Herc Holdings Inc Q2 FY2025 Earnings Call

Thank you for holding. My name is Kate, and I will be your conference operator today. I would like to welcome everyone to the Herc Holdings Second Quarter 2025 Earnings Call and Webcast. I will now turn the call over to Leslie Hunziker, VP of Investor Relations. Please proceed.

Thank you, operator, and good morning, everyone. Today, we're reviewing our second 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 our most recent 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 include H&E results for June in each of the 3- and 6-month periods for 2025. 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. 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. It's been a busy time since our last earnings call. During the second quarter, we successfully completed the acquisition of H&E Equipment Services. Since then, integration activities have been underway to validate financial, operational and cultural assumptions, identify key talent, mitigate risks and ensure a smooth transition for all stakeholders. One of our early priorities was to set up an integration management office and clearly defined roles and responsibilities within the integration process. This successfully ensured minimal disruption to the rest of our employees' daily responsibilities and allowed Herc sales and operations staff to remain focused and productive throughout the transaction process. In a dynamic environment, like the one we operate in today, where underlying local and national demand trends are bifurcated, this was critical. The local markets continue to see pressure as more commercial projects come to completion, while new projects in that sector remain on pause due to prolonged higher interest rates. The good news is that our local sales professionals are experienced, determined hunters using the full suite of Herc's product offerings, reputation for service excellence and industry-leading technology platforms to create opportunities and win new accounts. On the other side of the coin, national account demand remains strong, and we continue to capture our targeted 10% to 15% share of the mega project activity. There, we're supporting customer success with differentiated specialty solutions, a large and very general rental offering and a full-service fleet management, including maintenance, logistics, safety training and utilization insights. In the quarter, excluding Cinelease, Herc legacy branches continued to outpace overall market expansion, driven by growth in both national and local account revenue. I want to thank all of team Herc colleagues for bringing their best efforts every day for the collaboration and support you've shown your colleagues, old and new, and for keeping your eye on the ball and embracing the changes that bring opportunity and growth. As you can imagine, Herc's biggest growth opportunity today and over the next 3 years stems from the scale and synergies we gained through the H&E acquisition. Let's move to Slide 5 for some perspective on how the integration has progressed. Since we closed the transaction, our teams have been working tirelessly to successfully bring the two companies together. As reported in the first quarter, H&E's financial performance was impacted in part by disruptions to their employee base during the bidding process, and we saw those distractions continue through the close of the deal in early June. Since then, meeting the team and immediately putting in place comprehensive communications that address their most critical questions has gone a long way in stabilizing our acquired workforce. In the field, Herc RVPs and district managers have visited all of the acquired branches multiple times, getting to know the new organization. I personally visited over 40 H&E and Herc locations throughout the West, South, Midwest and Northeast over the last couple of months, and Aaron's covered even more of our network. Additionally, we've remapped the operating regions and optimized the sales force territories to address our now larger footprint. In doing so, we added two RVP positions, which were filled by H&E field leaders. We're