Q1 2025 Herc Holdings Inc Earnings Call
[inaudible]
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 in our 10-Q was filed with the SEC all are posted on the.
Events page of our IR website.
Let's move onto our safe harboring GAAP reconciliation on slide three 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 factors section of our annual report on Form 10-K for the year ended December 31, 2024 and.
In addition to the financial results presented on a GAAP basis will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance.
Reconciliations to these non-GAAP measures to the closest GAAP equivalent can be found in the conference commentary.
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 13th and the Keybanc Industrial conference in Boston on May 29, we hope to see you at one of these events.
Speaker Change: 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.
Speaker Change: Leslie and good morning, everyone. Our first quarter results reflect the strength and resiliency of our diversified business model and best in class talent.
Speaker Change: <unk> continued to demonstrate remarkable flexibility and disciplined leadership in a macro environment characterized by diverging trends between strength in national accounts from new large project development and challenges in the local market related to prolonged elevated interest rates.
Speaker Change: The team also executed very well navigating demand volatility in the recent quarter, resulting from unusually cold weather in late January and mid February in the southern states, which caused us to temporarily closed some of our branches and further impacted daily and weekly low local rentals during that period.
Speaker Change: Despite the headwinds we continued to leverage our broad capabilities to capture new opportunities and focus on what we control, while maintaining our strong commitment to safety and serving our customers well.
Speaker Change: With utilization snapping back in March and their incremental upside from 2024 acquisitions and strong Mega project activity, we delivered equipment rental revenue growth of approximately 5% in the quarter, excluding the <unk> business, which is currently held for sale.
Speaker Change: We continue to follow our playbook leveraging branch network scale, our broad fleet mix technology leadership.
Speaker Change: Capital and operating discipline to position us to manage across the cycle and generate sustainable growth over the long term.
Speaker Change: Now, let's turn to slide number four for a rundown on these growth strategies.
Speaker Change: As you know in the first quarter, we executed a merger agreement to acquire <unk> equipment services, and it's 160 U S branch locations to expand our scale geographic coverage and long term opportunities.
Speaker Change: Integrating this acquisition will be our primary focus over the next several years and therefore as stated we are pausing other M&A initiatives for the time being and completing the remaining in flight Greenfield.
Speaker Change: We opened three new facilities in the quarter.
Speaker Change: HMA acquisition like others before it helped to drive revenue and fleet efficiencies in key metropolitan areas in line with our urban market growth rather than.
Speaker Change: In addition towards desirable locations.
Speaker Change: <unk> brings complementary fleet category valuable new team members with a strong cultural fit and greater local account presence, while improving our national account capabilities.
Speaker Change: At its core the acquisition strategy for HMA is no different than the strategy used for the other 50 plus acquisitions, we've completed and while that's our largest we view this as quite manageable.
Speaker Change: Moving onto our fleet mix strategy, we're continuing to increase specialty fleet capex to be able to cross sell our expert solutions to acquire genuine customers to capture share of wallet opportunities.
Speaker Change: To support the incremental demand from Mega projects.
Speaker Change: Specialty solutions are a resilient product offering addressing urgent supplemental and critical demand situations technique.
Speaker Change: Technology is another important value driver for her.
Speaker Change: We continue to advance our proprietary and customized internal applications for pricing fleet management logistics and transportation, while delivering more value to our customers through our industry, leading brokerage roll account management platform.
Speaker Change: Finally, we are disciplined stewards of capital by strategically managing fleet investments to drive asset productivity and taking the targeted agile approach to addressing demand trends, we are focused on efficiency and driving higher returns on our investments.
Speaker Change: Now on slide number five I wanted to take just a minute to preempt some of your questions about the current demand environment and the potential impact of tariffs on our business also I'll provide a quick update on progress towards the closing of the acquisition.
Speaker Change: First as we stated as the operating landscape continues to be a tale of two contrasting trends our national account business is growing fueled by federal and private funding for large construction projects like data centers manufacturer, ensuring an LNG facilities, we are not seeing any emerging cat.
