Herc Holdings (NYSE:HRI) reported third-quarter financial results on Tuesday. The transcript from the company’s third-quarter earnings call has been provided below.
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Access the full call at https://events.q4inc.com/attendee/383873427
Summary
Herc Holdings reported a strong third quarter with equipment rental revenue increasing nearly 12% year-over-year, driven by efficient fleet management and strategic acquisitions.
The company’s strategic initiatives include expanding specialty offerings, enhancing technology platforms like ProControl, and focusing on megaprojects, aiming for a 20% market share in this sector.
CEO Larry Silber announced a transition to Executive Chairman, with Aaron Birnbaum set to take over as CEO, highlighting strong succession planning.
Future guidance indicates a positive outlook, with updated projections for full-year equipment rental revenue and adjusted EBITDA, supported by targeted investments in specialty equipment.
Operational highlights include successful integration of H&E Equipment Services, improved fleet utilization, and a robust pipeline of megaprojects anticipated for 2027.
Full Transcript
OPERATOR (Moderator)
We will host a question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Leslie Hunziker, Investor Relations. Leslie, please go ahead.
Leslie Hunziker (Investor Relations)
Thank you, Operator, and good morning, everyone. Today we’re reviewing our third quarter 2026 results with comments on operations and our financials, including our view of the industry and our strategic outlook. The prepared remarks will be followed by Q&A. Let me remind you that today’s call will include forward-looking statements. These statements are based on the environment as we see it today and are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the press release, our Form 10-Q and our most recent Annual Report on Form 10-K, as well as other filings with the SEC.
In addition, we’ll be discussing non-GAAP information that we believe is useful in evaluating the company’s operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials. Finally, please mark your calendars to join our management meetings at BNP Paribas Virtual Global group call on November 3rd, the Baird Global Industrials Conference in Chicago on November 10th, Rothschild & Co. Redburn’s virtual CEO conference on December 1st and the Melius Research Conference in New York on December 9th.
This morning I’m joined by Larry Silber, Chief Executive Officer, Aaron Birnbaum, President, and Mark Humphrey, Senior Vice President and Chief Financial Officer. I’ll now turn the call over to Larry.
Larry Silber (Chief Executive Officer)
Thank you, Leslie, and good morning, everyone. Before we turn to the quarter, I want to take a moment to address the announcement we made yesterday. Leading this company has been an honor and a highlight of my career and after more than a decade as CEO, I’ve decided the time is right to transition to Executive Chairman at the start of next year. I’m thrilled that Aaron Birnbaum will step in as Herc Holdings’ next Chief Executive Officer on January 1st. This transition reflects the strength of our succession planning and my complete confidence in Aaron and the entire leadership team. Aaron has been with Herc for more than 35 years. Over that time he has served in key roles across branch operations, sales, regional field management and executive leadership, and he understands this business as well as anyone in the industry. As our Chief Operating Officer and most recently as President, Aaron’s been instrumental in shaping our strategy and driving our operational excellence.
There is no one better prepared to lead Herc into its next chapter. In my role as Executive Chairman, I will remain actively engaged, working closely with Aaron and the Board on strategy, capital allocation and continuing to build on the strong foundation we’ve established together. I could not be prouder of what this team has accomplished or more excited about where it’s headed, and this quarter is a great example of why. The third quarter was an outstanding period for Herc Holdings and it reflects the strategic positioning we’ve built over the past year. As a reminder, in 2025 we closed the largest acquisition in our industry’s history and just nine months later we completed the integration of H&E Equipment Services, which Aaron quarterbacked from start to finish. That work is now firmly behind us and it has positioned us with a stronger and larger sales force, expanded scale and increased fleet availability to capture a greater share of wallet across the robust megaproject pipeline.
The third quarter is our first full quarter of comparable year-over-year combined results and the underlying performance is clear. Equipment rental revenue increased nearly 12% on an average OEC fleet growth of less than 2%. That relationship—strong revenue growth on modest fleet growth—is the direct result of being good stewards of capital. We’ve managed our fleet assets tightly, aligned the right equipment to the right markets and driven meaningful improvement in fleet efficiency, with dollar utilization up 360 basis points in the quarter.
This is exactly the kind of disciplined execution that defines Team Herc. Now turning to Slide 5, we continue to follow our proven playbook, executing against our long-term growth strategies. First, we are growing the core. Our top-line growth continues to be led by national accounts, fueled by robust megaproject activity across data centers, infrastructure, manufacturing and energy. Our increased scale and broader fleet capacity allow us to take on more of these large, complex projects and elevate our role with major contractors.