also adding key management positions to our sales organization to drive revenue synergies and develop our mid-market capabilities where we know H&E excels. Our new field structure has been cascaded to employees throughout the organization. At the same time, we're managing staffing priorities. Our fleet team completed its assessment of H&E's assets by market, category class, brand, utilization rates and equipment age. Based on the outcome, updated plans for incremental dispositions as well as the additional specialty fleet for synergies is considered in our net fleet CapEx guidance, which Mark will take you through in a minute. Most exciting is that the fleet sharing and sales referrals are already taking place. Let me give you just a couple of examples. One of our new sales reps recently was contacted by a customer of his, who currently is running a mega project. The customer asked this rep if he could provide the fleet needed for this large job now that H&E was part of Herc. This wasn't a project that H&E could have previously supported with its more limited product offering, and Herc didn't have a relationship with this contractor. It's a clear example of the whole being greater than the sum of its parts. And our national account project pipeline just got a bit bigger. In another example, we hosted joint branch manager, sales leader town halls in Dallas and Houston about a week after we closed. In each meeting, we asked the room if anyone had a story of renting equipment that they wouldn't have been able to rent just a few days earlier. Almost every hand went up. One person said they were able to fill a request for a special aerial attachment. Another said they were working on a generator deal where H&E previously didn't carry the size of generator the customer needed. It seemed that everyone had a story and there was a lot of excitement in the room. That's really what this is about, and it's one of the reasons we're confident in our revenue synergy target. Behind the scenes, we're checking all the boxes. Training for standardizing processes for things like logistics, maintenance and safety is also underway. And governance policies, including things like the customer and supplier contract approvals, have been communicated and controls are in place across the joint organization. Our next major initiative is the technology integration. We've got systems cutover planned in geographic phases throughout the third quarter and expect to be done by the end of September. We've invested significant time and attention in adding capacity to the Herc system, data testing capabilities, data migration and, of course, security and putting together training processes, mentoring structures, on-site extra support and a dedicated hypercare team. We feel good about the plan. Our initial cutover took place two weeks ago and it went very well. Our second phase is next week, and we feel very confident that we will be equally successful. At that time, nearly 45% of acquired locations will be fully integrated on the Hertz's industry-leading technology platform. The takeaway here is our new organization is working well. We're off to a great start as a combined company, and we're well positioned to capture the synergies of the acquisition while continuing to deliver on our long-term growth strategies, which are outlined on Slide 6. As we've said, integrating this acquisition will be our primary focus and, therefore, we are pausing other M&A initiatives for the time being and completing the remaining in-flight greenfields. In the first half of the year, we added 11 new facilities, of which eight were opened in the second 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 as a percent of our fleet composition long term. We're also planning to repurpose general rental branches into ProSolutions facilities beginning this year to support specialty equipment capacity with 160-plus acquired locations. 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 sustainable growth over the long term. 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 second quarter business performance drivers and transaction adjustments. Aaron?

