Herc (HRI) Q3 2025 Earnings Transcript

Note: This is an earnings call transcript. Content may contain errors.

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CALL PARTICIPANTS

• President and Chief Executive Officer — Lawrence Silber
• Senior Vice President and Chief Operating Officer — Aaron Birnbaum
• Senior Vice President and Chief Financial Officer — Mark Humphrey
• Vice President, Investor Relations — Leslie Hunziker

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RISKS

• Chief Financial Officer Mark Humphrey stated that “a higher proportion of our used equipment was sold through the lower-margin auction channel as we worked to align the acquired fleet,” which negatively impacted adjusted EBITDA margin in Q3 2025.
• Humphrey further indicated “lower fixed cost absorption as a result of the ongoing moderation in certain local markets where H&E was overweighted,” constraining margin performance.
• Management flagged exposure to “a tougher comp from a U.S. weather standpoint” according to W. Humphrey in the fourth quarter, referencing prior hurricane-related revenue that is unlikely to repeat.
• Continued use of the auction channel, which Humphrey noted will “continue to pressure proceeds and therefore, the used sales margin” in Q4 2025, may prolong margin headwinds.

TAKEAWAYS

• Equipment Rental Revenue — Up approximately 30% year-over-year in the third quarter, reflecting the H&E acquisition and elevated activity in mega projects and specialty solutions.
• Adjusted EBITDA — Adjusted EBITDA increased 24% compared to the third quarter last year, supported by higher rental revenue and used equipment sales in Q3 2025.
• Adjusted EBITDA Margin — Pressured by heavier auction channel use and lower fixed cost absorption in slower local markets following acquisition activity.
• REBITDA — REBITDA increased 22% in the third quarter, REBITDA margin reached 46% in the third quarter, affected by dilution from the lower-margin acquired business.
• Transaction Costs — Net income for Q3 2025 included $38 million of charges primarily related to the H&E transaction; on an adjusted basis, net income was $74 million.
• Free Cash Flow — $342 million in free cash flow was generated in the first nine months of 2025 (net of transaction costs), in line with internal expectations.
• Leverage Ratio — Reported at 3.8x as of September 30, 2025; the target is to reduce leverage to the high end of the 2x-3x range by year-end 2027.
• Completed Systems Integration — Full integration of technology platforms and key operational systems was achieved within 90 days, enabling unified visibility and new analytic capabilities company-wide.
• Branch Network Strategy — Management expects to consolidate some general rental branches for cost efficiencies while expanding specialty locations by approximately 50 next year, representing a 25% year-over-year increase in the specialty network projected for next year.
• Fleet CapEx and Disposals — Gross fleet CapEx for 2025 is targeted at $900 million–$1.1 billion, with disposals tracking at $1.1 billion–$1.2 billion original equipment cost (OEC) for the full year 2025.
• Salesforce Attrition — Stabilized to “normalized Herc levels,” according to Lawrence Silber with replacement hiring and training underway; new sales team members are integrating into newly aligned sales territories.
• Revenue Synergies — Management is in the early stages of cross-selling specialty products to acquired H&E customers and reports initial positive traction.
• 2025 Outlook — Full-year guidance was reiterated, reflecting management’s current visibility and confidence in integration progress.

SUMMARY

Herc (HRI +4.47%) finalized the integration of its largest industry acquisition on an accelerated timeline, providing immediate unified data visibility and operational alignment across all branches. Management announced a multi-phase branch and specialty footprint optimization that will add approximately 50 new specialty locations next year through both repurposing and co-location initiatives, signaling a decisive strategic pivot toward higher-margin specialty categories. Gross CapEx and asset disposals remain on track, with a deliberate auction-heavy disposition strategy in the short term (Q3 2025 and Q4 2025), which is expected to transition to higher-margin retail and wholesale sales channels as fleet optimization is completed. Leadership highlighted retention and assimilation of the sales force as largely stabilized and in the active retraining phase, with targeted sales analytics and pricing tools newly deployed. A reiterated guidance framework indicates management’s confidence in their integration roadmap, despite anticipated near-term margin pressures from both weather comparables and continued auction dispositions.

• The company completed the divestiture of Cinelease in July, using proceeds to reduce its asset-based loan (ABL).
• The company paused additional M&A and is focusing on completing the remaining in-flight greenfield opportunities, with 17 new greenfields opened year-to-date and 10 more expected in the final quarter.
• Management’s long-term target for revenue composition remains a 60% local and 40% national account split, exposing the company to both robust mega project activity and more challenged local markets.
• Company leadership maintains that mega project-driven national accounts do not significantly dilute overall margins, due to operational efficiencies and increased specialty product penetration.
• Chief Financial Officer Mark Humphrey declined to separately break out H&E contribution to rental revenue or EBITDA, citing combined business reporting post-integration.
• Discussions with analysts confirmed that the process of rightsizing and rebalancing the acquired fleet will substantially conclude by year-end 2025, assuming the macro demand environment remains stable into 2026.
• Initial internal safety metrics indicate that at least 97% of operational days were incident-free in Q3 2025, and the recordable incident rate remains below the industry benchmark of 1.0.
• Management reported that cost synergy targets of $125 million are being actively re-evaluated and that additional incremental efficiencies identified in ongoing platform reviews could incrementally lift margins.
• The company is emphasizing digital fleet management and customer-focused technologies, including expanded rollout of its proprietary ProControl platform.

INDUSTRY GLOSSARY

• OEC (Original Equipment Cost): Historical purchase price of owned equipment, commonly used as a basis for measuring capex, depreciation, and asset disposals in equipment rental businesses.
• ProControl by Herc Rentals: Proprietary customer-facing technology platform enabling equipment rental, tracking, and asset management for clients via web or mobile interface.
• Greenfield: A newly established branch or facility opened in a market where the company did not previously operate.
• REBITDA: Adjusted EBITDA metric excluding gains from used equipment sales, providing a normalized measure of core rental profitability.

Full Conference Call Transcript

Leslie Hunziker: 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.

Lawrence Silber: 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.

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