Second, we are expanding specialty. Specialty revenues grew double digits year over year in the quarter and specialty once again represents 20% of our total fleet at OEC, up from 17% a year ago. Specialty is a higher-margin, higher-return category and we continue to disproportionately invest here to support megaprojects, our new specialty branches and the cross-selling opportunities our larger customer base provides. Third, we are elevating technology as an industry leader.
Our proprietary ProControl platform remains a true differentiator, giving customers the insights and controls they need to track, measure and manage their fleet for a safer, more efficient job site. And finally, we continue to invest responsibly in our fleet to support highly visible customer demand while maintaining capital discipline and managing our balance sheet for the long term. Now moving on to Slide 6. Our performance also reflects a culture built on accountability, collaboration and shared commitment to our customers. As our organization has grown, that culture has kept our teams aligned and focused on consistent execution. Above all, safety remains our first priority. Our responsibility is to ensure our people have the training, tools and well-maintained equipment to work safely and help our customers do the same. That commitment underpins everything we accomplish.
With that, let me turn it over to Aaron to walk you through our fleet performance and our operating initiatives.
Aaron Birnbaum (President)
Thank you, Larry, for your leadership and mentorship over the years. I am honored to step into the CEO role in January, and I look forward to continuing the great work we started together. I’m also excited to have the privilege of leading the best team in the industry. The expertise, resilience, and dedication Team Herc Holdings brings to our branches and our customers’ job sites every day are truly what sets us apart, and in the third quarter that dedication showed up in our results.
Our expanded network, maturing specialty branches, broader fleet access, and stronger sales force are working together to serve more customer needs. Investments and integration work of the past year are translating into more effective execution across the organization and contributing to the second-half momentum we anticipated, turning to slide 8. Our fleet management approach is about more than deciding what to buy and what to sell. It’s about understanding customer requirements, coordinating equipment across our network, and getting the most productive use from the capital we already have invested. Our larger footprint gives us more flexibility to meet those requirements. We can draw on our broader equipment base, coordinate fleet across nearby branches, and support large projects without treating every new opportunity as a separate fleet purchase.
That expert fleet management is central to the efficiency Larry highlighted. At the same time, we are making targeted investments where customer demand supports attractive returns. We added approximately $580 million of fleet at original equipment cost in the third quarter, or about $1.2 billion year to date, supporting life cycle replacement, megaproject demand, and our expanding specialty offering. We also disposed of approximately $200 million of fleet at OEC versus $375 million in last year’s third quarter. The low level of dispositions reflects a different operating priority.
In the third quarter of 2025 we were actively right-sizing and aligning the acquired fleet. Today our focus is ongoing life cycle management and refining the mix to match demand. A key part of refining that mix is our specialty offering. As Larry noted, specialty equipment now represents 20% of our total fleet at OEC. That matches our pre-acquisition mix when we acquired H&E, which was weighted toward general rental equipment; our specialty share initially declined to 17%, returning to 20% this quickly. This reflects our targeted investment in specialty equipment to meet customer demand and intentional cross-selling activities to achieve our revenue synergy goals.
These assets generate higher dollar utilization and higher margins, but the value we bring goes beyond the equipment itself. Our specialty teams provide the expertise to help customers solve complex job site challenges, enabling us to address more of their needs and deepen those relationships. We continue to direct investment toward specialty and megaproject requirements while carefully managing general rental capacity in stable local markets. Ultimately, the goal is not simply a larger fleet.
It’s the right fleet deployed productively, with returns guiding our decisions. On slide 9, the demand environment continues to be bifurcated, and our diversification continues to serve us well. Local market activity remains stable. Overall, infrastructure, government, and maintenance-related demand continue to help offset softness in interest rate–sensitive commercial construction. National accounts, meanwhile, continue to lead our expansion. Our increased scale matters here. With greater branch density and a broader specialty offering, our sales teams can serve more of the customer’s requirements across multiple projects and locations and strengthen relationships with major contractors.
Our long-term diversification strategy remains focused on a balance of local and national accounts. The current strength of national account demand is an opportunity we are equipped to serve while maintaining the local presence and customer relationships that support resilience across the cycle. Slide 10 shows the breadth of that customer base. We serve contractors, industrial customers, infrastructure and government agencies, commercial facilities, and customers with event-driven requirements. Those end markets have different demand cycles, equipment needs, and service expectations. Our advantage is combining that breadth with sector expertise. A manufacturing facility, a utility project, and a data center may all need general rental equipment, but their special requirements and operating schedules can be very different.
Our sales professionals and product specialists work together to build the right solution for each customer. The larger specialty network gives those teams more to offer. It also creates opportunities to introduce specialty solutions to customers who previously rented only general rental equipment from us. That is how diversification translates into business development: more ways to serve existing customers and more entry points into new accounts, and less dependence on any single market.