Thanks, Larry, and good morning, everyone. I want to express my gratitude to our team for their agility in a dynamic environment, leveraging our diverse end market capabilities, comprehensive fleet offerings, broad geographic coverage, and strong customer relationships, all of which support a resilient business model. Our teams are excited about the unique opportunities that H&E brings, which is already translating into an expanded project pipeline. We are dedicated to converting opportunities into revenue while prioritizing customer success and a focus on safety. Safety is fundamental to our operations. Our major internal safety program aims for perfect days, and we strive for 100% perfect days across the organization. In the second quarter, every branch achieved at least 96% of days as perfect. Additionally, our total recordable incident rate is better than the industry benchmark of 1.0, demonstrating our commitment to safety for our people and customers. As Larry mentioned, we are facing disproportionate demand, with local markets impacted by interest-sensitive commercial construction, while mega project activity remains strong. In the second quarter, local accounts accounted for 53% of rental revenue, down from 56% a year ago. On a pro forma basis, if we had owned H&E since April 1, our rental revenue mix would have been 55% local and 45% national. We are expanding in local markets focused on infrastructure, education, government recreation, and facility maintenance projects. On the national account front, funding for large projects is robust. The drive to restore manufacturing, boost LNG export capacity, and expand artificial intelligence is fueling new construction demand. We are capturing more of our targeted share of these opportunities, with several new mega projects in the pipeline for this year and beyond. While questions about cancellations and delays arise, we haven't seen any cancellations on our mega projects. Delays are typical in national accounts due to design revisions, labor issues, and lengthy permitting processes. For instance, in June, we initiated equipment rentals for a major project awarded back in January that faced delays due to permitting. Our fleet and operations teams work closely together to navigate these challenges. As a combined company, we aim for a revenue split of 60% local and 40% national, which supports growth and resilience. Moving on to our capital expenditures, we're increasing our gross CapEx forecast to include more specialty fleet this year, aimed at enhancing cross-selling synergies. However, our net fleet CapEx forecast remains about 30% lower year-over-year. We offset expenditures with increased disposals as we adjust our fleet mix and utilization. In the second quarter, we spent around 9% less on new fleet compared to last year, focusing on specialty equipment. We disposed of 82% more fleet than the previous year in preparation for adding the H&E fleet and realized proceeds were 44% of the original equipment cost on those disposals. Our residual values have declined year-over-year, but the used equipment market started to stabilize recently. As of June 30, our total fleet value stood at $9.9 billion, with specialty fleet making up about 18%. Excluding certain assets, our base fleet is approximately $9.6 billion, with high-margin specialty fleet at about 16%. With the benefits from the acquisition, we expect specialty fleet to reach around 20% of our total. Our diversified offerings, including specialty fleet, help us meet the needs of both local and national customers, providing value-added solutions that enhance our operating resilience. Looking at industrial spending and construction forecasts, despite uncertainty in the market, there are strong growth opportunities driven by mega project development and infrastructure investments. Industrial spending is projected to reach $527 billion in 2025, with non-residential construction starts estimated to increase by 7% to $478 billion. Additionally, another $360 billion in infrastructure projects is expected for 2025, a 10% increase over 2024. The projected growth is set to outperform levels before the pandemic. We are in the early to middle stages of this multi-year opportunity, with an estimated $2 trillion in mega project pipelines yet to be accounted for. Diversification is key to sustainable growth and economic adaptability. Our efforts to diversify over the past nine years have reduced dependence on any single industry, making us more resilient in downturns and more adaptable to emerging opportunities. The H&E acquisition enhances our capabilities and opportunities. With that, I will turn the call over to Mark.