Speaker Change: <unk> trends or changes in the level of activity or scope of projects for 2025, and we are not seeing any unusual level of delays outside the normal course for modifying designs juggling permits or securing labor.
Speaker Change: It's too early to tell how that unfolds as developers get clarity around the administration's policy outcomes. We are already seeing some incremental onshoring announcements from chips and pharmaceutical manufacturers, but we'll have to wait and see how all that plays out today. It seems it's business as usual for the large national accounts.
Speaker Change: On the local landscape there continues to be challenges on we'll start anniversarying those here in the second quarter.
Speaker Change: While there are ongoing opportunities and facility maintenance municipal and infrastructure projects and the stalwart education and health care end markets. Other more interest rate sensitive jobs continue to be on hold restricting overall local account growth.
Speaker Change: With interest rates remaining high it's not getting any better but it continues to be manageable for those of us with diverse end markets customers product offerings and geographic coverage. If you don't have other opportunities to pivot to it's definitely a challenging local operating environment, having said that there is no real significant.
Speaker Change: Change for us in the local marketplace.
Speaker Change: When it comes to tariffs, we don't expect any direct impact to our procurement costs in 2025.
Speaker Change: Source the vast majority of our fleet domestically at orders on pricing for this year have already been secured regarding any indirect impact that Mike stemmed from our customers' tariff exposure again, it's too early to tell but for the national account product projects already underway and those that are scheduled to launch this year.
Speaker Change: As far as we know now there have been no changes to the existing plans.
Speaker Change: Strategic investments process improvements and enterprise wide cost management are where we're focused as we work to successfully navigate this dynamic operating cycle.
Speaker Change: To quickly update you on the acquisition.
Speaker Change: There is nothing really new to report if you've been following our filings last week, we refiled, our HSR application in order to give the FTC more time to complete their review process. We have been working closely with them to answer any questions and supplying requested data in a timely fashion. The bottom line is that we will be supportive of that.
Speaker Change: Process and are confident that with a combined 6% share nationally we won't have any unmanageable areas of concern sometimes these things just take time.
Speaker Change: As you know the S. Four has been filed related to the new shares will be issuing we received a first round of comments from the SEC and address those and an amended filing on Friday. So that process is going smoothly and we have no concerns here either.
Speaker Change: The tender offering works is that we need to complete the regulatory review and have a majority of the shares tendered before closing so our focus continues to be getting through the regulatory process as expeditiously as possible.
Speaker Change: Finally, we started preparing for the integration based on a targeted midyear closing our integration management office is led by one of our most senior field executives our integration team, which includes leaders from HR.
Speaker Change: <unk> and field operations has organized around the drivers of value.
Speaker Change: And the operating model I am pleased with the work that's being done.
Speaker Change: At the same time, we say it a lot and we say it with emphasis we cannot take our eyes off running our business.
Speaker Change: My job to make sure we've got the bandwidth to be able to successfully deliver on our commitments. The integration team has clear roles and responsibilities and we've engaged the Boston consulting group to support our cultural integration and change management initiatives.
Speaker Change: Our operators to focus on our customers and our business communication is going to be a key to a successful outcome. So that will be a priority all along the way now I will turn the call over to Aaron who will take a little talk a little bit more about operating trends and then Mark will take you through the first quarter business performance drivers.
Speaker Change: Aaron.
Aaron: 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.
Aaron: Safety is at the core of everything we do as you can see on slide seven our major internal safety program focuses on perfect days, and we strive for 100% perfect days throughout the organization and.
Aaron: In the first quarter on a branch by branch measurement all of our operations achieved at least 96% of days is perfect.
Aaron: Notable our total recordable incident rate remains better than the industry benchmark at one point, reflecting our high standards and commitment to the safety of our people and our customers.
Aaron: Turning to slide eight we are successfully addressing the needs of both local contractors and large national accounts continuing to target a 60 40 revenue split long term as this diversification.
Aaron: <unk> for growth and resiliency.
Aaron: Local accounts represented 53% of rental revenue in the first quarter compared with 55% a year ago.
