Herc Holdings, Inc. Stock

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.

Larry, congrats on the transition and looking forward to working with you more, Aaron, going forward. First question for me. The operating leverage this quarter was a lot more impressive than I would have expected. I know you're not ready to talk about '27 guidance yet, but from a high-level perspective, is there a way to think about baseline EBITDA flow-through if the market dynamics continue to be this strong? I know there's lots of puts and takes on the synergy capture and what the mix of the fleet is doing, but 90% EBITDA flow-through, I think, is maybe the strongest I've ever seen. It seems like the next quarter is going to be even stronger potentially. Just trying to level set the expectations for next year in terms of how that could flow through.

Yes. I mean I think that obviously, from a prepared remarks perspective, Ken, tried to touch on that a little bit, right? Like the sort of benefit to the quarter was sort of a decrease in dispositions of fleet in that comp, right? I think that certainly begins to normalize as we work our way through 2027 into a more normalized comp as well. I think the way high level, 2027 plays out is front half comps are much more favorable than the back half comps. And then I think you think about the growth coming, Aaron talked about tighter time utilization in Q3 and anticipated into Q4. I think that carries through into the front half of the year and then the back half of the year is supported by incremental fleet growth as we work our way through 2027. So that kind of 5,000-foot view, Ken, is sort of how I would think about the overall sort of activity of '27.

Understood. And then maybe just a quick one here. Solid work on offsetting the headwinds from higher transportation costs. I think you said it was about 100 basis points of headwind. If I remember correctly, I think you guys were looking for about 150 this quarter. Just -- sorry if I missed this, are you still expecting 100 basis points of margin headwind for the full year from delivery and ancillary costs?

I mean you're probably not too far off if 4Q behaves the way 3Q behaved, right? I mean we've done Yeoman's work on sort of the recovery on the refuel side of this, and that came through this quarter. The reality of that, though, is you've got more fuel revenue, which is sort of not necessarily accretive to your overall business margins, right? So you got a little bit of overhang there as this elevation of fuel comes through. We've recovered sort of the margin to pre-inflation. So Yeoman's work there.

The pieces of this that remain problematic are really the sales and service vehicles and sort of that interbranch transfer component, which has sort of got all of that same fuel increase running through it. So we'll continue to focus on all of those. Quite honestly, the biggest sort of go get is an incremental price and overall efficiency of the freight operation to sort of mitigate those factors. I think the other thing I would say, right, if this continues into 2027, you do get a comp break when you get to Q2 of 2027 because that's when this first elevated view started coming through. So even in the event of it continuing, we will get sort of the benefit of the work we've done as we comp into next year.

Your next question comes from the line of Kyle Menges of Citigroup.

Congrats, Larry and Aaron. I wanted to touch more on mega projects. Last quarter, you did up your target market share on mega projects. I'm curious how you're seeing that track as we progress through 2026. And you had a good slide on the pipeline of projects for 2027. I'm sure you're already having conversations with those customers now. Based on how those customer conversations are progressing, I'm curious if you would anticipate your mega project share to be higher next year versus this year?

Yes, Kyle, thank you. And regarding our position in megas, it's been a good tailwind for us this year. We -- I think as we got through the middle of the year, it got stronger and stronger. We -- with that visibility and kind of fully integrating the H&E acquisition, we thought that we had hit the top end of our 15% share in the mega arena, and we wanted to move the needle, right, because we thought we had more capabilities and capacity. So we moved it to 20%. That will take us some time to get there. It won't happen in 2027.

We view it as a kind of a few year kind of journey, but our capabilities will help us get there. And when we look at the setup, now we're in the fourth quarter, the setup for next year, the pipeline is strong. We're getting more wins and it's partly the reason why we had to take the CapEx up in the fourth quarter to get us -- get some of that fleet in place for the beginning of the year start. And we view next year as robust and solid in the mega space as 2026. And I think our capabilities, our new scale are really the reasons that we're able to kind of move our position and strengthen it and ultimately, like you mentioned, get to 20% share in the mega project arena.

That's helpful, Aaron. And a follow-up on that. It looks like just from your slide deck, you are sticking to that long-term target of 60% local mix. In light of the strength in mega projects and today, you're below that mix. I guess I'd like to hear your thoughts on why that 60% local mix is still the right mix long term.

Yes. In our opinion, we've always had -- I mean, since Larry became the CEO, we've had an urban market strategy. So that's how we've built out our network to get scale in the largest -- initially, it was the largest 50 markets. Now it's the largest 100 markets. There's parts of the local market that are attractive. The price point for rental is stronger than on the large customer side. We're just in a cycle right now where the big projects are swinging up and the local market is stable. And as we've been saying for the last few quarters, and that -- we know that cycle will change again.

So we want to be prepared for when that happens. The H&E acquisition was a local market play. It gave us the scale. And that's a big part of this rental industry and not something we want to take our eyes off of because diversification is the key. And we want to make sure we're in all those situations where we can be successful.

Your next question comes from the line of Neil Tyler with Rothschild & Co Redburn.

Just wanted to come back to the topic of synergies actually. And the component of the revenue synergies that you have targeted that relates to evening up the rate at the H&E customers. Can you talk a little bit around how that is progressing in what is an improving rate environment, whether that actually makes that more achievable or even potentially more difficult? And then, Mark, if you just remind us in terms of the flow-through on those revenue synergies, how you're thinking about that currently?

Neil, it's Aaron. I'll take the first part of that. The -- as it relates to the synergies and rate and the acquisition, so we're really happy where our synergies have landed for the first 1.5 years since we closed on the transaction. Our teams have worked very, very hard, and it's been a great story. One piece is we were able to expand our specialty network. And the other piece is we're able to drive revenues with customers that typically wouldn't have rented those equipments from H&E at the time. So we really drove that synergy. And now we're going on into the subsequent year.

It's kind of a 3-year play revenue synergies is for us. When we purchased the business, the price point was lower than the Herc Rentals price point. So we view that in 2 pieces. One is the spot market, right, which is the local market, it's the transaction market that happens every day. We bolted that business on to our algorithm, pricing tools within a few months. And so that started to kind of match up with what Herc was typically charging for those type of transactions. And I think we got the benefit of the scale of the business, but also the market dynamics of a tightening utilization going out there. So that built some momentum for pricing opportunity.

The second piece that we mentioned, and I'll remind is that H&E did have some contract customers, call it, 30% of their business was contract customers. And we said it would take us 3 years to match those rates with those customers that Herc expected. We weren't going to go get it all at the same time. We wanted -- what was most important is holding on to those customers and driving our synergies and our product diversification into them and building strong relationships. So we view it as a taking 1/3 price lift over a 3-year period and 3 years, we would get there. And we've been doing that.

So the first year, we took that 1/3 piece, and it might not have been exactly the price we won on existing Herc customer, but we did move the needle. And now we're going into the second year. And I think that the time utilization, the health of the market is -- are tailwinds to helping us kind of achieve that goal. And we look towards next year as another year of kind of turning the needle a bit and becoming more sticky with the customers, so we have more opportunities to do that. So we have some work to do to kind of harmonize that piece of the business. We started doing that in the back half of this year. And then as we roll into next year, our pricing harmonization will improve, we believe.

And Neil, the second part of your question, the original assumption as the guide was laid out was somewhere in that 65% to 70% flow-through on revenue synergies. And I think that you're probably at the low end of that as we're sort of walking through 2026. I think as the branch optimization and all of those underlying branches mature, I think you get to something that's closer to 70% in the out year.

Your next question comes from the line of Steven Ramsey with Thompson Research Group.

My congratulations to everyone. I wanted to hear a bit more on your positioning on mega projects. Do you find yourself more and more being a prime supplier versus a secondary as you move through this year or what you're bidding on that will hit next year? And are there any intentional strategic moves you're making on how you're positioned on these projects?

Steven, it's a good question. We -- as we mentioned in the prepared remarks, when we talk about our position in mega projects, it's always about, hey, do we have a secondary or a primary position? Are we the first or second supplier with an agreement with the customer. We don't really measure the tertiary activity that's going on. And as we've gone through the last 12 months, our positioning has strengthened. I would say those are related to 2 issues. One is our strengthening position and relationship with large GCs. Those are the ones that are doing most of the projects. And then the H&E acquisition gave us the scale to build the confidence and the fleet to go move in quicker and the confidence that we can execute on those jobs. .

General contractors on mega projects and people in the industry know this, they want to make sure you can execute, right? They're not taking too many chances on an entity that can't provide the safety, can't provide the high-quality equipment and the technology and the response to the service that's required. So the more we position it of 1 or 2, the more we expect that we'll win more new opportunities. And having a strong national account team is really critical to that. Then you have to have the operational acumen to mobilize. When you're mobilizing this kind of fleet, it's an exercise, the fleet planning, the demand planning of what's going to be needed on the job and then the kind of the forward operating view on what needs to happen out there.

We have teams that we've put together over the last several years that, that's what they do. It's not something we had 5 years ago, but we have dedicated operations and sales teams that focus in this arena because it's the opportunity where we have the capabilities, and that's where we want to go find revenue opportunities for the company.

Okay. That's helpful. And then on the specialty locations gaining momentum, are they at a point where you need more fleet on them to keep growing? Or is it more get operations more in line before adding fleet to those new locations? .

Yes. Good question, Steve. This is Larry. Look, these specialty locations are ramping, these new 50 locations are ramping as we'd expect. But just like any business, as they mature, you continue to give them the ability to ramp and acquire fleet as they show that they've matured in terms of technical knowledge, in terms of customer reach and ability to achieve fleet efficiency. So we're not there yet in the vast majority of them, and there's ample opportunity in the future as they continue to mature in those markets to add more capital as they grow and they grow efficiently. .

Your next question comes from the line of Seth Weber with BNP Paribas.

Sorry if I missed this. But Mark, in your prepared comments, you used the phrase pull forward on CapEx. So sorry if I missed this, but should we assume that CapEx for 2027 is going to be up at this point? Or I'm just trying to think about what that phrase pull forward means for next year.

Yes. No, fair question. I think what that really means is that we're sort of viewing that, call it, $150 million sort of at the midpoint as part of the 2027 CapEx. The beauty of that fleet is it now works for us of the entirety of the year. Generally speaking, you think about fleet adds and you divide by 2 to sort of think about the benefit you're getting from those fleet adds in any given year. So we're contemplating that fleet as part of the 2027 plan. Not ready to sort of publicize sort of the overall gross fleet CapEx yet for 2027. We're still working through all of that, as you would imagine. But come February, we'll provide that guide.

Okay. And then just local markets being stable, I think that's been your message for a while now. I mean, are you still thinking that we need a decline in interest rates for that to turn more positive? Or do you think -- I'm just trying to think through like what could get the local markets to be better here in intermediate term.

Yes. Look, absolutely. We believe that, that's a big key to what I would call continued development and growth above a stable market really requires that commercial market to accelerate and commercial market is not going to accelerate unless there is an appropriate interest rate sort of environment for that. It applies to the -- you got to look at the 10-year treasury and what's happening there, and that will impact where that market goes.

But look, we are firmly positioned in the local markets, particularly in the large, more densely populated areas. And once that turns around, we will participate certainly in an outsized way to achieve results and capture share in those markets.

We have reached the end of the Q&A session. I will now turn the call back to Leslie Hunziker for closing remarks.

Thank you for joining us on the call today. We certainly look forward to updating you on our progress in the quarters to come. Of course, if you have any further questions, please don't hesitate to reach out. Have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.

Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the Herc Holdings, Inc. Second Quarter 2026 Earnings Call and Webcast. [Operator Instructions].

I would now like to turn the call over to Leslie Hunziker, Head of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Today, we're reviewing our second 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 to these non-GAAP measures to the closest GAAP equivalent can be found in the conference call material.

Finally, please mark your calendars to join our third quarter management meetings at Morgan Stanley's 14th Annual Laguna Conference in California on September 16. 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. With the H&E integration successfully completed in the first quarter, our entire focus in the second quarter shifted to execution. As we've discussed, the first half of 2026 was about converting our larger optimized platform into stronger utilization and revenue growth as we move through the seasonal ramp. I'm incredibly proud of how Team Herc is performing. In the second quarter, we reached an important post-acquisition turning point as pro forma equipment rental revenue returned to growth, increasing 2% overall.

Importantly, that return to growth happened earlier than we expected within the quarter, which gives us momentum and confidence heading into the second half. Alongside revenue growth, disciplined fleet management drove positive fleet efficiency as we continue to align the combined fleet. We are also progressively capturing more of the value of this acquisition as revenue cross-selling synergies build and cost synergies tracks the plan.

That operating momentum, combined with accelerating customer demand gives us confidence to raise our full year guidance today. Of course, the quarter was not without its challenges. Fuel inflation was a macroeconomic headwind that pressured margins, most notably in April, though margins improved as volume built through the quarter. Mark will take you through those details.

Turning to Slide 5. We continue to follow our playbook, executing against our long-term growth strategies. First, we are growing the core. Today, our top line growth continues to be led by national accounts fueled by robust mega project activity. The H&E acquisition was well timed, adding scale, fleet capacity, talent and branch density to expand our role on large complex projects and capture a greater share of this increasing demand.

Second, we're expanding specialty. Specialty revenues were up double digits in the quarter, and we continue to disproportionately invest in specialty fleet to support mega projects, our new specialty branches and the cross-selling opportunities across our combined customer base. Third, we're elevating technology. As an industry leader, our digital capabilities remain a true differentiator. We continue to invest heavily in our proprietary ProControl platform, utilizing AI and advanced telematics and to give customers the insights they need to track, measure and manage their fleet for a safer, more efficient job site.

Engagement is building quickly. Active external users on ProControl grew nearly 20% quarter-to-quarter as more of our combined customer base puts these tools to work. At the same time, our e-commerce channels provide 24/7 flexibility for customers who know exactly what they need. The platform is a seamless way to transact and secure equipment on their schedule. Always backed by the expert support of our sales and branch team.

And that convenience is clearly resonating as Q2 was our highest revenue-generating e-commerce quarter-to-date. And finally, we're investing responsibly in fleet to support highly visible customer demand while maintaining capital discipline and managing our balance sheet for the long term.

Now moving to Slide 6. Our ability to execute at this level is a direct result of our people and our culture, integrating a large complex acquisition, while simultaneously pivoting back to growth in an uneven demand environment requires an exceptional organization. We have built a culture grounded in collaboration, standardized processes, comprehensive training and industry-leading technology to execute consistently across our expanded network.

And the absolute foundation of that culture is safety. It is the nonnegotiable starting point of everything we do. By equipping our teams with the right training, and safe, well-maintained gear, we ensure they can perform at their best, while delivering the superior reliable service our customers expect. Team Herc dedication to operating safely and efficiently is what makes our growth possible.

Now before we discuss the financial outlook, let me turn it over to Aaron to talk about our operational performance and initiatives. Aaron?

Thanks, and good morning, everyone. I 100% agree with Larry's comments on the strength of our culture. It was the dedication, discipline and collaboration of our team that allowed us to integrate the H&E acquisition so efficiently. Now with that heavy lifting behind us, we have fully pivoted to execution. Our sales force is aligned and fully engaged, and our operating model is standardized across the network.

Today, we are actively leveraging our expanded geographic footprint and beginning to capture the efficiencies of scale and the synergy opportunities that made this combination so compelling.

Turning to Slide 8. Optimizing our fleet was a critical integration initiative, getting the right equipment into the right markets with the right mix, but optimization is in a onetime event. It requires continuous active management to stay ahead of evolving demand trends. This is where HERC excels. We are experienced, disciplined fleet managers and as showed in the quarter as we brought the combined company back to positive fleet efficiency or revenue growth outpaces fleet growth.

By keeping our focus squarely on improving utilization we generated 2% higher pro forma equipment rental revenue on approximately 3% less average fleet at OEC compared to last year. That improved efficiency is exactly what positions us to grow. With the fleet now tightly aligned to demand and utilization moving higher, we have the operating discipline in place to invest in the accelerating opportunity we are seeing.

As seasonal volume ramped up in the quarter, we onboarded roughly $450 million of our 2026 sleep buy. Through the first half of the year, we added $634 million of fleet at original equipment cost. A portion of that spend supports the revenue synergy target we set for this year, while another portion supports the planned mega project growth embedded in our original fleet plan.

Today, however, our pipeline and on-rent activity on large multiyear projects are tracking ahead of our assumptions. External data also continues to point to increased mega project starts this year. So we are stepping up fleet investment where we have high conviction in the rising demand and where our larger scale is enabling us to expand our role with major contractors and grow share of wallet.

Mark will walk you through the revised capital investment plan in just a minute. But even as we increase clean investment, we remain highly disciplined with life cycle management. In the quarter, we disposed of $247 million of fleet at OEC generating healthy proceeds of approximately 46%. You'll see that our full year disposal step up from our original plan. That's intentional.

As demand acceleration is coming from mega projects in specialty, we are fine-tuning the fleet mix for today's environment. Recycling that capital at healthy recovery rates helps fund the higher demand fleet and keeps us capital efficient.

On Slide 9, despite the stronger rental activity we're seeing, the overall demand environment remains bifurcated. Local market activity is stable in general, though the dynamics vary -- while some markets are feeling the brunt of the weakness in the interest rate sensitive commercial sector, others are experiencing growth driven by infrastructure, education, health care and MRO. Certain local markets are also benefiting from the secondary demand generated by nearby mega projects.

That said, national accounts are where we continue to see the strongest growth, driven by increasing activity across energy, data center and manufacturing projects. The H&E acquisition significantly increased our bandwidth to serve this national market. Legacy Herc was already a strong mega project participant. What's changed is our ability to take on more of these opportunities and expand our role with major contractors because we now have more fleet capacity, more branch density and a larger operating platform.

As such, we have increased our target share of the total U.S. mega project opportunity from 15% to 20%. In today's uneven environment, diversification across geographies, project types and customer accounts is what drives our resiliency and gives us a distinct competitive advantage. And you can see the breadth of that diversification on Slide 10. This is where our diversification becomes more tangible. We serve contractors, industrial accounts, infrastructure and government agencies commercial facilities and event-driven customers, and each of those groups has different demand trends, project requirements and service expectations.

That's why sector expertise matters. Our sales teams understand the language of their customers, the nuances of their projects and the equipment and service requirements that matter most in each vertical. So whether it's a data center or a health care project, a utility job or a pharmaceutical manufacturing plant, we can bring the right solution to the table.

And now with the larger platform, broader fleet availability and leading-edge technology tools, we can support those customers in more ways. That what helps us deepen relationships and create stickier, higher-value opportunities over time. And those opportunities aren't as broad they're deep, and they keep growing.

Turning to Slide 11. The external data continues to back up what we're seeing in the field with Dodge projecting over $800 billion of U.S. mega project starts in 2026, all above the level we saw in 2025. We know investors are trying to translate these massive headline numbers into actual rental revenue. So let me frame how we think about it. First, that Dodge number reflects total construction value, nonequipment rental spend historically, about 2% converts into rental. So that varies by project type.

Second is our target share. As I said, over time, we are now targeting 20% share of that megaproject rental opportunity. And third, these are multiyear jobs, so the revenue doesn't hit all at once. It's spread over the duration of the project, which is typically 3 to 5 years or more. So the math is more nuanced than the headline suggests. But the takeaway is simple, the market opportunity is large. It is durable, and we now have the capacity to capture a meaningfully larger piece of it as these projects ramp a new projects into the pipeline.

Turning to Slide 12. This is the framework we introduced at the beginning of the year to illustrate our 2026 operational progression. The key message is that the playbook is working. The integration actions are behind us. The foundation is in place, and we are now moving into the acceleration phase with a 30% larger, more efficient business, a highly productive fleet, new specialty locations gaining momentum and a larger sales force maturing across the network.

As we execute this playbook, 2 factors have shifted since we set our original plan. The first is the strengthening mega project demand we just discussed. The opportunity is larger than we expected earlier in the year, we are increasing fleet investment to support that growth based on the robust project pipeline in front of us. We are adjusting our equipment rental revenue guidance accordingly.

The second variable is fuel and logistics inflation, which but is significantly higher beginning in April as a result of the conflict in the Middle East. Larry touched on this earlier, and Mark will take you through the specifics. But let me give you some operational insight into how we're thinking about logistics longer term and the opportunity it presents because fuel and logistics inflation isn't only a cost recovery issue.

With a much larger network in place, we have an opportunity to improve the way we manage transportation economics across the platform. That work is underway through a comprehensive logistics transformation initiative that began in late 2025. It builds on the progress we've made over the last several years, but is designed for the scale of the company we are today. The focus is on better routing, stronger process discipline, improved cost recovery and more consistent execution across the network.

This is a multiyear effort, and it is above and beyond our acquisition cost synergies. Over time, we expect it to help us build a more efficient, scalable delivery engine that improve service for customers and supports ongoing margin improvement. So as we move into the second half, the operating agenda is clear with the right fleet against accelerating demand, continue improving utilization and fleet efficiency and take the next step in scaling our cost structure for the long term. The team is aligned. The opportunity is strong, and we are focused on converting this larger platform into sustainable growth.

Mark will now walk you through the financial results and the updated outlook. Mark?

Thanks, Aaron, and good morning, everyone. I'm on Slide 14 with a summary of our key financial metrics. Starting with our GAAP results. Equipment rental revenue was up approximately 23% year-over-year, and total revenues grew 20%, primarily driven by the acquisition of H&E which was in our base for only 1 month in the prior year period. Adjusted EBITDA increased 19%, and adjusted EBITDA margin was 40.4%. REBITDA, which excludes equipment and parts sales increased approximately 18% and REBITDA margin was 41.4%.

Margin pressure was driven by the impact of the H&E acquisition and fuel and freight inflation year-over-year. Adjusted net income was $48 million or $1.43 per diluted share, including add-back adjustments of $4 million of restructuring and transformation costs. That includes initial cost of the logistics transformation initiative Aaron just discussed.

Because the prior year GAAP comparison includes only 1 month of H&E, Slide 15 provides a more meaningful view of the combined company's underlying performance in the second quarter. On a pro forma basis, with Hurricane H&E combined in both periods, equipment rental revenue increased despite the year-over-year reduction in average fleet at OEC resulting in strong fleet efficiency in the second quarter.

Pro forma dollar utilization increased more than 200 basis points over last year, another clear indication that the combined fleet and the rental revenue mix are becoming more productive. On profitability, pro forma adjusted EBITDA margin was down approximately 60 basis points and pro forma REBITDA margin was down about 120 basis points.

As noted, the largest source of the year-over-year cost pressure in the second quarter came from fuel and transportation inflation, which is up approximately 35% since the first quarter. This impacted adjusted EBITDA margin by about 150 basis points and adjusted REBITDA margin by 170 basis points. For context, not all fuel exposure can be recovered in real time. A portion of our fuel consumption comes from our own sales and service vehicles as well as typical enter region fleet positioning where there is no direct customer offset.

On the delivery and refueling side, which is embedded in ancillary revenue, recovery depends on customer arrangements and contract terms and the timing of that recovery can lag sudden price moves like we saw in April. So we're working on all of this through our own pricing actions, better pass-through discipline and contract renewal negotiations.

Those fuel and transportation pressures were partially offset by improved operating performance and cost synergies and such that when you exclude fuel inflation, adjusted EBITDA margin was up 90 basis points and adjusted REBITDA margin was up 50 basis points year-over-year.

Turning to Slide 16. You can see that we generated $202 million of free cash flow for the first half. We ended the quarter with ample liquidity of $2.1 billion and net leverage of 3.95x, and we paid our regular quarterly dividend to $0.70 per share.

When it comes to capital allocation, as Aaron said, we're making a deliberate choice this year to step up fleet investment to meet increasing demand. And importantly, that incremental investment is weighted toward higher margin, higher return specialty equipment. As this fleet goes on rent against strong demand, it drives EBITDA growth. And growing EBITDA is the most powerful lever for bringing down leverage. We like the flywheel setup, we're beginning to see as we think about the trajectory into 2027.

That brings me to guidance on Slide 17, which we are increasing to reflect stronger demand, particularly in national accounts. You can see the full ranges here. At the midpoint of the updated guidance, we now expect full year equipment rental revenue of $4.425 billion, supported by roughly $900 million of net fleet CapEx. On a pro forma basis, the revised midpoint estimate reflects equipment rental revenue growth of nearly 5% on flat average OEC year-over-year.

Adjusted EBITDA is now projected to be approximately $2.09 billion at the midpoint of the range. A few key assumptions behind the updated outlook. Our incremental revenue synergy target for the year is unchanged at $100 million to $120 million. We feel really good about the progress we're making there, and cost synergies also remain on track with an incremental $90 million this year towards the fully realized $125 million target by year-end.

That said, oil prices have moved higher again since June. So our guide assumes fuel and freight will remain cost headwinds in the second half. Given the uncertainty around how long that macro volatility persists, we're modeling a quarterly expense impact broadly consistent with the second quarter. All in, we expect fuel and transportation inflation to create about a point of pressure year-over-year on adjusted EBITDA margin for full year 2026.