Thanks, Aaron, and good morning, everyone. I'm starting on Slide 14 with a summary of our key metrics for the second quarter. I'll start with our GAAP results, which include both H&E's June results and the Cinelease results. Cinelease, 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 second quarter, rental revenue increased 13.7% and adjusted EBITDA was up 12.8% to $406 million. We recorded a net loss in the second quarter, which included $73 million of transaction costs primarily related to H&E and a $49 million loss on assets held for sale. However, on an adjusted basis, net income was $56 million. Let's move to Slide 15 where we can walk through the revenue breakdown by contributing business. In the second quarter, GAAP equipment rental revenue was up about 14%, but on a pro forma basis, which includes H&E for the full second quarter, rental revenue would have been down 2% year-over-year, primarily as a result of continued weakness in the film and TV vertical and a double-digit decline in the H&E business. Cinelease rental revenue was down nearly 40% from one year ago as the studio entertainment industry recovery that started to get traction in the first half of 2024 continues to be pushed out as entertainment companies delay re-shoring production. Excluding Cinelease, rental revenue from Herc legacy branches increased 4% in the quarter, reflecting strong mega project activity, moderated growth in the local market as well as positive results in both general rental and specialty product lines year-over-year. Shifting to H&E, as you saw in their last several earnings reports, the business has struggled to capitalize on opportunities outside of their local markets. Legacy H&E branches exited the quarter with rental revenue declining at roughly 15%. A portion of the decline is attributable to the workforce disruption including turnover caused by two announced transactions. The balance reflects the volume and pricing pressure that results from being limited by a narrow product offering in a moderating local market. As Larry and Aaron mentioned, we feel that the actions we've taken to stabilize and engage the workforce have been effective. Now rightsizing the fleet and providing the acquired branches with a broader portfolio of equipment and more sophisticated tools with which to manage the business should get things back on track as we move into 2026 and, hopefully, a better interest rate environment. This is the last time we'll provide a revenue breakdown by business. The fleet is fungible and is already being co-mingled, and customer account sharing and redesigned sales territories are in play. We are now one company. Moving on to Slide 16. 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 beginning on Slide 24 in the appendix of our presentation. For the second quarter, equipment rental revenue was up 15.6% year-over-year. Adjusted EBITDA increased approximately 15.1% compared with last year's second quarter, benefiting from higher equipment rental revenue as well as used equipment sales. Adjusted EBITDA margin primarily was impacted by higher revenue from sales of used equipment, which generate a lower margin than rental revenue. REBITDA, which excludes used equipment sales, was up 14.5% during the second quarter. REBITDA margin dipped 30 basis points compared with the prior year due to the one-month impact of the lower-margin acquired business. Margin improvement will come from cost synergies and a shift over time to a higher margin product mix as we deliver on the revenue synergies from the acquisition. ROIC for the core business is targeted to exceed our cost of capital within 3 years of closing the acquisition, supported by capital efficiencies, economies of scale and a higher-margin revenue mix. Shifting to capital management on Slide 17. You can see that we generated $270 million of free cash flow, net of transaction costs in the first half on higher operating cash flow and disciplined net capital expenditures. In June, we finalized the debt funding for the acquisition, raising $4.4 billion at a weighted average cost of 6.8%. This was done through a combination of unsecured notes, a term loan vehicle and incremental drawdown on our upsized ABL. Our current leverage ratio is 3.8x as we anticipated. We believe we can bring that back into the top of our target range of 2x to 3x within calendar year 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. If you flip to Slide 18, you'll see that we are introducing combined 2025 guidance. As noted, our guidance excludes the performance of Cinelease. We are now expecting to generate equipment rental revenue of $3.7 billion to $3.9 billion in 2025, which includes 6 months of forecasted H&E results. You'll recall that we projected a 10% dis-synergy target over 2 years in our initial modeling of the acquisition. We believe that all of that came to fruition pre-close as a result of the disruptions to the H&E business. The revenue outlook at a high level reflects the previously guided performance expectations for legacy Herc, the anticipated run rate revenue trajectory of legacy H&E, a reduction in greenfield openings and M&A branches year-over-year for both companies and the phasing in of initial revenue synergies. Notwithstanding the dis-synergies, which created a new lower base of acquired revenue at closing, our gross revenue synergy target remains the same at approximately $350 million over 3 years. When it comes to cost synergies, savings from redundant positions, contracts and public company expenses are already being realized. We expect to achieve 50% of our $125 million EBITDA run rate target by year-end 2025. We're confident in our ability to achieve both the full revenue and cost synergies and should be able to update you on the cadence of how those synergies come in when we give our guidance for 2026. For 2025, we estimate adjusted EBITDA will be between $1.8 billion and $1.9 billion, which implies an adjusted EBITDA margin of 42% to 43%. For net CapEx, as Aaron mentioned, we're tracking to our original guide of $400 million to $600 million despite increasing gross CapEx for synergy fleet. As we've stated, we believe we'll be able to generate the revenue synergies with roughly half the typical amount of fleet needed as we optimize utilization of the combined general rental fleet and only add incremental growth CapEx for specialty-type fleet to support the acquired customer base. In the second half of the year, we are targeting equipment disposals of $700 million to $800 million at OEC as part of the H&E fleet integration to better align our fleet level to the new base of acquired revenue. We forecast adjusted free cash flow for the year to be $400 million to $500 million net of transaction costs, reflecting an approximate $130 million cash tax benefit from the new legislation around retroactive bonus depreciation and the interest deduction limitations, partially offset by higher interest expense. As with any major acquisition, we've got some work to do as we integrate H&E operations. But as we gain more insight and intelligence into the acquired business, it's reinforced our view of the significant opportunities ahead and our belief that the combination with H&E will create long-term benefits for customers, employees and shareholders. With that, operator, we'll take our first question.