Aaron: Despite the slowdown of local projects starts as interest rates remained elevated we are expanding in select regions, where infrastructure education local utilities and facility maintenance repair projects are underway.
Aaron: While the national account side government and private funding for new large and Mega projects is still quite robust.
Aaron: We're continuing to win our targeted 10% to 15% share of the project opportunities with several new Mega projects on deck. This year and the 2024 projects still ramping up.
Aaron: Moving to slide nine as you know we've laid out a net fleet Capex plan for 2025, it's roughly 35% lower year over year at the midpoint of our guide.
Aaron: Continuing to improve fleet efficiency and address the dynamic market as the intended goal and we'll do that by aligning equipment category classes with demand digesting that 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 and in the prior year quarter.
Aaron: 2025 fleet investments are targeted for the typical replacement fleet certain mega project needs and growth in specialty categories.
Aaron: We also dispose of 56% more fleet on an OE basis last quarter versus a year ago to rotate older equipment and pull the 2024 acquired fleet for optimal equipment quality mix and utilization.
Aaron: At the same time, we continued to actively shift sales into the higher return retail and wholesale channels, helping to level set values and a stabilizing used equipment market.
Aaron: In the first quarter, we realized proceeds of 45% of all we see on our equipment dispositions.
Aaron: You can see our fleet composition it always see 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.
Aaron: Excluding the <unk> assets are basically it is about $6 7 billion.
Aaron: In our higher margin specialty fleet would be about 20% of that.
Aaron: With plenty of room to continue to grow.
Aaron: 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.
Aaron: And delivering value added expert solutions to meet these customers' critical or emergency requirements.
Aaron: <unk> another degree of operating resilience for our business.
Aaron: Sticking with the topic of resiliency lets turn to slide 10, where you can see that despite the uncertain sentiment swirling in the general market industrial spending and nonresidential construction starts still show plenty of opportunity for growth built on a foundation of Megaproject development and infrastructure investments.
Aaron: 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.
Aaron: Dodge is forecast for nonresidential construction starts in 2045 is estimated to increase 8% to $482 billion.
Aaron: Additionally, there's another 357 billion.
Aaron: In infrastructure projects forecasted for 2025, Thats also an 8% increase over 2024.
Aaron: The dotted line on these charts reflects growth over pre pandemic peak levels.
Aaron: To 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.
Aaron: We've also included a trend chart Mega projects starts on the upper right quadrant.
Aaron: It gives you a snapshot of the year to year growth are the largest construction project starts in North America over the last two years and for 2025.
Aaron: The charter continues to show a substantial number of Mega projects launching this year with a total dollar value exceeding $250 million.
Aaron: We estimate we're only in the early to middle innings of a multi year opportunity depending on the project side, whether it's infrastructure LNG data centers et cetera and.
Aaron: And as we've stated our goal is to capture 10% to 50% of these opportunities.
Aaron: We don't take the start out beyond this year because visibility is less clear for actual start dates of those projects still in the planning phases, but there was an additional two trillion dollars of the Mega project pipeline.
Aaron: Of course, there is some overlap in projects among these four datasets, but no matter how you look at it.
Aaron: For companies with the safety record product breadth technologies and capabilities to service customers at the national account level to opportunities for growth remains significant.
Aaron: Turning to slide 11, I'll state the obvious diversification is an important strategy for fostering sustainable growth and navigating economic cycles.
Aaron: As Hercules 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.
Aaron: We've become more resilient to downturns are more adaptable to emerging opportunities like the megaproject developments technology advancements that support customer productivity and the secular shift from ownership to rental, especially in the specialty category classes.
Aaron: We believe we are well positioned to manage dynamic markets and the integration of <unk> will further bolster our capabilities and therefore, our opportunities with that I'll pass the call on tomorrow.
Speaker Change: Thanks, Aaron and good morning, everyone I'm, starting on slide 13, with a summary of our key metrics for the first quarter for.
Speaker Change: For clarification. These are our GAAP results that include center lease, which as has been discussed is classified as assets held for sale.
Speaker Change: I'll just make a couple of quick points here before turning the focus to the core results.