Finally, as a result of the higher fleet investment, free cash flow is now expected to be between $250 million to $350 million this year. The bottom line -- the revenue inflection we expected is now underway. Demand is stronger than our original plan, and we are investing to capture that opportunity while continuing to manage fleet efficiency costs and capital with discipline.

Now let's open it up for questions. Operator?

[Operator Instructions]. Your first question comes from the line of Jerry Revich with Wells Fargo.

I just wanted to ask really nice to see the dollar you accelerate over the course of the quarter. We're hearing about price increases up to 1 point per month in some regions. Just talk about the pricing environment that you're seeing? Is that consistent with the cadence that you've seen over the course of the quarter and into July, mark?

Yes. I mean I think from our perspective, Jerry, right, the dollar utilization was, quite honestly, a lot of self-help. We saw and anticipated the fleet to get healthier as we sort of worked our way and inflecting through Q2. That happened probably a little bit ahead of where we thought it would -- and that's probably the biggest driver in the lift from a dollar perspective.

I think on the pricing environment, right? I mean I think at the end of the day, we have a rational and constructive pricing environment the supply and demand dynamics are extremely healthy. It's a huge focus for us, and we're going to continue to sort of push price like we always do.

Okay. Super. And then on the time utilization part of the equation, when we look at the strong results you folks were posting as a stand-alone company before H&E dollar in the mid-40s. How much progress can we make on closing that dollar gap based on what you see in front of you compared to what HERpostedon stand-alone basis, call it, 4 years ago?

Yes. I mean it's a great question, Jerry. I mean I think you have to think about that sort of in context of averages, right? And so Herc was probably running 42 and 43s. I think as we sit here today, there's still a mixed component of that, that we have to continue to invest in to sort of bring that overall mix back up to where Herc was on a stand-alone basis pre-acquisition.

But I do think, as you think about sort of the incremental from a dollar perspective, I think you can anticipate probably seeing what you saw incrementally from Q1 to Q2, probably that sort of lift into Q3 and Q4 as well year-over-year dollar lists.

Your next question comes from the line of Robert Zeiler with Melius Research.

You were just touching I know you just touched on it with Terry and previously, but -- what do you see as your biggest margin opportunities kind of going forward? I mean are there still inefficiencies there still a lot of sales force ramp as you try to get people to sell the broader range of what you guys do. Just curious what gets you back there.

And I'll just ask my second now. On mega projects, does this put you in a position of wanting to bid for more first position in mega project? Maybe you could just talk about that opportunity widening out? Is that just more support? Is that a change in how you approach go-to-market?

Yes, Rob, on the margin question, I would say it's moving our mix profile back to where we were with specialty. We have a longer-term goal of kind of taking our specialties to like a 20% to 30% range of our business. But with -- after the H&E acquisition, we fell down until like the mid-teens. So moving that back up really helps our margin profile. There's a lot of self-help stuff we can do like we're talking about our logistics work we've embarked on, which will be a multiyear program.

We're still -- the sales teams are large, but they're still working. You'll learn how to work together from the acquisition. So as we -- that kind of matures, you could the tools being used properly, tools like pricing discipline. So those are things that are going to help our discipline.

On the mega piece, when we look back kind of what our position was 2 years ago, to now, yes, we are more equipped to be like the primary or a strong secondary on more mega projects than I think we were 2 or 3 years ago. Our scale matters a lot.

And quite honestly, I've mentioned just a view that the large contractors take when they look at us because we have more fleet, more scale, more capabilities better technology than we had a few years ago. So those are all things that are kind of positioning us in the right spot to win more.

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

Good morning, everyone. Just going back to the CapEx guidance increase. I think I heard 2 things going on, and I'm trying to parse out which is the bigger driver here. On the 1 side, you're talking about better demand in mega projects being the root of that. you're also talking about leaning into specialty more.

So I'm trying to understand if this CapEx increase is a function of you sort of trying to truly ramp up the specialty business, maybe taking advantage of that H&E footprint? Or if this is more truly a demand signal -- and presumably, this tells us something about 2027 really given the timing of your CapEx increase. So help us kind of parse these things out.

Yes. I would say meg that the increased fleet is demand driven. That demand is coming from both mega projects and specialty. And oftentimes, those are going hand in hand. And so when you think about this or when we're thinking about this as we move into the back half of the year, sort of that midpoint of the new guide sort of grows fleet at about 300 basis points to H. and sort of levels you year-over-year from an average fleet perspective.

And so when we step back and look at that, I would tell you that this increased is absolutely not speculative. This is demand-driven and not sort of a Phase 2, if you will, of the branch optimization where we're just trying to put additional fleet into those new specialty locations that may be part of it, but the demand is the driver here.

Okay. That's helpful. My follow-up on the H&E integration, which you said that you're pretty much done with that. My impression of their business prior to you acquiring it is that pricing was a little bit different relative to what we would consider best-in-class maybe in the industry and maybe some of the things that you were doing. So I'm curious where you are in terms of reassessing pricing for that part of the business. maybe some of the contracts that are a little more longer term in nature that PNE had.

Yes. I mean I think you have to bifurcate that answer. -- you have to bifurcate that answer between sort of the local market spot and the contracts. I think that maybe to answer your question directly, I think we're probably right where we thought we would be. Two, I think that the contract component of this will probably take sort of the 3-year run to sort of raise the ultimate contract pricing to where we anticipated it to be back pre-acquisition.

I think the spot market component will run as the local market runs. I mean they're inside of our technology and pricing tools now. So we're beginning to see those benefits today. But I think that the real pricing lift comes from sort of the local market being reignited.

Your next question comes from the line of Kyle Menses with Citi Group.

I was hoping if you could just unpack a little bit what's going on in the fuel and transportation cost inflation. And I'm not sure if you're able to maybe break it down a little bit further, maybe between what's stickier versus more transitory in your mind, kind of what is tied to your sales and service vehicles versus just maybe timing of getting better recoveries, et cetera.

Yes. No, I think simplistically, if you think about 170 basis points of impact, I would call it all transitory as we sit here today. That's just a measure off of Q1. And as I mentioned in my prepared, we saw somewhere in the order of magnitude of sort of 35% increases as we worked our way through Q2.

Simplistically, probably half of that impact is not able to be passed on. So you just think about sort of the inter-branch moves, which we've done from the beginning of time and sort of the servicing of our own sales and service vehicles. That probably equates to about half of the impact. The other half to your point and question is items that have the ability to be passed on to customers. We continue to sort of work there to make sure that we're as tight as we can possibly be as we move into Q3.

The wildcard is does 35% become 50%. Like I said, we sort of built in about the same level of impact in 3 and 4, and then we'll see how it plays out.

Got it. That's helpful. And then just curious, any update on the 50 or so specialty locations that you had opened in the fourth quarter and first quarter and just how those are progressing in the ramp and the cross-selling as well.

Yes, Kyle. So those are performing well. We -- it was really just a benefit of an exercise with the real estate that we picked up from the acquisitions. -- to scale our specialty business that rapidly that would have taken us several years to do without an acquisition with that much real estate. So it's working very well. It will take 2 years for that kind of that EBITDA margin to mature to a level that is like our mature locations, but they're contributing EBITDA now.

And they're all managed by internal managers that came up through our organization. So there's a lot of career movement with all those branch optimization openings. But -- our regional management has done a great job getting people and positions to win, and our team is working really well, share and fleet.

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

Maybe first, Mark, just on the synergy capture targets, -- sorry if I missed this in your prepared remarks, but of the incremental $90 million in cost synergies and the incremental $100 million to $200 million of revenue synergies, how much of that is left to kind of be realized in the back half of this year? Or just help us kind of frame just the momentum that we have looking into the third and fourth quarter?

Yes. I mean I think you got to think about from a revenue perspective, it was always more heavily weighted to the back half, probably 60-40 back half weighted. From a cost perspective, it started that incremental $90. It started a little slower. That ramp now is probably extremely ratable from July through December, probably think probably 55% of that, if I'm sort of rounding here probably is incremental back half, give or take.

Okay. Yes. Got it. That's very helpful. And then maybe just going back to -- for my follow-up, just going back to the fleet and the CapEx needs, it's good to hear that activity is heating up. It's supporting the visibility that you have into the back half I guess, when you think about your suppliers and the price of equipment inflation, One, do you think the OEMs have capacity to support even further fleet expansion if the market supports it.

And then two, is there -- how do you think about the incremental return on that next piece of equipment being bought because obviously this would be purchased outside of your advanced purchase agreements that you do late in the year of last year?

Yes. Look, we are very confident in the OEM's ability to supply us with gear in the back half of the year to the incremental level. The vast majority of it, probably 70% of it is specialty equipment that we'll be bringing in. We do think that, that will be able to contribute to the levels that we expect relative to financial performance and dollar and time utilization because most of that will probably go right to a job. And it will also set up a great flywheel going into '27.

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

My question is more of a medium-term question. Given your free cash flow expectation has come in a bit lower now, how do you think about your potential to deleverage the balance sheet over the next 12, 24 months, if you have to continue investing in CapEx in response to improving demand?

Yes. No, it's a fantastic question, Tammy. I think just looking at 2026, firstly, has very little impact to the 2026 leverage expectation we have there. I do think that you hit on it though and really harkening back to what Larry just said, there's a flywheel effect of this into 2027, we're kind of staring at maybe 2.5% to 3% fleet growth into 2027, generating EBITDA, which, as you are well aware, that EBITDA generation is the most efficient way to get that leverage down.

And so I don't necessarily see yes, maybe very, very slight sort of short-term impact from a leverage perspective. But as you think about that in context of getting to that at the end of 2027, I don't see this as problematic in the slightest. I think we're going after the demand. Like I said, this is not speculative. So it should be EBITDA generating, which is what we need to sort of lever down to that 3x range.

Understood. That's very helpful. My second question is on fuel inflation. I appreciate all the comments you made earlier. I'm hoping to fish for some numbers, if that's okay. The 150 basis point fuel headwind in the second quarter you saw. Do you currently have any expectation of what that headwind might look like in 3Q and 4Q in terms of basis points?

Yes. I guess what I would say is we're sort of anticipating the same level of impact in Q3 and Q4 that we saw in Q2. Obviously, Q3 and Q4 are higher equipment rental revenue quarters. So the percentage will go down slightly -- what I would say is that we are anticipating about 1 point of drag for the entirety of the year.

Your next question comes from the line of Neil Tyler with Rothschild at child no Redburn.

Just going back to the earlier question on the changed goal for mega project participation. How does that impact your sort of longer-term strategy in terms of customer mix? And therefore, I suppose, are there any -- within that, any verticals that you think you might need to add to accommodate that change go-to-market strategy? That's the first one.

And then the second question, I'll ask that now. On the longer-term sort of logistics efficiency program, can you help us with I appreciate that's going to take some years to sort of filter through and to smooth things out. But can you help us with the sort of how you're thinking about the upfront investment cost -- and at what point that sort of balances out with those efficiencies? And whereabouts we will be when that happens?

Okay. Neil, first part was the balance of our revenues. We believe to have a 60% local, 40% national mix is the right mix long-term. In this environment, with interest rate pressure on the local markets, it's difficult to achieve. So obviously, there's opportunities, and that's how we're moving our business and scaling and servicing those mega opportunities.

Now over time, the local is attractive to us because we're hopeful that cycle will change at some point. That's how we built our business. It's -- we have an urban market strategy. And actually, the pricing point, the pricing that you get to the local market is a better price point than you're local. But in the meantime, our fleet is fungible. So we can move it from the local markets to serve the mega projects.

But long term, 60-40 is still where we want to be, and we think that's the optimal way to manage the business. Now -- and we continue to focus on the local markets, right? So we know that the cycle will turn, it always turns and we want to be ready for it. So we continue to work on building our capabilities on the local market and not kind of completing what we're doing in the mega with our core local business, okay? That's always kind of the core part of our business, and we'll continue to be focused on that.

The logistics, we're very excited about the logistics. It's actually something we started to focus on about 3.5, 4 years ago internally. So we built a logistics team to focus on improving our recovery of costs for the Herc Rentals business for the big acquisition. When we move to the big acquisition, we saw that we have all this extra scale. And although we got some early synergies with logistics by having more trucks on the road in the urban markets, we saw that we could do much, much better.

Logistics is a complex item. Our core business is rental and solution services, right? It's not logistics, but logistics is a big cost burden on the business. So we're moving to become expert at logistics side of our business, too. As far as the cost piece, we do have a core team. We expanded our team, and we enlisted some help from a large consulting company that's expertise and logistics because there's things that we knew that we couldn't do alone. So that's beginning to happen.

That engagement started earlier in the year, we'll call it January, and now we're rolling out into pilot. So as we get traction, as we have more information to share, we'll provide that. But we know that we'll -- we focus, you win and it's a multiyear project, and we'll get to a point where we're experts at our logistics business is what wells our rental and solutions business.

Your next question comes from the line of Steven Ramsey with Thompson Research Group.

I wanted to get deeper on the national accounts topic here, you can now reach the 20% share, at least on the mega projects, that is, is that something you expect to achieve in second half 2026? Or is this something that you reach in 2027?

If you look back in time over the last few years, we said our guide on our share of Mega is 10 to 15. We said that the big acquisition really positioned us better. We started to touch that 15% level. And with our pipeline of activity, our commitment to new business contracts we have, what we're doing with our CapEx this year. We just see that we're going to shift from a 15% to 20%. That doesn't mean we're going to get to 20 in 2026 or '27. But over the next few years, we see our position strengthening to a 15% to 20% range.

Okay. That's helpful. And then thinking about raising CapEx and better market demand, do you feel like you were missing opportunities in the marketplace and now with the larger fleet, you can capture that? Or is it simply it's out there and we can go get it now?

No, it's really just about Herc's positioning in the opportunities that are in the mega project arena and our capabilities. So we're a much different looking company than we were 15 months ago. So that's really our view on where we're going with that.

Your next question comes from the line of Seth Weber with BNP Paribas.

Nice to talk to you. He's historically had a pretty strong footprint in some petrochemical type projects. I'm wondering if you're seeing any pickup in that part of the world, specifically?

Yes. They had a good footprint in the Gulf and in the West Texas, the Permian as did Herc Rentals. Herc had upstream, H&E had upstream, Herc had downstream and H&E didn't have downstream. But our position is still in the mid-single digits, high single digits range. When oil shoots up the way it does, usually, you see like the downstream business slowdown, turnaround activity because they want to produce more fuel. And so it's kind of ebb and flow. So no material change to our oil and gas business built in the mid- to high single-digit level.

Okay. And then just can you help us on this CapEx on the CapEx cadence for the second half? I mean, it seems like third quarter could be unusually large year. Is that the right way to think about it, the fourth quarter kind of goes back more normal? Is it just very heavily third quarter weighted?

Yes. I think, Seth, the way I would tell you to think about that is if you think about the new midpoint $1.325 billion and you think about 70% -- 70%, 75% of that being acquired in Q2 and Q3. I think that's the right way to think about it. I think that the 1Q and 4Q will come back and look normal. But I think you probably have a little bit heavier -- and that's probably consistent as well. But Q2, Q3, heavier, 70%, 75% of the totality and then the remainder would fall into 4Q.

I will now turn the call back over to Leslie Hunziker for closing remarks.

Thank you for joining us on the call today. We certainly look forward to updating you on our progress in the quarters to come. Of course, if you have any further questions, please don't hesitate to reach out to us. Have a great day.

Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect.

Good morning, everyone. Thanks for joining us here today. I'm Sherif El-Sabbahy from the machinery team here at BofA. Happy to have with us Herc Rentals, Larry Silber, CEO; and Mark Humphrey, CFO today.

So with that, I'm going to pass it off to Larry and Mark to introduce themselves and give a few opening remarks.

Great. Thank you, and good afternoon, everybody. Thanks for joining us. I'm Larry Silber, I'm the CEO of Herc Rentals. Mark Humphrey, who is to my left here, and he is our Senior VP and CFO; and Leslie Hunziker is right in front of me, who's our Investor Relations person.

Before we get started, of course, I want to talk about our safe harbor statement about information around non-GAAP information that we might be discussing today. So I want to make sure we covered that and have all the legalities covered before we begin. A little bit about Herc Rentals on this slide. For those of you that are either new to our company or remember it, we're one of the leading full-line equipment rental companies in North America. And we have a mission, vision, values that we've not deviated from for the last 11 years that I've been associated with the company. And we support a purpose-driven company where we pledge to service our customers and communities to build a brighter future.

A little bit about our company. We've been in business for over 60 years. Today, we have approximately 10,000 team members that work for Herc Rentals across North America. We're in the 5 Western Canadian provinces and 46 states in the Lower 48 and Hawaii. We service an addressable market -- equipment rental market that's about $90 billion with significant long-term growth opportunities, particularly as you're hearing around mega projects and certainly the local markets that we expect to continue to serve where we're focused on the top 100 MSAs in North America.

From an investment standpoint, we operate around 5 key areas that really differentiate us in a highly fragmented market in which we operate in. We're an industry leader, and we've generated above-market growth over the last 10 years that we've been functioning as an independent public company through fleet investments, greenfield store openings as well as M&A activity. We've been very disciplined in terms of our capital and really consistent around being a steward of capital input into the business. And we're investing to -- in the industry where, really, scale matters in this industry. And we've been driving that growth over the last 5 or 6 years through a combination of M&A as well as greenfield strategies.

We've continued to make investments in technology over the last 10 years. We believe we are market leaders in technology, and technology is really sort of table stakes today in the industry, and we've been able to leverage our platform for our customers to create stickiness and connectivity to our customer base. That's helping us win more and more projects in the marketplace. We're executing on a multifaceted diversification strategy to improve operating results and ensure resiliency across all markets and all kinds of conditions that we operate in. No one industry represents more than 10% of our business. So we're well diversified across our business.

And finally, we are a market consolidator, having completed more than 50 acquisitions over the past 6 years in our business, and we intend to continue to do that, which leads us to our most recent acquisition, which was H&E that we acquired June 2 of last year, was the single largest acquisition in the history of the industry and was the fourth largest rental company at the time in North America. It had 162 locations that gave us a significant market presence in 11 of the top 20 markets. And if you think about where were they strong, if you drew a smile around the United States, starting in the Carolinas, came down across the Southern Coast and up through Southern California, that would kind of be where they were, as you can see depicted in this map here.

The combination increases our network, our customer reach and certainly the efficiencies that come with scale. And the transaction accelerated our growth by about a 5- to maybe 6-year time frame over that period. So we now -- if you look at what it's done for us, we now have a 30% larger business than what we had a year ago, more fleet, more locations, more specialty capabilities and a larger maturing sales force, and that's really the foundation. And the first half of this year is really about converting that foundation into performance. And we've seen that really take hold, and we're really happy with the progress that we've made and what we've seen to play out over the last 9 months or 10 months that we've owned the business, which is driving accelerated growth into the back half of this year.

The progress that we've mapped out in the first half is really building the foundation that will flow into the back half and create the flywheel for 2027 and beyond. So it's really about higher revenue, expanding our margins and increasing our capability to deleverage and capture the synergy that we said we would capture. So the path that we've laid out, we're on, and we're very happy with the progress that we've made and to deliver the full value of the acquisition that we committed to our stakeholders in the business.

From a strategy standpoint, we really are focused around these core areas. So it's really growing the core, our branch network of scale, our broad fleet mix, including a growing and expanding specialty business, our technology leadership, we believe we have a leading-edge technology platform that we operate from and our capital and spending discipline that we've incorporated in our business. And we differentiate ourselves by superior customer service that allows us to manage across the life cycle, generate sustainable growth over the long term. And with that, we are committed to becoming the supplier, the employer and the investment of choice in our industry.

So with that, I'll turn it over to Sherif.

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

Yes, great question. So what's gone maybe as well as could be expected and perhaps even better than what we expected was certainly the technology stack integration of the business. Really a flawless integration of the technology stack within a 90-day period. I'm really pleased with that progress. I think the other thing that we're really pleased with is the people and the culture acceptance of the business. We were just named for the third year in a row, Great Place to Work in America. And that's from incorporating 2,500 new people or about 30% of our total population into the surveys that were independently made, and we had over 87% of the people respond, and we passed with flying colors, which tells us that the culture has been accepted. The people are enjoying the work environment that they're in, and we're really happy about that.

I'd say, additionally, we found ourselves positioned in 11 of the top 20 markets where we're marketplace leaders. We have incremental fleet capability. And certainly, we're really pleased with the footprint of the properties that we acquired, the 162 locations, really, all purposely built -- or for the most part, purposely built locations that give us ample opportunity for growth and expansion and incorporation of our specialty business without adding any additional overhead. So the overhead was already existing in the business, and now we're able to just put new businesses into those facilities and leverage that existing overhead. So really, those are the things that we're really happy about.

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

Yes. Great question. You want to take it?

I'll take it. Yes. I mean I think just taking a quick step back, right, Larry mentioned we did 100 -- we purchased 162 branches with this acquisition. And I think that what we were able to do through a branch optimization is sort of convert, call it, 50 of those 160 into specialty locations, which is sort of the ramp and the guide for the synergy lift over this next 3-year period. I think as it relates to the sales force, the sales force doesn't need to understand or know how to sell specialty. And I think that's an important point. The way that we've layered these specialty branches into the markets, there is existing subject matter experts inside these markets. So when we've set up these 50 new locations, they're already -- they're fleeted and there -- we have the employees for the specialty side.

So it's really just having the understanding and the wherewithal to tap your subject matter expert on the shoulder and bring them with you to that sales call. You don't need to be the expert in order to sell that specialty solution.

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

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

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

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

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

Well, look, Herc, since becoming an independent public company, we've remained really focused on increasing our scale and geographic reach through both greenfield development and strategic acquisitions. So this acquisition really accelerates our strategy, call it, 5 years, 6 years, 7 years, depending upon how you look at it. And it enables us to continue to develop market-leading growth and superior value creation as we go forward. So we've been able to expand that increased density in economies of scale in geographic areas as well as customer diversification with a much larger fleet.

Now that the integration really is complete, we're really focused on branch optimization, continued training and development, systems transfer is all complete, and we're looking at how we take that to all of the H&E customers now. So that's something that we've been really focused on. And we're really pleased with the progress that we've made. So it's really around execution. So we're going to continue to execute the playbook that we've played in the past, focusing on customers and growth opportunities that present themselves.

Right now, obviously, we're seeing a lot of mega project opportunity. Herc's been in business for over 60 years, has relationships with these large national contractors that go back 30 years. So they have confidence in us. They know we can do this, and they're taking us to new areas. So we're capitalizing on preferred access with customer relationships to mega projects. And right now, in 2026, there's about $800 billion of mega projects that are in the pipeline, with several trillion more that are yet to be announced that have been talked about that we'll see in the future. And we're really targeting about 10% to 15% of that opportunity. And H&E has given us the capability to move towards the upper end of that range. And we're really looking at this incremental scale and capability to bring us to the top end of our target there.

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

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

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

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

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

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

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

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

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

Well, how we service them is through temporary power, right? And we provide either a combination of diesel power and/or battery power or a combination of both together, depending upon where that project is located and what the requirements. You get into -- if there's a project that's happening in a community or nearby a community, as we've seen recently, sometimes you need to have quiet power, so you're not allowed to run your diesel generators at night. So we provide battery technology. We charge them during the day. They run, and power those facilities at night because they're working 24 hours around the clock, building these data centers and getting them ready. So we put in long-term power capability for as long as it takes to get the grid to these locations.

And then obviously, in the more densely populated markets, power might be available, but not in the certain capacity levels that they need. So you might have the grid working part of the time, and we're providing backup or temporary power when the grid can't supply what they need, mostly through diesel capability, but also in some cases, through battery power.

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

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

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

Yes. Look, we're still operating in a very fragmented business, even the top 3 players have only about 1/3 of the market, so there's plenty of market opportunity out there. That said, the industry has really professionalized over the last 10 years, with professional management, IT and systems capability, platforms that improve that capability. And there have been some -- I wouldn't call them new entrants. There have been some growing entrants. There have been folks that have been out there for 10 or more years that seem to want to get on the growth track, no different than we have for the last 10 years. I mean, 10 years ago or 11 years ago, when I got to Herc, we had about 230 locations. We shed a number of those and then built back up to now, we're over 600 locations across North America.

So we've been on a growth track. But look, there will continue to be consolidation in this industry because it's still fragmented. And you have a whole area that's really, what I would call, in the embryonic stages of consolidation, which is the specialty businesses. What happened on the general rental side has been moving into the specialty rental side, and you'll continue to see that. You might have some specialty players that decide to add general rental into their mix. But that's kind of been the change, and you'll continue to see movement towards rental as the secular change keeps moving. I don't think it will ever get to be where the U.K. or Japan is, to where the whole market is rental first, but there is a significant amount of movement towards rental.

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

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

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

Yes. I don't think we've seen folks that operate in a local market decide to pick up and move to where these other larger projects are. I think they're focused on what's going on in this market. If you go look around New York City, it's a stable local market environment that they're serving. I don't really see a big shift. What you really have the folks serving these big projects are the big name, national contractors that you're aware of, and they tend to pick up subs that are around that local market that they're in, not necessarily asking somebody from New York City to come to Iowa and help them build a data center. They're not sort of that transient or that capable of moving. So I don't see a lot of that happening.