Turning to slide 11, the external forecasts provide context for the opportunities our teams are pursuing. Dodge’s updated projection is for nearly $723 billion of U.S. megaproject starts in 2026, well above the level we saw in 2025. For 2027, Dodge is currently reporting about $776 billion of megaproject starts, with trillions of dollars more still working through the planning stages. As we discussed last quarter, we are targeting 20% share of the megaproject rental opportunity over time, counting only our revenue from projects where Herc Holdings is a designated primary or secondary supplier.
The pipeline we are pursuing continues to expand across project types and end markets. Our focus is converting those opportunities into rental activity through strategic project selection, coordinated fleet deployment, and reliable execution for customers. Turning to slide 12, this is the progression we outlined at the beginning of the year. The third quarter demonstrates how that preparation is translating into performance. Revenue synergies were an increasing contributor in the quarter, consistent with the second-half weighting we previously outlined. That momentum is the direct result of our operational progress. Our newer specialty locations are maturing, our sales teams are successfully cross-selling the broader offering, and our larger network is enabling deeper penetration into national accounts.
Beyond the acquisition synergies, we continue to focus on operating efficiencies at our larger scale. The Logistics Transformation initiative we discussed last quarter is a multi-year effort to improve routing, process rigor, cost recovery, and consistency across the network. Those priorities remain important, especially in an environment of elevated fuel and freight costs. As we move through the fourth quarter, our operating agenda is straightforward: serve the expanding project pipeline, maintain efficient fleet deployment, and keep improving execution across the network. The team has done the work to build this platform. Now we’re putting it to work for our customers and shareholders. Mark will now take you through the financial results and our updated outlook.
Mark Humphrey, CPA (Chief Financial Officer)
Thanks, Aaron, and good morning, everyone. I’m on slide 14 with a summary of our key financial metrics. Equipment rental revenue increased approximately 12% in the third quarter, reflecting growth in both our general rental and specialty solutions offerings driven by higher megaproject volume, pricing improvement, and improved fleet mix. This is our first full quarter with H&E included in both reporting periods. Last year’s third quarter was still an active integration period, including fleet realignment, sales, territory reallocation, and systems migration.
So this quarter’s results reflect the operating benefits of that early work. Total revenue increased approximately 5% in the quarter. The difference between rental revenue growth and total revenue growth primarily reflects lower revenue from equipment sales following the elevated dispositions associated with fleet optimization last year. Adjusted EBITDA increased about 9% and adjusted EBITDA margin expanded 190 basis points to 44.2%. I want to distinguish the consolidated margin result from the performance of the rental business itself. With equipment sales lower year over year, rental revenue represented a larger proportion of total revenue, which benefited the adjusted EBITDA margin. REBITDA, which measures contribution from our core rental business excluding equipment sales, increased roughly 10% and REBIT margin was 45.2%. While this was down 70 basis points year over year, the headline understates the underlying strength of the rental business.
Higher rental volume, pricing improvement, and H&E revenue and cost synergies all benefited margin. However, this quarter those benefits were more than offset by core operating cost inflation, higher field incentive compensation tied to operational outperformance—particularly in fleet efficiency—fuel and freight inflation. On fuel and freight specifically, these pressures, including the related ancillary revenue mix effect, accounted for approximately 100 basis points of year-over-year REBIT margin pressure.
That compares with 170 basis points of pressure in the second quarter. So even with diesel costs higher sequentially, we delivered significantly improved recovery quarter over quarter. And while we continue to focus on improving delivery economics and transportation efficiency across our network, including through the Logistics Transformation Initiative Aaron discussed, adjusted net income was $131 million or $3.91 per diluted share. Turning to slide 15, we generated $133 million of free cash flow through the first nine months of the year. We ended the quarter with ample liquidity of $2.1 billion and net leverage of 3.9 times, down from 3.95 times at the end of June. We also paid our regular quarterly dividend of $0.70 per share. Our capital allocation priorities remain consistent: invest where we see attractive returns, maintain financial flexibility, and reduce leverage as the earnings contribution from our larger platform builds.
That brings me to our updated outlook on slide 16, which reflects the expanding megaproject portfolio in front of us. You can see the new guidance ranges here. At the midpoint, we now expect full-year equipment rental revenue of $4.513 billion and adjusted EBITDA of $2.13 billion, up about 2% from the previous guidance. We are also increasing our net fleet CapEx to approximately $1.05 billion at the midpoint, driven by an increase in gross purchases that will be partially funded by higher fleet dispositions.
This additional investment is primarily for specialty equipment to support newly won or expanded megaproject assignments in the fourth quarter. It is tied to identified customer requirements, not a speculative fleet build or an assumption of a broader market recovery. These are multi-year projects, and the equipment we add in the fourth quarter will be in place to serve customers for the entirety of 2027 and beyond. Because of this, we view this roughly $150 million of incremental net fleet CapEx as effectively being pulled forward from our 2027 fleet budget.
