Herc Holdings Inc Q1 FY2025 Earnings Call

Thank you, Operator, and good morning, everyone. Today we're reviewing our first 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. Earlier today, our press release and presentation slides were furnished and our 10-K was filed with the SEC. All are posted on the events page of our IR website. Now let's move on to our safe harbor and GAAP reconciliation on Slide 3. Today's call will include forward-looking statements. These statements are based on the environment as we see it today and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from the forward-looking statements made on this call. You should also refer to the risk factor section of our annual report on Form 10-K for the year ended December 31, 2024. In addition to the financial results presented on a GAAP basis, we'll be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations beneath non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials. A replay of this call can be accessed via dial-in or through the webcast on our website. Replay instructions were included in our earnings release this morning. We have not given permission for any other recording of this call and do not approve or sanction any transcribing of the call. Finally, please mark your calendars to join our management meetings at the Bank of America Industrials Conference in New York on May 13 and the KeyBanc Industrials Conference in Boston on May 29. We hope to see you at one of these events. 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. Our first quarter results show the strength and resilience of our diversified business model and exceptional talent. The Herc team has displayed impressive flexibility and disciplined leadership amid a macro environment marked by contrasting trends: strong performance in national accounts from new large project developments while facing challenges in the local market due to prolonged high interest rates. The team effectively managed demand volatility in the past quarter, caused by unusually cold weather in late January and mid-February in the southern states, which led us to temporarily close some branches and affected local rentals during that time. Despite these challenges, we continued to leverage our broad capabilities, seize new opportunities, and maintain a strong focus on safety and customer service. With utilization rebounding in March, the incremental benefits from 2024 acquisitions, and robust megaproject activity, we achieved equipment rental revenue growth of about 5% in the quarter, excluding the Cinelease business that is currently for sale. We are following our strategy of leveraging branch network scale, a diverse fleet mix, technology leadership, and disciplined capital and operations to manage through cycles and generate sustainable long-term growth. Now let's move to slide number four to discuss these growth strategies. In the first quarter, we executed a merger agreement to acquire H&E Equipment Services and its 160 U.S. locations to enhance our scale, geographic coverage, and long-term prospects. Integrating this acquisition will be our main focus over the next several years, which is why we are currently pausing other M&A initiatives and finishing remaining greenfields. We opened three new facilities in the quarter. The H&E acquisition, similar to previous ones, will help boost revenue and fleet efficiency in key metropolitan areas in line with our urban market growth strategy. Besides its prime locations, H&E brings complementary fleet categories, valuable new team members with a strong cultural fit, and an enhanced local account presence while improving our national account capabilities. Our acquisition strategy for H&E mirrors the approach taken in over 50 prior acquisitions, and while it is our largest, we find it manageable. Regarding our fleet mix strategy, we are increasing specialty fleet capital expenditures to cross-sell our expert solutions to GenRent customers, capturing share of wallet opportunities and supporting demand from megaprojects. Specialty Solutions address urgent and critical demand situations effectively. Technology is also a significant