Speaker Change: In the first quarter rental revenue increased two 8% and adjusted EBITDA was flat at $339 million.
Speaker Change: We recorded a net loss in the first quarter related to $74 million of HMA transaction costs. However, on an adjusted basis net income was $37 million.
Speaker Change: We have nothing new to report on the sale of certain lease as we continue our negotiations towards a deal let's move to slide 14.
Speaker Change: Here, we outline our core financial results, which exclude <unk> from both periods in order to give you a better sense of how the base business performed in the quarter.
Speaker Change: A full reconciliation of quarterly performance metrics can be found on slide 24 in the appendix of our presentation.
Speaker Change: For the first quarter equipment rental revenue was up four 9% year over year in line with our internal expectations made up of increases in both rate and OECD fleet on rent, partially offset by an unfavorable mix, primarily resulting from equipment inflation year over year.
Speaker Change: For clarification when it comes to revenue fleet inflation is in the mix to adjust the volume measured at OFC dollars two a unit metric.
Speaker Change: EBITDA during the first quarter was up slightly but EBITDA 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 and greenfields versus last year.
Speaker Change: 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 absorptions.
Speaker Change: Including the increased insurance expense year over year, we will anniversary that in the second quarter adjusted EBITDA increased two 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 <unk>.
Speaker Change: Margin in rental revenue.
Speaker Change: Trailing 12 month ROIC for the core business declined 110 basis points to nine 8% at the end of the quarter.
Speaker Change: <unk> year over year relates to the impact of the local market slowdown and inefficiencies associated with new acquisitions and Greenfields overtime. 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.
Speaker Change: 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 capital expenditures. Our current leverage ratio is two five times, we remain confident in our business model and are committed to increasing shareholder value.
Speaker Change: In the first quarter, we declared a quarterly dividend of <unk> 70, which.
Speaker Change: Which represents a 5% increase in our annual dividend to $2 80 per share.
Speaker Change: If you flip to slide 16, you can see that on our Standalone 2025 guidance is unchanged as noted our guidance excludes the performance of <unk>. Despite.
Speaker Change: Despite the weather related choppiness to demand in the first quarter March rebounded nicely.
Speaker Change: In April month to date 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 we will lap the local market slowdown that began last year for a better comp.
Speaker Change: For net Capex, we're tracking to our guide and expect by mid year, we will have executed on approximately 45% of our gross Capex plan given the seasonal ramp in the second quarter heading into the peak season.
Speaker Change: 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 though even through this slower phase of the cycle.
Speaker Change: Finally on slide 17, I thought I would reiterate our confidence in the value creation opportunity that the <unk> acquisition brings to hurt the two most frequently asked questions we're getting from investors.
Speaker Change: Or about the durability of the revenue synergy target and the path to deleveraging post close.
Speaker Change: When it comes to revenue synergies in evaluating these opportunities we brought to bear 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 targeted synergize multiple.
Speaker Change: Like those businesses <unk> offering is predominantly general rental which provides us substantial cross selling white space, where we can bring our specialty fleet and expertise and rental solutions to their customers.
Speaker Change: We also have general rental opportunities that combined with <unk> expanded location network propelled a better valuation proposition across customer accounts.
Speaker Change: For our base case, we're confident in our ability to achieve the revenue synergies over the three year integration period.
Speaker Change: With the expectation of 20% captured in year, one primarily focused around general.
Speaker Change: General rental cross selling and then ramping up to 60% in year, two with specialty cross selling and the balance in year three.
Speaker Change: 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.
Speaker Change: With relatively lower capital to achieve that EBIT.
Speaker Change: Reflecting better utilization of existing fleet, and our purchasing shift to higher utilization specialty fleet. The combined entity will be capitalized to maintain financial strength and flexibility.
Speaker Change: All in all we're excited about all of the opportunities ahead and believe the combination with <unk> will create benefits for shareholders employees and customers with that operator, we'll take our first question.
Speaker Change: We will now begin the question and answer session.
Speaker Change: I would like to ask a question at this time since <unk> followed by the number one on your telephone keypad and again, please limit to one question and one follow up.