Your first question comes from Rob Wertheimer with Melius Research.

Congrats on getting the deal done and off to a new era. The first one is going to be a little bit tricky to answer because it touches on '26 guidance. I don't want to go explicit, but I wonder if you could give general comments on how you feel set up for fleet in light of the dollar reversal, in light of having acquired a bunch and what that means for future CapEx? Did you consider tightening it further for this year? There's always different categories I know you need. So maybe just talk about your use of capital over the next couple of years.

Yes. I think broadly speaking, Rob, obviously, this is very early innings here. We have sort of an adjustment to make on the new revenue base, which will be sort of rightsizing that H&E fleet into the broader organization. Hopefully, the majority of that activity will occur in the back half of 2025. I think when you then think about that going forward, there's a revenue synergy component to this, as I stated and prepared, there's a $350 million goal over a 3-year period. So that will take some invested capital-light as we've modeled it. But the majority of the increase here in the back half of the year on the growth side is related to revenue synergy fleet. That will layer in over the back 6 months, probably ratably throughout. I think it's too early for me to sort of give you guidance into 2026. I think we need to see the uptake of both the plan to rightsize how the revenue synergy fleet is laying in and be able to then provide you more clarity as we provide you 2026 guidance in Q4 with Q4 results.

That's totally fair. And then if I can, I wonder if you could just describe, obviously, this is a big transaction, but you expected revenue dis-synergies. There was a little bit of a rush for that in the beginning. I mean, how confident are you that you've gotten past that? How does that normally play out? People come after some key employees or some key accounts and maybe that's what you figured? Maybe just any expansion there and I'll stop.

Yes, Rob, this is Aaron. I'll take the back half of that question for sure. So as we communicated in the prepared remarks and as you're aware, there was a lot of change going on during the due diligence and HSR period. So there was some loss of employees from H&E, some of them were sales reps. But once we closed the transaction, we were able to get in front of the employees, that really settled everybody down, and we haven't had the same issues since June 2. So it's really a different business, as we said, it's one company now and we're seeing synergies occur. We've really stabilized the force, and I think we're all working together right now.

I think, Rob, maybe coming at it a little bit differently, and to Aaron's point, we've absolutely stabilized the revenue base. That doesn't completely take into account the tough comparison that the H&E business would have had on the back half of the year; it was an acquisition for them that was sizable in 2024, obviously didn't reoccur in 2025. So while the revenue base has stabilized, it's not going to necessarily come through from a growth perspective in that same manner. There will be additional pressures to the revenue growth, if you will, in the back half of the year assumed in that H&E business. Does that make sense?

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

This is Alec filling in for Tami. My first question is regarding the timing of the $1.1 billion to $1.2 billion in overseas sales for the full year, specifically comparing the third quarter to the fourth quarter. Additionally, can you provide insight on the expected recovery rate for that OEC and any updates on the used market since the last quarter?

I'll address the first part, and then Aaron can provide insights on the used market as it stands today. From a disposition standpoint, if we consider the midpoint of our guidance, we are looking at approximately $750 million in dispositions for the latter half of the year. Based on our current outlook, it seems likely that this will be fairly evenly distributed between the third and fourth quarters. Now, I'll turn it over to Aaron for his comments on the market.

Yes, our view on the used markets is that they're healthy. They're steady. They've really stabilized since late last year. Whether you're talking retail, wholesale or the auction channel, they're stable, kind of looking back to like a 2019 level. So it's a healthy market. We think the used equipment markets are a good place for us to rebalance as we get through the balance of this back half of the year with the H&E fleet. So we're encouraged about the stabilization there.

I appreciate it. And just for clarification, I think the slides mentioned accelerated impact of acquisition dis-synergies created a lower revenue base, but sort of how should we think about how much of synergies versus dis-synergies are embedded in the full year revenue and the EBITDA guide as well?

Yes. Good question. I think if you think about the entry rate of H&E into us, prepared remarks had about a minus 15% and then my comments back to Rob is you're probably looking at something a little bit greater than minus 15% in the back half just due to the tough comparison. So that's how I would think about it.