I think they're just dealing with whatever is in their local market. They've scaled back. They're trying to survive this period until interest rates are such that investment is going to happen in the local market and go from there. The folks servicing these mega projects are really the big players. The top 50 contractors in North America are the primaries, and they have the big subs that are servicing them because they know how to handle that. It takes a certain level of expertise, it takes a level of scale, it takes a level of safety and operating in those environments. So you just can't sort of call on a local contractor to come and move and do something for you when they don't have that experience level.

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

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

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

Yes. No. Look, I think we have a lot of similarities in terms of scale. They might both have a little larger scale, but our scale is around capability and the products and solutions that we offer in our specialty business. And we have a tremendous amount of experience in handling large customers and large projects of this nature. So similarly, our footprint is pretty good relative to them. We are certainly focused on the top 100 MSAs where we have every bit as good a capability as our 2 peers. We have the scope in terms of products and portfolios, and we have the experience.

Where we differ is they might be in some broader ranges of specialty that we're not in, but we have partnered with other companies. An example might be scaffolding or tents. We're not in either of those businesses, but we have partners in those businesses. They happen to be in them. They're just not areas that we feel are, at this point, part of something that we want to invest in. We'd rather partner with somebody who we're not competing with to handle that broader scope of products. But outside of that, there really is no difference in capability.

The other area that we're -- like I said, we're focused on the top 100 MSAs. We're not focused on rural areas. So we really don't want to be in rural markets. I believe that high-density, high-concentration market areas give you a greater resistance to any kind of an economic period that you go through because there's always going to be activity in a high concentrated market, whereas rural communities are more dependent upon and more susceptible to recession than perhaps the highly populated, dense urban markets. So I think while there's a difference there, I think our strategy plays better over an extended period of time.

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

Thank you.

Thank you.

Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the Herc Holdings Inc. First Quarter 2026 Earnings Call and webcast. [Operator Instructions]

I will now turn the call over to Leslie Hunziker, Head of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Today, we're reviewing our first 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 in 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 to 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 second quarter management meetings at the Bank of America Industrials Conference in New York on May 12, the KeyBanc Industrials and Basic Materials Conference in Boston on May 27 and the Wells Fargo Industrials Conference in Chicago on [indiscernible]. 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. I'm pleased to report that with the completion of our branch optimization program, the integration of H&E Equipment Services the largest acquisition in our industry is now complete. Integration was an enormous undertaking, and I could not be prouder of this team and the strength of our culture is what dismay confidence and what comes next. For the third consecutive year, Herc Rentals has earned a Great Place to Work certification based on independent employee survey results. What makes this recognition especially meaningful this year is the context.

Large acquisitions are disruptive by nature. We brought approximately 2,500 new employees into the Herc family, people facing new systems, new processes and a new way of doing things. Based on the survey feedback, our new colleagues recognized our strong culture through change management support, per mentoring and the extensive training and tools they received throughout the integration. And now they recognize the opportunity in front of them. With integration behind us, our focus shifts fully and decisively to leveraging our new scale to drive growth and efficiencies through execution. We have a larger platform, a stronger team and a broader set of capabilities than at any point in our history. The work ahead is about unlocking the full potential of our platform, winning more business, serving customers better and delivering stronger returns for our shareholders.

Now turning to Slide #5. With a 30% larger branch network, we are optimizing fleet mix by market, driving network density and capturing the operating efficiency that come with scale, lead efficiency, employee productivity and margin improvement are the goals. Second, we are enhancing our fleet mix and Specialty Solutions as a standout area of focus. Double-digit specialty revenue growth in the quarter reflects targeted fleet investments, 25% more specialty locations and strong demand for mega projects cross-selling and the continued structural shift from equipment ownership to rental.

Third, we are advancing our industry-leading digital capability through control by Herc Rentals. Advanced technology features from fleet utilization insights and equipment location tracking to our patented mobile access controls and remote operations gives customers the tools to run safer, more efficient job sites. And our e-commerce platform continues to gain traction, delivering a seamless omnichannel experience with 24/7 self-service and personalized interactions. E-commerce revenue reached an all-time record high in the first quarter a clear signal that our customers value the flexibility to do business with us however and whenever it works best for them.

As always, we lead through continuous improvement with our E3 operating systems built on a foundation of standardized processes, superior customer experiences and a relentless focus on execution across our expanded network. And finally, as prudent stewards of capital, we invest responsibly. We took on incremental debt to acquire H&E a deliberate decision to accelerate our scale and long-term earnings power. We expect to return to the top of our targeted 2 to 3x leverage ratio by year-end 2027. Our path to deleveraging is clear. As we capture the full run rate of our synergy targets, EBITDA growth, free cash flow build and leverage comes down.

Now let me turn it over to Aaron to talk about our operational performance. Aaron?

Thanks, Larry, and good morning, everyone. With the integration behind us and our foundation set, this is the moment our team has been working toward. Investments we've made in people, fleet systems and culture are now fully in place. What you'll see from our operations team in 2026 is a relentless focus on putting all of it to work. We are executing with the larger network, a stronger bench and a sharp percent of where the opportunities are. The work ahead is straightforward, win business, serve customers exceptionally well and drive the performance this platform is built to deliver. In everything we do, every efficiency we drive every customer we serve every dollar of performance we deliver starts with one nonnegotiable. The safety of our people and our customers. From the job site training we provide to the safe, well-maintained equipment we put in their hands, safety is how we show up every day. So let me start there.

On Slide 7, our major internal safety program focuses on perfect days, and we strive to 100% perfect days throughout the organization. In the first quarter, on a branch-by-branch measurement, all of our operations achieved over 96% of days as perfect. Also notable, our total reportable incident rate remains better than the industry's benchmark of 1.0, reflecting our high standards and commitment to the safety of our people and our customers. Our safety foundation is what makes everything else possible.

On Slide 8, you can see that what we're building on that foundation starts with one of our most important assets, our fleet. At $9.4 billion in original equipment costs, fleet is both our largest investment and our primary revenue growth engine. We entered 2026 with pro forma fleet down nearly 2% by design. The integration priority was alignment, the right equipment in the right markets with the right mix, and we achieved that. By the end of the first quarter, average OEC was down approximately 1% on a pro forma basis versus last year, consistent with our focus on utilization improvement. While fleet expenditures were up 78% on a pro forma basis, this reflects a return to normal seasonal buying levels after deliberately reduced purchases in early 2025, when we're preparing to bring in the acquired H&E fleet in the second quarter. Our Q1 '26 investments of $183 million are directed toward growth opportunities and supporting our new specialty locations as they ramp up and be again contributing to revenue synergies.

Fleet disposals at OEC were 20% higher year-over-year, reflecting life cycle rotation and ongoing mix adjustments. For the $281 million of disposals in the first quarter realized proceeds were 49% of OEC, up from 45% in Q1 2025, reflecting a healthy [indiscernible] across almost every category as well as our focused selling into the higher return wholesale and retail channels. As you know, the first quarter is our seasonally slowest demand period. Having strong fleet alignment right now before the seasonal ramp is critical. Disciplined fleet management and our sales team is executing with increasing effectiveness across the combined network, drove sequential monthly improvement in time and dollar utilization and employee productivity throughout the quarter.

As utilization tightens into the peak season, we expect that discipline to translate directly into revenue growth and further improvement in fleet efficiency in the second half of the year.

Turning to Slide 9. We will gain better visibility into seasonal trends over the next month or so, but today, the bifurcated markets remain relatively consistent with what we have seen over the past year. In the local market conditions remained stable overall. Government, infrastructure, MRO and institutional construction demand are offsetting the still moderate commercial sector, consistent with what we expected coming into the year. On the national account side, large-scale project funding remains strong. Mega project activity is centered around manufacturing, LNG, renewables and the continued surge in data center development. We are winning our targeted 10% to 15% share of these opportunities with new projects coming online and current projects still in ramp-up phase. Mega project activity was notably strong in the first quarter with project ramp-ups accelerating earlier than is typical for our seasonally slowest period, activity that was built into the full year guidance we provided just 2 months ago.

In the first quarter, local accounts represented 47% of rental revenue compared with 53% of national accounts. As we have said, our long-term target is 60% local and 40% national on [indiscernible] for both growth and resiliency. The national weighing we are seeing today reflects the strength of our national accounts and mega project activity, and we expect the local mix to improve as the seasonal ramp build and eventually as local demand recovers.

Turning to Slide 10. Diversification is an important strategy for fostering sustainable growth and navigating economic cycles. As Herc diversified into new end markets, geographies and products and services over the last decade, we have reduced our reliance on any single industry or customer. We have become more resilient to downturns and more adaptable to emerging opportunities from mega project development and the continued surgeon data centers to technology advancements that support customer productivity and the secular shift from equipment ownership to rental. With our expanded scale, we are better positioned than at any point in our history to capitalize on this breadth of opportunity and to find growth even as individual markets ebb and flow. And the opportunity across end markets isn't just broad, it's deep.

Turning to Slide 11. Let's look at what the data tells us about the forward pipeline driving demand across our customer base. Here, you can see that despite the uncertainty of broader markets, whether around interest rates, freight policy or general economic sentiment, the fundamental drivers of our business remain intact. Industrial spending and nonresidential construction starts continue to show meaningful opportunity for growth built on a foundation of project development and infrastructure investment. Of course, there are some overlap across these 4 data sets but no matter how you look at it, for companies with the safety record, scale, product breadth, technologies and capabilities to serve customers of the local, regional and national level. the opportunity for growth remains significant, and we believe Herc is well positioned to capture it.

Turning to Slide 12. This is where we are in our near-term journey, and I want to be clear against our 2026 plan. We are exactly where we expected to be. The integration work is behind us, but we have now a 30% larger business, more fleet, more locations, more specialty capabilities and a larger maturing sales force. That's the foundation. In the first half of 2026 is about converting that foundation into performance, tightening utilization as we move into the seasonal peak and sharpening sales effectiveness across the combined network, and we have seen that start to play out. First, fleet efficiency. After working through the integration and fleet optimization process, we saw sequential improvement in Herc supply and demand alignment through the quarter, something we have been building towards since last summer's acquisition.

That's not a small thing. And while mega project demand provided a tailwind, even in our seasonally slowest first quarter, we are still early in the ramp of our specialty locations and sales force maturation, which is why Q1 played out right in line with our plan. It tells us that we move into the seasonally stronger second quarter, we have the right fleet and the right markets ready to work. In consuming all that improvement plan in Q2 is what gives us confidence in the utilization trajectory in the back half. Second, our specialty locations. The branch optimization program added 25% more specialty locations opening Q4 2025 and Q1 2026. These locations are now staffed, fleeted and gaining momentum.

New locations take time to mature and that maturation curve is playing out as we modeled. By Q3 and Q4, those locations will more meaningfully contribute to revenue and margin growth. If we get the first half right in the second half follows, revenue growth accelerates our fixed cost base works in our favor and margin improvement becomes increasingly visible. That's the progression we have mapped out. First half builds the foundation, second half delivers the growth. It's also the flywheel into 2027. Higher revenue, expanding margins and increasingly apparent deleveraging as synergy capture compounds. That's the path and we're on it.

Now Mark will go through the details. Mark?

Thanks, Aaron, and good morning, everyone. I'm starting on Slide 14 with a summary of our key financial metrics. For the first quarter, on a GAAP basis, equipment rental revenue was up approximately 33% year-over-year. driven by the acquisition of H&E. On a pro forma basis, rental revenue declined 3%, representing a meaningful sequential improvement from the fourth quarter.

To put that into context, the acquired business was experiencing revenue pressure prior to close, a trend we've been actively working to reverse through fleet optimization, sales force training and network alignment. And while mega project tailwinds and specialty execution benefited us in Q1, the inflection of the combined platform into revenue growth is a second half event consistent with our plan. Adjusted EBITDA increased 33% compared with last year's first quarter, benefiting from the higher equipment rental revenue as well as 31% more used equipment sales. Adjusted EBITDA on a pro forma basis was down approximately 5%. The increase in used equipment sales, which have a lower margin than the rental business, impacted the adjusted EBITDA margin. Also affecting margin was the static demand in the local market and the impact from the lower-margin acquired business.

EBITDA, which excludes used equipment sales, was up 30% during the first quarter. EBITDA margin was 40%, impacted year-over-year by the lower-margin acquired business. The path to margin improvement is clear. Rental revenue synergy contributions in the second half a shift toward a higher margin product mix, full realization of cost synergies and improved variable cost management at scale. We expect margins to continue to improve from here, especially as those drivers take hold in Q3 and Q4. Our net loss in the first quarter included $5 million of transaction costs primarily related to the H&E acquisition. On an adjusted basis, net income was $7 million.

On Slide 15, you can see we generated $94 million of free cash flow for the first quarter. Our current pro forma leverage ratio is 3.96x which is in line with our expectations as H&E's stronger 2025 quarters roll out of the trailing 12-month calculation. The ratio will remain relatively consistent through the year before improving meaningfully at year-end when revenue synergies drive EBITDA growth in Q3 and Q4 and capital expenditures, which ramp in Q2 and Q3 to support the seasonal peak and new specialty locations began to provide greater EBITDA contribution. Leverage improvement is a year-end story, and we're managing to it deliberately. We still expect to return to the top of our target range of 2 to 3x by year-end 2027 as revenue and cost synergies and drive higher EBITDA flow-through.

Turning to Slide 16. We are affirming our full year 2026 guidance across all metrics. Q1 came in as expected, rental revenue growth of 33% and on an actual basis reflects the contribution of the combined platform. Adjusted EBITDA margin held at 39.3%, consistent with last year despite the integration work that was still underway. The operational proof points Aaron walked you through, sequential monthly improvement in fleet efficiency and dollar utilization, specialty location maturation, sales force momentum are the leading indicators that give us confidence in the back half acceleration embedded in our guide. On synergies, cost synergies are running ahead of expectations and we remain on track to secure an incremental $90 million this year to fully realize the $125 million target by year-end.

Revenue synergies are back-half weighted and the $100 million to $120 million incremental target for 2026 is intact. The guide assumes the business performs, as Aaron described. First half sets the foundation. Second half delivers the growth. Q1 is consistent with that plan. Now let's open it up for questions. Operator?

[Operator Instructions] Your first question comes from the line of Rob Wertheimer with Melius Research.

Your Slide 11 puts together a bunch of the different kind of ways to look at the end market, and you mentioned and there's others that are conflicting, let's say,-- but if you look at the top right, that mega project chart is a lot of money kind of flowing down the pike. And what I'd like to ask is whether that step-up in '25, whether you saw that in customer conversations, et cetera, whether you see it today because actually $300 billion in starts or whatever and a $900 billion market a lot. I want to ground truth the data that are sometimes ambiguous.

Yes, Rob, it's Aaron. I'll take that one. So it's really both. When you build relationships with large general contractors, our national accounts, they guide you to what's coming down the pipeline. And often, you bid on a project and they let you know that you've been awarded it, and it's going to start or they've negotiated a contract and they want to bring you in as their trusted supplier. So that's one mechanism. But there's a lot of data around it. [indiscernible] provides a lot of preview into what's coming. Now the pipeline of planned projects is pretty deep. I think we mentioned it's in the trillions of dollars. But it's really one that starts when they change from planning to start is when that data starts hitting a slide that we showed you there. And if you just look at 2026, April, May, June, July, August, September, you can see a lot more starts happening all across the board.

So infrastructure, wastewater or bridges, rose, but also these big mega projects that you see coming out, a lot of renewables, you see obviously, a lot of data center activity and other projects. So you have to -- you get it from both ways. So you can use both data sets to kind of guide your fleet planning and where your year is going to go.

And to you, that feels like better times ahead in the back half as these things ramp, I mean the time line feels great?

As you can see, there's more starts happening. Now these -- they don't all start when they say they're going to start, right? Sometimes you've heard us talk that sometimes they start 6 months away. But it is building. And once these projects do start to last for 2 or 3 years, as you know. So they're already in our plan for the -- as we go through Q1 into Q2 and then the balance of the year. So we like where it is right now, but it's exactly the way we kind of planned out our year.

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

I guess where I would like to start is with maybe a bit of a spotlight on your dollar utilization. At least to me, it's looking like this metric came in a little bit better than what we normally see sequentially from a seasonal standpoint. So I'm wondering if you can comment on that. Is it an indication of sort of activity itself and better fleet utilization or just the fact that maybe in Q4, we had a relatively easy comparison. And related to all of this, how would you advise us to think about the remainder of the year? How do we think about the seasonal ramp into Q2 and Q3 from here and out?

Yes, great question. And I think, quite honestly, Mig, I would take the revenue conversation, the dollar conversation and the margin conversation all in the same direction. As Aaron mentioned, right, we saw fleet efficiency gains in the first quarter, which then sort of built through the dollar utilization, it improved sequentially as we walked our way through the quarter. We spent the last 10 months, optimizing our fleet and optimizing branches, putting new specialty locations in. And so I would tell you that first quarter sort of plays the way that we thought it was going to play. But as you roll that forward, there's an inflection point inside of Q2. And once we hit that inflection point inside of Q2, then I think you'll see dollar revenue and margin expansion as we work our way through the back half of the year.

And maybe my follow-up on this. And I appreciate the sort of directional commentary. But if I'm thinking about normal seasonality here, right, is there reason to think, based on everything that you have that you're going on operationally that the improvement in dollar utilization can actually exceed that normal seasonality. And maybe you can put a finer point on how you think about the time utilization component of it, right, efficiency in your asset base relative to what's happening with maybe pricing or rates more broadly in the market.

Yes. I think that sort of normal isn't really this year. The reality is, is that we had a hole to climb out of entering this year, sort of down as we exited 4Q. And so there's a big efficiency play that we needed to see collectively as a business before investing growth CapEx into the business in the May, June, July time frame. And so I would tell you it's playing out the way that we thought it would. Now granted, it's early. May and June will be a much larger tell to sort of how the rest in the balance of the year plays out. But I think we're not necessarily looking at this as normal or abnormal. We just know where we have to go to get the fleet back to a healthy and efficient level.

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

I'm wondering if we could just talk about overall pricing that you're seeing in the market? So an oversupply of aerials of particular pricing is pretty tough. Can we just talk about -- are we optimistic that pricing can outpace inflation this year? And as positively surprised by the realization and use values for you folks this quarter, it sounds like supply demand is improving. Can we just unpack that, please?

Yes. I mean I'll unpack it to the level that I can. We don't comment specifically on price. But I would say that we are encouraged by the fundamentals that we're seeing in the industry. The fleet in and fleet on dynamics are good, particularly as we sort of exit and I think that the market is being both rational and constructive. And so we look forward to taking advantage of such marketplace.

Super. I appreciate it. And then just to shift gears a little bit here. In terms of the performance of legacy H&E branches versus Herc, obviously, legacy her pricing and time you based on historical stats has been significantly higher. Has that gap closed at all, where are we in the process of driving the H&E branch performance towards legacy or performance today versus 12 months ago versus where we see it 12 to 18 months out?

Yes. I mean I think thankfully, Jerry, I can't really answer that question for you, and that was part of this integration was to integrate this business in such that there is no longer an H&E or Herc, right? And so I think if I could still answer that question, then I would say we probably haven't done our job. And so I think collectively, Q1 sort of played out the way that we planned Q1 to play out, and that's probably about as deep as I can go in terms of insights between H&E and Herc.

Super. And lastly, I know you said in your prepared remarks that the quarter dollar was in line with your expectations. It was better than I think a lot of us had modeled when we saw the industry data, it looked like pricing accelerated in March, and it looks like it inflected as well. I know you don't want to provide a ton of color, but can you just comment on demand cadence over the course of the quarter? And any other color you're willing to share on that point?

Yes. I think from our vantage point, right, I mean, we are anticipating, Jerry, in an inflection point sometime inside of Q2. And then I think from that point forward, you should see growth/improvement depending upon which line item you're looking at dollar utilization improvement, revenue growth and margin expansion as you sort of inflect out of Q2 and into the back half of the year.

Your next question comes from the line of Kyle Menges with Citigroup.

You had mentioned that pro forma fleet is down a little bit and by design, I would love to hear you unpack that a little bit and then just how you're thinking about pro forma fleet growth for the full year and maybe bifurcating between gen rent and specialty? .

Yes. I mean, we walked into the year, as Aaron said, almost 2 points down. fleet on a pro forma basis. I think as you exit Q1, you're still down a point, give or take. And so that, again, was part of the plan. And so I think as you start then taking sort of the guided CapEx from a gross perspective and the guided sort of dispositions, you can sort of play that through. I would tell you that the expectation is we'll probably load that gross CapEx number into the business in between the back half of Q2 and Q3. So that should give you sort of the meaningful data points that you need to model.

I would add to, Mark, that as CapEx goes through the year, we'll be over-indexed to our specialty fleet to feed our branch optimization, our shift to grow the specialty side get back closer to what it was pre-acquisition.

Helpful. And I know you've expanded the specialty locations quite a bit and working on cross-selling, which understandably the cross-sell is expected to be a bit back half weighted. So It'd just be helpful to hear about what the learning curve has been as you roll out specialty and more SKUs across the H&E network and just the visibility you feel like you have to actually hitting the revenue synergy targets as you get into the second half?

Yes. I would say that our revenue synergy for 2026, we're on the plan where we need to be as we exited Q1 and as we look towards the rest of the year, where we expect it to be for all of our revenue synergies as it relates to cross-selling. It's cross-selling with the specialty business is really a 2-front exercise you got a bigger sales force. You got to make him comfortable with asking those types of questions of their customers. They don't have to be experts at the specialty products. We have experts on the sales side that support them, and that's where the cross-selling goes hand-in-hand. But when you have a large customer base and we did a large acquisition and those customers weren't used to specialty products to the extent that Herc Rentals had.

So that's where the cross-selling goes on those tens of thousands of customers introducing specialty solutions to them with the sales force that we onboarded from the H&E acquisition. So it's really 2 parts, but a lot of relationship building internally and we've been doing it for 9 months, and we like where we are right now, and we feel real comfortable about what we're going to get done in this arena, Q2, 3 and 4.

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

Mark, maybe -- sorry if I missed this, but just going back to the cost synergies. I think you said that it was running ahead of schedule. Can you just maybe help us quantify how much you were able to capture this quarter? And just help us think about the revenue synergy capture progress through the rest of the year?

Yes. The intent of that comment was that the $125 million or the incremental $90 million will lay into 2026, which was ahead of the originally scheduled sort of synergy lay that was supposed to come in over a couple of years. So that was the intent there, and I appreciate you asking that question. It's relatively ratable. I would say slightly, slightly back half loaded, but it's coming in reasonably ratably over the 4 quarters, Ken.

Understood. Okay. That's helpful. And then for a follow-up, I think we've been hearing some rumblings on improving oil and gas markets here in the states. I know H&E used to play a much larger role in those end markets. Curious if you could just maybe help us understand what the exposure to oil and gas is today with the H&E fleet? And how you think about that opportunity and whether you're seeing that kind of pop up as potential starts opportunities in the next, call it, 12 to 24 months?

Yes. A few points on that, Ken. First, our oil and gas mix of our business is less than 10%, all right, before the acquisition and after when you got $9 a barrel oil, you're going to have some surge in the upstream and some surge in the downstream. The downstream guys actually produce and make more margin. H&E had relationships with -- since they had a big footprint along the Gulf. They had a lot of relationships with contractors that were industrial contractors. They might have worked in all facets of the industrial complex, not just oil and gas, but it might have been the chemical complex.

They didn't really have downstream contracts, so there were long-term contracts that we picked up with the acquisition. So our part of our business is still below 10%. However, we made relationships with a lot of healthy H&E contractors to work in that space, as I mentioned. So with night oil, there's probably going to be a increased activity in the Permian Basin in Texas and down the ship channel. So we're well positioned for that. But our position in oil and gas didn't increase because of the acquisition. We like to think diversified. So we like where we're at.

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

Congrats on the wonderful results. First question on fuel costs, that has been rising nationwide. Could you just remind us how you manage that with in terms of your own costs and how you pass it on to customers and whether there's any lag? And also, was the hedging difference for legacy Herc versus H&E? So any color would be helpful.

Yes. The price of oil rising nearly $100. That's something that the business has to really focus on. We take the input of the price of fuel of 3 different ways: one, into our internal vehicle service vehicles that we use to conduct our business. Second way is refueling of rental equipment. And the third way is the logistics of our delivery apparatus to deliver equipment and pick up equipment all day long.

So the first wave just our own assigned vehicles, there's not a much bunched buy better, right? By the gasoline at a favorable price point. The second piece is we do charge a fee to our customers if we have to refill the equipment when they rent it. So we give them the option, hey, bring it back full, no charge, bring him back less than full, there is a charge. So we have a fee for that. And then the logistics piece is the more complicated one because you have a lot of transactions happening every day across the entire network and we recover that by the delivery fee we charge from picking up and delivering. And also there's a surcharge that's indexed that allows us to move with the price of oil per barrel as it moves through all cycles and all times and events macro geopolitically.

Understood. That's very helpful. A similar question regarding freight rates, which have also been rising Again, could you remind us if that is a risk you hedge, if you have long-term contracts with third-party haulers or more real-time rates that you pay?