These assets also help us maintain manageable time utilization and availability needed to deliver reliable service. We’re balancing the productive use of our fleet with the capacity to respond to customers, rather than maximizing utilization at the expense of availability. Importantly, the updated guidance continues to reflect substantial fleet efficiency. At the new midpoint, we expect second-half equipment rental revenue growth of approximately 14% on average OEC fleet growth of approximately 4%, culminating in full-year pro forma rental revenue growth of about 8% on roughly 2% average OEC growth. We’re generating meaningfully more revenue from our asset base while selectively adding equipment where customer demand supports attractive returns.
So what does this CapEx increase mean for our free cash flow and deleveraging path? First, our 2026 free cash flow guidance remains unchanged at $250 to $350 million. Second, and more importantly, because this equipment is tied to immediate megaproject demand, it will go on rent and begin contributing to EBITDA right away in the fourth quarter. But the real power of the investment is in 2027 and beyond, when we capture the full-year EBITDA benefit of these high-margin specialty assets.
As a reminder, growing EBITDA is the single most powerful lever we have for reducing our leverage ratio. By securing this fleet now for committed projects, we are rapidly growing the denominator of that ratio. This investment doesn’t delay our deleveraging path; it actively supports it. It gives us a higher EBITDA baseline entering next year and will be evaluated as 2027 capital as we build out next year’s fleet plan. Deleveraging is a top priority and we remain focused on returning to the top of our targeted leverage range by the end of 2027.
The bottom line: demand continues to exceed our expectations, and our team is capturing that opportunity through active asset management and targeted deployment. As a result, we’re raising our earnings outlook and strengthening the setup for 2027. Now let’s open it up for questions.
OPERATOR (Moderator)
We will now begin the question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question is from Rob Wertheimer with Melius Research.
Your line is open. Please go ahead.
Rob Wertheimer (Analyst)
Sorry. Thank you. Good morning and congratulations, Larry.
Larry Silber (Chief Executive Officer)
Thank you. Morning, Rob.
Rob Wertheimer (Analyst)
So I think you kind of touched on some of the headwinds to margin in the quarter. I mean, you have obviously the fuel and some other things. Do you think that you’re getting as much rate as you need to offset natural inflation? And do you think that we see higher incrementals as you kind of roll through the next quarter with the full kind of entity operating, you know, as a unified whole?
Larry Silber (Chief Executive Officer)
Yeah, I mean, it’s a great question. I think that, you know, obviously rate is always a focus. You know, I think when we evaluated sort of Q3, it performed about where we thought it would. But at the same time, I would say that from a one-year view, rate is not sort of at the same level as inflation, particularly in mind of, you know, the fuel and the freight impacts. But that’s always a focus for us and we’ll continue to focus on that as we sort of round into 2027.
OPERATOR (Moderator)
Your next question comes from the line of Tommy Zachariah with J.P. Morgan. Your line is open. Please go ahead.
Tommy Zachariah (Analyst)
Hi, good morning. Thank you so much. Very nice quarter. So I know it’s probably a little too early, but as you think about next year, any preliminary thoughts on whether rental revenue growth can outpace OEC growth to the same degree we saw in 3Q and what you’re expecting for 4Q?
Larry Silber (Chief Executive Officer)
Yeah, I mean, I think, you know, if you look at Q3, right, that was a 12 over a 2. I think if you look at the midpoints, as I said, you know, you’re kind of looking at 16 at the midpoint rev growth on fleet growth of 5. You know, I think some of that continues into the front half of next year, Tommy, but begins to normalize a bit more as you get into 3Q and 4Q of 2027. I think I would say, you know, fleet efficiency is always our mantra. It will continue to be something that we focus on.
And I think that, you know, in this environment, the good news is, is that the fleet adds aren’t necessarily speculative. We sort of know what we’re buying and we know that that fleet is going on rent, which certainly helps this fleet efficiency. And I think we’ll continue to do that as we walk into 2027.
Tommy Zachariah (Analyst)
Understood, that’s very helpful. And then quickly, could you remind us how much incremental synergies in terms of revenues and cost you have left or you are expecting in 2027?
Mark Humphrey, CPA (Chief Financial Officer)
Yeah, I mean, you know, we said we were going to get 90 incremental on the cost side and 110 to 120 incremental on the rev side. I would say, you know, as we sit here today, both of those are on track. I have said that we will give sort of a full report out come February of sort of how both of those things performed. But I think the message today is both are on track.
OPERATOR (Moderator)
Your next question comes from the line of Meg Dobre with Baird. Your line is open. Please go ahead.