value driver for Herc. We are advancing our proprietary internal applications for pricing, fleet management logistics, and transportation, providing more value to our customers through our leading pro-control accountant platform. Lastly, we are cautious with capital, strategically managing fleet investments to drive returns and adopting an agile approach to meet demand trends while focusing on efficiency. Now, on slide five, I would like to address some potential questions about current demand and the impact of tariffs on our business, and I will provide a brief update on the acquisition progress. As we mentioned, we are experiencing contrasting trends in the operating landscape. Our national account business is growing, driven by federal and private funding for large construction projects such as data centers and LNG facilities. We are not observing any emerging cancellation trends or changes in project activity for 2025, nor are there unusual delays beyond the norm for design modifications or securing permits and labor. It's still too early to determine the long-term effects as developers await clarity on administration policy outcomes. We have seen some incremental announcements from chip and pharmaceutical manufacturers, but it is too soon to see how this will play out. Currently, it is business as usual for large national accounts. In contrast, the local landscape continues to face challenges as we approach the second quarter. While there are ongoing opportunities in facility maintenance, municipal projects, and stable education and healthcare sectors, other interest rate-sensitive jobs remain on hold, limiting local account growth. High interest rates persist, and while the situation isn’t improving, it's manageable for those of us with a diverse customer base and geographic reach. However, lacking other opportunities makes the local environment challenging. Overall, we haven't seen significant changes locally. Regarding tariffs, we do not foresee direct impacts on our procurement costs in 2025, as we primarily source our fleet domestically and have secured pricing for this year. Indirect impacts from customer tariff exposure are too early to ascertain, but for national account projects already in progress or launching this year, there have been no reported changes. Our focus remains on strategic investments, process improvements, and cost management to navigate this dynamic cycle. Now, for a quick acquisition update, there are no significant developments beyond what has been reported. Last week, we refiled our HSR application to give the FTC more time to complete their review. We have been collaborating closely with them, answering questions and providing data promptly. We support the review process and believe that with a combined 6% national share, there shouldn’t be significant concerns. These processes can often take time. Additionally, we have filed the S-4 related to the new shares we will be issuing, and we received initial comments from the SEC, which we addressed in an amended filing. This process is progressing smoothly. The tender offering requires us to complete the regulatory review and achieve a majority of shares tendered before closing, so our focus is on navigating the regulatory process efficiently. Lastly, we have begun preparations for integration with a targeted midyear closing. Our integration management office is led by one of our senior executives. The integration team, which includes leaders from HR, IT, and field operations, is organized around value drivers and our operating model. I’m pleased with our progress, emphasizing the importance of staying focused on our operations. We have clearly defined roles within the integration team and engaged the Boston Consulting Group to assist with cultural integration and change management. This will allow our operators to concentrate on our customers and business. Effective communication will be crucial for a successful outcome, and it will be a priority throughout the process. Now, I will hand the call over to Aaron to discuss operating trends, followed by Mark, who will review the first quarter business performance drivers.

