HRI - NYSE

Hello and welcome to the Herc Holdings Q1 Earnings Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Now, I would like to turn the call over to Leslie Hunziker, Head of Investor Relations. Leslie, please go ahead.

Thank you, Operator, and good morning, everyone. Today we're reviewing our first quarter 2025 results with comments on operations and our financials, including our view of the industry and our strategic outlook. The prepared remarks will be followed by an open Q&A. Earlier today, our press release and presentation slides were furnished and our 10-K was filed with the SEC. All are posted on the events page of our IR website. Now let's move on to our safe harbor and GAAP reconciliation on Slide 3. Today's call will include forward-looking statements. These statements are based on the environment as we see it today and therefore involve risks and uncertainties. I would caution you that our actual results could differ materially from the forward-looking statements made on this call. You should also refer to the risk factor section of our annual report on Form 10-K for the year ended December 31, 2024. In addition to the financial results presented on a GAAP basis, we'll be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations beneath non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials. A replay of this call can be accessed via dial-in or through the webcast on our website. Replay instructions were included in our earnings release this morning. We have not given permission for any other recording of this call and do not approve or sanction any transcribing of the call. Finally, please mark your calendars to join our management meetings at the Bank of America Industrials Conference in New York on May 13 and the KeyBanc Industrials Conference in Boston on May 29. We hope to see you at one of these events. This morning, I'm joined by Larry Silber, President and Chief Executive Officer, Aaron Birnbaum, Senior Vice President and Chief Operating Officer, and Mark Humphrey, Senior Vice President and Chief Financial Officer. I'll now turn the call over to Larry.