Yes, we have a robust long haul process when we have to broker third-party freight. So we have a robust process there, and we built that over the last 3 years, and we know that we get a favorable price point compared to the market any day of the week. So whether the price of oil is at $60 or $100 per barrel, we're getting a favorable price point as the price for bill goes up, you just can't avoid those costs. You try to pass on as much as you possibly can and try to anticipate how long it will last for.

Your next question comes from the line of Steven Ramsey with Thompson Research Group.

From a high level, I was wondering if you could parse the specialty performance a bit. Clearly, it was strong. But maybe if you could talk about specialty, excluding mega projects and if it's outpacing the local markets, and maybe specialty on a same-store basis when you exclude the new branches, just different ways of the strength of specialty in the quarter and as you look forward? .

Yes, Steven, we don't break it out in that kind of detail nor would we just -- because it's -- then you get into sort of segmentation, and we don't do that. But generally, the specialty business has been performing well. We saw double-digit growth in the quarter. We expect to continue to see that as it services all facets of our business. The mega project business, our national account and big industrial contracts as well as the local market activity where we're penetrating on a greater basis as a result of our increased location count into that. So specialty will continue to grow. We're excited on it, but we can't and won't break out individual areas.

Okay. Understood. That's helpful. And then on disposals going through retail and wholesale, clearly, a good story there. Can you talk about maybe on an innings basis or however it makes sense where you expect to be in '26 versus the prior year and where you hit maturity on that this year? Or is that something beyond?

Maturity related to what, Steven? Just in terms of where the fleet sits as we exit the year?

More the fleet disposals that go through the higher-margin channels.

I got you. I got you. Yes, I mean, we've -- this has been a couple of year journey, right? Like we've been trying to flex these retail wholesale muscles and Q1 was a really good example of that, and it was approaching sort of 70% into the retail wholesale channel. That's a sweet spot for us. That's where we'd like to be. And I think Q1, Q4 will be your heavy disposal quarters, Q2 and Q3 will be a little more moderated. So I would anticipate that that's our control and we'll probably sort of remain in or around as we sort of walk through the year.

Your final question comes the line of Neil Tyler with Rothchild & Company Redburn.

Just wanted to ask you guys about the sort of different sort of flow-through dynamics in the second half associated with things like the ramp-up in mega projects, which might potentially, I guess, hold margins back a bit and the specialty growth because that seems -- those 2 in combination seem to be contributing a larger proportion of your anticipated sort of demand upside in the back half. So can you sort of maybe help me think about how you're thinking about those factors playing through on margin overall and flow-through and underlying that? What's happening?

Yes. Sure, Neil. I think as I said earlier, right, we are anticipating margin expansion inside of Q3 and Q4. And so if you sort of look back to where margin was last year, Q3 and Q4 within this 45%, 46% sort of range from a rental EBITDA perspective. And so therefore, if I'm anticipating margin expansion in that incremental margin will certainly be greater than last year's 45% or 46%. And so I can't get too terribly pointed there, but we are anticipating margin expansion as sort of all of these initiatives come together and fuel revenue growth in the back half.

I will now turn the call back over to Leslie Hunziker for closing remarks.

Thank you for joining us on the call today. We look forward to updating you on our progress in the quarters to come. Of course, if you have any questions, please don't hesitate to reach out to us. Have a great day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Good afternoon, everyone. This is Tami Zakaria, Head of Machinery, Engineering Construction and Waste Equity Research at JPMorgan.

We are delighted to have with us today the Herc Holdings team. We have with us Mark Humphrey, CFO; and Aaron Birnbaum, President. I'm going to pass it on to Aaron. I think he has a prepared presentation for you.

All right. Thank you, Tami, and we're happy to be here today. As always, the first slide here serves to remind you of our safe harbor statement and information regarding non-GAAP financial measures. This slide, for those of you new to our company, Herc Rentals is one of the leading full-line equipment rental suppliers in North America. Our vision, mission and value statement support our purpose-driven company, where we pledged to equip our customers and communities to build a brighter future.

Herc has been serving customers for more than 60 years. We have more than 9,500 team members, and we work out of 600 physical locations in North America, in 46 states and 5 Canadian provinces. We serve an addressable equipment rental market of nearly $90 billion with attractive long-term industry growth dynamics. We operate from a set of core strength that differentiates us in a highly fragmented industry and puts us in a much stronger position today man at any other time in our history. We are an industry leader that has been generating above-market growth through investments in fleet, new greenfield locations and M&A. We are disciplined stewards of capital.

We're investing to win in an industry where scale matters and secular trends, infrastructure funding and industrial mega projects are setting up the largest players to continue to gain share and generate profitable growth. Our investments in technology are paying off as we leverage data and digital tools for better customer experiences and increased productivity. And we're executing on a multifaceted diversification strategy to improve operating results and ensure resiliency in uncertain times. Finally, we are a market consolidator having completed more than 50 strategic acquisitions since launching our M&A strategy in December 2020.

In fact, last summer, we completed the industry's largest acquisition to date. H&E Equipment Services was the fourth U.S. largest player with 162 branches and desirable locations across the important Southeast, Gulf Coast, Midwest and Mountain West regions. The combination increases our branch network, customer reach and the efficiencies that come with scale. This transaction accelerates our growth plan by 4 to 5 years.

I'm pleased, really pleased with the progress we're making on the integration. And we remain confident in our ability to deliver the full value of this acquisition, both in terms of cost efficiencies and accelerated growth while continuing to deliver on our long-term growth strategies. Since closing the transaction has made swift progress on our integration. We expanded our field operating structure, completing a comprehensive sales territory optimization exercise, finalize the full systems integration in record time and finish the fleet optimization, which ensures we have the right fleet in the right markets.

This quarter, we will complete our branch network optimization, which allows us to expand specialty solution capabilities across our combined network to support the cross-selling opportunities created by the acquisition. By the end of March, through general rental location consolidations and branch-in-branch openings, we will have increased our number of stand-alone or co-located specialty branches by approximately 25% without adding any brick-and-mortar.

This work positions us to ramp into the peak season from a new stronger foundation, allowing us to execute more effectively on our strategic plan and drive accelerated growth in the back half of this year. As a reminder, our strategic plan includes leveraging our branch network scale, our broad fleet mix, technology leadership, capital and operating discipline and superior customer service, to position us to maintain across the cycle and generate sustainable growth over the long term. We are committed to our goal of becoming the supplier, employer and investment of choice for the industry in which we serve.

With that, I'll turn it over to Tami for questions, and I'll have a seat.

Perfect. And that was super helpful. [Operator Instructions]. So with that, let me start off on U.S. mega projects, which have been theme for quite a few -- the last few years. Where do you believe we are in that mega project investment cycle?

Yes, Tami, I'll take that one. I would call it the early to mid innings. It's a really robust space. On our last earnings call, we mentioned there was roughly $600 billion of new projects starting that we saw in 2026. But the pipeline is in the trillions of other projects that are being planned, but haven't been given a start date yet. So it's a great space. And manufacturing is an area that we've seen a lot of activity such in the pharma space. LNG plants along the coast. You see like the next wave of chip plant investment going on. And then the data center space, as we'll probably read a lot about is very, very robust and expanding rapidly.

So related to that, I think this acquisition of H&E came at a very opportune time. Post the acquisition, I think HRI is expected to control about mid- to high single-digit percent of the rental market. In your view, how do you see this changing your competitive advantage or dynamics within the industry? Can HRI become a powerhouse over time in both general rent and specialty rent?

Yes. Our share is roughly 5% market share in a really fragmented industry. So there's a lot of opportunity. The H&E acquisition gave us a 30% bigger footprint with 160-plus locations. And in our customers' eyes, the ones that we had strong relationships or others that we are building relationships with because of our capability and things such as specialty, it put us on a new level of confidence that we can execute for them. And we've seen that from the moment we closed that transaction in our conversations with our customers. So yes, we see ourselves strengthening and over time, get more scale.

Staying on that theme, cross-sell is a big opportunity in general rental and specialty rental. Could you help us frame what kind of investments in the fleet, people back in operations you need to make before you see a major inflection in specialty growth? Or do you think you already have the infrastructure in place to reap the benefits of specialty cross-selling?

Yes. It's a great question. I think -- and I reference Aaron's opening comments. With the branch optimization, we'll be opening or have opened 50 new locations without really increasing fixed cost structure. And so really, that will all be completed by the end of Q1 2026. So then it's really about sort of taking at the middle of to the back end of 2025, we invested about $100 million in synergy fleet, which we'll execute on and have that become more efficient as we work our way through 2026. And then we will feed that incremental network of specialty locations as we work our way through sort of creating a tailwind into 2027.

I think just as a reminder, we have -- we recognize about $40 million in rev synergies in the back half of 2025 with the anticipation expectation of an incremental $100 million to $120 million as we work our way through 2026.

Super helpful. Thank you. I wanted to touch on the leverage topic. Since the H&E acquisition, our leverage is in the high 3 turns now. You said your goal is to bring it to the high end of 2 to 3 turns by the end of next year. Help us understand how that will be achieved. Is it going to be through EBITDA growth or pay down or a combination of both?

Yes. It will be -- we'll ride the coattails of the EBITDA growth over the next couple of years to round ourselves into the top end of this 2x to 3x. I think additionally, free cash flow generation in both '26 and '27 will also play a role there as well. We're looking to invest in growth CapEx. We won't be doing M&A activity and really very minimal greenfield activity here over the next couple of years with a sole focus of getting back inside of that 2x to 3x range.

Perfect. So let's turn to macro. Since September 2025 -- actually 2024, we've had 6 Fed rate cuts. Related to that, are you seeing any signs of improvement in demand at the local market level? What do your customers on the ground say about the current interest rate environment? Is there more room to come down? Or this is enough to spur activity?

No. I think it's a little bit of a nuanced conversation. I think while we've seen the Fed rate cuts, it really hasn't worked its way in and through the 10-year which I think from our perspective, I think that when you're talking about this commercial construction, that's probably the most important point there. And I think from stable, not necessarily a headwind, not necessarily a tailwind as we sort of walk our way through 2026, and that's really the expectation.

Understood. Turning back to H&E. This was bigger than any of your prior acquisitions. What were the initial challenges that you hadn't anticipated, but you had to face. And on the flip side, sitting here today, what are the most immediate opportunities that you see from that acquisition?

Yes, I'll take that one. We had done over 50 acquisitions since we started our current strategy in 2020. This was the first one that was a public entity that we bought in H&E. So it's a longer process, right? By the time we announced it, it was 5 months before closing. And before we announced we were going to be purchasing it, there was another suitor. So there was a fair amount of anxiety, I would say, in the H&E team, which had been a family. A public company, but kind of run by a family entity, had that kind of culture there.

And so there's 5 or 6 months of this period before we could close. And through that, there was some exodus to the sales team. Once we did close and we began the integration process, which we plan really well for, we started to connect with the teams, and that sales turnover slowed down dramatically. And by the time we got to the fourth quarter, we had not only slowed down the turnover to what was Herc historical levels, but we had put the entire H&E's team and the business on our system. So we integrated the H&E 160-plus locations in 90 days on to all of our CRM, our back office, front office, functions which gave both sides a lot of visibility.

When you look forward, we're super excited because our scale got 30% bigger. The value creation that we see in the business is the synergy play and the expansion of the general rental fleet that Herc had roughly 6,000 different cat classes, and H&E business had 600 cat classes. So kind of a narrow product lineup. And in this industry, the things that are important is scale and diversity of product, diversity of customers. So it's -- I think the goodness of Herc can bring to those rich H&E customer bases. And I think we have several years of great kind of value creation ahead of us.

I want to touch on that synergy comment. Can you walk us through the thought process behind the $240 million of revenue synergy target you put out there from the H&E acquisition. How much of that is specialty versus gen rent or any way to break down the buckets?

Yes. I'll take that one. I think $240 million, I think it's probably easier just given the dis-synergy that sort of hit us on the front side of this. I think it's probably better to think about it in terms of sort of the gross revenue synergy opportunity. We see that over the 3-year period as being somewhere in this $380 million, $390 million opportunity. I think what we accomplished in '25 was about $40 million. We're looking to sort of have an incremental lift of $100 million to $120 million by the end of 2026. And so I think there's a fleet infusion, growth fleet CapEx infusion component here that will play a big role here.

I think overall, though, it's sort of a CapEx light synergy play because we're able to take advantage, as Aaron mentioned, we've got so many more categories of fleet to sell into this very robust H&E customer base. And so when I think about sort of that split, if you will, pricing obviously is included in that $390 million. But when you think about and want to sort of split that apart, it's probably gen rent and other about haves of that and specialty, the other half.

How about the same question but on the cost synergy side? What makes up the $125 million cost synergy?

The big buckets there are really people sort of first order of business would sort of take out the duplicative headquarters and everything on that front. So that would run to the G&A side of the house. You think about people duplicative resources in the field as well operationally. And so people was about 40-ish percent of this bucket, and then you start bringing in other elements like contract consolidations and the like.

And then there are some self-help initiatives that are in there as well, just think maintenance, logistics and those types of things that Aaron talked about from a tools perspective that we bring and that rounds out to this $125 million.

Just as a follow-up, within that $125 million, is there any purchasing synergies embedded in terms of now you're a bigger customer of your equipment, right? So I'm guessing what H&E used to buy, you would probably get a bigger discount now. So is something like that embedded in that $125 million? If so, how big?

Yes. I think there's absolutely a buying benefit that we bring to the table. I didn't necessarily reference there or it's not really included inside of the $125 million because the $125 million was really an EBITDA contribution. But we certainly will buy better than H&E did, which will ultimately come through your dollar utilization and other metrics.

Understood. We got a question online. [Operator Instructions]. So the question we got is, please describe your equipment financing strategy. And please elaborate on off-balance sheet arrangements exposures, if any?

Yes. I'll take that one. We utilize our $4 billion ABL. Cost of capital is the primary focus for us. And so today, that's the most efficient method and manner for us to handle our equipment financing. And obviously, we'll evaluate any and all potential opportunities. But today, that's the cheapest cost of capital for us to utilize.

So looking back at H&E, we get that question -- get that question a lot. When H&E was its own public company, they talked about negative rental rates for a few quarters, along with utilization rates down what opportunity do you see to align H&E legacy contracts with HRI, how far are you in that integration/of great opportunity?

Yes. No, great question. I think from a pricing perspective, and again, I'll reference what Aaron said, right, we've put our optimist to pricing tool into the hands of all of our sales folks. And so really, that was -- all of that technology lift was completed inside of the third quarter of 2025. And so the lift begins really now. It began then realistically. But I think the way that I'm sort of thinking about that price lift, I mean, they were several hundred basis points behind us from a pricing perspective. But I think what we're going to do is show our value to customers and we would anticipate seeing the benefits of that pricing lift over probably this 3-year period.

But I also think, too, right, when you think about you really have two different buckets of pricing. You've got contract pricing and then you've got spot pricing. And so we've already renegotiated at least for the first year, the contracts that were underneath the H&E business, and we'll continue to sort of evaluate that and move that along over the 3-year journey. I think the other side of the equation from a spot rate perspective, I think that the sort of tepid muted local environment, I think you'll see price lift as sort of the tightening and the demand profile inside of the local market changes.

So this is more of a long-term question or medium- to long-term question. How do you think about the mix of specialty versus gen rent over time. The reason I ask that, I think anecdotally, we know specialty penetration in the industry is a lot lower than general rent. So maybe there's more growth opportunity there in the initial years. what is the optimal mix for HRA? And what does that mean for HR's margin profile when you reach that level?

I think the secular trends in the industry are in our favor overall because more users of equipment, are choosing rental over ownership, the general rental side is a little bit more penetrated than the specialty side. And when you look at specialty, the penetration is very, very low. So call it, 10%. And it's not that customers had their own gears that they're finding solutions to problems from the top rental companies that have that competency.

So when we purchased H&E, our specialty business was about 20% of our fleet. After the acquisition, it went down to 16% because -- he didn't have much of a specialty business. And we know that our specialty business drives about 800 basis points higher dollar utilization than general rentals. So financially, it's a premium business. So our goal now is to get it back to 20%. We did that with some of the capital investments last year back half of last year to get some of the low-hanging fruit, an outsized part of our capital spend for '26 will be in specialty. And we'll keep that back up here until we get to 20%. Long term, we see it as 25% to 30%. Again, it helps with the financial economics of what we're trying to do with dollar yield and margin.

Understood. Let's stay with the CapEx theme. You mentioned it. I think your growth gross CapEx outlook for this year is down about double-digit percent. At the midpoint, net CapEx is flattish to slightly down. When can we -- two-pronged question. First, when can we expect HRI to return to CapEx growth? And related to that, of this year's CapEx how much is replacement versus new or growth? How much is specialty versus gen rent?

Yes. No, great questions. I think from a -- just an overall CapEx plan for 2026, this was sort of a planned year in that the fleet that we acquired from H&E was significantly younger than ours. And so what that enabled us to do is sort of cut back on the gen rent CapEx spend, age that fleet out. We sat at about 45 months at the end of December. And so normal for us is probably in that 47-month sort of age range. And so that's the expectation. There isn't a read through there in anything other than we're going to take advantage of the opportunity that we acquired.

Your second part of your question is a little nuanced. I don't necessarily like talking about replacement versus -- because there's constantly in this industry, the replacement CapEx is mix shifting into different sorts of categories. You're going to replace an excavator with three lifts and lighting and on and on and on. And so I can tell you that from a sort of execution perspective, there will be an outsized growth attachment to the specialty business for 2026.

Perfect. So I think we should let the audience here to ask questions. If anybody has any question, raise your hand and we'll get the mic to you. I think we have one there.

For the equipment categories that did overlap between HERC and H&E, was there a difference in rate, generally speaking?

Rental rate? Like that we would charge?

Yes. Yes.

Yes. And Mark had mentioned there was -- we had a sophisticated algorithm, kind of pricing tool that our sales team used developed 10 years ago, and it really became our platform to drive the proper pricing in different situations, H&E didn't have that. They had more of a kind of decentralized approach. So when we looked at contracts, when we look at the spot market opportunities, we were performing 300 bps higher rate. So some of that will happen pretty quickly because over half of H&E's business was in the spot market. And then the rest of it will be contract work that, as Mark said, we'll take 3 years to go get.

Any more questions? I'll keep going. Again, feel free to raise your hand if you have a question. [Operator Instructions]. Question we get asked a lot data centers. How big is data centers as a percentage of your end markets now? And do you service that end market mostly through power? Or there's other categories involved as well?

Yes. As I mentioned earlier, it's really important to have a diversified customer base. So none of our customers are more than like 2.5% of our revenue. We don't really disclose what data centers are of our business. As I said, it's a growing part of like the mega arena. If anybody flew in here yesterday, you flew over a lot of data centers. It's incredible. This is kind of like the epicenter of data center building. It started over a decade ago. But it's growing rapidly.

We deploy our fleet in many ways. So most of these projects are $3 billion, $4 billion, $5 billion. They used to be $300 million or $400 million, $500 million and some over $10 billion, they usually do buildings in sequence. They finish one they do the next. So if they have a long-range plan to build multiple buildings, they'll often request a premium rental company to come on-site often so that you have a kind of a captive environment to provide the gear.

And it really is all the equipment that we have in our portfolio of products. So could be a lot of power. If they're not connected to the grid. It could be cooling, if they don't have connection to the grid, they need cooling. But before you get to that point, you have to do the civil work, you have to put up the concrete panels, you need material handling. You just need a lot of different types of gears.

So -- but they're balanced jobs. So usually, you get a nice chunk of specialty with general rental on the same project. And what's great about data centers or other mega projects as we call them, is that they're long-term projects. So you get good utilization on your product if you execute well, you can support all the subcontractors are on the project. And then as I mentioned, the specialty business kind of weaves in there. So the returns are similar to what we get on our regular business.

I wanted to ask you about greenfield locations. Two questions. The first one, how many do you plan to open over the next few years? And we know -- you mentioned this year's target. But should we expect an acceleration in greenfield location openings after this year?

We were doing about 20 to 25 a year through the last 4 or 5 years. with the H&E acquisition, there was a lot kind of in play on their side and our side. So we finished those off in '20. Most of those off in 2025. We only have about 5 or 7 planned for this year. And we're really focused on kind of operational execution right now and getting the leverage down to the levels that Mark talked about before we kind of ramp up more greenfields and more M&A. So those are our focus areas.

I think from that perspective, right, when you think about a greenfield generally takes again, sort of macro willing, it's probably 24 to 36 months to maturation such that, that greenfield location begins to look like all of its other brothers and sisters. And so to Aaron's point here, right, we're highly focused on sort of the execution on the H&E acquisition, just brought in last year. And so for that reason and the ramp-up, et cetera, we're going to hold off, we'll get our leverage back down, and then we'll begin to execute probably as we would think about the back half of 2027 and into 2028.

So a follow-up on that. Longer term, what is the white space you see because I've heard you say in the past that you focus on the 100 MSAs. How much room is there for new locations before you reach like an optimal.

Yes, I think you got to -- what's the marker that you want to have, right? I mentioned our share is 5%. We focus on the top 100 markets. And within those top 100, there's multiple locations we can build out in that network market. So it takes the fleet to get absorbed, to get the revenue to grow your position and your share. So we're really focused on being a premium equipment rental company. And our positioning with our customers and this acquisition, we pulled forward like 4 or 5 years of growth by doing the H&E acquisition. So going forward, I feel like a 5% share in a highly fragmented market, there's a lot of room to grow.

Understood. We have a few more minutes. Any more questions in the room? So one question on utilization. Once H&E is fully integrated, do you expect your dollar utilization to revert to your prior low 40% level? Or could it be even higher? So what is the vision for dollarization.

Yes. I mean I think that's fair. As Aaron mentioned, right, we sort of ran at this low 20s sort of specialty mix into the overall fleet. I think it sits at about 17%, 18% today. And so as you roll that forward and execute on the revenue synergies and invest that specialty fleet back into the business, you should anticipate being somewhere in that low 20s again, which if all of that plays out in that manner, then I would expect to see the dollar utilization back to the levels in which Herc Rentals was historically.

Perfect. We did not talk about used equipment. So tell us about that. Are you nearing a stabilization in used equipment recovery rates? And how much of your sales are through auction versus retail now?

Yes. The used equipment markets are stable, just kind of like the rental market is, every month, we can see what's going on in the auction markets. And when you sell wholesale or retail, that's always a premium to the auction markets. So you kind of have to use all channels, but we mentioned several years ago that we are pivoting to kind of a more retail wholesale channel mix that we're going after. When we did the H&E acquisition, we had to kind of rebalance our fleet, optimize our fleet pretty quickly to get things right in Q3 and then by Q4, we got back to our normal channel mix.

And we'll continue that going forward, call it, like a 70-30 retail wholesale over time, probably 80-20 but that's what we're after. And -- but the used equipment markets are healthy. You can see the data, things such as large worth moving, compact earth are improving off the trough and then aerial things such as reach forklifts, material handling are kind of bouncing off the trough, but the trough is really back to 2019. So there's a demand for rental and there's demand for used equipment out there.

Perfect. So final question. What is your vision for Herc Holdings in the next 5 years?

Well, the first vision is to get all the value out of the H&E acquisition, right? That's our first order of business. We've got the scale and now it's to drive the efficiencies through that scale, really excited about our opportunities there. Specialty will continue to be something, as I mentioned, long term, 25% to 30% of our business coming from that, continue to develop great relationships with the contractor base in our industry, an amazing industry that we participate in.

We went through a big -- two more -- we went through a big digital transformation back in 2020 and technology is becoming more and more of the story in our industry. So we continue to invest in new enhancements in all of our technology every 6 months. We might not talk about it too often, but our customers know that we have terrific digital tools and our sales force uses it to be more efficient in their jobs.

And then finally, just to be really good stewards of the capital that our investors us and deploy it so that we can drive our margins and have great culture in our employee base.

Awesome. Thank you. Thank you for joining, and we hope to host you next year as well. Thanks, everyone.

Thank you.

Thank you.

I think we can get started. So I'm Kyle Menges. I'm the U.S. machinery analyst at Citi. I'm joined by the Herc's team. I've got Larry Silber here, CEO; and then Mark Humphrey, CFO. Larry, I think you had some prepared remarks you wanted to start with and get into Q&A.

Sure. Thank you, Kyle. Thanks for inviting us this morning. And good morning, everybody. And thanks for joining us. Glad to have the opportunity to speak to you. I'd like to first start with our safe harbor statement and remind everybody that everything we're here is talking about adjusted numbers or non-GAAP financial numbers as we discuss through the morning.

So a little bit about Herc. For those that don't know, we're a company built around mission vision value with a purpose to be a full supplier and support our customers and communities and everything that they do. We're one of the leading full-line equipment rental suppliers in North America. And we've been on a growth trajectory over the last 10 years since we went public, that's been a CAGR of nearly 10% CAGR growth over that period of time.

We've been servicing our customers. We've been in business for over 60 years, servicing a very broad and diverse customer base. No one customer represents more than 3% of our business, and no vertical is more than 10% of our business. We have approximately 9,600 employees today, post the acquisition of H&E Equipment last June, and we have over 600 locations across North America.