Thanks, Larry, and good morning, everyone. I first want to thank our team for their continued tremendous efforts, leveraging areas of upside and executing strategically and with agility. Just like in any best-in-class culture, they continue to prioritize customer success and a safety-first focus. Safety is at the core of everything we do. As you can see on Slide 7, our major internal safety program focuses on perfect days, and we strive for 100% perfect days throughout the organization. In the first quarter, on a branch-by-branch measurement, all of our operations achieved at least 96% of days as perfect. Equally 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. Turning to Slide 8. We are successfully addressing the needs of both local contracts and large national accounts continuing to target a 60-40 revenue split long term, and this diversification provides the growth and resiliency. Local accounts represented 53% of our total revenue in the first quarter compared to 55% a year ago. Despite the slowdown of local project starts as interest rates remain elevated, we are expanding in select regions where infrastructure, education, local utilities, and facility maintenance repair projects are underway. On the actual account side, government and private funding for new large mega projects is still quite robust. We're continuing to win our targeted end to 15% share of the project opportunities with several new mega projects on deck this year and the 2024 projects still ramping up. Moving to Slide 9. As you know, we've laid out a net fleet CapEx plan for 2025 that's roughly 35% lower year-over-year at the midpoint of our guide. Continuing to improve fleet efficiency and address the dynamic market is the intended goal. And we'll do that by aligning equipment category classes with demand, digesting the 2024 acquired fleet, and remaining agile with expenditures given the overall health of the supply chain. In keeping with those priorities, in the first quarter, we spent roughly 55% less on new fleet than in the prior year quarter. 2025 fleet investments are targeted for the typical replacement fleet, certain mega project needs, and growth in specialty categories. We also disposed of 56% more fleet on an OEC basis last quarter versus a year ago to rotate older equipment and pull the 2024 acquired fleet for optimal equipment quality, mix, and utilization. At the same time, we continue to actively shift sales into the higher return retail and wholesale channels, helping to level set values in a stabilizing used equipment market. In the first quarter, we realized proceeds of 45% of OEC on our equipment dispositions. You can see our fleet composition at OEC on the right side of the page. Total fleet was $6.9 billion as of March 31, 2025, with specialty fleet representing about 24% of the total. Excluding the Cinelease assets, our base fleet is about $6.7 billion, and our higher-margin specialty fleet would be about 20% of that with plenty of room to continue to grow. Having a diversified offering that includes specialty fleet is an advantage for us in addressing the comprehensive needs of both local and national account customers. And delivering value-added expert solutions to meet these customers' critical or emergency requirements provides another degree of operating resilience for our business. Speaking with the topic of resiliency, let's turn to Slide 10, where you can see that despite the uncertain sentiment swirling in the general market, industrial spending and non-residential construction starts still show plenty of opportunity for growth built on the foundation of mega project development and infrastructure investments. Taking a look at the updated industrial spending forecast at the top left, Industrial Info Resources is projecting 2025 to be another strong year of capital and maintenance spending at $503 billion. Dodge's forecast for non-residential construction starts in 2025 is estimated to increase 8% to $482 billion. Additionally, there's another $357 billion in infrastructure projects forecasted for 2025. That's also an 8% increase over 2024. The dotted line on these charts reflects growth over pre-pandemic peak levels. You can see that this year and the next three years are currently projected to be some of the strongest periods of activity that this industry has seen. We've also included a trend chart for mega project starts in the upper right quadrant. That gives you a snapshot of the year-to-year growth of the largest construction project starts in North America over the last two years and for 2025. The chart continues to show a substantial number of mega projects launching this year with a total dollar value exceeding $250 million. We estimate we're only in the early to middle innings of the multiyear opportunity, depending on the project type, whether it's infrastructure, LNG, data centers, et cetera. And as we've stated, our goal is to capture 10% to 15% of these opportunities. 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 is an additional $2 trillion in the mega project pipeline. Of course, there is some overlap in projects among these four data sets, but no matter how you look at it, for companies with the safety record, product breadth, technologies, and capabilities to service customers at the national account level, the opportunities for growth remain significant. Turning to Slide 11. I'll 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 nine years, we have reduced our reliance on a single industry or customer. We've 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're well-positioned to manage dynamic markets and the integration of H&E will further bolster our capabilities 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 13 with a summary of our key metrics for the first quarter. For clarification, these are our GAAP results that include Cinelease, which, as has been discussed is classified as