Speaker Change: Phosphate shrike moment to compile the Q&A roster.
Speaker Change: And your first question comes from the line of Jeremy Revich with Goldman Sachs. Jeremy. Please go ahead.
Jeremy Revich: Yes, hi, good morning, everyone.
Speaker Change: Good morning, Gerry Mark.
Speaker Change: Mark I'm wondering if you could just continue the conversation you mentioned in April the results were in line with your expectations for the full year guide. So I think just pulling the pieces together that implies the dollar utilization turn north of 40% in April can you just comment on that is that the magnitude of recovery.
Speaker Change: That you saw in April because thats, what to get the full year run rate, if thats linear over the coming quarters.
Speaker Change: That's what the math would imply so.
Speaker Change: Is that what you saw in April or are you banking on a continued great question, Jerry and Thats really spot on I guess, maybe I go a step further and say that really the the dollar utilization improved in March to.
Speaker Change: To that at the levels.
Speaker Change: That were sort of comping against from prior year.
Speaker Change: So that is essentially whats carried through at least through the first half ish of April.
Speaker Change: And so I think then you would expect sort of a 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 a build from Q3 into Q4, and then sort of stabilizing at or around that level for <unk>.
Speaker Change: Okay Super I appreciate the color and then Larry can I ask in terms of the <unk>.
Speaker Change: Pricing discipline that you are seeing in the industry can you just comment on that obviously everyone's seeing just general cost inflation in the industry data I think has been pretty makes one indicator showed a modest contraction in pricing in March can you just talk about what youre seeing in the market.
Speaker Change: What's your view on the industry pricing discipline that you are seeing based on all of the indicators you track.
Speaker Change: Yes.
Speaker Change: We stopped reporting on pricing per se in any detail, but I would tell you that we continue to feel comfortable that that there is discipline in the industry is not over fleeting.
Speaker Change: We will have to adjust according to what happens in the local market, but generally where.
Speaker Change: We are seeing fairly constant and stable pricing.
Speaker Change: Okay. Thank you.
Speaker Change: And your next question comes from the line of Ralph Lauren timer with Melius Research. Please go ahead.
Speaker Change: Hi, Thanks, Good morning, I Wonder if you could talk around more about you. Yes. Good morning, your <unk> margin performance in the quarter and maybe it may be.
Speaker Change: A range of revenue scenarios that you need in order to post positive margin. Let me just talk about the factors that led to the margin decline and then where do you kind of need to be above stall speed on margin maybe thats. The other day in February maybe thats right <unk> lindeman minutes talking about margin dynamics from different revenue shares.
Speaker Change: Yes, I mean I think fit.
Speaker Change: Youre sort of staring at rate quarter to quarter, you have sort of a 150 basis points sort of.
Speaker Change: Decrement, but the reality is is that that's occurring in Q1 lowest revenue quarter.
Speaker Change: The reality is that's about $10 million.
Speaker Change: So at the end of the day.
Speaker Change: We're not talking about huge dollars, even though the margin profile certainly looks bigger than that when you were just talking about 150 basis points, but it is happening in Q1, obviously, that's our lowest.
Speaker Change: Quarter of the season and I think the other thing that is sort of.
Speaker Change: <unk> the comp is the fact that there is one less calendar day in 'twenty Fives Q1 versus <unk> 24 in Q1, which took the benefit of an extra day.
Speaker Change: Okay got it and then could you just talk about how you spent on fleet through the year you didn't change your capex outlook, you or maybe a little bit Conservative I think you touched on this and <unk> all else equal are you trying to be a little bit more tactical this year and casualty environment weakens or is that just random random vary.
Speaker Change: So I don't know, whether thats, a signal that you're being more cautious on sage black and I'll start.
Speaker Change: I don't think Theres any signaling in it it was just sort of reacting to the quarter and how it played out right. We talked about sort of the choppiness of the demand profile in both January.
Speaker Change: January and February and so.
Speaker Change: Zinc gross capex adds from.
From an OE perspective, we're about $75 million in Q1.