We're in 46 states and the 5 Western Canadian provinces. And we participate in a market that's approaching $90 billion of market opportunity on an annual basis. A little about us in terms of how we go and what's important to us. We operate from a set of core strengths that differentiates us in a highly fragmented market and industry. Together, the top 3 players have less than 40% of this highly fragmented market that I just mentioned.

We've been generating above-market growth through investments in fleet, M&A and greenfield locations over the last 10 years and really are in a position to accelerate that growth with the acquisition that we completed with H&E that added about 30% size to our capability. We're disciplined stewards of capital in everything that we do, and we really focus on developing scale where it matters following secular trends, infrastructure spending and the industrial mega project opportunities that are with us.

We've made tremendous investments in technology, and we believe we have industry-leading technology and capabilities, and we continue to invest in that on an annual basis. We're executing on a multifaceted diversification strategy to improve our operating results and make sure that we have resiliency even in uncertain times, by focusing on top metropolitan markets that have large-scale populations that tend to be more resilient during economic downturns.

And finally, we've been a market consolidator. H&E acquisition that we completed in June was our 54th acquisition in the last 5 years. It was certainly our largest. We added with that acquisition, 162 locations to our already 460 that we've had. You can see they're represented on this slide by the blue dots.

We believe that this was an outstanding opportunity to increase our network, our branch network, our customer reach. They brought us 45,000 new customers that we did not participate in a big way in. And certainly, the efficiencies that come with the economies of scale. The transaction probably accelerated our growth by 4 to 5 years, whereas we've been doing smaller acquisitions over the last 5 years, and this essentially sort of takes up a 4- to 5-year process along that way.

From a synergy standpoint, we're successfully integrated, completely integrated this, the IT stack was completely done within a 90-day period. It's kind of a record for this type of a deal. We've expanded our field operating structure to support this business. We've completed an extensive sales territory organizational realignment exercise. And we've completed the fleet optimization plan. At the same time, the branch network optimization will be complete by the end of this quarter with about -- adding about 50 new specialty locations that will increase our specialty capability and branch count by about 25%, and we'll be ready to go for the beginning of the season, which begins in early April.

And from a standpoint of what's our strategy, our strategy is really focused around growing the core branch network scale, density in the top 100 MSAs is really how we've been focused a broad, fleet mix, including expanding the specialty gear. We're currently at about 18% of our fleet specialty. We were higher but that got diluted a little bit with H&E because they were not in the specialty arena, and that is where the big synergy opportunities for us.

Continue to elevate and expand and invest in technology. As I mentioned earlier, our technology stack is at the forefront of the industry. We believe we are a leader, if not the leader in technology in the industry. And we'll continue to focus around capital and allocating that capital in a very disciplined manner, making sure that we're focused on free cash flow and paying down debt, and deleveraging over the next couple of years. Mark will be glad to talk to that.

And finally, we want to make sure that we execute at the highest levels, provide our customers with the service level that they expect, particularly on these large mega projects, mission-critical jobs that we need to perform, and we are performing well so that we get invited to future opportunities. And with that, Kyle, I'll turn it over to you.

Awesome. Thanks, Larry. That was a great overview. Maybe taking a step back, thinking about just your time since you came into the business a decade ago, when it spun from Hertz. Maybe just talk a little bit about what you've done since the spin with the portfolio, the strategy, infrastructure, and then I know you started to do some M&A, and that's really led you to now acquiring H&E. Maybe just talk a little bit about that evolution and the transformation that you've driven over the last decade at Hertz.

Yes. Thanks. You're making me feel old. I joined the company back in 2015, as Kyle said, when it was still part of Hertz, and then we spent about a year. We're getting ready to separate the Car Rental business from the Equipment Rental business. We completed that July 1, 2016. So we're coming up on our 10th anniversary as an independent public company. And we've really spent the first 5 years of that evolution in fixing the company.

It was a neglected business. It was a strong business. It was the first national account recognized equipment rental supplier with national footprint -- actually an international footprint. And we spent the first 5 years cleaning that up, exiting the European locations, the Saudi locations, the China locations, the Latin America locations, there were locations all over the world. And we just began to focus on North America only. And then once we got into it, we even exited Eastern Canada, everything that was non-English speaking going east and really got down to strategy of we want to be in the -- first, we started with the top 50 MSAs, and then we expanded that in the last couple of years, once we're ready at top 100. But we had to rebuild the company. We had to invest in technology. We had to clean up the fleet, invest in fleet, develop a fleet strategy for the business, develop a program to educate and train people, bring people in from the ground floor level and build them up and really be ready to grow.

So we've had some, as I mentioned before, we've grown at over 10% CAGR over the last 10 years on revenue. EBITDA has grown nearly close to 12% CAGR over that period of time. And we've had about 800 to 1,000 basis points of margin expansion over that period.

We implemented a specialty business, which Herc did not have when we spun. We began to build a specialty platform, beginning with HVAC, moving into pumps, moving into other types of technologies like trench shoring and added more and more capabilities to build that specialty portfolio, which improves the margin profile of the total business.

And then locations, once we paired out all of the international and I would call nonstrategic locations, we started with about 300 locations, we began first to add greenfields before we did M&A. And then as I mentioned, we've completed 54 M&A transactions, bringing us to over 600 locations today. And our priorities now are once the heavy lifting on the integration is complete, we now want to get that traction as we go into the second quarter of this year, and build on the new expanded capability that we have, and then also make sure that our leverage is focused on to bring that down so that at some point, we can get back into that game of looking to do more M&A and do more greenfield openings.

Awesome. That's a really helpful overview of the last decade.

It was that easy.

Yes. You made it sound so easy, right? Maybe I'd love to hear from both of you guys, just on the H&E acquisition, in your view, maybe talk about the merits of the deal, and then also what surprised you the most relative to your initial expectations since you closed?

Yes. So look, from a merit standpoint, we were #3. H&E was #4, was the largest, what I would call big regional player that was left at the time. And we just -- I knew that company for many years. As you know, the -- my time with Ingersoll-Rand for 30 years, they were a dealer of mine. So I knew the company, I knew their family, I knew their business. We competed against them, but they were really competing at a different level, more focused on what I'll call regional and large regional and smaller accounts and local accounts.

They did some participation at the bigger account level, but there wasn't really any overlap. We knew they didn't have a specialty business. So when we looked at the deal, we saw 165 great locations that were all purpose-built by them, and they tend to be larger because they were a dealer for big equipment. They were Komatsu dealer, Grove Crane dealer. So they handle a lot bigger equipment. So all of these were large locations with great capability.

So we looked at that. We looked at the customer base, 45,000 customers. We looked at there was a tremendous opportunity for synergy with specialty and with an expanded general rental business. And we said, "Hey, this is the right deal for us. We can accelerate our growth for 4 to 5 years in one fell swoop." Yes, it will be challenging, but we knew we were up for the challenge. We had 53 prior acquisitions that we had gone through that had prepared us for technology cutover, training, education, getting people onboarded dealing with those me issues, knowing how to get everybody settled down, and we pulled the trigger. We thought it was the right thing for us at the right time.

Mark, anything to add that Larry missed or?

No. I think, Larry nailed that one.

Yes, I would agree. Yes. Maybe since the deal was closed, you've had some dis-synergies, right, that maybe come a little bit sooner than anticipated. Maybe talk about that. And then transitioning to just how things are going now on the synergy front as well, which, I mean, is going better than initial expectations.

Yes. I mean I think that from the dis-synergy perspective, the way that we had sort of modeled this is that we would have sort of 10%-ish customer degradation over a couple of year period. just having tough pricing conversations and/or just fit somebody just didn't want to continue doing business with a large national player. That was sort of the expectation. And I think that what we received was sort of a 15% dis-synergy effectively the day that we closed.

So this dis-synergy was very, very front-sided, which we sprung into action. We sort of -- we rightsized the fleet by market in the back half of 2025 that better positions us as we enter into 2026. I think on the synergy side of this, we invested a little over $100 million of synergy fleet in the back half of 2025. And with that investment and being able to sort of rely on our larger gen rent portfolio, we did about $40 million of rev synergy in the back 6 months, anticipating an incremental $100 million to $120 million of rev synergies inside of the 2026 guide.

And so I think that next layer of synergy fleet injection will come as we work our way out of the shoulder period and getting into the back into Q2 and Q3 to sort of fuel that next round of synergy fleet after we've ingested this first round that we put in, in the back half of 2025.

Got it. And maybe on the cost synergies as well, I'll just talk about that.

Yes. So from the cost synergy perspective, we had essentially modeled this that we would have effectively the $125 million of cost synergies in, in the first 2 years, about 60% in by the end of year 1. And the reality is, is that we'll have the entirety of that $125 million in EBITDA in 2026. So the cost synergy side of this probably went better than -- certainly better than modeled and maybe better than we had originally thought. But yes, good story, certainly, a good story on the cost side.

And I understand going into the deal, the modeling is not perfect. So on the cost synergy side, any cost buckets where you're seeing maybe more synergy or less than anticipated?

I mean, there's always puts and takes in that. But I think when I sort of look at sort of how the overall synergy components broke out, it was about 50-50 from a G&A perspective to an operational perspective. And so buckets may have changed a little bit, but inside of the broader G&A category or the DOE category, it sort of fit back in there rather nicely.

And maybe you guys can both talk about just now that you've had H&E for a little while and just how you're getting the employee base situated up to speed, getting the IT infrastructure in place as well, getting them on the ERP system, I guess, pricing system. Maybe talk about that a little bit, too.

Yes. Obviously, there was some -- any kind of a major transaction such as this. There's a lot of disruption, a lot of consternation on the part of the acquired company. And there was a fair amount of disruption in the sales organization early on. A lot of that, quite frankly, happened at the first announcement when the company was being sold to one of our peers. And then -- and they had a fair amount of loss of some talent in that organization. We came on, and that loss slowed down. And in fact, we've been able to recapture some of those folks that left over the last couple of months and brought them back on board, not all of them, but a good number of folks.

But we immediately -- we couldn't talk to the organization, obviously, until we closed. So early June, as soon as we closed, we were in there, we had everybody onboarded onto our payroll system, our health and benefit system indoctrinated into our safety culture and system within the first couple of days that we owned the company.

So all of that happened smoothly and seamlessly, got everybody on board. And then we began to deal with certainly first with the sales organization, getting them understanding what their me issues were. Most salespeople are concerned about what's my territory, what truck am I going to drive? What do I have to wear? What do I have to do? What's my -- what am I going to have to learn from equipment, from sales force automation, from technology standpoint and ultimately, how am I going to be paid. And so we got all of that settled down in the first 30 days. We got people understanding that things were going to change, but it was going to change for the better.

And then we began an extensive training program, getting people trained on our technology stack, our tools, our pricing tools, particularly the salespeople, understanding that we have a technology pricing tool is proprietary in our industry. Get them familiar with that and understanding how that can actually help them make money and help them be better at what they do, and then understanding our whole portfolio, which is sort of an outtake of salesforce and how that helps them manage their territory.

So we've gone through all that training, and then we began product training, introducing them to the broader amount of general rental gear and the broader amount of specialty gear, which we're not requiring them to learn per se, we want them to understand what that is, but more importantly, learn who their counterpart is on the specialty side, so they can bring them in and be the subject matter experts, the SMEs to help them close deals. And we've seen, obviously, as we went through the fourth quarter, we saw a fair amount of synergy sales already on the specialty product, and that continues to grow and develop.

So next week, we're going to have this whole team together. We're going to have 1,750 sales and operators together at our annual, what we call our Pro Expo, which will further solidify their connectivity and relationship with the company, help them build those relationships with the specialty people and enable them to go to market as we come out of March and into our peak season. So...

Yes. Good to hear. And I heard that you wanted to go out and visit all the H&E branches. Are you close yet?

Well, I visited 87 locations of the 162 that we talked about. We're going to get through this next couple of weeks of earnings and investor meetings like this and our own big meeting, and then Aaron and I will be back on the road visiting all of these locations, and we're going to try to get to all 162 locations before the end of 2026. So that's my target.

You're a busy man.

Yes. Keeping the airlines busy.

Maybe we can talk a little more about the revenue synergies. So you talked about $40 million last year, $100 million to $120 million this year. It sounds like it's mostly specialty, but what else is within that revenue synergy number?

Yes. It's actually the broader gen rent fleet that we can offer into that customer base is a huge component of that. It's -- if you thought about the $100 million, it's kind of 50-50-ish from a specialty to gen rent. And I think that Larry was talking about this, but from a sales perspective, right, it's just gaining the comfort. We don't necessarily need them to have the wisdom to be able to sell all of these products. It's really about being comfortable attaching yourself to an SME, subject matter expert, to walk into your customer that you've had for a long period of time, and sell these additional products into them.

And so as we sort of walked our way through the fourth quarter, the third quarter was this quarter of just adjustment for everybody, technologies and new tools and new apps and so really, the fourth quarter was really the first time that the entirety of the workforce had had the opportunity to begin to experience these tools and put them into practice. And so I think as we sort of walk forward into 2026, this will continue to sort of expand and become more experiential for them where they can gain their confidence and the trust that, yes, I'm going to bring someone with me, they're going to sell as well as I sell and we'll continue to gain traction out of this shoulder period Q1 really start ramping into the back half of Q2 and into season 3 and 4.

Awesome. I'll pause and see if there's any questions from the audience. You have one up front.

You guys have done a lot of work over the last several years, a decade, for sure. My question was just on the specialty business. You described it, but maybe in a little bit more detail. And then you mentioned in the H&E acquisition, they didn't really have a specialty business. So -- and it sounds like that's a better margin. Can you -- have you described the difference in the margin profile between specialty and the regular businesses? And then how big can that become, I guess, once you get H&E ramped up there?

Yes. Great question. I think that sort of the way we look at -- and there's several verticals inside of our specialty offerings. But on whole, I would tell you that sort of the dollar utilization runs 800 to 1,000 basis points better and generally speaking, that makes its way down through your P&L, even from a cost recovery side from -- so your margins generally reflect that as well. I think that as we sit here today, I think Larry mentioned it, we're down our specialty gear to our overall fleet is about 18% today. I think as we sort of walk through this sort of initial 3-year journey, we would like to bring that specialty percentage back up into the early 20s, 22%, 23%, which is essentially where we had left off prior to the H&E acquisition. And then our goal from there is to continue to sort of round out those specialty offerings. There may be additional specialty offerings in 3 years, 5 years' time. But at this point in time, focusing in on the areas that we are expert in and driving that overall specialty to gen rent percentage into that 25% to 30% range over time.

And let me maybe just clarify a little further on specialty. You got to think about specialty, not necessarily as just more gear. You got to really think about specialty as a solution that we're providing something that's either engineered or near engineered that provides a methodology to bring a solution to the customer that either they may not know about or not know how to complete, but we get -- we really get paid for that expertise where really that the additional margin comes from is providing the expertise to the solution.

Any other questions? All right. No question. I can continue. Maybe we can talk a little bit about mega projects. I would think with this added capacity and some of the revenue synergy you're seeing, you could start to win more share on the mega projects. I think your target is 10% to 15%. I want to say you said on the call, you were somewhere in the middle of that today. Just -- maybe talk a little bit about mega projects and what you're seeing as far as just competitive, how competitive it is bidding on those? How do you win the mega projects opportunity to gain more share as well on those mega projects?

Yes, absolutely, H&E does give us more scale, more density and more capability with fleet, with people, resources, service techs branches in those markets. But when we talk about mega projects and our 10% to 15% share, yes, we're in about the midpoint of the higher end of that in terms of where we want to go. But we don't really count a mega project as our participation unless we're named as a primary or secondary on that project. You can -- and H&E as a case in point, H&E, if you remember their earnings calls prior to the acquisition, they would say they were participating in mega projects. Well, they were only participating through maybe a sub that brought a piece or 2 equipment onto the site. And they termed that as participation, but they weren't primary or secondary on any, once we got in there, and we're able to take a look at the business.

So we don't say we're on a mega project until we're actually named by the general as a primary or secondary, and that's where we are. We expect that over the next year or 2, we'll be able to move to the top end of that range. not necessarily because of H&E, but certainly gives us the capability to do that. But because of the relationships that we've developed and the performance that we've had over that period of time. And what helps you win a mega project? It starts with safety. You're not even invited to the party unless you have a safety record where they can responsibly bring you on to one of these sites, knowing that you're going to be committed to safety standards that are better than industry standards and certainly in line with what they want to do for their customer and for their own business. So safety starts there.

And then it starts, it could start with specialty gear that you go on or it could start with general rental gear. And depending upon where that starts sort of determines what your margin profile is going to be either at the beginning or over a period. But over a period of time, and maybe Mark can talk to a little more the margin profile of a mega project emulates what we do elsewhere. So it's no better, no worse.

It just depends on where you are in sort of the spectrum of how you get engaged on these mega projects. But we're in a broad, diverse universe where everything from LNG plants to data centers to power plants, to small nuclear reactors to stadiums to big infrastructure projects we're participating in it all, and we feel really good about our position and our relationships that are growing with these larger contractors doing these and them inviting us to the next project that they have.

Awesome. So you only count it if you're the primary or secondary. Hopefully, your competitors are counting it the same. I don't know if that's not the case. Yes. I mean, Mark, it would be helpful. I think I get a common question from investors is that, that margin profile on mega projects. So maybe you can elaborate on that a little bit? And is there any sort of inefficiency at the start, like in year 1, and then maybe you make that back in year 2, year 3? Just how to think about that?

Yes. I wouldn't necessarily call it inefficiency. I think that when you think about being able to layer into one project, a branch or 2 or 3 size of gear, right? You're talking $20 million, $40 million, $60 million of gear onto a single project, you do get economies of scale from the very beginning of that, right? Your time utilization, less touches, your on rent is probably far in excess of what your general rental fleet looks like. However, if -- to Larry's point, if that starts with all gen rent gear Then, yes, your margin probably does lag that of your consolidated margin profile on the outset. But generally, what happens in this primary or secondary position is you then bring in additional solutions and gear specialty side. And so sort of over time, the margin looks very, very similar to that of your overall business. And so I don't see it, we don't have any data that shows you're 10 basis points off or 100 basis points off one way or the other. It sort of performs like you would expect it to perform over time.

Got it. That's helpful. Maybe we can talk a little bit about, from your guys' perspective, how the industry has evolved and gotten more disciplined over time. It seems like there's been some shift in that over the last decade. And just what's your confidence level that we can maintain a positive rate environment, maybe irrespective of macro conditions?

Yes. Look, this industry has -- certainly in the last 10 years has grown to where certainly the big 3 have professional management in place, professional systems, IT capability, ERP systems, pricing systems that we all use, all proprietary, each company has their own management capability. Telematics has added to be able to understand fleet productivity, fleet maintenance, predictive maintenance, understanding how you manage and control that. So that level of sophistication in now what used to be a mom-and-pop industry is now a professionally managed industry with professionals that have experience in the business and treat it like it's supposed to be like any what I would call mature developed industry is.

So the industry is disciplined. Look, there's always pockets where someone is going to have an opportunity maybe to disrupt or not. But I don't think it impacts the general nature of the majors that are playing in this field today. We all know we have big organizations to run. Everybody wants a raise every year. So you got to make sure you're growing that to cover your inflationary pressures. You have cost of facilities go up every year with lease renewals, for those of you that live in areas where energy is expensive. You know cost of energy is going up, the cost of fuel is going up. So we all have to continue to try to grow margin and you grow margin by raising prices to cover those costs and provide the same acceptable rate of return to your shareholders, right? We all know that.

Yes. And maybe you guys could talk a little bit about your tech platform as well and how you think it stacks up maybe both against some of the large-scale players, but also some of the smaller players. And just how it's evolved over time.

Yes. From a tech standpoint, we -- as I mentioned, we believe we are a leader, if not the leader, in terms of the technology stack. Look, all of the big 3 have technology capability. We all operate on basically the same initial platform, which was something called RentalMan, but then we've all taken that and developed it our own.

Last year alone, we developed 300 new features to our technology stack to enable greater use of the what we have from a telematics standpoint to give our customers greater application, greater use and greater capability. So we continue to invest in that. It's a key feature. Last year alone, we increased our online ordering by over 50% from what it was the prior year. We'll continue to invest in guys, your age, I don't want to really talk to people. They want to be able to get immediate feedback from their cell phone. Everything we have can be done on our handheld today. You don't need to be on a connected device. It all has Bluetooth capability.

We have several patents that are proprietary patents in our technology stack, and we view that as a key enabler. Certainly, for us, and the other big 3 have similar but different capabilities. But I think the industry is pretty well technology-enabled and is going to continue to invest there.

I can open it up one more time if there's any questions from the audience. We got one over here.

We've been hearing from other industrial companies that the tone shift is kind of in some of the industrial market is kind of picking up. So anything filtering through to the local markets.

Yes. We would say the local markets are moderated or rooted, nothing positive, but nothing negative either. In areas where there are mega project activity, the local markets seem to be a little more vibrant, and a little more active because the mega projects bring in people, and then they have to bring in additional capabilities. They have to provide hotels.

They have to provide strip malls as they build out permanent workforces, they need to build communities, need to build schools and hospitals, and things to support that. But outside of that, and particularly what I'll call the western 1/3 of the country, Rocky Mountains going west there really aren't a lot of mega project activity. So that's where the local markets are probably most impacted and most muted. But we're not seeing any real big green shoots anywhere other than around where mega-project activity is.

And I think it's going to take some more rounds of interest rate cuts to get those developers to want to invest money to kick that off, and it'll have to flow back down through the 10-year treasuries in order to do that. But even when that happens, we're probably 6 to 9 months away before shovels can really go on the ground, because once they get comfortable, then they have to go get permits, then they have to go get contractors and people and materials. So it's a best case, we might see it late in the back half of the year. but more likely not until '27 as that being -- having an impact on the local -- the general local market activity. I hope that helps.

Any other questions? All right. Maybe we can just wrap up quickly talking about the 2026 guidance and just on the integration work, you're planning to continue into the first half of the year and some noise lapping the acquisition, but maybe how will things look as you move into the second half of the year and on margin, fleet metrics, things like that?

Yes. No, it kind of ties into the last question and answer really. I think that the sort of the building blocks of the plan was sort of based on a sort of muted not headwind, not tailwind sort of local market environment inside of 2026. I think when we look inward, we've got -- we exited the year on a pro forma negative growth rate. And so as we work our way through Q1 with all of the fleet work and the activities that took place in the back 6 months, we feel like we've positioned ourselves to sort of begin to lap those metrics as we work our way out of Q1, Q1 will be down sort of year-on-year on a pro forma basis. And then as you sort of work your way and begin to sort of feel that springtime seasonal aspect at the back end of Q2 and into Q3, that's when we'll inject our growth CapEx into this and begin to turn that corner, and then actually experience growth. And then all of the metrics sort of sequentially and year-on-year should be improved as we walk our way through the year.

Yes. Awesome. Well, we can wrap it up there. Thanks for joining us today.

Thanks for having us. Thank you, everybody, for joining us.

Thank you.

All right. Great. So I think we'll get started here. My name is Adam Seiden, and I lead the U.S. machinery and construction effort for Barclays. Joining us for this session, we have the folks from Herc Rentals. So Larry, Mark as well as Leslie from the IR side in the audience. So the format of this session is going to be mostly a fireside chat with myself and the Herc folks. But before we begin, I wanted to pass it off to Larry, maybe for a couple of quick comments. So thanks for being here.

Thanks, Adam. I guess, it's still morning. Good morning, everybody. For those of you that don't know us, I'm Larry Silber, President, CEO of Herc Rentals. Mark Humphrey is our Senior Vice President and Chief Financial Officer; and Leslie Hunziker, is here with us from our Investor Relations team.

Adam, glad -- thank you for having us here in Miami. Start off, of course, everybody remembers that we do have our safe harbor statement here on our first slide, and we ask you to review that and understand that the information here is regarding non-GAAP financial measures.

Let me just move to our first slide to tell you a little about us. We operate as a leading full-line equipment manufacturer, one of the leading full-line equipment suppliers, rental suppliers in North America. We operate with a vision, a mission and values around a purpose-driven company, and we -- our purpose is really to supply our customers and our communities with equipment to build a brighter future.

About us a little bit, Herc has been in business for 60 years. And today, we currently have about 9,600 team members. We operate out of over 600 locations across North America, 46 states and the 5 Western Canadian provinces, and we operate in an addressable market that's approaching $90 billion today.

We're a company that operates from a set of core strengths that differentiates us in what is still a highly fragmented market in the industry, but we're in a much stronger position today than any time in the history of this company in our industry. We're an industry leader that's been generating above-market growth through investments in fleet, in new greenfields and of course, in M&A. We are disciplined stewards of capital in our industry and we focus where scale matters, really paying attention to secular trends, infrastructure spending, the industrial mega projects that we all hear about. And we're continued -- we're set up to continue to play a major role and take significant share in those spaces that we operate in.