assets held for sale. I'll just make a couple of quick points here before turning the focus to the core results. In the first quarter, rental revenue increased 2.8% and adjusted EBITDA was flat at $339 million. We recorded a net loss in the first quarter related to $74 million of H&E transaction costs. However, on an adjusted basis, net income was $37 million. We have nothing new to report on the sale of Cinelease as we continue our negotiations toward a deal. Let's move to Slide 14. Here, we outline our core financial results, which exclude Cinelease from both periods in order to give you a better sense of how the base business performed in the quarter. A full reconciliation of quarterly performance metrics can be found on Slide 24 in the appendix of our presentation. For the first quarter, equipment rental revenue was up 4.9% year-over-year, in line with our internal expectations, made up of increases in both rate and OEC fleet on rent, partially offset by an unfavorable mix primarily resulting from equipment inflation year-over-year. For clarification, when it comes to revenue, fleet inflation is in the mix to adjust the volume measured at OEC dollars to a unit metric. REBITDA during the first quarter was up slightly, but REBITDA margin and flow-through were under pressure from one less calendar day in February compared with 2024 and a greater contribution this year from less efficient acquisitions in greenfields versus last year. Also, the local market weakness hadn't started until the second quarter last year, so we had a tougher comp this first quarter managing the fixed cost absorption including the increased insurance expense year-over-year. We'll anniversary that in the second quarter. Adjusted EBITDA increased by 2.7% compared with last year’s first quarter benefiting from higher total revenue. Adjusted EBITDA margin was impacted by higher revenue from sales of used equipment, which generate a lower margin and rental revenue. Trailing 12-month ROIC for the core business declined 110 basis points to 9.8% at the end of the quarter. The variance year-over-year relates to the impact of the local market slowdown and inefficiencies associated with new acquisitions in greenfields. Over time, the maturation of newer locations, greater fleet efficiency from our prudent onboarding of new fleet and the recovery in the local market will drive ROIC improvement. Shifting to capital management on Slide 15. You can see that we generated $49 million of free cash flow in the first quarter on higher operating cash flow and disciplined net capital expenditures. Our current leverage ratio is 2.5 times. We remain confident in our business model and are committed to increasing shareholder value. In the first quarter, we declared a quarterly dividend of $0.70 which represents a 5% increase in our annual dividend to $2.80 per share. If we flip to Slide 15, you can see that our standalone 2025 guidance is unchanged. As noted, our guidance excludes the performance of Cinelease. Despite the weather-related choppiness to demand in the first quarter, March rebounded nicely and April is meeting our expectations for growth. Acquisitions completed in mega projects launched in the back half of last year will continue to provide incremental upside in the second quarter this year and will lap the local market slowdown that began last year for a better comp. For net CapEx, we're tracking to our guide and expect by mid-year we'll have executed on approximately 45% of our gross CapEx plan given the seasonal ramp in the second quarter heading into the peak season. Overall, the strong demand we're experiencing for large projects in the manufacturing, industrial, and infrastructure markets, along with the stability that comes from industrial and commercial maintenance projects, provides plenty of opportunity to continue to grow even through the slower phase of the cycle. Finally, on Slide 17, I thought I'd reiterate our confidence in the value creation opportunity that the H&E acquisition brings to Herc. The two most frequently asked questions we're getting from investors are about the durability of the revenue synergy target and the path to deleveraging post-close. When it comes to revenue synergies and evaluating these opportunities, we brought to our M&A experience over the past five years where we’ve been successful in integrating our specialty fleet across our acquired general rental customer base, supporting improved returns. On fully integrated acquisitions, we have achieved our target synergized multiple. Like those businesses, H&E's offering is predominantly general rental, which provides a substantial cross-selling white space where we can bring our specialty fleet and expertise in rental solutions to their customers. We also have general rental opportunities that, combined with H&E's expanded location network, propels a better valuation proposition across customer accounts. For our base case, we're confident in our ability to achieve the revenue synergies over the three-year integration period with the expectation of 20% captured in year one, primarily focused around general rental cross-selling and then ramping up to 60% in year two with specialty cross-selling and the balance in year three. Regarding the path to deleveraging, the revenue and cost synergies are also expected to drive higher free cash flow conversion given that our EBITDA flow-through will be meaningfully higher than existing margins with relatively lower capital to achieve that EBITDA reflecting better utilization of existing fleet and a purchasing shift to higher utilization specialty fleet. The combined entity will be capitalized to maintain financial strength and flexibility. All in all, we're excited about all of the opportunities ahead and believe the combination with H&E will create benefits for shareholders, employees, and customers. With that, operator, we'll take our first question.

