customers is, you know, 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's how we want our customers to view us. And lastly, you Know, the Way We Allocate Capital. We did a big acquisition. We're very focused on as we exit 27, we get our leverage down to this high end of the two to three times leverage that Mark will, I'm sure, take some questions on. And we feel like we're in a real good position to execute on that. So with that, Mick, I'll give it back to you. You really didn't lie. It was three minutes, so I appreciate that. If you'd like to contribute questions, you can email session1 at rwbear.com. You know, maybe the place to start here is with the H&E acquisition. You know 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, and I'd be curious to hear from you beyond cost synergies, just a strategic rationale. Why does it make sense to combine these two businesses, and what H&E brought you that maybe it would have been either hard or impossible to build organically? Yeah, it a transformational acquisition. That location footprint kind of accelerated our growth six years, right? We were doing tuck-in M&A, we were doing Greenfields, but that allowed us to accelerate that six years. And 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. So in that aspect, it was very, very important. As you mentioned, it the largest transaction ever done in this in 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. And as we kind of knew what the value was with 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 that gets you those higher dollar youths and better margins. So we believed that we could take that business and make it better. And we've our specialty capabilities into it. And that's where we pegged a lot of the revenue synergies. And we had a three year go get on the revenue synergies that we publicly told everybody was gonna be like, you know, round up like a $375 million. As we exit this year, we told, we had mentioned that we'll 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 and $120 million of revenue synergies in 26, and we're right there. That's going to happen. And then, you know, as you look at the flywheel going in 27, it's another year of synergies that will 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. So 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 that $120 million cost synergy range. Walking out of 2025, we did about $30 million of cost synergy, And we said that the that incremental 90 would flow into 2026 and so that is the expectation we're actually actually starting to cross over some of that synergy some of the earliest synergy of Q3 of 2025 was crossed over in Q3 2026 but the expectation. Is it will all begin by the end of the year okay. So going back to your Q3 report, you know, 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 like up 2%, give or take, on a year-over-year basis. So, you know, 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 27 might bring? Well, having, we call that fleet efficiency, and that's something that we talk about often on our earnings calls and to our teams. It's part of how our teams kind of manage their business. that 12 over 2 was a function of the activities we did to get the fleet right. So that fleet optimization through integration to get that mixture right. Now, 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. Now, that 12 over 2 is a factor of just a lot of discipline and right size in the fleet, as I said. It's not something that we're going to be able to operate the business always going forward, but we will always focus on revenue outgrowing the fleet growth. That's the proxy that we're always looking at, and by doing that, we'll have a healthy business. We won't get overfleeted, And that'll help with the dollar you continue to go the direction we want it to go. And, you know, what you guys have experienced to one degree or another, your peers have experienced as well in terms of revenue, rental revenues coming in, maybe better than a lot of folks in my seat would have anticipated. So once again, it seems like megaprojects are the things that are driving it. But when you double click within the megaprojets, what is it that's been emerging this year? Because if we look at the past couple of years, let's face it, the industry has been in a much tougher spot than in the past few months. So something has changed for the better. What is it? Yeah, I think the non-res construction, which a lot of the megaproduct projects sit in, has been bifurcated. So the local markets have been stable. the mega projects have been robust very robust so but it's only you know I showed a slide about the size of the addressable market at 90 billion dollars you know the the way we view it the mega project opportunity is about 15% of that so most of this market is not mega and when you look at our portfolio of where the revenue is coming from you know you got your non-res construction but you also have you know government activities you know that infrastructure investment that what's been going through the economy. There's a big industrial piece to revenue opportunities in that addressable market. There's 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 areas where there's a lot 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 to 20% of the fleet. And I'm curious if you'd be willing to share that as well. 