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

I have a question regarding the free cash flow guidance. Could you explain it a bit more? It seems like there was about $130 million expected from the Big Beautiful Bill and a potential $300 million benefit from sales of OEC. That doesn’t leave much implied for the core business’s free cash flow for the year. What should we consider as the baseline for free cash flow going into next year for the business?

Yes. Good questions, one and all. I think I've said in my mind, the way I would think about the free cash flow capabilities of this business in a normalized environment sort of thinking mid-single-digit growth is somewhere between 10% to 15% free cash flow generation off of the revenue base. I think what makes the look through here a little bit more difficult, Kyle, is that we're missing five months of free cash flow generation from H&E. And so when you think about that, I think my sort of guide here of 10% to 15% of revenue on a free cash flow basis begins to make some sense. That aligns to whether you wanted to look at it on a GAAP basis for the year, if you wanted to look at it on a pro forma basis, and evaluate H&E in there. You kind of come to this $500 million to $600 million on a pro forma basis for the year, which aligns with where I would have anticipated the business to be.

That's helpful. It seems there is still some pricing pressure for H&E in the quarter, so it would be useful to compare pricing for H&E versus legacy Herc. Is H&E pricing still negative while Herc remains positive? Additionally, how should we view pricing at a high level for the remainder of the year and into next year?

Yes. I mean, I think the pricing headwinds that H&E are taking on are sort of already embedded inside of that overall revenue guide that I gave you for them. I think on the Herc side of the equation, we don't break apart pricing components. I would tell you that pricing was a contributor to revenue growth in the quarter and leave it at that.

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

Mark and Aaron, I think you guys talked about workforce stabilization at the beginning of the call. Can you just remind us how much of the $125 million of cost synergies is headcount related? And maybe just help us clarify does that assume that the headcount reductions have already kind of taken place here into the back half? Or is there still work to do there as well?

Yes. Great question, Ken. I don't think we ever necessarily publicly disclosed how much of it was workforce related, but I would tell you it's a pretty good chunk. There's other components in their contracts and locations, and yadda yadda yadda. But yes, I would tell you we absolutely have identified the people and that sort of gives me the confidence to lay out that number as we sort of get to the end of the year being able to clip off sort of at a run rate basis, 50% of that $125 million. And we have sort of laid them out in buckets. There's a three, six, nine, and twelve sort of disposition of employees as we sort of work our way through the transition of the business. And so yes, all of that is sort of timelined and bright lined, and we have those marching orders.

Okay. And then for the follow-up, obviously, with the dis-synergies on the workforce disruptions last quarter, I'm just curious how you think about share gains or share loss in the quarter and your opportunity to kind of recapture that back as we progress through the rest of the year?

Yes. The H&E business, Ken, as you're aware, was really tied to the local markets more heavily than the Herc business. So some of those share issues will get manifested over the course of the marketplace kind of improving maybe some time when the cycle shifts again. But as far as the specifically about like the revenue that was assigned to some of the sales people that left earlier in the year, we know all those customers. We have all the data. We're putting in place plans and activities to reach back out to those customers right now and over the rest of the year. Some of those customers, we didn't have a relationship with, some of them we did. So there's going to be a lot of activity going on with our sales force. And now we've got a very large sales force, so with our CMs and our activities to get them all engaged there. Our teams are all aligned now and ready to go, so we're planning on clawing that back.

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

I have a couple of questions. First, regarding the revenue synergy from cross-selling specialty products, you previously mentioned that this might take some time due to the need for training and education of the sales team. Are you expecting to move through this process quickly since you're bringing the fleet on board this year, and will you start to see those revenue synergies in the early part of 2026? Is that an accurate understanding? Secondly, I would like some clarification on the legacy Herc component of the guidance. Can you walk me through the different aspects? I understand that there has been no change in the underlying market for Herc, but you've adjusted your expectations regarding branch openings. Is that the key difference?