We are continuing to invest in technology. We believe we are a technology leader today and have digital platforms that interact not only internally, but externally with our customers and they are allowing us to scale with effectiveness in the marketplace. We're executing on a multifaceted diversification strategy to improve our operating results and ensure resiliency certainly in uncertain times by focusing on the top 100 MSAs. We like operating in big metropolitan markets. We think that is recession-resilient and it's something that has allowed us to continue to perform over time.

And finally, we are a market consolidator. With this past June, we closed on the largest transaction in our industry's history, acquiring the #4 player in the marketplace, and that was our 54th transaction in the last 5 years. We feel we are well positioned with that. H&E was the name of the company. We have integrated that quite well. It had over 160 locations in mostly desirable marketplaces along the Southeast, the Gulf Coast and the Mountain West region. The combination of Herc and H&E has increased our branch network, our customer reach and certainly, the efficiencies that come with scale and allowing us to be as big as what we are. H&E is depicted in the black dots here on the map that you're seeing. They had about 160-plus locations, combine that with 460. So we are a company of scale and continuing to grow.

The transaction, we believe, accelerated our growth plans by 4 to 5 years with 1 large transaction, and we're pretty much well integrated. Since the closing in June, we've completed and made swift progress through a complete IT integration completed in 90 days in record time. We've expanded our field operating structure. We've completed a comprehensive sales territory optimization exercise, and we finished a fleet optimization exercise as well to have the right fleet in the right markets. So that we can enter into our up season here as we approach the second quarter. So we're almost done with all of the branch optimization. We have a few of our specialty locations that will be completed here in the next 30 days. That will be fully staffed, fully trained and fleeted up and ready to go for our up period.

So this positions us for a great opportunity as we enter our peak season, with a stronger foundation, allowing us to execute more effectively on our strategic plan and drive accelerated growth in the back half of 2026. We're operating from -- as a reminder, a network, a branch network that is now of scale, a broad fleet mix technology leadership. We believe we have one of the leading technology platforms in the industry. Capital and operating discipline is the foremost in which we operate, superior customer service, and it positions us to manage over a cycle and generate sustainable growth in the long term.

So with that, we are committed to becoming the supplier of the employer and the investment of choice in the rental industry. With that, Adam, you can begin your questioning and maybe I'll -- let me leave it there.

Yes. Yes. We'll have a Herc load, yes, might as well. Changes up a little bit. All right. Well, thank you for that, Larry. Appreciate the opening remarks there. So -- my God, 54 transactions, 5 years. That's a lot going on. But the big one, right, which is H&E. So curious what's proven better or worse? Or has it been more manageable than you expected or not?

Well, obviously, let me begin by saying we had a bit of a surprise going into the transaction. We -- as you know, we expected to have about 10% dis-synergies over the course of the transaction. When we finally closed, we had significantly greater dis-synergies than what we expected. So a bit of a surprise, but we've recovered from that, and we've been able to stabilize the organization quickly, stabilize the sales force and get everybody up and trained and running.

So from a positive side, our IT integration was a home run. We completed that in a record of 90 days, complete without a hiccup, off and running. Everybody is on the same platform as of the beginning of Q4. So a solid home run there.

Branch optimization. We've now completed another home run. And then certainly, as Mark can talk to, the cost synergies have come in at an accelerated level, and that's certainly another home run. We think the fleet is fully optimized at this point as we bring in new fleet for the seasonal uptick in business when demand upticks. So we already put in over $100 million worth of synergy specialty fleet that we're getting traction on, and that's been a positive. We saw that happen in Q4, where we had a fair amount of cross-selling synergy on specialty gear and we're seeing that acceptance at a rapid pace.

So that's really positive, something we're excited about. And the other, I'd say, thing that helped us is we've really gotten to know their customer base and their relationships, what I would call the big regional accounts are outstanding. And we've been able to now bridge those relationships, introduce Herc and gain traction at some of those accounts. So that's been real positive.

What I love is when I talk with you, there's always nice baseball analogies, and I'm a huge baseball fan. So home run, single, double -- yes, that's true. Don't have me for being a Mets fan. So I guess, from a qualitative standpoint, is H&E more valuable to Herc today than when you signed the deal?

I think when I think about the H&E transaction, right, I mean -- and Larry mentioned it, but we accelerated this expansion strategy by 5, maybe even 6 years in sort of completing this transaction. And so in this industry, scale wins and H&E sort of coming in 7 of the top 10 markets, 11 of the top 20 sort of gave us scale that we didn't otherwise have. And so I think when you think about sort of the benefits longer term for what this transaction does for us, right, it's specialty expansion. Cross-selling specialty into that customer base that Larry was talking about, huge opportunities for us over the next 3 years. I think it does -- with the increased scale, it certainly makes us a larger player on the mega project side here as we roll into 2026 and beyond. I think that those elements of this transaction sort of aren't necessarily shining through in the first 6 months of the transaction. But over the long term, 3- to 5-year horizon of this transaction, I think that all of the things that I'm speaking of come to fruition.

Got it. And when you think through some of those synergies, there's been a bunch of -- notched them already. On the cost side, you're building in, more cost in 2026. So it feels like that is achievable. I guess the big question is going to be on the revenue side. So your thought around the revenue side, whether those synergies could be achieved a little bit maybe some cost too.

Yes. So as you mentioned, right, the cost synergies, we really thought would probably take 2 years to sort of run rate in. And it looks like we achieved about $35 million of cost synergies inside 2025 and really expect to have $125 million of cost synergies impacting 2026 from an EBITDA perspective. So a big win there.

On the revenue side, and that's the one that Larry was talking about the dis-synergy portion. I think the piece of that, that's in our control or at least more so in our control is sort of the gross synergy. How much revenue synergy can we generate from the existing customer base that we acquired. And so that gross number is about $390 million of rev synergy that we see over a 3-year period.

Larry mentioned, we accomplished about $40 million of that, give or take, in the back 6 of 2025, an incremental sort of $100 million to $120 million should be in 2026. So you sort of stop there and you say, okay, well, that's about 35% to 40% of the gross synergy. And I think the remainder of that sort of ratably comes in over the next couple of years.

The dis-synergy side of that, I think, is a bit more of a question, I think, that it's probably a longer horizon to sort of claw back, if you will, that dis-synergy piece as you work your way through this sort of 3-year guide. And I think a couple of things in my mind stand out. One, I think we need some macro local market stimulus to sort of make that happen and then have the confidence to invest the fleet into that, that sort of helps in that recovery. So that's sort of the response to the revenue side of that equation.

Great. And then you were talking a little bit about the cross-sell and we've brought up specialty as well. So what early evidence are you seeing on the legacy H&E customer base adopting more specialty?

Yes. Great question. As Mark just mentioned and I might have mentioned earlier, in Q4, we saw some of that actually happen with about $40 million worth of specialty cross-sell realization through the H&E customer base and through the H&E sales organization. We're beginning to see them take a hold of that, understand and learn that product portfolio and introducing that to their customer base. So early days, but we have already seen that. We have the gear. We have these 50-plus locations that will all be fully completed through the branch optimization here in the next 30 days. So they will all be ready to roll as we enter our peak season and all the training is done and customers have been introduced to the product portfolio. It's now a question of asking for the order, right?

Sure. So on -- thinking through the CapEx guidance that was given yesterday -- so switching just a little bit, just to be like the CapEx levels that you came out with for '26, how does that look on a run rate basis going forward? And I guess how did H&E affect your views on '26 CapEx as a whole of their fleet.

Great question. I think let me take the H&E side of that first. I think what we acquired was a younger fleet in comparison to the overall sort of age profile of the Herc fleet. And so we're only going to probably dispose of $700 million, give or take, in 2026. Whereas in 2025, as we sort of rightsized that fleet, it was more like $1.2 billion of disposal. And so what that's going to allow us to do, conserve capital a little bit on the disposal side, we'll put that fleet to work and age our fleet out to something that looks more like an average age of the Herc fleet in that 47, 48 months sort of profile.

On the gross CapEx side, at the midpoint of the guide that we gave yesterday, it's about $1 billion of gross spend. And that will sort of layer in, Larry was talking about the branch optimization sort of completing through Q1. Sort of the time line of that is -- and it will look rather normal to historical where about 65% of that fleet will be coming in at sort of the back end of Q2 and Q3 that sort of provides that stimulus into season and then a little bit of flywheel into 2027.

Got it. That's helpful on the cadence there. So local market has been talked about a little bit already today. So how would you characterize the rental market, I guess, today versus a year ago? And then if you think about not just on the demand side from local megas, et cetera, but how would you characterize the supply-demand balance as well?

Yes. Look, I think supply is readily available. And I think we are operating in a, what I would call, a pretty disciplined market where there's not a lot of oversupply. And I think certainly, the big 3 are being very responsible on the amount of fleet that we bring in and put to work. I don't think the demand environment has changed much from a year ago. You still have a very, what I would call, stable but tough local market environment, and that's more regional in my mind.

I think everything west of the -- Rocky Mountains and West has a challenging local market environment. Primarily because there's no megaprojects going on in any of those markets. And when you have a mega project, that helps to spur on some local activity. The mega projects, there's $1 trillion worth of work in the pipeline. They're very active in most of the areas where we acquired H&E assets, with the exception of the western locations, which wasn't their most dense. But that's what we're seeing is it's a regional bifurcation on the local market. But wherever there's mega projects, there's pretty ample activity, both at the mega project and in the local market.

Got it. So then what do you guys need to see? Or what are some of the indicators, I guess, that you're looking at to get -- gain confidence that the local market is making forward progress here?

Do you want to take it? We don't see it making progress, but go ahead.

I think that -- I think rate cuts stimulus is a big factor here and maybe even a little more pointed than just rate cut stimulus. I think it's rate cut stimulus that's working its way into the 10-year treasury from a decision to build, make, lease, whatever you're talking about from a local commercial perspective, right, that ROI has to make sense. And so I think that is probably the piece of this that we would like to see more of in order to provide that stimulus into the local. And I'll leave it there.

Yes. On the mega project side, I think you were talking a little bit about the 10% to 15% share of mega projects yesterday. But I guess I'll ask it anyway. Has your participation in mega projects been where you wanted to be? Are you seeing any sort of changes in competition? Is that intensifying and so forth?

Yes. No, great question. Look, we have been a player since about '23 when we first put our focus on these mega projects, and we've grown nicely, and we made sure that whatever we went after, we could deliver on, and we were a Bonafide supplier to that. We've continued to grow that share in those as those customers have gained confidence in us and have moved to new projects and have taken us along with them to new projects.

Certainly, the acquisition of H&E has given us more scale in a number of those markets, have given us locations, fleet and people to be able to support projects, more projects. We're at about the midpoint today in terms of our share, but we don't consider being on a mega project unless you're really named as a primary or secondary supplier. As a case in point, when we acquired H&E, they said they were on a number of mega projects. Well, in reality, they weren't named a primary or secondary on any project.

So it's one thing to say you're there. And another thing to say you're really mission-critical to that contractor. So we want to be mission-critical. We are mission-critical in many projects, and we're going to continue to grow that. And certainly, H&E will enable us to grow towards the top end of that range. And we'll see if we can go beyond that based upon where we stand, once we're -- the full integration is done, and we understand what those customer requirements are going forward.

Yes. And I see your point, there's a difference between being on a mega project and on a mega project, exactly. Which is well taken. On the economics, though, of the mega projects as a whole, I know we've had this conversation for a couple of years, it feels like. But now that -- some of these projects are starting to move through their life cycle and so forth. Curious, are those projects performing the profitability that you thought they would? And how does that compare versus gen rent?

Yes. No, great question. I think that as we sort of -- we can only speak for what it is that we're experiencing. But given sort of the level of fleet required when you're in this sort of primary or secondary, it certainly lends to less touches of the gear and higher timing. And so when those 2 things get mixed in and then you begin to add in sort of your specialty solutions into these projects as well. And generally speaking, that's what happens. You're probably going to lead with your gen rent offerings and then provide specialty solutions on top of that to yield up. Those sort of economics look very, very similar, Adam, to what it is that we're experiencing sort of in that consolidated margin profile perspective.

Got it. So thinking through '26 from the conversations we had yesterday and you had yesterday, I'm sure too. Is there a path for rate and utilization to improve in 2026, if not for Herc but for the industry? Just curious on your broader views there.

Yes. I think from a rate perspective and sort of the way we thought about 2026 is rates stable. I think there's probably a case back half where you could get some lift from a rate perspective, but that's not necessarily how we thought about or planned for. I do think from a utilization perspective, however, that we would anticipate sort of sequential and year-over-year improvement sort of as we work our way out of this front side of the year and beginning to move into the back half of the year, both sequentially and year-over-year. I do see improvement possibility there.

Great. So I wanted to touch on a little bit. We were talking about the markets here, local and national and so forth. Obviously, a lot of players, some guys primary, some secondary. First call, second call sort of thing on the project. So how competitive do you see the marketplace today? Is it any meaningfully different today versus how it's been over the course of your guys careers around the space.

Over the course of my career?

You can start talking about Ingersoll Rand here a little bit.

That would be a long time, but look, let's just sort of deal in the last couple of years. I don't think that there's been any significant difference since we saw the inflection in terms of local markets trailing off and sort of becoming challenging, if you will, and mega projects growing. I think the nature of the competitiveness in the market has remained somewhat the same. I don't see there being anything that's sort of a dynamic that pushes you in one direction or another. I think the marketplace is disciplined. I think certainly us and our larger peers are disciplined in the market. I think manufacturers are certainly disciplined in terms of pushing equipment into the market. And so I think the competitiveness is what it's been.

Fantastic. So I guess I'll just throw it out there to say like what needs to happen to see the business get back to kind of that like 50%, 60% flow through within the business?

Yes. I mean, really what you're asking, right, is that margin expansion really probably at least where we sit today, is talking about incrementals that would be in this sort of 50-plus sort of range. And I do think that as we were just talking about sort of how sequentially this year plays out, I do think that you sort of work your way through that front half and create that stability and growth engine as you work your way through Q2 and into Q3.

I think that's when you start to see sort of larger incrementals beginning to build. And then if the behavior of the fleet in comes in as we've sort of talked about, then you're also creating a little bit of flywheel into 2027 as you've got some growth fleet sitting there as dry powder as you work your way into 2027. And so I think you'll begin to see that aspect of the business change as we work our way out of and through this stabilization period of this acquisition.

Excellent. So maybe we'll switch over to the audience response questions here. We're going to have to lose the forklift. All right. So first question here is do you currently own the stock? Yes, overweight, market weight, underweight or no. Once the timer comes up, guys, that's the best time to queue in. All right. About 70% of the room says no.

Moving to the next question. What is your general bias towards the stock right now, positive, negative or neutral? We've got 3 positives here from the 3 management -- all right. It's about split half and half between positive and neutral.

Next question. In your opinion, through cycle EPS growth for Herc will be above peers, in line with peers or below? Okay. About 40% above peers, about 60% of so in line with peers.

Next question, please. In your opinion, what should Herc do with excess cash, bolt-on M&A, larger M&A, repos, divvies, debt pay down or internal investment? Okay. Overwhelming response towards debt pay down, makes sense post the deal.

And then we'll do the last one and come back to this with the team here. But the last question here is around valuation. In your opinion, on what multiple of '26 earnings should Herc trade, and it bands from less than 10x to higher than 21x. That was a long 1 second, right? It was -- about half the room in 13 to 15x band, about 40% in the one right above that actually. All right.

So cash. It seems like the room wants you to pay down some debt. So we're -- so do Larry. So where do we stand with that in terms of the ability to pay down some debt into the balance of this year, getting into that target range? I know you've talked a little bit about it, but you can reiterate that. And then I would be also curious to always have that conversation about free cash flow through the cycle, what the combined business can look like?

Absolutely what the fine business come up like. Yes. So I think we've stated publicly that we would like to be back at the top end of the 2 to 3x range by the end of 2027. We believe that, that is what we will accomplish. And so that is going to be accomplished through one, EBITDA expansion and utilizing free cash flow to pay down debt. So in 2026, sort of the current projection is $400 million to $600 million sort of range of free cash flow. And I think as I sort of think about this business as we sort of walk through this 3-year plan with this acquisition, right? The goal here is sort of as you sort of work your way through that, that you've structurally set this thing up from a scale perspective such that you're probably being -- you're probably free cash flowing, excuse me, in this 10% to 15% range of total revenue. And we think that, that's ultimately sustainable.

That's about where 2026 would play out as well in terms of percentage to revenue. And we think that there could be a little bit of lumpiness of that in terms of fleet acquisition or fleet buy, if we're seeing things a little bit differently. But I think over the over the term, you would think about that as sort of a 10% to 15% range of your total revs.

Great. Well, I think that's a good place to leave it. So Larry, Mark, Leslie, let's join and thank them for being here.

Thank you for attending.

Thank you for standing by. My name is JL, and I will be your conference operator today. At this time, I would like to welcome everyone to the HERC Holdings, Inc. Fourth Quarter and Full Year 2025 Earnings Call and webcast. [Operator Instructions]. I would now like to turn the conference over to Leslie Hunziker, Head of Investor Relations. You may begin.

Thank you, operator, and good morning, everyone. Today, we're reviewing our fourth quarter and full year 2025 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 an open 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 and our annual report on Form 10-K as well as other filings with the SEC.

Today, we are reporting financial results on a GAAP basis, which includes H&E results for June through December of 2025. In addition, we'll be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations to 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 first quarter management meetings at the Barclays 43rd Annual Industrial Select Conference and Citi's Global Industrial Tech and Mobility Conference in Miami, tomorrow and Thursday. Then we'll be back in Miami on March 3 for the JPMorgan Leveraged Finance Conference and last will be attending the JPMorgan Industrials Conference in Washington, D.C. on March 17.

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. 2025 was a truly transformational year for our company. In June, we completed the largest acquisition in our industry's history, a milestone that expands our scale, strengthens our capabilities and accelerates our long-term growth strategy. From day 1, our focus has been on thoughtful integration, moving with urgency where it matters while remaining disciplined in preserving the strengths of both organizations.

I'm extremely pleased with how well the collective team Herc has executed against our integration priorities in the 8 months since closing. Employees across the company stepped up with extraordinary effort and commitment, successfully integrating a transaction of this size, while continuing to serve customers at the highest level, requires focus, collaboration and execution and our teams have delivered.

The integration action taken in the fourth quarter further bolstered the critical work done in the third quarter where we expanded our field operating structure to 10 U.S. regions adding key leadership roles to ensuring operating continuity and scalability, completed a comprehensive sales territory optimization exercise to restructure coverage and transition the acquired branches under Herc's technology stack in record time.

As you can see on Slide 5, during the fourth and first quarter seasonal shoulder periods, we've continued our focus on 4 key priorities to complete the integration of the acquired assets. This work positions us to ramp into peak season from a new, stronger foundation, allowing us to execute more effectively and drive accelerated growth in the back half of the year.

First, the branch network optimization. One of our core integration priorities is expanding specialty solutions capabilities across a combined network to support the cross-selling opportunities created by the acquisition. We've made great progress selectively consolidating general or rental equipment within facilities in the same market to open up space for stand-alone specialty branches while in other general rental locations, we're adding specialty fleet to expand branch capabilities.

Through these actions, we'll increase the number of stand-alone or co-located specialty branches by approximately 25%. As of the fourth quarter, we have completed 80% of the planned branch optimization, which will be finished next month. Integrating the fleet was another critical milestone following the acquisition. Right out of the gate, we began a comprehensive restructuring of the combined assets, addressing size, age, category classes and brands to ensure alignment with customer demand and market opportunities.

By year-end, the fleet was realigned with the right equipment in the right locations. This positions us well as we move through 2026 with a stronger product portfolio and enhanced flexibility while setting us up to be able to improve time utilization as we scale our sales force and as demand evolves seasonally across regions and end markets.

Along that vein, sales force's simulation is showing good progress. Integrating the sales organization has been a major focus since the transaction closed. We've been scaling the sales team to align with larger market opportunity while investing in training, leadership support and deeper adoption of our CRM systems, sales models and our broader fleet offering. We're now seeing improvement in proficiency across the go-to-market strategy and pricing systems, which is beginning to translate into more consistent execution, better customer engagement and early cross-selling success.

Productivity improvement and cost efficiencies across the entire organization are the fourth area of focus. By operating from unified systems and aligning to standardize processes, we're already recognizing meaningful results. On a pro forma basis, employee productivity increased year-over-year in 2025. New team members across the organization are becoming more adept on our logistics and operating systems resulting in more consistent execution.

And we're leveraging Herc's broader fleet offering to capture synergies by reducing external sourcing and bringing rerent activity back in line with our historical levels. As a result of these actions and the progress we've made in eliminating redundant costs, optimizing procurement and streamlining corporate functions, cost synergies are now tracking ahead of plan.

On Slide 6, equally important to our integration success is our unwavering commitment to safety across the combined organization. Safety is at the core of everything we do. And as an immediate priority, we onboarded 2,500 new team members into our health and safety program in the second half of last year. Our major internal safety program focuses on perfect days and we strive for 100% perfect days throughout the organization. In 2025 on a branch-by-branch measurement, all of our operations achieved over 97% of days as perfect. Also notable, our total recordable incident rate remains better than the industry benchmark of 1.0, reflecting our high standards and commitment to safety of our people and our customers.

As we continue to work through the integration of H&E, we are following the same playbook that has served us well over time, positioning the business to perform across the cycle and generate sustainable long-term growth. While there's still work to do, the progress we've made to date gives us confidence that the combined company is on track to deliver the operational and financial benefits of a large-scale acquisition while accelerating our strategic growth plan which is summarized on Slide 7.

Over the course of the last year, we made meaningful progress expanding our footprint through the acquisition and strategic greenfield openings, adding scale and gaining share in key geographies. We also continued to direct a greater portion of our gross capital investment toward higher-return specialty fleet supporting revenue synergies and advancing our goal of increasing specialty as a percentage of our total fleet.

At the same time, we strengthened our digital capabilities to maintain our market leadership in innovation and support of our customers' productivity. Our digital revenue grew by more than 50% last year, with hercrentals.com, giving our customers an easy way to reserve gear 24/7. Our acquired customer base has full access to ProControl and is already using it to order equipment, managed fleet and handle account activities. And when it comes to telematics, today, approximately 80% of eligible gear is equipped, providing utilization and performance metrics to help reduce downtime and drive job site efficiency, all visible within our ProControl system.

Further, our E3OS business operating system continues maturing, helping to drive greater consistency and efficiency across the organization for our customers. Throughout all of this, capital discipline remains a management comparative. We are investing responsibly prioritizing returns and strengthening the foundation of the business while integrating a transformational acquisition and sharpening our strategic focus.

Now I'll turn the call over to Mark, who will take you through the recent financial performance and 2026 guidance and then Aaron will talk about macro trends and operating initiatives supporting our growth plans for this year. Mark?

Thanks, Larry, and good morning, everyone. I'm starting on Slide 9 with a summary of our key financial metrics. For the fourth quarter, on a GAAP basis, equipment rental revenue was up approximately 24% year-over-year, driven by the acquisition of H&E, strong contributions from mega projects and sales of specialty solutions.

Adjusted EBITDA increased 19% compared with last year's fourth quarter, benefiting from the higher equipment rental revenue as well as 53% more used equipment sales. The increase in used equipment sales which have a lower margin than the rental business impacted the adjusted EBITDA margin. Also affecting margin was lower fixed cost absorption as a result of the ongoing moderation in demand in certain local markets where H&E was overweighted as well as acquisition-related redundant costs preceding the full impact of cost synergies.

REBITDA, which excludes used equipment sales was up 17% during the fourth quarter. The EBITDA margin was 45% and impacted year-over-year by the lower-margin acquired business. Margin improvement will come from equipment rental revenue growth, a shift over time to a higher-margin product mix and a return to selling used fleet through the more profitable retail and wholesale channels as well as delivery of the full cost synergies and improved variable cost management from the increased scale.

Our net income in the fourth quarter included $14 million of transaction costs primarily related to the H&E acquisition. On an adjusted basis, net income was $69 million or $2.07 per share. For the full year, our results were reasonably aligned to our early expectations. In any large-scale acquisition, integrating the acquired operations and acclimating new team members is a phase in ongoing effort. It takes time to get a clear read on the pace and effectiveness of change.

But after 6 months, we have better clarity, and I like where we sit. Using a baseball analogy, in addition to many singles and doubles the teams delivered in a short period of time, there have been some home runs in key areas like cost management, systems transfer and fleet optimization.

Let me take a minute to walk you through how our fleet optimization plan has evolved and what that means moving into 2026. If you turn to Slide 10, in just 6 months, we rebalanced our combined fleet by market to drive capital efficiency and set the stage for improving fleet productivity. At the same time, we made initial targeted investments in specialty equipment to unlock revenue synergies, ensuring we're not just leaner, but also more capable and better aligned with high-value opportunities.

In the second half of 2025, fleet expenditures were roughly 22% higher than the second half of 2024 and fleet disposals at OEC were 65% higher. Overall, for the full year, 2025 expenditures were flat year-over-year while full year disposals increased 67%, reflecting the acquisition fleet realignment. Of the $342 million of disposals in the fourth quarter, realized proceeds were 44% of OEC, up from 41% in Q3 2025 as more equipment was sold through the higher return wholesale and retail outlets in the last quarter of the year compared with the third quarter.