Speaker Change: I don't think theres anything to read through to that because at the end of the day I think by the end of the second quarter will probably be somewhere in that 45% of the of the Capex guide, so essentially sort of halfway through it.
Speaker Change: As a reminder, two and three are the big Capex adds as we build into the season in Q1, and four are sort of the disposition quarters sort of all in so I don't think Rob you would read anything into that other than just sort of the choppiness that started the quarter.
Speaker Change: Thank you.
Speaker Change: And your next.
Speaker Change: Question comes from the line of Tami Zakaria with JP Morgan Stanley. Please go ahead.
Tami Zakaria: Hey, good morning. Thank you so much for taking my question.
Tami Zakaria: My first question is I think there's some general talks about a potential macro slowdown later this year or possibly a recession, even and given all the tariff conversation I was wondering does your current guide embed.
Tami Zakaria: <unk> scenario.
Tami Zakaria: If not how should we think about the <unk>.
Tami Zakaria: <unk> ability of that.
Tami Zakaria: No I mean, I think the guide as it sits today is sort of what we see today.
Tami Zakaria: And that is sort of a no growth local market environment, which we stated when we release guidance and sort of the backfill to that is growth in the infrastructure and Mega project environment, if the macro were to change.
Tami Zakaria: Significantly.
Tami Zakaria: Then that theoretically could cause us to sort of change our guide too.
Speaker Change: Understood. That's helpful and then related to the pending acquisition I know you laid out some synergy targets.
Speaker Change: Wondering was there any customer exits and embedded in that synergy target at sometimes there is some natural customer churn after major acquisitions like that between two parties, though was anything like that embedded in your synergy target or not really.
Speaker Change: No there absolutely was we assumed a 10% dis synergy.
Speaker Change: Customer churn.
Speaker Change: Which we took sort of when you think about sort of the guide the revenue the revenue synergy guide about 60% of that churn.
Speaker Change: Was year, 1% and 40% of that churn was in the second year post close.
Speaker Change: Is that 10% sort of close to normally you would see in a year or higher than that.
Asking that question one more time Tammy.
Speaker Change: Is that 10% churn that you just mentioned baked into into the synergy target is that the normal rate of China is that elevated versus what you see normally.
Speaker Change: Yes, I would say it's.
Speaker Change: It's probably right in line I would also tell you that thats sort of above sort of the normalized attrition rate.
Speaker Change: That the rental companies.
Speaker Change: <unk>.
Speaker Change: Sort of experience on a year to year basis.
Speaker Change: Okay. Thank you.
Speaker Change: Okay.
Speaker Change: And your next question comes from the line of Steven Ramsey with Thompson Research Group Steven. Please go ahead.
Speaker Change: Good morning wanted to think about Mega projects being key to supporting the 5% growth outlook and the Mega projects start level being over two times. The last couple of years, leading my question Mega projects, where you are the primary supplier or large supplier.
Speaker Change: But to start to pick up what you have in hand is that enough to support a sustained sort of mid single digit growth outlook beyond this year.
Speaker Change: Yes, 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.
Speaker Change: The key got 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.
Speaker Change: Disciplined pricing, but I'm curious if your go to market approach is changing in any way to make sure you keep that share.
Speaker Change: Well, we have a comprehensive go to market strategy, which is attributed to our local sales team in the field.
Speaker Change: And we updated that a couple of years ago. So it hasnt changed from 2024, but the go to market strategy gives incentives for.
Speaker Change: Acquiring new business.
Speaker Change: Revenue health like diversifying your pure rental across our specialty businesses.
Speaker Change: Things of that nature, so it hasnt changed since 'twenty four and it's the same go to market that will use when.
Speaker Change: The <unk> acquisition has brought on board.
Speaker Change: Okay. That's helpful. Thank you.
Speaker Change: Okay.
Speaker Change: And your next question comes from the line of Kyle Mangas with Citigroup Kyle. Please go ahead.
Kyle Mangas: Thank you I was hoping if you could provide some color on just what youre seeing in the core end markets I know you touched on it a little bit, but maybe just color on what youre hearing from customers, both national and local.