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 in a public company for 10 years. We always really tried to stay very diversified. That number you recanted as how much is deployed to the data center, that's not our number. That's not, we're not that high of a number by any stretch. So we like where we are. We don't wanna be so dependent on one component that if it falls off that we're having to find other avenues. Now, AI, you gotta go where the things are hot too, but that number's not a number that we disclose, but I'll tell you, it's not. We're not high of the number that you just recanted. And maybe tackling the megaprojects more broadly, I think you have publicly talked about targeting, I think, 20% share? Yeah. So 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 there's a question for you in terms of what are the incremental revenues that you think we would have to model out if if if you can actually deliver on that well i mean i think you know a couple of points there mig i think one um you know that is a a longer term goal um and so i think inside of the construct of you know the gross capex one that we put to work in 2026 um you Know it will 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 move that, you know, we were up, we were at the upper end of the 10 to 15%. So there's a lot of runway between, you know, 13, 14, and 20, just as you're talking about a growing marketplace. So, you know what, we're not going to sort of overcommit there. You know, 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 27 and even into 28. So I think I missed this nuance because, you know, 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. So, so I think that, that I want to make sure that I get that correct. Yeah, that that's right. So we had originally, so the mega project TAM was something that started call it 2022, right? We, we didn't have an H and E business at the time. And we said at 10 to 15%, that's where we think we could play because we had a 5% market share right so we thought well with our capabilities we can outbap that we should be able to do 10 to 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 right that there's 30 large national general contractor's doing most of this work and the fact that we're we We have the scale we have today and the capabilities we have the day. There's more trust, more understanding, and we're getting pulled into more opportunities. So therefore, we're touching, kissing that 15%. We're like, it's time to move the needle. And I think we'll get to 20 just with our normal, you know, CapEx rhythm that we go through over the next, you know, three or four years. It'll take several years to get there. It won't be like 27 or 28. It'll 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 better. And I'm curious if there's a way to maybe separate out market effects, just in general in terms of supply and demand of equipment, versus the things you've been doing internally. And, you know, just based on my own personal checks in the industry, I've heard that you've 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's left still ahead of us to come in 27 on that front? Yeah, maybe we both can take that one. I'll take the first part. So when we bought H&M, I mentioned it was a very general rental business, didn't have the scale Herc had. So that kind of puts 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 would guide them to the pricing to use for every transaction, for every SIC code they were talking to. So when we brought in the H&E business, it took six months to get that team trained up on it. And that's 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. And 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 27, the reset in pricing. We think it will, yeah, we do. And we analyze it, right? We're going through and we're making adjustments. We note the other thing that's been a benefit is the supply and demand in the industry. So that's when you, anybody that's, you know, in economics knows if the demand's high and there's so much supply, there's opportunity. So we're paying attention to that. And then Mark had mentioned kind of the contract point of view with H&E. And any other color you wanted to add? Yeah, I mean, I think, you Know, when you think about the H&A component of this, I think it provides a bit of a tailwind, really, for the next couple of years. You know, our sort of 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. So we started thinking about that over a three-year trek. And I think that, you know, sort of one-third of that, if you will, ish, has been clipped off. But, yeah, I mean, that's a flywheel into 27 and, quite honestly, into 28. I think the other piece here, and Aaron mentioned it, is just sort of the overall industry sort of time you component here where fleet is just we're in a very healthy spot where, you know, I think, you know, if you look at 26 over 25, time you as an industry has gone up. And so I think if you think about that going into twenty twenty seven, I think sort of we're all positioned rightly to take advantage of opportunity in twenty seven. So as it relates to all of that, I know you've talked about dollar utilization, which, you know, 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? So one, dollar used is just your overall annualized revenues over your average fleet for the year. And, you know, that's sort of running toward probably something that looks like 40, if you were to sort of take, you know, the annual guide of 2026. And so, historically, HERC ran at something 42-ish. And so that's the first step in this journey, one, getting the mix back to this sort of 20% contribution of the overall fleet, which we landed there in Q3. So the first step here is to get us back to 42 sort of pre-acquisition levels. I'm not in a position yet to say whether that happens in 2027. We'll give some more color on that in February. But that's goal one. But I think even taking