Meg Dobre (Analyst)
All right, thank you for the time. And Aaron and Larry, congrats to both of you. My first question is on dollar utilization. That looked quite good this quarter. And unless I’m wrong in my model here, I got to go back to 2022 to find a Q3 that looks similar to this one. So I guess my question, as we sort of think about especially the forward outlook, right—Q4, but even into 2027—how should we think about dollar utilization maybe relative to a strong year like 2022?
Is it possible that we’re going to see, on a seasonally adjusted basis obviously, similar performances to what we have there? And what are some of the moving pieces that you’d encourage us to consider here in terms of what you can physically get in terms of physical utilization from the equipment relative to rental rates or mix or anything else?
Aaron Birnbaum (President)
Hey, Meg, thank you. And I’ll take that question. The inputs to dollar utilization for us in the quarter would definitely be our specialty business getting back to 20% of our fleet, right. With the premium nature of that type of fleet and the returns you get, that really helped us get that dollar utilization to that level in Q3. Time utilization was strong. That’s the other input. I wouldn’t call it a record, and we still have work to do on certain categories as we kind of invest in the fourth quarter and going into next year.
But those are the two inputs. Pricing was starting to improve as we went through the rest of the year. You know, we really had to kind of get through the integration and start to harmonize our business in a lot of ways. And so those are three inputs. When we look at, you know, where do we go from here, we’re happy with where we were in Q3 with that dollar utilization. We think that our first goal is to get back to where we were pre-acquisition, which is like a 42% annual run rate. And then we’ll continue to build, you know, annually on top of that. The more you can get your specialty business as a part of your business, it’s going to give some fuel to that overall dollar utilization. And that’s our mission as we go out, you know, beyond just ’27.
Meg Dobre (Analyst)
All right, that’s helpful. My follow-up is, you know, since you brought up the mix and that specialty is now 20% of the overall OEC. I also heard you say that, you know, some of the increased capex is almost kind of like a pull forward relative to 2027. I understand you’re not providing guidance today, but I’m sort of curious as to what the right general framework is to think about capex and frankly to think about free cash flow here as well as we think about the path for delevering hopefully by year-end 2027.
Thank you.
Mark Humphrey, CPA (Chief Financial Officer)
No, it’s certainly a fair question, Meg. I think it will be a combination of those two. I think, you know, my prepared remarks. I mean, I think, you know, in order to deliver, to delever, you know, coming out of ’27 to the top end of that, EBITDA growth will be paramount, and that doesn’t mean we’re turning our back on free cash flow, but we will provide the growth capital necessary to continue to support our customers. And with that, you know, I think it’s first and foremost EBITDA growth, free cash flow in terms of the mix, to get you to the top end of that guide as we walk out of 2027.
OPERATOR (Moderator)
Your next question comes from the line of Jerry Revich with Wells Fargo. Your line is open. Please go ahead.
Jerry Revich (Analyst)
Hi, good morning everybody, and Larry, Aaron, congratulations. Larry, I was just looking back; when you took over the business it was about EPS breakeven. TU was about 10 points lower. So congratulations on the fantastic improvement in the profile of the operations. I want to ask on the outlook for pricing, pricing that Aaron and Mark, you spoke to. So typically time utilization leads pricing, and it sounds like pricing for you folks improved over the course of the quarter.
So is it fair to think about pricing accelerating into year two of the recovery, as we typically see for your business, or is there anything we need to keep in mind compared to that normal cyclical pattern where you folks had the time utilization acceleration this year and pricing acceleration should hopefully follow?
Larry Silber (Chief Executive Officer)
Yeah. Hey Jerry, thanks for the kind words, much appreciated. And as you know, pricing has always been top of mind for me and for Herc since I got here. And we’re focused on it. We are operating in a very rational and constructive pricing environment right now. Supply dynamics are healthy. Cost inflation, including fuel and freight, is an incremental incentive to raise rate. However, the magnitude of the inflection will depend on the spot market recovery going forward.
Jerry Revich (Analyst)
Okay, thank you, Larry. And can I ask, in terms of where you folks are delivering more equipment, the semi fab capex outlook is for roughly a doubling in ’27 versus ’26. Can you just talk about the magnitude of deliveries that you’ve already made to these sites? They’re well positioned relative to your footprint, so just curious what you folks are seeing in the planned delivery onto those sites over the next couple of quarters based on what your visibility looks like.
Larry Silber (Chief Executive Officer)
Jerry, it sounded like you were specifically asking about chip plants, is that right? That’s right. That’s right. Yeah, that’s right. Given your footprint. That’s exactly right. Yeah, we feel like we’re well positioned there. You know, there was an initial wave, I guess maybe it was 2021, 2022, with a lot of chip plant activity, and we didn’t have the footprint we have today then. But, you know, we were able to secure a fair amount of activity from those plants that came online at that time. And now there’s another wave, if that’s what you’re referring to. So, yeah, that’s something we’re monitoring. We feel like we’re well positioned.