We will now begin the question-and-answer session. Your first question comes from the line of Jerry Revich with Goldman Sachs. Jerry, please go ahead.

Yes, good morning, everyone.

Good morning, Jerry.

Mark, could you continue the conversation? You mentioned in April that the results aligned with your expectations for the full-year guidance. Pulling everything together, it suggests that dollar utilization surpassed 40%. Can you comment on that recovery in April? Is that the level of improvement you observed, as it would be necessary for the full-year run rate to stay consistent over the upcoming quarters? Is that what you experienced in April? Or are you relying on continued improvement?

Great question, Jerry, and that's really spot on. I guess maybe I'd go a step further and say that really the dollar utilization improved in March to that at the levels that we're sort of comping against from prior year. So that is essentially what's carried through at least through the first half-ish of April. And so I think then you would expect sort of the normalized cadence of dollar utilization as you work your way through the quarters where you would have a normal build from Q1 into Q2 and to build from Q3 into Q4 and then sort of stabilizing at or around that level for Q4.

Super. Appreciate the color. And then, Larry, can I ask in terms of the pricing discipline that you're seeing in the industry, can you just comment on that? Obviously, everyone's seeing just general cost inflation and the industry data, I think, has been pretty mixed. One indicator showed a modest contraction in pricing in March. Can you just talk about what you're seeing in the market? And what's your view on the industry pricing discipline that you're seeing based on all of the indicators you track?

Yeah. Well, as you know, we stopped reporting on pricing per se in any detail. But I would tell you that we continue to feel comfortable that there is discipline. The industry is not overfleeted, and we'll have to adjust according to what happens in the local market. But generally, we're seeing fairly constant and stable pricing.

Thank you.

And your next question comes from the line of Rob Wertheimer with Melius Research. Rob, please go ahead.

Hi, thanks, good morning. Could you provide more insight into your EBITDA margin performance for the quarter? Additionally, could you share some revenue scenarios that would allow you to achieve a positive margin? Please discuss the factors that contributed to the margin decline and clarify what level you need to maintain a healthy margin. Thank you.

Yeah. I mean I think that you're sort of staring at, right, quarter-to-quarter, you have sort of 150 basis points sort of detriment. But the reality is that's occurring in Q1, lowest revenue quarter. The reality is that's about $10 million. So at the end of the day, we're not talking about huge dollars even though the margin profile certainly looks bigger than that when you're just talking about 150 basis points, but it's happening in Q1. Obviously, that is quarter of the season. And I think the other thing that is sort of comp is the fact that there is 1 less calendar day in '25s Q1 versus '24s Q1, which took a bit of an extra day.

Okay. I got it. And then expense lead through the year, you didn't change your CapEx outlook or you we're a little bit conservative. I think you touched on this in 1Q. All else equal, are you trying to be a little bit more tactical this year in case the environment weakens or is that just random ran variance? I don't know whether that's a signal that you're being more cautious on fleet deployment and I'll stop.

I don't believe there's any indication in that. It was really just a reaction to the quarter and how things unfolded. We mentioned the fluctuations in demand during both January and February. In terms of gross CapEx from an OEC perspective, we were around $75 million in Q1. I don't think there's much to interpret from that because by the end of the second quarter, we’ll likely be at about 45% of our CapEx guidance, which is essentially halfway through. Just as a reminder, Q2 and Q3 are the significant periods for CapEx increases as we prepare for the season, while Q1 and Q4 are generally the quarters for asset disposition. So, Rob, I wouldn't read anything into that besides the fluctuations that started the quarter.

Thank you.

And your next question comes from the line of Tami Zakaria with JPMorgan. Tami, please go ahead.

Hey, good morning. Thank you so much for taking my questions. My first question is, I think there's some general talks about a potential macro slowdown later this year or possibly a recession even given all the tariff conversations. I was wondering, does your current guide embed a recession scenario in it? If not, how should we think about the possibility of that?

No. I mean I think the guide as it sits today is sort of what we see today and that is sort of a no-growth local market environment, which we stated when we released guidance and sort of the backfill to that is growth in the infrastructure and mega project environment. If the macro were to change significantly, then that theoretically could cause us to sort of change our guide too.

Understood. That's helpful. And then related to the pending acquisition, I know you laid out some synergy targets. I was wondering, was there any customer attrition embedded in that synergy target? Sometimes there's some natural customer churn after major acquisitions like that between two parties. So was anything like that embedded in your synergy target or not really?

No, there absolutely was. We assumed a 10% disenergy customer churn, which we took sort of when you think about sort of the guide, the revenue synergy guide, about 60% of that churn was year one, and 40% of that churn was in the second year post-close.