I'll take the first one, Neil. When considering specialty, customers can generally be divided into two groups. Some know exactly what specialty product they need, while others require assistance in technically setting up their projects to address specific issues. We're already seeing some early synergy successes with the H&E team, which has started right away, and we're monitoring this progress. The first group consists of customers who knew what they wanted but where H&E lacked the necessary product. We've begun a campaign to gradually develop the H&E sales team's understanding of our extensive specialty product range. However, we must proceed cautiously. The immediate priority is to integrate them into our systems, and we're already achieving some early successes. As we approach the beginning of 2026, everyone will be fully trained. The interesting aspect of specialty is that if you're a general rental sales professional with a customer requiring a technical solution, you don't need to have the technical know-how yourself. You can rely on our sales force and the technical experts we have in the specialty area to assist with customer issues, which is essentially how our system operates.

And then, Neil, on the legacy Herc side of this, and I think I said it in the prepared remarks. But effectively, what we did at a high level was flowed the Herc first half run rate into the new guide as a starting point and then layered on to that our anticipated growth provided by H&E and then layered on top of that some revenue synergies, which Aaron just kind of covered off with you.

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

I wanted to dissect fleet movement impact to the second quarter and the second half maybe from a couple of different ways. And number one, just shifting fleet from lower utilization branches to markets with high demand? Secondly, fleet disposition with H&E and how that impacts fleet movement within mega projects and just overall, was fleet movement an incremental headwind to REBITDA margin in the second quarter? Or is it embedded in the second half?

Yes. Steven, a couple of things about fleet movement I'd mentioned is that the Western United States has more moderated local markets than other parts of the U.S. So we've moved fleet kind of that direction. When the H&E business came in, in June, we found that we were able to say yes more frequently and quicker to big projects, mega projects, a lot of examples in that arena. And then the last piece is that when you think about the logistics, right, so one of the things we noticed right away is that with our greater scale and larger footprint of fleet and locations, we're able to use third-party freight to move fleet less frequently than we have previously, and there has been a tremendous amount of inflation in third-party freight over the last year or so. So that's really helped us kind of be more efficient, Steven. Did I answer your questions there?

The only last part of it would be if there's extra expense headwind embedded in the second quarter result for REBITDA or in the second half?

No. I think, Steven, Aaron kind of summed that up. But I think as we sort of get used to our new normal increased scale, I think you'll even see less of that. I would tell you that repositioning of fleet sort of is what we do. And I think as we go forward, the scale benefits of this to our markets sort of allows us to hopefully do less of that over time. Fleet is closer to where we needed to be just because of increased scale.

Excellent. Okay. And then my follow-up would be dissecting core Herc rental revenue trends to 4% growth seems solidly in line with where large peers were. Just on an order of magnitude, were locals a negative and megas a positive when you look at that? And then thinking about rate and volume, just order of magnitude, how that contributed to the 4%?

Yes. I would tell you that sort of across the board, general rental, specialty, and then if you wanted to roll that up and look a level higher, your national accounts were all sort of contributors to revenue growth inside of Q2. As I stated earlier, we're not pulling apart pricing, but it was a contributor to revenue growth in the second quarter as well.

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

I just wanted to touch on guidance again. I know we've discussed it quite a bit. But just looking at the EBITDA raise of about $237 million. In the back half of last year, H&E did about $350 million EBITDA in Q1 for them was down 19%, so this seems to imply EBITDA weakening about down 30% year-over-year in the back half. So given that you've stabilized the revenue base, why is it that you seem to be implying that EBITDA declines increase?

I believe that if you break it down, for at least the first six months of the year, we effectively have a 100% flow-through of that revenue dollar to the negative. So while it may appear to be around 30% from a percentage standpoint, it’s nearly dollar for dollar in terms of the revenue being lost. Furthermore, I think there’s a transition aspect to consider. We need to adjust our fleet and business to fit the new revenue base, and that is part of the transition we are experiencing in the latter half of the year.