With the enormous amount of work done last year to optimize the fleet, including significant investments in synergy fleet, this year we shift our focus from rightsizing fleet to extending the average age of the younger acquired fleet and improving utilization. We expect to be able to address the growing demand in national and regional accounts and specialty solutions while meeting our 2026 revenue synergy goals with increased capital efficiency.

On that topic, let me quickly run through capital management on Slide 11. Here, you can see that we generated $521 million of free cash flow, net of the transaction costs for the year ended December 31, 2025. Our current pro forma leverage ratio was 3.9x -- 3.95x, which is in line with our expectation as H&E's 2024 quarters roll out of the trailing 12-month calculation. We still expect to return to the top of our target range of 2 to 3x by year-end 2027 as revenue and cost synergies drive higher EBITDA flow-through.

On Slide 12, you can see our initial 2026 guidance. Our plan is to invest roughly $950 million of gross CapEx at the midpoint of that guide. That, combined with a significantly lower level of dispositions this year would bring net CapEx to approximately $650 million at the midpoint relatively flat with last year. Our fleet plan is aligned to generate rental revenue growth of 13% to 17% this year.

As you would assume, given the significance of the H&E acquisition in June 2025, the rate of growth slows on a GAAP basis from 1Q to 2Q as the second quarter has 1 month of the H&E acquisition in its base. On a pro forma basis, quarterly revenue and fleet metrics improved sequentially from negative to positive growth from first half to second half, driven by higher fleet efficiency and utilization as we work through the seasonal shoulder period and build into the peak season.

After we cross over the acquisition anniversary, results in the third and fourth quarters will be measured against comparable periods in the prior year. While our business has stayed front-loaded revenue dissynergies in 2025 versus the original plan, our goal for generating roughly $390 million of gross revenue synergies through 2028 hasn't changed. Capturing the revenue synergies will happen over time as fleet investments take hold, the new specialty branches mature, annual contracts renew at higher values and the local market recovery supports increased customer demand and improving spot rates.

For 2026, we're forecasting incremental revenue synergies of approximately $100 million to $120 million. Cost synergies are running ahead of expectations and we expect to recognize the total of $125 million of cost synergies in 2026, supporting EBITDA margin improvement across the rental revenue guide.

We estimate adjusted EBITDA will be between $2.0 billion and $2.1 billion, representing profitable growth ranging from 10% to 16% as cost synergies are delivered and fleet productivity improved throughout the year. The higher return specialty revenue gains momentum in the back half. This is partially offset by the lower sales of used fleet year-over-year. And finally, we're guiding to another year of free cash flow in the range of $400 million to $600 million.

With that, I'll turn the call over to Aaron, who is going to walk through the macro and operational drivers behind our outlook.

Thanks, Mark, and good morning, everyone. We entered 2026 as one team, one company and one of the leading equipment rental businesses in North America. The hard work of bringing our companies together is largely behind us. The work ahead is about fully realizing the value of our integrated team, capturing synergies, optimizing our new stronger foundation and translate scale and capability to consistent performance and results.

Turning to Slide 14. This year, our priorities are clear. First, we plan to complete the integration by the end of the first quarter. The execution on the branch network optimization plan has been best-in-class. So I'm confident all the 50-plus additional specialty locations will be staff, fleeted and open for business as we move into the peak season. We're starting to see stronger contributions from the new sales professionals and will continue supporting their efforts, so they are on a good trajectory as demand picks up.

At the same time, scaling our sales force for our larger company is a priority to ensure we've got the resources we need to execute our plan and execution remains the top focus. We have a defined go-to-market strategy that all of our sales professionals have been trained on. We measure progress against that weekly. As you know, what gets measured to drive performance. We're tracking data on revenue synergies, customer recovery programs and cost synergies around maintenance and transportation, among other things.

In addition to weekly meetings at the regional and district level, Mark and I have been on the road getting in front of the teams for [ singer ] report outs and helping to prioritize solutions for any pain points. The engagement level in the field is really strong which gives me confidence in the next phase of value creation.

Last year, we invested over $100 million of capital specifically to capture the early revenue synergies from this transaction. with a significant portion directed toward expanding our specialty fleet. That investment is now being put to work across a larger customer base and provides a full year run rate benefit as we move through 2026 and into 2027.

As we deploy specialty fleet into our larger specialty location network and continue to expand the sales force's offerings, we expect to drive incremental revenue synergies. Our [ surety ] lines generated double-digit rental revenue growth in December. So we're seeing the progress, and it's clear that the product training, team selling approach and shift to solution selling are starting to pay off. We believe we are well positioned as we move from integration into the acceleration phase. The fundamentals of the combined company are stronger. The team is executing with increasing focus and urgency and our markets are stable.

Turning to Slide 15. The resiliency of our business model remains supportive as mega project activity continues to be robust and the shift from equipment ownership to rental offers plenty of opportunities for specialties penetration. In the local market, we expect 2026 will be relatively neutral to 2025 with government, infrastructure, MRO and institutional construction demand offsetting the still moderate commercial sector.

On the national account side, funding for new large-scale projects is still robust. Mega project activity in 2025 and was centered around manufacturing, LNG, renewables and data center growth. We are winning our targeted 10% to 15% share of these project opportunities with even more new mega projects on deck and current projects still ramping up.

In 2025, local accounts represented 51% of rental revenue compared with 49% for Nashville accounts. As a combined company, we'll continue to target a 60% local and 40% national revenue split long term, knowing that this diversification provides for growth and resiliency. The scale we've gained through the acquisition bolsters our ability to respond to near-term trends in local markets while also leveraging efficiencies to prepare for the start of a cyclical recovery but it's important to remember that a pickup in local demand typically lags interest rate reductions. With that in mind, for 2026 we're being thoughtful and disciplined in our planning, balancing our short-term responsiveness with long-term readiness.

Turning to Slide 16. In a disproportionate demand environment like the one we're operating in today, diversification is an important strategy for fostering sustainable growth and navigating economic cycles. As Herc is diversified into new end markets, geographies and products and services over the last 9 years, we have reduced our reliance on a single industry or customer. We become more resilient to downturns and more adaptable to emerging opportunities like the mega project developments, technology advancements that support customer productivity, and the sector shift from ownership to rental.

We believe we are well positioned to manage dynamic markets and the acquired scale further bolsters our capacity and therefore, our opportunities. Sticking with the topic of resiliency. Let's turn to Slide 17, where you can see that despite the uncertain sentiment in the general market around interest rates, industrial spending and nonresidential construction starts still show plenty of opportunity built on a foundation, a mega project development and infrastructure investments.

Taking a look at the updated industrial spending forecast at the top left, strong capital and maintenance [ bidding ] is projected through the end of the decade with a 4% increase in 2026. [ Todd's ] forecast for nonresidential construction starts in 2026 is estimated at $473 billion, a 1% increase year-over-year with 5% to 7% growth continuing in successive years. Additionally, the mega project chart in the upper-right quadrant gives you a snapshot of the total dollar value in U.S. construction project starts over the last 3 years and an early projection for 2026 that reflects another $573 billion of investment. I expect that number to grow as more projects get assigned a start date as there is a $1 trillion pipeline that is working through the planning stages.

As a result, we estimate we are only in the early to middle innings of this multiyear opportunity. Finally, there's another $369 billion in infrastructure projects estimated for 2026 after a record year in 2025. That's down slightly year-over-year because of some very large project starts last year as well as some volatility around funding, but infrastructure construction activity is expected to remain steady at strong levels through the end of the decade. Of course, there are some overlap in projects among these 4 data sets. But no matter how you look at it, for companies with the safety record, scale, product breadth, technologies and capabilities to service customers at the local, regional and national account level, the opportunities for growth remain significant.

In closing, I want to thank our team for their extraordinary efforts during this transition our customers and shareholders for their continued trust and support. We are confident that the steps we are taking today will enable us to deliver sustainable long-term value as we move forward together. With that, operator, we'll take our first question.

[Operator Instructions]. Your first question comes from the line of Mig Dobre of Baird.

My first question is a bit of a clarification on the guidance. So we've got $235 million, I believe, in additional EBITDA relative to 2025. Is there a way to maybe give us a little bit of a bridge here in terms of how this additional $235 million is being generated? How much of this is from the incremental savings that you have from synergies, integrating the businesses?

Maybe obviously, there's a little bit of a carryover from H&E for 5 months of the year that, that business wasn't in your P&L in 2025. And I'm sure there are some other moving pieces there, too.

Yes. So a few things, Mig. So if you think about my prepared remarks, I said that we expect the cost synergies to be in their entirety for 2026. So that's a cost synergy increase or EBITDA increase of about $125 million, then you sort of take the other piece of that, which is the revenue synergies, which I said was going to be in the neighborhood of $100 million to $120 million.

And that would then have an EBITDA flow-through in the 60% to 70% range. So you're sort of talking about incremental EBITDA of $60 million to $70 million from a revenue synergy perspective. So those are the 2 big bridge components between the 2 years. And then obviously, if you're looking at this on a GAAP basis, you're going to have 5 months of EBITDA contribution from a comp perspective as you work your way into June of 2026 as well.

And would you be able to help me with that last component in terms of what's incremental for those 5 months, the EBITDA?

Well, I mean, I think if you're talking about it from a GAAP perspective, right, you're going to have an increase of something more like EBITDA would go from about [ $1.8 million ] to a midpoint of between [ 2% and 2.1% ]. So the incremental without getting to pointed, I think you just have sort of the run rate coming out of 4Q is going to be negative, as I said, on a pro forma basis, and then it's going to work its way sequentially and year-over-year improvement as you work your way through the year.

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

Mark, I just wanted to touch on how we should think about the cadence of dollar utilization as we move through the year. The first quarter, in particular, maybe just some help just given some of that color you gave on the this pro forma performance. I mean should we assume something more than normal seasonality quarter-to-quarter from 4Q to 1Q?

And then maybe at the midpoint of that guide, would you expect LOU to be could it get over 40% in the second half of this year?

All right. Let me pull that apart a little bit. I think -- and I'll answer this from a pro forma perspective, and so from a pro forma perspective basis, you would anticipate negative pro forma 1Q year-over-year from a dollar perspective. And then the rate of that decline improves as you work your way out of the shoulder period, Ken, and then you would look for improvement sequentially and year-over-year as we work ourselves through the peak season and back half 2H in totality.

So with that, our top-end performance from a dollar view perspective in 2025 was 40 points in the third quarter. Based on what I just said, the anticipation is you would be above that 40 seasonally in the back half.

Yes. Okay. That helps. And then maybe I know you're expecting the fleet disposals should be lower versus last year. I guess maybe the question here is, help us think about what fleet sales could look like this year? Or maybe if there's a way to help us think about what the midpoint kind of implies for total OEC exiting the year at the midpoint?

So let's stick with the disposal side of it. I think that we've got line of sight to give or take $700 million of disposals. So a pretty significant decrease year-over-year with the intent of sort of aging the fleet out to something that looks more like a historical average age for Herc Rentals. And with that, I think you'll see mid-40s from a disposal to proceeds to OEC, which would probably run you into the 30s, give or take from a margin perspective on that used equipment activity, Ken.

Your next question comes from the line of Kyle Menges of Citigroup.

Maybe we could start and just I'd love to hear a little bit more color on the revenue synergies, that $100 million to $120 million you're targeting for 2026 and what's embedded in there and just your visibility to achieving that as well.

Yes, Kyle, this is Aaron. Well, there are several areas in there. I'll take you back in time a little bit. We've got a broader breadth of fleet that we're pushing into the acquired branches. That's part of the revenue synergy. If you recall, we had roughly 6,000 more cat classes that we're pushing into that network so that our sales teams can generate revenues off of those. And [ minicars ], got our specialty businesses. And as you heard in the remarks, we're opening up 50 new specialty locations. Those will be up and running. 80% of them are done now. The rest of them will be up and running over the next month. And that grows our network specialty locations by 25%.

So those are 2 big components. We need the -- there's a pricing component in there, too. We've or our own pricing tool that we use for our sales force. And we've assimilate that into our new sales team, and that's going to help kind of move the needle on that over time. We're not expecting that to be like a 2026 big move, but over time over 3 years of our synergy run, that's where we're going to get that. So those are the big components that are in the revenue synergy to get for us.

That's helpful. And then just on the mega projects, it would be helpful to hear what you're seeing as far as competitiveness to get on these projects and how you are winning? And then you talked about getting that 10% to 15% share that you've targeted. I'm curious just if there could be some upside to that as you're integrating H&E.

Yes. Right now, we've -- as we said, 10% to 15% share on the mega projects, we're right at that midpoint. Our goal is to kind of move that to the upper end. The activity on the mega project landscape is very robust. So you asked about competitiveness. It really comes down -- these are mission-critical jobs that the contractors are operating in. And they need to have a trusted supplier to make sure that these mentioned critical pieces or a function of the way they're supposed to.

We measure our position kind of as a primary or secondary player, not just measuring how many pieces we have on the landscape overall on the mega projects. But the competitiveness has really been very stable, I would say. When I mentioned the word mission-critical, what I'm talking is about the ability to execute the safety protocols they need, the technology that's required for the project.

There's a big specialty component that goes in to these projects. You have to have the capabilities and solution selling to provide the right solutions and provide it in an economic fashion that the customer can realize to the benefit of the project. So it's a complex landscape, but it's not more competitive and we feel like we're in a really good position.

And then the expanded network of our H&E locations really allows us to scale that even further to our customers. And we've seen benefits from the new scale all through the back half of 2025. And it really makes us even more competitive as a player solution provider as we roll into '26.

Your next question comes from the line of Neil Tyler of Rothschild & Co Redburn.

Just wanted to actually first of all, follow up on that question and maybe ask you, Aaron to talk a little bit about the sort of softer factors that you need to put into place to realize those synergies in terms of training around extended cat classes, the specialty business and how you're confident that the employees can appropriately push those into customers in order to for the new specialty locations to reach maturity, for example?

And then the second question, I wonder if you could talk a little bit, Mark, about the assumptions aside from the synergy component of rate, the other assumptions or expectations around rate progress this year and also anything within the sales mix. I'm thinking in my mind about the sales bridge within the mix that might contribute to the '26 on '25 moves.

Okay, Neil. I'll take the first part. If you lean in on the softer side of achieving those synergies, it's a few components. One is expanding our footprint, 50 new locations certainly helps kind of get it into markets where we might not have been as dense that H&E helped us. So that's a big piece of it. And leaning into providing the capital to deploy in those new 50-plus markets as well as our existing specialty network that we already have.

We started that last year, as I said, to get to kind of the early beginnings of the synergy story, and we'll do that again as we roll through 2026. I think what is interesting, and I want to kind of underscore is that we have a very large sales team now. We don't need our new sales professionals to be experts of specialty. We need them to know how to ask the right questions of their customers, and then they can bring in one of our subject matter experts in specialty to help kind of solution sell that. And that's really what we're teaching our new team to do.

Of course, we're taking them through product knowledge, awareness and bringing them into our locations to show them the different offerings they have now. And then, of course, we also highlight the compensation piece of this and how they can kind of yield up on their compensation by selling into the specialty business. So we have grown our specialty team by these 50-plus locations, but we also already expanded our SMEs that are out there and our specialty sales reps that are out there to help get this all done.

We've seen some early success with some of the general rental fleet that we introduced, right, because this is some of the stuff that [indiscernible] didn't have in their portfolio. And a lot of those new salespeople, they really we're able to grab that pretty quickly and put that on rent. The specialty piece is just another element of this. And it is kind of the softer side. So it takes a lot of our thought and planning. But we don't need our new salespeople to be experts. That's the key thing. They can lean into the operational excellence and our sales teams on the specialty side to get that done.

And then Neil, in terms of sort of forming a bridge, if you will, from a revenue guidance perspective, I think if you're sitting at the top of the guide, you would think about that as sort of rev synergies on target, continued mega growth, pricing slightly positive year-over-year and local markets stable, meaning sort of low single-digit growth. I think as you walk off at the top of that guide down, the biggest swing factors in that would be market demand and price.

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

I wanted to ask a follow-up question on specialty. I think you increased the footprint by 25%. That's very impressive. I wanted to understand what's the go-to-market strategy for specialty with the existing general rental customers. Can you offer some examples of stories where you saw a quantifiable uptick in total rental volume from a particular customer once they began taking specialty from you, but we're not taking in the past? Any quantification would be helpful unless it's too early to comment on this.

No. So as I mentioned, if you just take a look at the past 6 months of 2025, we already had roughly 150 specialty locations in our network in HERC. And so we quickly connected with the sales team on the H&E side to identify opportunities. And with human nature, the sometimes there's early adopters that kind of lean into it and are excited that there's a new opportunity to go rent something they couldn't rent before. So there was a lot of opportunities in Q3, Q4 that came in for our power generation business that's under our ProSolutions umbrella as well as our pump business. The trench opportunities are starting to escalate now. That's a little bit of a different sales cycle.

But we had a lot of those happen in the third and fourth quarter, which really helped us kind of absorb some of that capital that we deployed early on because we knew that, that was going to be something we want to get the wheels turning on fast. So as we roll into 2026, now we go from 150 roughly specialty locations to 200 and a bigger sales force and some more fleet being deployed, a larger specialty subject manager expert team. We really like where we are positioned here at the beginning and I think the specialty story for Herc Rentals is going to be a solid one. As we progress through the year and these other 50 locations kind of get up and running as we get into the second half of the year.

Understood. That's helpful to know. And a question on the CapEx guide. Can you give some color on how to think about gross versus net CapEx as the year progresses, the 4 quarters versus the 4 quarters of last year?

Yes, Tami, this is Mark. So I think really, you get 2 components here, right? You sort of have $700 million, give or take, of fleet that will be disposed of needs to be rotated out will be rotated out. And then on the flip side of that, if you're just sort of running this down the middle, you've got about $1 billion, give or take, of gross CapEx spend.

I don't necessarily view -- it has maintenance versus growth because there's probably mix shift. There will be mix shift in the disposed items as we bring it back on board. So really, we're thinking about sort of being more capital efficient with the next $1 billion of fleet that we're bringing in sort of across the gene landscape as well as the specialty landscape as we work our way through Q2 and Q3, which will hold about 65%, 70% of those fleet adds as we walk through the year.

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

Good morning, guys. This is [ Evan ] on for Jerry Revich. Just had a question on general rental. We're seeing really strong demand for earthmoving equipment, but aerials are lagging. Are you seeing that disconnect? And is that a function of large projects and data centers being less aerials intensive?

No, I would say the earthmoving -- there's 2 categories in earthmoving, one is kind of excavators and ones compact earth and then aerial. Those are all -- as you go through the winter period, it's pretty much what we thought it would be. Of course, we did a lot of kind of fleet optimization in the back half of the year.

But one area you do see it is in the used equipment market, where the excavator earthmoving product kind of had bottomed out and the values are starting to go north a bit again. from the trough, whereas aerial hasn't really made be troughed out, I should say, hasn't turned back up. It's kind of been bouncing along this trough period. So what's interesting is right after the business came back up the pandemic, the excavators were the ones that went down the hardest in the used equivalent market.

So I think you're just seeing a natural kind of balancing of fleet and demand in the used equipment market. But on the rental market, it's all pretty much where we think it should be for this time of year. And your question about big projects, the similar part of that typically takes very, very large equipment, some of it not equipment that we carry in our earthmoving fleet, but the aerial demand in a mega project is pretty large.

Got it. Understood. And then on 4Q dollar utilization down quarter-over-quarter, how do we think about the moving pieces, rate mix time utilization? And how do we think about that into 1Q?

Well, I think I would say reasonably speaking, the back half collectively sort of met our expectations from a dollar perspective. I don't think that the sort of fall off from 3 to 4 with anything that we didn't necessarily anticipate. I think as you take that into Q1 and you're looking at that on a year-on-year basis, I do believe that from a pro forma perspective, your dollar utilization will be down Q1 to Q1 and then build and the rate of decline improves as you work your way out of the shoulder period.

The other piece of that just is 2024 had a hurricane in it, which was worth about 3 points of growth to us. And obviously, that mix of gear to sort of service an emergency or hurricane need is very specialty intensive, which also drives dollar utilization.

Your next question comes from the line of Rob Wertheimer of Melius Research.

My question is around mega project profitability. And you touched on this earlier, obviously, discussion around competitiveness. But you're winning an outsized market share versus your traditional market share capabilities, as you touched on, are different for large projects, you add more value are margins higher or lower there because it looks like from industry results that margins aren't higher as the mix goes up and mega projects and margins don't go up.

Rob, typically, when you get started on a mega project, it depends what's going in first, right? Is it a bunch of specialty equipment or is a bunch of general rental equipment. It's a bunch of -- if it starts with general rental equipment, Yes, as we've said before, you're getting the benefit of volume, but your -- the rental rate is a little bit more competitive.

And so you want a project that allows you to get special equipment in at the midpoint, all the way through the rest of the project. And then it becomes a very -- a typical margin business for us. That's been our history in the past and it currently is as well. Now if you start the project with a lot of specialty equipment, your margin can move up pretty quickly depending at what point you inflect and get some general rental equipment.

And these projects for us, at least they've started these 2 different ways, right? Sometimes our specialty solutions is kind of our entry point. And sometimes our location, our relationship and our general rental scale is our entry point but one thing for sure is that all projects typically use a big chunk is general rental and a big chunk of specialty depends what comes first. But the margin always end up -- if you talk about a 3-year project, always ends up like the rest of our business.

Perfect. Okay. And then just on the kind of sequential from 3Q to 4Q move, fleet growth is still ahead of rental revenue growth by about the same amount. You need that trade shoulder period where you have kind of lower seasonality, I guess, in 1Q, especially a couple of times. Is there anything with the mix that was kind of hurting you as you move into 4Q and 1Q? Or are you just sort of saying when you get more volume back overall, you'll be able to sort of see the effects of the management you've done?

No, that's a good question. There's certainly an element of time utilization in that ultimate dollar [indiscernible], right, stabilizing that acquired fleet as we worked our way through the back half of the year, the fleet actions that we took, I think, Rob, as you think about 2026, you will have improving fleet efficiency as you work your way through the year and the intent would be that your rev growth would outpace your fleet growth as you get into the seasonal component of 2026.

Your last question comes from the line of Sherif El-Sabbahy of Bank of America.

I just wanted to a bit of a finer point on outlook. You've outlined about $230 million of EBITDA expansion. Within that, there's about $190 million of synergies contributing to that. And you've mentioned positive pricing, stable local markets, a bit of growth in mega projects.

If we think about the lapping of H&E in Q1, it seems to account for the remainder of that $40 million expansion. So can you help me kind of reconcile some of that commentary on markets with the EBITDA guidance?

Well, I mean, I think if you're looking at it from a pro forma perspective, Sherif, you will be down Q1 year-over-year, right? We're sort of walking into the year, if you want to adjust the hurricane out of 4Q 2026, you're walking into the year down minus 6%. And so the sort of forecast is you're going to be down Q1 and then begin to come out of that as you exit the shoulder period of Q2 and then ramping into sort of growth in the back half of the year, which sort of coincides with all of the incremental synergy fleet, et cetera, rolling into these optimized branches as you work your way through and out of the second quarter.

With no further questions, that concludes our Q&A session. I'd like to now pass it back over to Leslie for closing remarks.

Thank you for joining us on the call today. We look forward to updating you on our progress in the quarters to come. Of course, if you have any further questions, please don't hesitate to reach out to us. Have a great day.

This concludes today's conference call. You may now disconnect.

Hello, and thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to Herc Holdings, Inc. Third Quarter 2025 Earnings Call and Webcast. [Operator Instructions] Now I would like to turn the call over to Leslie Hunziker, Senior Vice President, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Today, we're reviewing our third quarter 2025 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 an open 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 in our most recent annual report Form 10-K, as well as other filings with the SEC.

Today, we're reporting our financial results on a GAAP basis, which include H&E results for June through September in the 9-month period for 2025. In addition, we will 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 the Baird Industrial Conference in Chicago on November 11, Redburn Atlantic Virtual CEO Conference on December 2, and the Melius Research Conference in New York on December 10. This morning, I'm joined by Larry Silber, President and Chief Executive Officer; Aaron Birnbaum, Senior Vice President and Chief Operating Officer; 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. I want to start by thanking all of Team Herc for their incredible energy, focus and commitment throughout the third quarter. Integrating the largest acquisition in our industry is no small feat, but our team has truly risen to the challenge, driving alignment, accelerating progress, supporting one another, and accomplishing a large systems migration, all while remaining focused on scaling operations in a mixed demand environment.

We continue to see robust activity across mega projects and specialty solutions, underscoring the strength of our strategic positioning. In the local markets, growth is limited as new projects in the commercial sector remain on hold due to the high interest rate environment. In this bifurcated landscape, our scale, advanced technology platform and diversification across geographies, end markets and product lines continue to be competitive advantages is enabling us to operate with agility and resilience. At the same time, we're executing against our integration road map with discipline, speed and a clear focus on unlocking both cost and revenue synergies within our 3-year time frame.