Is that 10% sort of close to normally you would see in a year or higher than that?

Yeah. I would say it's probably right in line. I would also tell you that, that's sort of above sort of the normalized attrition rate that the rental companies sort of experience on a year-to-year basis.

Great. Thank you.

And your next question comes from the line of Steven Ramsey with Thompson Research Group. Steven, please go ahead.

Good morning. I wanted to think about mega projects being key to supporting the 5% growth outlook in the mega project start level being over two times the last couple of years, leading to my question, mega projects when you are the primary supplier or a large supplier with the starts pick up. What you have in hand, is that enough to support a sustained sort of mid-single-digit growth outlook beyond this year?

Yeah, our pipeline, where we sit now versus the kind of the growth trajectory we've had in the Mega success from last year and then how we look out forward. It is enough to keep us in the guide range of 5% growth for the Enterprise.

Okay. Okay. That's helpful. And then flipping to the local markets. Is your strategy for capturing business in the local markets? Is it different than it was in 2024? You've talked about disciplined pricing, but I'm curious if your go-to-market approach is changing in any way to make sure you keep that share.

Well, we have a comprehensive go-to-market strategy, which is attributed to our local sales team in the field. And we updated that a couple of years ago. So it hasn't changed from 2024 but the go-to-market strategy gives incentives for acquiring new business, revenue health, like diversifying your rental across our specialty businesses, things of that nature. So it hasn't changed since '24 and it's the same go-to-market that we'll use when the H&E acquisition is brought on board.

Okay, that’s helpful. Thank you.

And your next question comes from the line of Kyle Menges with Citigroup. Kyle, please go ahead.

Thank you. I was hoping if you could provide some color on just what you're seeing in the core end markets? I know you touched on it a little bit, but maybe just color on what you're hearing from customers, both national and local post-Liberation Day and just have had tariffs entered the conversation at this point? And just what are you hearing from customers on tariffs and how that could maybe impact projects or CapEx this year?

I can address that in two ways. First, regarding the larger national accounts involved in significant projects, particularly those related to mechanical, general, and electrical contracting, they are quite busy and will likely continue to be so. However, local markets have slowed down, meaning local contractors may be experiencing a reduction in construction activity. Concerning tariff impacts, it's still too early for us to see any significant effects. We're not receiving much feedback from our contractors about changing their strategies, and we aren't observing many project delays. It's a bit early to determine the full impact, but we are monitoring the situation closely as it continues to evolve.

Got it. Understandable. And then on margins, equipment rental margins were a little bit light in the quarter. I understand it was just lower fixed cost absorption. And I guess how much was also related to weather and some branch shutdowns in the quarter? And then just any other cost pressures that were maybe unexpected in the quarter that we should be thinking about or paying attention to?

No. I mean I think that, one, sort of the reduced margin comparably over Q1 of 2024 was certainly anticipated, right? I think as Q1 of last year, the used equipment market continued to sort of moderate as you work your way through 2024. And I think it just shows primarily through the proceeds percentage last year, it was 49%, and this year, it was closer to 45%. So you think about sort of a 10%-ish sort of reduction there. I think the good news on that front is that we view the used equipment market has stabilized. It's sort of been that way through the back half of 2024 and into Q1. So I think that sort of coupled with fixed costs that in Q1, it's sort of your most exposed quarter because it's your smallest revenue quarter. I mentioned in my prepared remarks, we hadn't crossed over sort of the increased insurance expense that we talked about last year Q2. So that was a comparable or comp that wasn't necessarily there last year Q1. And then just general, M&A and greenfield activity and covering off that fixed cost component is more exposed in Q1 because the revenue is certainly less.

Got it. Thank you, guys.

Thank you.

And your next question comes from the line of Ken Newman with KeyBanc Capital Markets. Ken, please go ahead.

Hey, good morning. Maybe my first question, Mark, just thinking about the flow-through. Obviously, there's a lot of moving pieces that you talked through just now. Is it fair to say that flow through also normalized in March? And are we back to that more normalized, call it, 40% to 50% type of range in the second quarter here?