that a step further, it's really about continuing to expand that specialty construct in our fleet and take that from 20% to 25% so that you're really running your dollar utilization up to something that is more in that mid-40s range on an annualized basis. That's really sort of the longer-term goal here. One, 42, and then two, run your specialty, improve that mix so that you're running to the mid-40s in the next several years. Could I add something to that? Yeah, please, Nick. So on the 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 yield and a premium margin. You know, in our view, for us, it's about 800 basis points premium. So the more we can turn the clicks on specialty, the more it helps with our mix, the more It helps with their overall dollar yield profile, and therefore flows down to margin. So we're early in our, I think, our journey to keep turning that dial. We believe we can, you know, our next threshold milestone will be 25%. So we'll keep building that. And that's, I thing it's a great opportunity for Herc Reynolds just to be more efficient and drive more margin. That's fair. You know, I'm going to pivot the conversation here. question from the audience, as you probably suspected at the beginning, on the path to delevering. So you've got your target here, targeting net leverage below three. You talked about getting there, exiting 2027. So I guess this question has a few parts. First, how do we think about the balance between EBITDA growth versus actual debt pay down? When you guys think about what you can do effectively within your control to reduce debt. What can we expect in 27? And 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 27. But 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 27 that's being spent this year, so maybe I should adjust my forward expectations of what capex looks like. So again, debt pay down, delevering, and capex. Debt pay down. Okay, let's start there. Debit pay down and the delever, you know, it's a, there's a very disciplined approach to sort of walk this line. Make no mistake about that right you know I think you know when you look at the why why we did this transaction as Aaron said a lot of incremental scale a lot of incremental earned confidence from the largest GCs sort of comes along with this as long as you execute and so those relationships and being able to take you know that relationship from job to job and sometimes those are sort of happening all at the same time those are really good problems to have in that you know you you never want to say no to that customer that you've built scale and trust with and so that's the fine line we're walking here so I think when you think about 2027 it will certainly be an outsized component of this will be EBITDA growth. Cash flow is 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 two to three times range, it's it is an outsized pace of EBIT DAG growth than it is to freak or debt pay down, let's let's let's call it that. Now I think that as you start to normalize and your in your margins begin to expand again then that conversation turns a little bit and then you're obviously you're looking out at you know sort of what your demand profile is into 28 etc but free cash flow is always the focus margin expansion pricing and all of those things that sort of run to that those are very very in focus for us as well so that was one what was the second part of that? It was CapEx related. CapEx related, yeah. So, you know, I think in many ways, I've almost viewed 26 and 27, in many ways there was this journey to getting to 3x. And so, yes, we've got these natural breaks in quarters and years and reporting and the like, but, you know. the reality is, is that I'm almost looking that over, it was almost like a 24-month glide path, as opposed to, you know three months or 12 months. And And so 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 capitol will go in, go to work. It's not speculative. And so 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 growth capex, you're generally dividing by two because you've got sort of a half year contribution in that first year. And so that was a big piece of that, again, and that goes back to sort of the customers, the scale and all of that saying, we need more gear, we want more projects, et cetera. And so putting that capital to work in a non-speculative way was a no-brainer for us. All right, with the couple of 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 are rolling out these tools, if you are, and where do you see the biggest applications? Is it around dispatching and logistics? Is it about the technology? Is it it around pricing? Is it maintenance? You know, certain corporate functions. so 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 we have a team we've had a team that just focuses on AI technology our 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 our productivity so yes logistics we got a big logistics project that we're going through right now we talked about our earnings calls and we'll give everybody updates as we go along but that 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 put power the AI in the hands of our technicians in the field to to reduce labor hours and and get parts and solve technical issues that they have 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 in the market 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 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 gonna be super powerful. So 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, and 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 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, Vic. Thank you.