Kyle Mangas: Post Liberation day, and just have tariffs and then the conversation at this point and just.
Speaker Change: What are you hearing from customers on tariffs and how that could maybe impact projects or capex. This year.
Well I'll answer it in two different ways first from the larger national accounts that are doing the big projects, especially like mechanical general contractors electric contractors, they've got plenty of work.
Speaker Change: That's going to continue on and we believe the local markets of course have slowed down so.
Speaker Change: Local contractors, they're probably.
Speaker Change: <unk>.
Speaker Change: Feeling a slower pace of.
Speaker Change: Construction activity as it relates to the tariff activity, it's really early for us to get that kind of pulls were not hearing much from our contractor base about them changing their direction. We're certainly not seeing an abundance of delays of projects. So it's really just early in that phase, where we're paying close attention to that and.
Speaker Change: As we all know it's a moving target right now.
Speaker Change: But we're paying close attention to it.
Speaker Change: Got it understandable and then on margins for the equipment rental margins were a bit light in the quarter understand there was some just lower fixed cost absorption.
Speaker Change: And I guess, how much was also related to weather and some branch shutdowns in the quarter and then just any other cost pressures.
Speaker Change: Maybe unexpected in the quarter that we should be thinking about or paying attention to.
Speaker Change: No.
Speaker Change: Think that one sort of the reduced margin.
Speaker Change: Comparably over Q1 of 2024 was certainly anticipated rate I think as Q1 of last year.
Speaker Change: The used equipment market continued to sort of moderate as you work your way through 2024, and I think it just shows.
Speaker Change: Primarily through the.
Speaker Change: The proceeds percentage last year was 49% and this year it was closer to 45%.
Speaker Change: So you think about sort of a 10% ish.
Speaker Change: Sort of reduction there I think the good news on that front is that we view the used equipment market has stabilized its sort of been that way.
Speaker Change: Through the back half of 2024 and into Q1.
Speaker Change: So I think that sort of coupled with.
Speaker Change: Fixed costs that in Q1, it's sort of you're most exposed quarter, because it's your smallest revenue quarter.
Speaker Change: I mentioned in my prepared remarks.
Speaker Change: We hadn't crossed over sort of the increased insurance expense that we talked about last year Q2.
Speaker Change: So that was a comparable.
Speaker Change: Our comp that wasn't necessarily there last year Q1, and then just general.
Speaker Change: M&A and greenfield activity and covering off that fixed cost component is more exposed in Q1, because the revenue is certainly less.
Speaker Change: Got it thank you guys.
Speaker Change: Thank you.
Speaker Change: And your next question comes from the line of Ken Newman with Keybanc capital markets. Please go ahead.
Ken Newman: Hey, good morning, guys.
Speaker Change: Good morning.
Speaker Change: Good morning, Ken.
Speaker Change: Thank you for my first question Mark.
Speaker Change: Just thinking about the flow through obviously, there's a lot of moving pieces that you talked to just now.
Speaker Change: Is it fair to say that flow through also normalized in March and as are we back to that more normalized call. It <unk>.
Speaker Change: 40% to 50% type of range in the second quarter here.
Speaker Change: Yes, I think Thats fair to say I think that.
Speaker Change: It's sort of it falls into place once sort of the demand.
Speaker Change: Normalizes, which we saw in March and that was sort of the results sort of across the board.
Speaker Change: <unk> I mentioned earlier flowed through et cetera.
Speaker Change: Got it that's helpful and then for my follow up.
Speaker Change: I did want to ask what's driving the confidence that local account activity stays stable through year end I think you guys are.
Speaker Change: Acknowledging that the visibility within that market still remains kind of choppy youre not seeing it seems somewhat stable.
Speaker Change: My guess is that local account rental revenue was down year over year of <unk> and if that's right I think thats. The first time since 2020. So one is that the right way to think about it and then secondly, driving the confidence that that stays stable through year end.
Speaker Change: Yes look I think.
Speaker Change: Our confidence comes from the diversification of our business.
The new verticals in the new markets that we've entered as well as the addition of our specialty business into the local Gen rent companies that we've acquired that gives us ample opportunity to continue.