Those are great projects. They have very long project timelines. They last several years. And some of the ones we’ve seen in the news are extremely large projects. So we’re excited about that, and I think it’s helpful, you know, just for the overall diversification of the mega landscape, that those big projects are coming again in different parts of the U.S. So we feel like we’re well positioned for that.
OPERATOR (Moderator)
Your next question comes from the line of Ken Newman with KeyBanc Capital Markets. Your line is open. Please go ahead.
Ken Newman (Analyst at KeyBanc Capital Markets)
Hey, thanks. Good morning, guys. Larry, congrats on the transition and looking forward to working with you more. Aaron, going forward. First question for me, you know, the operating leverage this quarter was a lot more impressive than I would have expected. You know, I know you’re not ready to talk about ’27 guidance yet, but from a high-level perspective, is there a way to think about baseline EBITDA flow-through if the market dynamics continue to be this strong?
I know there’s lots of puts and takes on, you know, the synergy capture and what the mix of the fleet is doing. But, you know, 90% EBITDA flow-through I think is maybe the strongest I’ve ever seen. It seems like the next quarter is going to be even stronger, potentially. Just trying to level set the expectations for next year in terms of how that could flow through.
Mark Humphrey, CPA (Chief Financial Officer)
Yeah, I mean, I think obviously from a prepared remarks perspective, Ken, I tried to touch on that a little bit. Right. The sort of benefit to the quarter was a decrease in dispositions of fleet in that comp. Right. I think that certainly begins to normalize as we work our way through 2027 into a more normalized comp as well. I think, at a high level, you know, how 2027 plays out is: front-half comps are much more favorable than the back-half comps. And then I think you think about the growth coming — you know, Aaron talked about tighter time utilization in Q3 and anticipated into Q4. I think that carries through into the front half of the year, and then the back half of the year is supported by incremental fleet growth as we work our way through 2027. So that kind of 5,000-foot view, Ken, is sort of how I would think about the overall sort of activity of ’27.
Ken Newman (Analyst at KeyBanc Capital Markets)
Understood. And then maybe just a quick one here. You know, solid work in offsetting the headwinds from higher transportation costs. You know, I think you said it was about 100 basis points of headwind, if I remember correctly. I think you guys were looking for about 150 this quarter. Just sorry if I missed this. Are you still expecting 100 basis points of margin headwind for the full year from delivery and ancillary costs?
Mark Humphrey, CPA (Chief Financial Officer)
I mean, you’re probably not too far off if 4Q behaves the way 3Q behaved. Right. I mean, we’ve done yeoman’s work on sort of the recovery on the refuel side of this, and that came through this quarter. The reality of that, though, is you’ve got more fuel revenue, which is not necessarily accretive to your overall business margins. So you’ve got a little bit of overhang there as this elevation of fuel comes through. We’ve recovered the margin to pre-inflation.
So, you know, yeoman’s work there. The pieces of this that remain problematic are really the sales and service vehicles and sort of that inter-branch transfer component, which has got all of that same fuel increase running through it. So we’ll continue to focus on all of those. Quite honestly, the biggest sort of go-get is incremental price and overall efficiency of the freight operation to sort of mitigate those factors. I think the other thing I would say — if this continues into 2027, you do get a comp break when you get to Q2 of 2027, because that’s when this first elevated view started coming through. So even in the event of it continuing, we will get the benefit of the work we’ve done as we comp into next year.
OPERATOR (Moderator)
Your next question comes from the line of Kyle Menges of Citigroup. Your line is open. Please go ahead.
Kyle Menges (Analyst)
Thank you, and congrats, Larry and Aaron. I wanted to touch more on mega projects. Last quarter you did up your target market share on mega projects. I’m curious how you’re seeing that track as we progress through 2026, and you had a good slide on the pipeline of projects for 2027. I’m sure you’re already having conversations with those customers now. Based on how those customer conversations are progressing, I’m curious if you would anticipate your mega project share to be higher next year versus this year.
Aaron Birnbaum (President)
Yeah, Kyle, thank you. And regarding our position in megas, it’s been a good tailwind for us this year. I think as we got through the middle of the year it got stronger and stronger. With that visibility and kind of fully integrating the H&E acquisition, we thought that we had hit the top end of our 15 share in the mega arena, and we wanted to move the needle, right, because we thought we had more capabilities and capacity. So we moved it to 20%.