I think that's a fair observation. It seems that things are falling into place now that demand has started to normalize, which we noticed in March. This was reflected in the results across the board, as I mentioned earlier, including flow-through, among other factors.

Got it. That's helpful. For my follow-up, I wanted to ask what is driving the confidence that local account activity will remain stable through year-end. It seems that there is still some choppiness in visibility within that market. Local account rental revenue was down year-over-year in the first quarter, which may be the first time that's happened since 2020. Is that the correct way to understand it? Additionally, what is contributing to the belief that this stability will continue through year-end?

I believe our confidence is rooted in the diversification of our business, along with the new verticals and markets we've entered. The addition of our specialty business into the local companies we've acquired also provides us with significant opportunities for continued positive performance. I don't think we experienced a decline compared to last year in Q1. While we are currently operating at a relatively low level, we are continuously adding capabilities and diversification that will keep us in a strong position moving forward.

Okay, thanks.

Your next question comes from the line of Mig Dobre with Baird. Mig, please go ahead.

Thanks for filling me in. Just a question on margin as well. Sorry, we keep going back to this topic. But as mega projects are becoming maybe a bigger part of the mix, is this mix negative from a margin standpoint for your business?

No, it is not. I believe the profitability profile of mega projects is consistent with what we've been discussing for at least the past four or five quarters. The margin pressure in the first quarter aligns with my earlier comments regarding the transition from last year's first quarter, where certain events did not occur, to the second through fourth quarters and the first quarter of this year. Additionally, this quarter is typically our slowest, and we have fixed costs to manage in a challenging M&A and acquisition environment.

Yeah. Okay. So that's interesting because the H&E's experience with mega project is a little bit different. In their case, if I remember correctly, they sort of called that out as being a bit of a headwind to margin because pricing was different. So I'm kind of curious how your business is maybe structured in this regard different than H&E and how you plan to adjust that post-acquisition?

Yeah. I mean I think, Mig, our business is much different than H&E's. I mean there similarities are both renting core fleet, but our breadth of products in the general rental category is much broader so we can answer the call more often on a mega project. And then the specialty fleet, which worked just much more along in our journey than H&E. That really is the difference maker when you go into these big mega projects. And it really neutralizes the price you give for volume on the general rental fleet; you get the specialty fleet, which gives you the premium financial returns, and therefore, your stake in a mega project looks a lot like our core business overall. And you're getting that flow and extended utilization, time utilization of the fleet over time. We like it.

I see. If I may squeeze one final one. Leverage is, obviously on a lot of people's mind, especially after you announced this large acquisition. So I'm curious, maybe you can comment on how you think about pro forma leverage profile once the transaction is closed. And maybe given what's been communicated through the stock price and also the uncertain macroeconomic environment, how do you think about bringing that leverage down post-close? What's the plan here, maybe one to two years out? And what are some of the levers that you can pull to maybe accelerate that process?

Yeah. No, great question. I think sort of the entry or exit point, however you want to look at that, is probably just north of the 3.5 range. As we've stated, we believe that we'll be back inside our 2 to 3 times leverage profile within 24 months. I think your question is sort of if the macro does, in fact, change on us post close, then it's really just running the playbook that we would run in a downside scenario. However you want to think about how deep that downside scenario is, right? We would cut CapEx, age the fleet, sell off excess fleet and then begin to evaluate the variable cost structure of the business to continue to protect our margin profile.

Yeah. And additionally, I'll remind you, Mig, maybe I don't know if you were following us back when we spun from Herc, we were levered at 4.3 times with a totally broken company, and we were able to bring that leverage down quite significantly in a pretty short period of time. In this environment, neither company is a broken company. We are running two excellent companies, and we expect to be able to perform as we've stated.

Thank you, good luck.

Thanks.

That concludes our question-and-answer session. I will now hand it 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 today's call. You may now disconnect.