Speaker Change: That would be positive for us and I don't think it was down over last year Q1. So.
Speaker Change: We are looked into.
Speaker Change: We're operating at a relatively low level and I think we continue to add capability as well as diversification that'll keep us in good stead there.
Speaker Change: That's helpful. Thanks.
Speaker Change: Your next question comes from the line of <unk> <unk> with Baird Mig. Please go ahead.
Speaker Change: Thanks for fitting me in.
Speaker Change: 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 mixed negative from a margin standpoint for your business.
Speaker Change: No. It is not I think.
Speaker Change: The Mega project profitability profile is right in line with as we've talked about it.
Speaker Change: Now for I don't know, probably four or five quarters at a minimum.
Speaker Change: I think the the margin pressure in Q1 is right is back to what I said earlier in terms of sort of the.
Speaker Change: Not crossing over Anniversarying over a couple of things that happened in our didn't happen in Q1 last year that sort of happened in.
Speaker Change: Qs two through four and into Q1 of this year and then the other component of that is just sort of the lowest slowest quarter that we have and the fixed cost that we have to to overcome in that in a slowing M&A and acquisition environment.
Speaker Change: Yes, okay. So that's interesting because the Chinese experience with Mega project is a little bit different in decades, if I remember correctly.
Speaker Change: Sort of call that out as being a bit of a headwind to tomorrow.
Speaker Change: To margin because pricing was different so I'm kind of curious how your business is maybe structure in this regard different in <unk> and how you plan to adjust that post acquisition.
Speaker Change: Yes, I think Mig our business is much different than <unk>. I mean, there are similarities are both running core fleet that our breadth of products and 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.
Speaker Change: We're just much floor along in our journey than than <unk> that really is the difference maker. When you go into these big Mega projects and are really neutralize some of the the price you get for volume on the general rental fleet, you get especially fleet, which gives you that premium financial returns and therefore your stake.
Speaker Change: A megaproject looked a lot like our core business overall, and youre getting that that flow and extended utilization time utilization of the fleet over time.
Speaker Change: We like if I may.
Speaker Change: I would say if I may squeeze one final one.
Speaker Change: The leverage is obviously on a lot of People's minds, especially after after you announced this.
Speaker Change: The large acquisition. So I'm curious maybe you can comment on how you think about the pro forma leverage profile once the transaction is closed.
Speaker Change: And.
Speaker Change: Maybe given what's been communicated through through the stock price.
Speaker Change: And also on.
Speaker Change: Uncertain macroeconomic environment, how do you think about bringing that leverage down post close whats. 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 yes.
Speaker Change: Yes, no great question, I think sort of the entry or exit point. However, you want to look at that as probably just north of that three five range.
Speaker Change: As we've stated.
Speaker Change: We believe that we'll be back inside our two to three times leverage profile within 24 months.
Speaker Change: I think your question is sort of if the macro.
Speaker Change: It does in fact change on us.
Speaker Change: Post close.
Speaker Change: Then it's really just running the playbook.
Speaker Change: That we would run in a downside scenario. However, you want to think about how deep.
Speaker Change: That that downside scenario is right, we would cut capex age the fleet.
Speaker Change: Sell off excess fleet, and then begin to evaluate the variable cost structure of the business too.
Speaker Change: To continue to protect our margin profile.
Speaker Change: And Additionally, I'll remind you Meg maybe I don't know you were following us back when we spun from Hertz.
Speaker Change: We were levered at four three times with a totally broken company and we were able to bring that leverage.
Speaker Change: <unk> quite significantly in a pretty short period of time in this environment. Neither company has a broken company we are running two excellent companies.
Speaker Change: We expect to be able to perform as we've stated.
Speaker Change: Thank you good luck.
Speaker Change: Thank you.
Speaker Change: That concludes our question and answer session I will now hand, it over to Leslie Hunziker for closing remarks Leslie.
Leslie Hunziker: 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.
Leslie Hunziker: That concludes today's call you may now disconnect.
Leslie Hunziker: Okay.