That’ll take us some time to get there. It won’t happen in, you know, 2027. We view it as kind of a few-year journey, but our capabilities will help us get there. And when we look at the setup now — we’re in the fourth quarter — the setup for next year, the pipeline is strong, we’re getting more wins, and it’s partly the reason why we had to take the capex up in the fourth quarter to get some of that fleet in place for the beginning-of-the-year start. And we view next year as robust and solid in the mega space, as 2026. And I think our capabilities, our new scale, are really the reasons that we’re able to kind of move our position and strengthen it and ultimately, like you mentioned, get to 20% share in the mega project arena.
Kyle Menges (Analyst)
That’s helpful, Aaron. And a follow-up on that: it looks like just from your slide deck you are sticking to that long term of 60% local mix. In light of the strength in mega projects, and today you’re below that mix, I guess I’d like to hear your thoughts on why that 60% local mix is still the right mix long term.
Aaron Birnbaum (President)
Yeah, in our opinion, we’ve always had — I mean since Larry became the CEO — we’ve had an urban market strategy. So that’s how we built out our network to get scale in the largest — you know, initially it was the largest 50 markets, now it’s the largest 100 markets. There’s parts of the local market that are attractive. The price point for rental is stronger than on the large customer side. We’re just in a cycle right now where the big projects are swinging up and the local market is stable, you know, as we’ve been saying for the last few quarters, and we know that cycle will change again.
So we want to be prepared for when that happens. The H&E acquisition was a local market play. It gave us the scale. And, you know, that’s a big part of this rental industry and not something we want to take our eyes off of, because diversification is the key and we want to make sure we’re in all those situations where we can be successful.
OPERATOR (Moderator)
Your next question comes from the line of Neil Tyler with Rothschild and Co, Redburn. Your line is open. Please go ahead.
Neil Tyler (Analyst)
Yeah, thank you. Good morning. Just wanted to come back to the topic of synergies, actually, and the component of the revenue synergies that you have targeted that relates to evening up the rate at the H&E customers. Can you talk a little bit around how that is progressing in what is an improving rate environment, whether that actually makes that more achievable or even potentially more difficult? And then, Mark, if you just remind us, in terms of the flow-through on those revenue synergies, how you’re thinking about that currently.
Aaron Birnbaum (President)
All right, Neil, it’s Aaron. I’ll take the first part of that as it relates to the synergies and rate and the acquisition. So we’re really happy where our synergies have landed. For the first year and a half since we closed on the transaction, our teams have worked very, very hard and it’s been a great story. One piece is we were able to expand our specialty network and the other piece is we’re able to drive revenues with customers that typically wouldn’t have rented that equipment from H&E at the time.
So we really drove that synergy and now we’re going on into the subsequent year. It’s kind of a three-year play. Revenue synergies is for us, when we purchased the business, the price point was lower than the Herc Rentals price points. So we view that in two pieces. One is the spot market, right, which is the local market, is the transaction market that happens every day. We bolted that business onto our algorithm, you know, pricing tools within a few months, and so that started to kind of match up with what Herc was typically charging for those types of transactions.
And I think we got the benefit of the scale of the business but also the market dynamics of a tightening utilization going out there. So that builds some momentum for pricing opportunity. The second piece that we mentioned and I’ll remind is that H&E did have some contract customers, call it 30% of their business was contract customers. And we said it would take us three years to match those rates with those customers that Herc expected. We weren’t going to go get it all at the same time. We wanted, what was most important, is holding on to those customers and, you know, driving our synergies and our product diversification into them and building strong relationships.
So we viewed it as taking one-third price lift over a three-year period and after three years we would get there, and we’ve been doing that. So the first year we took that one-third piece and it might not have been exactly the price we wanted on existing Herc customer, but we did move the needle and now we’re going into the second year and I think that the time utilization, the health of the market, is our tailwind to helping us kind of achieve that goal.
And we look towards next year as another year of kind of, you know, turning the needle a bit and becoming more sticky with the customers so we have more opportunities to do that. So we have some work to do to kind of harmonize that piece of the business. We started doing that in the back half of this year and then as we roll into next year our pricing harmonization will improve, we believe.
Mark Humphrey, CPA (Chief Financial Officer)
And Neil, the second part of your question. You know, the original assumption as the guide was laid out was somewhere in that 65% to 70% flow-through on revenue synergies. And I think that, you know, you’re probably at the low end of that as we’re sort of walking through 2026. I think as the branch optimization and all of those underlying branches mature, I think you get to something that’s closer to 70 in the out year.
Neil Tyler (Analyst)
Great. Thanks, guys, that’s really helpful.
Mark Humphrey, CPA (Chief Financial Officer)
Thanks, Neil.
OPERATOR (Moderator)
Your next question comes from the line of Stephen Ramsey with Thompson Research Group. Your line is open. Please go ahead.