Understood. And just turning to a different segment of the business. Looking at the breakdown, it seems like expenses at Cinelease have tripled year-over-year. What's the driver behind that pickup in costs there? And is that something that you expect to recur going forward?

I think that, obviously, we've stated Cinelease has struggled. It started to get some footing at the beginning of 2024, and then it took a pause again and that's sort of what we're up against until productions re-shore into the U.S. I think the biggest sort of cost difference year-over-year, Sherif, is just an impairment that we took on the fair value of the assets. The operational piece of that really is relatively unchanged year-over-year, but we did take an impairment charge in the second quarter.

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

To follow up on the previous questions, if I understand correctly, H&E revenue is expected to decrease by about 15% in the latter half of the year, with EBITDA under pressure by around 30%. How would you differentiate what's cyclical from the issues related to employee turnover that you mentioned earlier? Additionally, how do you perceive the structural aspects of this situation, and what actions are necessary to address it? Although you mentioned that conditions have stabilized, do you need to focus on replacing employees, possibly initiating a hiring campaign, or should you prioritize accelerating cost synergies to adjust for the business operating at a lower level?

Yes, there's a lot to unpack here. As we navigate through the integration and optimize our fleet, we are committed to running the business and making informed decisions. I do not expect us to expedite cost synergies at this stage; we need to follow through on our integration plan. This process is likely to align with the early part of Q1 regarding the realization of cost synergies. I believe we will be able to provide more clarity as we approach 2026. We are currently in a transitional phase that requires adjustments in various areas, including our fleet and workforce.

Understood. And I'm curious, I guess, for my follow-up, how you think about leverage and the path towards delevering? Maybe you can comment on that. If I understood your comments on free cash flow on a more normalized basis, we should be looking somewhere north of $600 million, maybe closer to $700 million. You've got over $8 billion in debt. So what's the path here going forward? And given your leverage goals, how long do you think you're going to be maybe on a sideline from an incremental M&A perspective?

All very good questions, Mig. And I'll take the last piece of that first. I think that we have stated that we will be inside of a target of 2x to 3x sometime inside of calendar 2027. And that really hasn't changed. Obviously, the base of the business here needs adjusting and we'll do that. But that doesn't change sort of the outlook of getting inside of that target range of 2x to 3x inside of calendar 2027.

Yes. As far as M&A goes, Mig, as I've said in my prepared remarks and we'll continue, we're going to pause any additional M&A activity for the near term, until we complete this integration and achieve a start on the path of achieving our synergy targets, both on a cost and a revenue side. And then as we get this leverage moving in the right direction, we'll see what's available out there. And at that time, we'll determine whether or not there are any appropriate targets for future M&A.

Your next question comes from the line of Steven Fisher with UBS.

I'm just wondering if you see any differences in the profile of large projects over the next, say, 12 to 18 months relative to what you've seen over the last couple of years in terms of either end-markets or geography? Is there going to be more public sector infrastructure big projects versus what's been the private sector over the past couple of years? Just curious about that large project mix.

Yes, Steven, this is Aaron. I'll address that. Over the next 12 to 18 months, we have a strong pipeline. There's certainly an increase in data center activity, along with more planned infrastructure work coming online. We're seeing a significant rise in industrial manufacturing projects, whether related to reshoring, pharmaceuticals, or chemicals. Additionally, there is a notable increase in projects focused on water treatment and services, which also falls under infrastructure. It's a very robust pipeline. Moreover, it seems like every city is looking to develop new stadiums, with frequent announcements in that area. This is quite encouraging, and I'd say the pace has accelerated more than ever.

That's really helpful. And then just as a follow-up, I think you gave the 6.8% as the rate on the new debt, did you give a total interest expense guide for the year? I didn't. But I think if you think about sort of weighted average cost of debt running somewhere between 6.3% and 6.4% on your debt projection, you're going to land right in line with where you need to be.

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

Okay. 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. Have a great day.

Ladies and gentlemen, that concludes today's call. You can now disconnect. Thank you, and have a great day.