Let's now turn to Slide #5 for an update on our progress. Since closing the transaction, we expanded our field operating structure from 9 to 10 U.S. regions, reorganized districts and added key leadership roles to ensure operational continuity and scalability. Our regional vice presidents and field support staff continue to relentlessly manage change and support our teams for growth.

Early on, we completed a comprehensive sales territory optimization exercise to restructure coverage and deepen customer relationships given our much larger scale. And we equipped our new sales team members with a broader product offering and expert product support. They are now undergoing training on enhanced market and customer analytics and customer engagement tools. Together, these initiatives will further improve retention and strengthen the capabilities and execution of our sales force.

Equally important in the quarter, we completed the full systems integration. We got this done in just 90 days, compared to a typical time line of 6 to 18 months for companies of a similar size and complexity. This accelerated execution reflects the strength of our internal capabilities, disciplined planning and deep experience with enterprise technology deployments. This integration included an enterprise platform consolidation, where we transitioned the H&E branch operations from SAP to our customized rental and front end system, and Oracle ERP framework.

Our proprietary pricing engine also is now fully integrated with centralized controls in place to ensure consistency, protect margins and align pricing decisions with our broader business goals. Our logistics system called [indiscernible] is also now operational across the expanded network to improve delivery accuracy and optimize route planning at the lowest possible cost. As we deployed our business intelligence suite across the acquired locations, giving us real-time visibility beginning this month into combined performance metrics, customer behavior and operational KPIs.

Finally, our industry-leading customer-facing technology, ProControl by Herc Rentals is now available to our entire customer portfolio, enabling equipment renting, tracking and asset management and control from any device anywhere. We view these systems integrations not just as a technical milestone, but as strategic enablers. They're going to allow us to scale faster, operate smarter and deliver more value to our customers and shareholders.

The systems alignment marks a turning point. For the first time beginning in the fourth quarter, we have full visibility into our combined business and are now positioned to analyze the operations at a more granular district and branch level. Specifically this quarter, we're drilling down into three key areas. First, productivity. We're using the data to benchmark performance, lagging underperforming locations for deeper review and identifying top-tier branches where we can replicate best practices to drive operational improvement across the organization.

Second, expense management. We want to pinpoint additional variable cost saving opportunities, discontinue activities that do not align with our strategic priorities, and eliminate inefficiencies at the local level. And third, fleet management. After having conducted a full audit of our combined equipment assets in the third quarter, we made good progress of disposing underutilized, off-brand and aged acquisition fleet. Aaron will share some of those details. But our focus on fleet management is ongoing as we rebalance our portfolio to match demand patterns, optimize mix and support scalable growth.

Another way we're scaling the business for 2026 and beyond is by optimizing our network footprint. We've undertaken a market-by-market analysis of our combined branch locations with a goal of reducing redundancies and enabling better product allocation to further strengthen our market presence. Over the next 6 months, we expect to consolidate some general rental branches for cost and operational efficiencies. We'll repurpose certain of those branches into stand-alone specialty equipment locations. In other instances, we'll further expand access to our specialty solutions by co-locating specialty equipment within existing general rental facilities.

These initiatives are expected to result in about 50 additional specialty locations, increasing our specialty network by 25% next year and supporting accelerated growth in these high-margin product categories. Overall, we're making excellent progress on the integration. Our teams are getting acclimated. Our systems are unified. Our customers are already seeing early benefits. We remain confident in our ability to deliver the full value of the acquisition both in terms of cost efficiencies and accelerated growth while continuing to deliver on our long-term growth strategies, which are outlined on Slide #6.

As we said, integrating this acquisition is our primary focus, and therefore, we have paused other M&A initiatives for the time being, and are completing the remaining in-flight greenfields. Year-to-date, we added 17 greenfield facilities, of which 6 were opened in the third quarter, and we have roughly 10 more new location openings planned for the fourth quarter. Capitalizing on the secular shift from ownership to rental, particularly in the specialty market, and yielding greater value from mega projects through specialty solutions is a key focus for us.

Further cross-selling specialty gear is an important component of the revenue synergies with H&E. In line with this strategy, we've continued to over-index our gross CapEx plans towards specialty, with the goal of increasing this category as a percent of our overall fleet composition long-term. And of course, re-purposing general rental branches into ProSolutions facilities, as I just mentioned, will support specialty equipment capacity for the 160-plus acquired locations.

Finally, we continue to elevate our industry-leading ProControl by Herc Rentals technology offering with new efficiency features and controls, seamless navigation and tailored experiences all in a single app, addressing our customers' more complex and expanding needs. While we work through the integration of H&E, we'll continue to follow our playbook. Leveraging branch network scale, our broad fleet mix, technology leadership, and capital and operating discipline to position us to manage across the cycle and generate substantial growth over the long-term. We are committed to our goal of becoming the supplier, employer and investment of choice for the equipment rental industry.

Now I'll turn the call over to Aaron, who will talk a little bit more about operating trends, and then Mark will take you through the third quarter financial performance and outlook. Aaron?

Thanks, Larry, and good morning, everyone. As we continue executing on this important integration, I also want to personally thank our teams for their incredible commitment and perseverance. Whether navigating change, supporting integration efforts, or pushing forward on growth initiatives, their resilience and focus have been exceptional. They have continued to show up for our customers, for each other and for the future we're building together. That dedication is what drives our momentum and it's what sets team Herc apart.

Equally important to our success is our unwavering commitment to safety. Safety is at the core of everything we do and is an immediate integration priority. We onboarded 2,500 new Herc team members into our Health and Safety program in the third quarter. As you can see on Slide 8, our major internal safety program focus on perfect days. We strive for 100% perfect days throughout the organization.

In the third quarter, on our branch-by-branch measurement, all of our operations achieved at least 97% days as perfect. Also notable, our total recordable incident rate remains better than the industry's benchmark of 1.0, reflecting our high standards and commitment to the safety of our people and our customers.

Turning to Slide 9. We're operating in a disproportionate demand environment, where the local market remains affected by interest rate, sensitive commercial construction, while mega project activity continues to be robust. In the third quarter, local accounts represented 52% of rental revenue compared with 53% a year ago on a pro forma basis. On the national account side, private funding for new large-scale projects is still quite robust.

We kicked off several new mega projects in the third quarter as the push for restoring manufacturing, along with increases in LNG export capacity and the expansion of artificial intelligence are continuing to drive new construction demand. We are winning our targeted 10% to 15% share of these project opportunities with even more new mega projects on deck and current projects still ramping up. As a combined company, we'll continue to target a 60% local and 40% national revenue split long-term, knowing that this diversification provides for growth and resiliency.

Sticking with the topic of resiliency, let's turn to Slide 10, where you can see that despite the uncertain sentiment in the general market around interest rate -- interest rates and tariffs, industrial spending and non-residential construction starts still show plenty of opportunity for growth, built on a foundation of mega project development and infrastructure investments.

Taking a look at the updated industrial spending for forecast at the top left, industrial info resources is projecting strong capital and maintenance spending through the end of the decade. Dodge's forecast for non-residential construction starts in 2025, is estimated at $467 billion, a 4% increase year-over-year, with 3% to 6% growth continuing in each successive year. Additionally, the mega project chart in the upper right quadrant gives you a snapshot of the total dollar value and U.S. construction project starts over the last 2 years, and a growth projection that exceeds $650 billion for 2025.

We estimate we are only in the early to middle innings of this multi-year opportunity. We don't take the chart out beyond this year because visibility is less clear for actual start dates of those projects still in the planning phases. But there are trillions of dollars in the mega project pipeline that aren't accounted for here. Finally, there's another $346 billion in infrastructure projects estimated for 2025. That's a roughly 6% increase over 2024, and infrastructure construction activity is expected to further strengthen in the out years.

Of course, there are some overlapping projects among these 4 data sets, but no matter how you look at it, for companies with a safety record, product breadth, technology and capabilities to service customers at the national account level, the opportunities for growth remain significant.

Moving to Slide 11. Let me take a minute to walk you through how we're managing fleet levels and equipment mix in response to this dynamic and evolving landscape. First, we are rightsizing our acquired fleet and aligning brand consistency to drive operational efficiency and long-term value. At the same time, we're making targeted investments in specialty equipment to unlock revenue synergies, ensuring we're not just leaner, but also more capable and better aligned with high-value opportunities.

Our fleet strategy is also calibrated to support the divergent operating environment scaling a repositioning fleet to meet national demand while maintaining flexibility in local markets. In the third quarter, we executed against the strategy, increasing gross CapEx seasonally and expanding our specialty equipment offering in line with our much larger branch network and our revenue synergy goals. We're still expecting gross fleet CapEx of $900 million to $1.1 billion for 2025.

Also in the latest quarter, we nearly doubled disposals on an OEC basis versus last year, as we work to optimize our larger general rental fleet post acquisition. Realized proceeds were 41% of OEC on those equipment dispositions. Given the significant amount of fleet we were selling and the variance in brand quality, more sales went through the auction channel this quarter than in the recent past. Once we have the fleet in a more optimal position we'll resume our channel shift strategy to the higher-return wholesale and retail outlook.

For the full year, we're still expecting disposals at OEC of $1.1 billion to $1.2 billion. We're tracking at about 75% of that target with the remainder coming in the fourth quarter. I know there's strong interest in our 2026 CapEx plan, but it's still early in the process. So we're not yet in a position to share specifics. But from a high level, I could tell you that we have an especially young fleet today as a result of the H&E acquisition. We'd like to get it back to Herc's historical average fleet age, so that's something that will be considered in our fleet plan.

Also, we fully expect continued growth in national accounts and specialty solutions next year, we're planning our fleet by mix and geography to support that momentum. At the same time, demand visibility for local projects remains highly compressed, which reinforces the need for agility in both how we manage our existing fleet and the pace of planning for 2026.

The scale we've gained bolsters our ability to respond to near-term trends in local markets while also leveraging efficiencies to prepare for the start of a cyclical recovery. But it's important to remember that a pickup in local demand typically lags interest rate reductions. Developers still need time to secure financing and contractors have to obtain permits and mobilize labor for planned projects. So we're being thoughtful and disciplined in our planning, balancing short-term responsiveness with long-term readiness.

Turning to Slide 12. I'll continue to state the obvious. Diversification is an important strategy for fostering sustainable growth and navigating economic cycles. As Herc is diversified into new end markets, geographies and products and services over the last 9 years, we have reduced our reliance on a single industry or customer. We become more resilient to downturns and more adaptable to emerging opportunities like the mega project developments, technology advancements that support customer productivity, and the secular shift from ownership to rental, especially in the specialty category classes. We believe we are well positioned to manage dynamic markets and the acquired scale further bolsters our capacity and therefore, our opportunities.

With that, I'll pass the call on to Mark.

Thanks, Aaron, and good morning, everyone. I'm starting on Slide 14 with a summary of our key metrics for the third quarter, which includes Cinelease results for July. As you may have seen, we completed the sale of Cinelease on July 31 with proceeds used to pay down our ABL.

For the third quarter, on a GAAP basis, equipment rental revenue was up approximately 30% year-over-year, driven by the acquisition of H&E, and strong contributions from mega projects and specialty solutions. Adjusted EBITDA increased 24% compared with last year's third quarter, benefiting from the higher equipment rental revenue, as well as used equipment sales.

Adjusted EBITDA margin was primarily impacted by a higher proportion of our used equipment sold through the lower-margin auction channel as we work to align the acquired fleet. Also affecting margin with lower fixed cost absorption as a result of the ongoing moderation in certain local markets where H&E was overweighted, as well as acquisition-related redundant costs preceding the full impact of cost synergies.

REBITDA, which excludes used equipment sales, was up 22% during the third quarter. REBITDA margin was 46%, impacted by the lower-margin acquired business. Margin improvement will come from equipment rental, revenue growth and a shift over time to a higher margin product mix, as well as delivery of the full cost synergies and improved variable cost management from the increased scale. Our net income in the third quarter included $38 million of transaction costs primarily related to the H&E acquisition. On an adjusted basis, net income was $74 million.

Shifting to capital management on Slide 15, you can see that we generated $342 million of free cash flow, net of transaction costs in the 9 months ended September 30, 2025, which was in line with our expectations. Our current leverage ratio is 3.8x. Our goal is to return to the top of our target range of 2 to 3x by year-end 2027, as revenue and cost synergies drive higher EBITDA flow-through. And less capital will be required to achieve the revenue synergies due to scale benefits on the utilization of existing fleet. The combined entity will be capitalized to maintain financial strength and flexibility.

On Slide 16, we're reiterating our 2025 guidance. When we set the guide a month into the integration, we modeled the back half of the year using the second quarter trends we were seeing for each of the legacy companies. Of course, in any large-scale acquisition, integrating the acquired operations and acclimating new team members as a phase an ongoing effort.

We're starting to get a better read on the pacing of training, upskilling and re-engaging the acquired team. And we're making good progress on backfilling for the H&E sales force attrition that occurred, with strong patterns in place for recruiting candidates and onboarding and training new hires. Despite a lot of moving pieces with the integration overall, the guidance still feels about right based on current visibility.

Two points I'd like to call out for the fourth quarter. First, unless something big happens in the next 2 weeks, we'll likely have a tougher comp from a U.S. weather standpoint, with last year benefiting from about 2 to 3 points of hurricane-related pro forma revenue upside for the combined company. Second, when it comes to fourth quarter adjusted EBITDA, you should expect that we'll continue to utilize the auction channel more than Herc typically would as we're still rightsizing the acquired fleet with a focus on dispositions of off-brand and aged general rental equipment. This shift in channel mix will continue to pressure proceeds and therefore, the used sales margin.

With a completed systems integration now providing a uniform granular view of the entire company, we're putting action plans in place to address any underperforming areas or foundational inefficiencies. All of that will better position us as we planned for 2026. Longer term, based on all the opportunity we see, we remain confident in the strategic value of this combination, and our ability to achieve both the full revenue and cost synergies over the next 3 years.

With that, operator, we'll take our first question.

[Operator Instructions] And your first question comes from the line of Mig Dobre with Baird.

I guess my first question goes to this comment on the rightsizing of the fleet. And I'm kind of curious where you are in this process? Do you expect to be largely done with this in the fourth quarter? Or is this kind of stretching into 2026?

And is there any way to maybe get us to better understand the magnitude of the work that needs to be done here, either in terms of amount of OEC that needs to be disposed, or any other way that you want to frame it?

Yes, Mig, this is Aaron. I'll take that question. A lot of the heavy lifting was done in Q3. We still have more work to do as we go through Q4. As long as the 2026 kind of landscape economic -- demand landscape is good, we'll be essentially kind of closing that part of it out. The Q3 -- higher disposals in Q3 was really related to just some rebalancing of the fleet. On the H&E side, they didn't do their normal cadence of disposals that they historically would have done in Q1 and Q2. So we had to catch up on that.

And then just some of the brand mix, the operations are more efficient when you've got a standardized kind of manufacturer-type fleet. So that's what some of the shaping was done. And we feel good what we got done, but as we mentioned, a little more auction activity than we typically would do. And as we get into '26, we'll get back to our normal cadence of getting the higher retail wholesale channel.

Mig, this is Mark. Maybe just a couple of other points there. I think when you think about what Aaron said. Going back to Q2 and the comments we made then, we thought that there was probably, call it, $250 million, $300 million of activity that needed to happen in the back half of the year to sort of rightsize or better rightsize that fleet for the territories it was going in. And I would say, as we sit here through Q3, probably half of that was completed, maybe a little bit more than that in the third quarter. And so the expectation would be better rightsizing the fleet as we get through fourth quarter, such that next year, we can lean on aging the fleet and disposing of less gear.

All right. That's helpful. Then maybe a question on your overall mix. The national accounts account for, if I'm not mistaken, pretty much a record as far as my -- back as my model goes. So a lot more business done with national accounts. I guess that would be consistent with your comment on mega projects being an area of growth.

As you sort of think about 2026, I do wonder if this business, megaproject national accounts is to some extent, dilutive to margins. If this is something that we need to think about as we think about the margin framework for next year? And I'm not asking for guidance. I'm just asking for some color as to how this portion of the business is really impacting you?

Yes. Mig, Larry, I'll take that. Look, we're expecting, obviously, for the same type of activity to continue into '26 because as you know, until interest rates have a substantial reduction, which maybe we'll see tomorrow another 25 basis points, who knows. It usually takes 6 to 9 to as long as 12 months for that to trickle down into the local market to make that a more attractive business opportunity and certainly spur the activity for us in the local market, which remains somewhat muted.

Overall, though, we don't find that there's any significant margin dilution. Because remember when we put equipment out at a national account or a mega project, you have minimal movement of that project. You're not having excessive delivery there. And we also have a larger volume of equipment out there, and we tend to also get a lot more specialty product out on those projects that are opportunistic for us as we go along. So we don't see much dilution at all relative to continuing in this trend.

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

My first question is on the comment you made about combining some of the [ gen rent ] locations. I think you said you're going to have 50 additional specialty. Is it the right way to think about it that about 100 of the general rental locations would close and those would sort of merge and become 50 specialty? How should I think about the interchange between the two?

No, not at all, actually. Our branch count increased dramatically as a result of the acquisition. The way we want you to think about it is there were, hopefully, in two buckets. One, we have a strategy where we typically do a branch and branch, right? So that's how we kind of scale the business. We'll open a specialty business inside of a general rental branch and let it mature. And when it gets enough scale, then we'll pop it off and have its own stand-alone location. That's really what's the fuel with the 50 new locations as we go through next year's period.

There were just a handful of locations that H&E where they're like 1 mile away from our brand, so we could consolidate those. And in those cases, we're turning those into another specialty branch right away sooner than we typically would. But we're not closing branches from H&E, that would be dilutive to what our strategy is. So we like the scale and it gives us a bigger footprint, which allows us to solve the market needs better.

Understood. That's super helpful. And my second question is now that your -- the two businesses are on the same platform, it gives you more visibility into the combined business. Would you consider revisiting some of the cost synergies and any -- the revenue synergy targets you had at the start of the journey?

Yes. I mean, I think, Tami, I mean that's an ongoing process, right? I mean I think that from a cost synergy perspective, we originally laid out $125 million into buckets. So those buckets look the same today as they did yesterday? No. Will they continue to change and evolve? Yes.

And then I think -- and probably good news here, as I mentioned in my prepared remarks, there's also efficiency reviews taking place now that we're on the same platform. And so whether you want to call that synergy or efficiency, I don't care. Ultimately, it's incremental margin and efficiency that we're going to gain. So that's how we're looking at it, and I think it will continue to evolve as we move forward.

Your next question comes from the line of Kyle Menges with Citi Group.

Yes, maybe following up on that. I guess, is there anything noteworthy or unexpected incremental coming from these efficiency reviews that are taking place now, now that you're on the same platform?

Again, I mean, it's early innings, right? I mean it's just sort of completed at the end of Q3. I guess the way I would respond to that, Kyle, is that Herc has a fair number of operational KPIs. And so as we sort of rolled ourselves out of Q3 and had clear visibility really for the first time, right? Now it's about aligning our KPIs and our expectations to these newly formed, or re-devised territories on the consolidated platform. So I don't think there's anything of a surprise nature in that. I think it's just us running our playbook and our game plan and looking for efficiency along the way, and that's exactly what we'll do.

Yes. And keep in mind that we still -- while we have the IT integration completed, we still have a fair amount of training and education and development of people and aligning resources that needs to happen here in Q4 to prepare the organization as it goes into Q1. And we have a fair amount of work ahead of us still in addition to the movement of these branches that Aaron talked about a moment ago. So a lot of work ahead, and we'll continue to look for opportunities for improvement.

Makes sense. And then it would be helpful just to hear an update on dissynergies and synergies. I guess, just what's giving you guys confidence that dissynergies are behind you? Are you continuing to see that stabilization in the sales force, any success bringing people back? And then just it would be helpful to hear an update on some of the earlier -- early revenue synergies that you're seeing as well?

Yes, I'll take the first part of that and saying, yes, look, we've been able to stabilize the sales organization. Now attrition is happening at or below normalized Herc levels that we've seen in the past. And a lot of that is behind us. There have been a couple of folks that we brought back into the organization.

But we fill the vast majority of those holes with our team, with our Black and Gold team that have been in training in preparation for sales territories and we're looking to continue to keep with the training, with the education, with the introduction to our technology platform, that's an enabler for these salespeople to earn more money, and it's also a retention device. So we're excited about that being behind us for the most part.

Aaron, do you want to?

Yes, we're seeing on the revenue synergy side, we're seeing -- it's early innings. We're just getting started with it. We're introducing some of the specialty products to customers that were on the H&E side, regional type customers, and we're getting some good traction, right? So it's -- some of the products we offer weren't offered at H&E and the customers were able to kind of move their share of wallet, our direction. So it's -- we're happy where the progress is, but we've got a lot more work to do.

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

Maybe for my first question, Mark, it seems like gross margins in the quarter came in a bit lower than I would have expected, but you did leverage SG&A a little bit stronger than my model. Is there any way you could help us just dimensionalize how to think about gross margin sequentially, third quarter to fourth quarter, just given all the moving pieces? Maybe also a little bit of help on how we think about SG&A dollars going forward.

I guess, look, there was a little bit of noise, quite honestly, in the original view, at least the way that I was looking at this and we couldn't know the answers until we finished all of the mapping of their expenses into our general ledger structure. And so I think what -- and the way that I would sort of guide you here is that in totality, you probably had somewhere in the order of magnitude of 55% between DOE and SG&A in the quarter.

And I think that, that's a reasonable proximity into the fourth quarter, recognizing that there's probably a little less coming through the funnel in the fourth quarter shoulder period. So I don't think that there'll be a ton of movement. But I think, generally speaking, you're probably a little less efficient in the fourth quarter just from an overall revenue sort of downtick as you get into the November and December time frame.

Okay. No, that's very helpful. I'm sorry if I missed it, but did you disclose how much H&E's contributed to rental revenue and EBITDA in the quarter? I'm just trying to get a sense of what core dollar you would like in the quarter?

You didn't hear that because I can't give it. We wouldn't be doing our job, Ken, if I could still sort of pull apart and tell you the performance of H&E and Herc. I can't, and therefore, I won't. But I would tell you that sort of overall, the business on hold performed about the way that we thought it would inside of Q3.

Your next question comes from the line of Rob Wertheimer with Melius Research.

A couple of questions. Larry, you touched on it, if I didn't mishear, you touched on employee retention and you're kind of going in the positive direction now with hiring, rehiring, and then attrition has stopped. Customer attrition, can you talk about that on H&E kind of former accounts if we come through all the dissynergies as you kind of thought in recent quarters?

And then I'll just bolt on my second one. When you've had a chance to look at the business more closely now, how does rental rates stack up and what do you need to do if it's below? What do you need to do and what time frame to kind of improve service levels or broaden out service levels and improve that?

Yes. Look, what I said and what I hope came through is that we've stabilized the attrition that had happened prior to close. And we feel that, that is now at a normalized level with no further significant attrition that we're expecting that would be any different from what we would experience with Herc on a normalized basis. So I think we're okay there. But remember, we have backfilled a lot of those positions with folks that have been in our Black and Gold, what we call our PSA program, Professional Sales Associate program.

So they're going into new territories, they're on a learning curve, picking up new responsibilities and -- and we'll have some training and education to do over the course of the balance of the year and into early next year. But it will have to ramp up probably into Q2 when we see them become fully effective. And as you know, that usually takes over a 2- to 3-year period for a sales person to sort of really understand their territories and really perform at the levels we'd like them to perform at.

I'll pass the other side over to Aaron relative to your comment on pricing and where it was, and what we're doing to get back to the overall Herc average.

Yes, Rob, so I'd say to Larry's point, the attrition and all that stabilized. As Q3 went through, we focused a lot on integration. We got the reorganization all done. And now we're back to kind of like performance management and developing our sales team with the go-to-market strategies we already have. When H&E came into the business, their pricing was lower than the Herc. So we're working on moving that to the needle upward with our tools and systems that we have. We talk about some of our pricing tools that are proprietary to Herc.

So they're learning the tools. Our sales management is working with them. That's not going to happen overnight, right? That's a bridge that's going to happen over time to get them back to the Herc historical, kind of, rental rate performance. But we've done a good job with the customers. We've negotiated all the contracts H&E had into the Herc system. And the regional type H&E customers, as I mentioned earlier, have really embraced some of the extra fleet breadth that we have.

And then the local customers where the market is not as strong and there were some disruptions with some leading up to the closing of the acquisition. Maybe that was because they weren't as busy or maybe because their sales rep moved on. So we've got all the data. We're moving forward with our CRM and our sales efforts to engage with those customers. And some of those engagements take 3 or 4 different -- 5 different cycles of connection. But we know that we've got a great rental operation, and we're confident those customers will come back over time. But we're happy where we are in the process right now.

That concludes our question-and-answer session. I will now turn the call back over to Leslie Hunziker for closing remarks. Leslie?

Thank you for joining us on the call today. We look forward to updating you on our progress in the quarters to come. Of course, if you have any further questions, please don't hesitate to reach out to us. Have a great day.

That concludes our question-and-answer session. This concludes today's call. You may now disconnect.