Stephen Ramsey (Analyst)
Good morning. My congratulations to everyone. I wanted to hear a bit more on your positioning on mega projects. Do you find yourself more and more being a prime supplier versus a secondary as you move through this year or what you’re bidding on that will hit next year? And are there any intentional strategic moves you’re making on how you’re positioned on these projects?
Larry Silber (Chief Executive Officer)
Stephen, it’s a good question. We, as we mentioned in the prepared remarks, when we talk about our position in mega projects, it’s always about, hey, do we have a secondary or a primary position? Are we, you know, the first or second supplier with an agreement with the customer? We don’t really measure the tertiary activity that’s going on. And as we’ve gone through the last 12 months, our positioning has strengthened. I would say those are related to two issues.
One is our strengthening position and relationship with large GCs. Those are the ones that are doing most of the projects. And then the H&E acquisition gave us the scale to build the confidence and the fleet to go move in quicker and the confidence that we can execute on those jobs. General contractors on mega projects, and people in the industry know this, they want to make sure you can execute, right. They’re not taking too many chances on an entity that can’t provide the safety, can’t provide the high-quality equipment and the technology and the response to the service that’s required.
So the more we position as a one or two, the more we expect that we’ll win more new opportunities. And having a strong national account team is really critical to that. Then you have to have the operational acumen to mobilize. When you’re mobilizing this kind of fleet, it’s an exercise: the fleet planning, the demand planning of what’s going to be needed on the job, and then the kind of the forward operating view on what needs to happen out there.
We have teams that we’ve, you know, put together over the last several years that that’s what they do. It’s not something we had, you know, five years ago, but we have dedicated operations, sales teams that focus in this arena because it’s the opportunity where we have the capabilities, and that’s where we want to, you know, go find revenue opportunities for the company.
Stephen Ramsey (Analyst)
Okay, that’s helpful. And then on the specialty locations gaining momentum, are they at a point where you need more fleet on them to keep growing or is it more get operations more in line before adding fleet to those new locations?
Larry Silber (Chief Executive Officer)
Yeah, good question. Steve, this is Larry. Look, these specialty locations are ramping. These new 50 locations are ramping as we’d expect. But just like any business, as they mature, you continue to give them the ability to ramp and acquire fleet as they show that they’ve matured in terms of technical knowledge, in terms of customer reach and ability to, you know, achieve fleet efficiency. So we’re not there yet in the vast majority, and there’s ample opportunity in the future as they continue to mature in those markets to add more capital as they grow and they grow efficiently.
OPERATOR (Moderator)
Your next question comes from the line of Seth Weber with BNP Paribas. Your line is open. Please go ahead.
Seth Weber (Analyst)
Hey guys, good morning. Sorry if I missed, but Mark, in your prepared comments, you used the phrase, you know, pull forward on capex. Sorry if I missed this, but should we assume that capex for 2027 is going to be up at this point or I’m just trying to think about what that phrase pull forward means for next year. Thanks.
Mark Humphrey, CPA (Chief Financial Officer)
Yeah, fair question. I think what that really means is that we’re sort of viewing that, call it $150 million sort of at the midpoint, as part of the 2027 capex. The beauty of that fleet is it now works for us the entirety of the year. You know, generally speaking, you think about fleet adds and you divide by two to sort of think about the benefit you’re getting from those fleet adds in any given year. So we’re contemplating that fleet as part of the 2027 plan.
Not ready to sort of publicize sort of the overall gross fleet capex yet for 2027. We’re still working through all of that, as you would imagine. But, you know, come February we’ll provide that guide.
Seth Weber (Analyst)
Okay, thanks. And then just, you know, local markets being stable. I think that’s been your message for a while now. I mean, are you still thinking that we need a decline in interest rates for that to turn more positive or do you think, you know, I’m just trying to think through like what could get the local markets to be better here in intermediate term.
Larry Silber (Chief Executive Officer)
Yes, look, absolutely. We believe that, you know, that’s a big key to what I would call, you know, continued development and growth above a stable market really requires that commercial market to accelerate. And that commercial market’s not going to accelerate unless there is an appropriate interest rate sort of environment for that. You know, it’s, it applies to the, you got to look at the 10-year Treasury and what’s happening there, and that will impact where that market goes.
But look, we are, you know, firmly positioned in the local markets, particularly in the, you know, the large, more densely populated areas. And once that turns around, we will participate, you know, certainly in an outsized way to achieve results and capture share in those markets.
OPERATOR (Moderator)
We have reached the end of the Q and A session. I will now turn the call back to Leslie Hunziker for closing remarks.
Leslie Hunziker (Investor Relations)
Thank you for joining us on the call today. We certainly look forward to updating you on our progress in the quarters to come. Of course, if you have any further questions, please don’t hesitate to reach out. Have a great day.
OPERATOR (Moderator)
This concludes today’s call. Thank you for attending. You may now disconnect.
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