Thank you, Leslie, and good morning, everyone. Our first quarter results reflect the strength and resiliency of our diversified business model and best-in-class talent. Team Herc continued to demonstrate remarkable flexibility and disciplined leadership in a macro environment characterized by divergent trends between strength and national accounts from new large project development and challenges in the local market related to prolonged elevated interest rates. 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 close some of our branches and further impact the daily and weekly local rentals during that period. Despite the headwinds, we continued to leverage our broad capabilities, capture new opportunities, and focus on what we control while maintaining a strong commitment to safety and serving our customers. With utilization snapping back in March, an incremental upside from 2024 acquisitions, and strong megaproject activity, we delivered equipment rental revenue growth of approximately 5% in the quarter, excluding the Cinelease business, which is currently held for sale. We continue to follow our playbook, leveraging branch network scale, our broad fleet mix, technology leadership, and capital and operating discipline to position us to manage across the cycle and generate sustainable growth over the long term. Now let's turn to slide number four for a rundown on these growth strategies. As you know, in the first quarter we executed a merger agreement to acquire H&E Equipment Services and its 160 U.S. branch locations to expand our scale, geographic coverage, and long-term opportunities. 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 greenfields. Of those, we opened three new facilities in the quarter. The H&E acquisition, like others before it, helped to drive revenue and fleet efficiencies in key metropolitan areas in line with our urban market growth strategy. In addition to its desirable locations, H&E brings complementary fleet categories, valuable new team members with a strong cultural fit, and greater local account presence while improving our national account capabilities. At its core, the acquisition strategy for H&E is no different than the strategy used for the other 50-plus acquisitions we've completed. And while it's our largest, we view this as quite manageable. Moving on to our fleet mix strategy. We're continuing to increase specialty fleet CapEx to be able to cross-sell our expert solutions to acquire GenRent customers to capture share of wallet opportunities and to support the incremental demand from mega projects. Specialty Solutions are a resilient product addressing urgent supplemental and critical demand situations. Technology is another important value driver for Herc. We continue to advance our proprietary an internal applications for pricing, fleet management logistics and transportation, while delivering more value to our customers through our industry-leading pro-control accountant platform. Finally, we are disciplined stewards of capital by strategically managing fleet investments to drive at and taking a targeted agile approach to addressing demand trends we are focused on efficiency and driving higher returns on our investments. Now on slide number five, I want 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. First, as we've stated, 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 insuring and LNG facilities. We are not seeing any emerging cancellation 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 permit or securing labor. It's too early to tell how that unfolds as developers get clarity around the administration's policy outcomes. We've already seen some incremental insuring announcements from chips and pharmaceutical manufacturers. But we'll have to wait and see how all of that plays out. Today it seems it's business as usual for the large national accounts. On the local landscape, there continues to be challenges and we'll start anniversarying those here in the second quarter. While there are ongoing opportunities in 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. 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's no real significant change for us in the local marketplace. When it comes to tariffs, we don't expect any direct impact to our procurement costs in 2025. When we source the vast majority of our fleet domestically and orders of pricing for this year have already been secured. Regarding any indirect impact that might stem from our customers' tariff exposure, again, it's too early to tell but for the national account projects already underway and those that are scheduled to launch this year, as far as we know now, there have been no changes to existing plans. Strategic investments, process improvements and enterprise-wide cost management are where we're focused as we were to successfully navigate this dynamic operating cycle. Now to quickly update you on the acquisition. There's 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've been working closely with them and answer your questions and supplying requested data in a timely fashion. The bottom line is that we will be supportive of the 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. As you know, the S-4 has been filed related to the new shares we'll be issuing. We received the first round of comments from the SEC and address those in an amended filing on Friday. So that process is going smoothly, and we have no concerns here either. The way 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. 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, HR, IT and field operations has organized around the drivers of value and the operating model. I'm pleased with the work that's being done. At the same time, we say it a lot, and we say it with emphasis. We cannot take our eyes off running our business. It's 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. That will allow 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'll 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. 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. Safety is at the core of everything we do. As you can see on Slide 7, our major internal safety program focuses on perfect days, and we strive for 100% perfect days throughout the organization. In the first quarter, on a branch by branch measurement, all of our operations achieved at least 96% of days as perfect. Equally notable, our total reportable incident rate remains better than the industry's benchmark of 1.0, reflecting our high standards and commitment to the safety of our people and our customers. Turning to Slide 8. We are successfully addressing the needs of both local contracts and large national accounts continuing to target a 60-40 revenue split long term and this diversification provides the growth and resiliency. Local accounts represented 53% of our total revenue in the first quarter compared to 55% a year ago. Despite the slowdown of local project starts as interest rates remain elevated, we are expanding in select regions where infrastructure, education, local utilities and facility maintenance repair projects are underway. On the actual account side, government and private funding for new large mega projects is still quite robust. We're continuing to win our targeted end to 15% share of the project opportunities with several new mega projects on deck this year and the 2024 projects still ramping up. Moving to Slide 9. As you know, we've laid out a net fleet CapEx plan for 2025 that's roughly 35% lower year-over-year at the midpoint of our guide. Continuing to improve fleet efficiency and address the dynamic market is the intended goal. And we'll do that by aligning equipment category classes with demand, digesting the 2024 acquired fleet and remaining agile with expenditures given the overall health of the supply chain. In keeping with those priorities, in the first quarter, we spent roughly 55% less on new fleet than in the prior year quarter. 2025 fleet investments are targeted for the typical replacement fleet, certain mega project needs and growth in specialty categories. We also disposed of 56% more fleet on an OEC basis last quarter versus a year ago to rotate older equipment and pull the 2024 acquired fleet for optimal equipment quality, mix and utilization. At the same time, we continue to actively shift sales into the higher return retail and wholesale channels, helping to level set values in a stabilizing used equipment market. In the first quarter, we realized proceeds of 45% of OEC on our equipment dispositions. You can see our fleet composition at OEC on the right side of the page. Total fleet was $6.9 billion as of March 31, 2025, with specialty fleet representing about 24% of the total. Excluding the Cinelease assets, our base fleet is about $6.7 billion and our higher-margin specialty fleet would be about 20% of that with plenty of room to continue to grow. Having a diversified offering that includes specialty fleet is an advantage for us in addressing the comprehensive needs of both local and national account customers. And delivering value-added expert solutions to meet these customers' critical or emergency requirements provides another degree of operating resilience for our business. Speaking with the topic of resiliency, let's turn to Slide 10, where you can see that despite the uncertain sentiment swirling in the general market, industrial spending and non-residential construction starts still show plenty of opportunity for growth built on the foundation of mega project development and infrastructure investments. Taking a look at the updated industrial spending forecast at the top left, Industrial Info Resources is projecting 2025 to be another strong year of capital and maintenance spending at $503 billion. Dodge's forecast for nonresidential construction starts in 2025 is estimated to increase 8% to $482 billion. Additionally, there's another $357 billion in infrastructure projects forecasted for 2025. That's also an 8% increase over 2024. The dotted line on these charts reflects growth over pre-pandemic peak levels. You can see that this year and the next three years are currently projected to be some of the strongest periods of activity that this industry has seen. We've also included a trend chart for mega project starts in the upper right quadrant. That gives you a snapshot of the year-to-year growth of the largest construction project starts in North America over the last two years and for 2025. The chart continues to show a substantial number of mega projects launching this year with a total dollar value exceeding $250 million. We estimate we're only in the early to middle innings of the multiyear opportunity, depending on the project type, whether it's infrastructure, LNG, data centers, et cetera. And as we've stated, our goal is to capture 10% to 15% of these opportunities. We don't take the chart out beyond this year because visibility is less clear for actual start dates of those projects still in the planning phases, but there is an additional $2 trillion in the mega project pipeline. Of course, there is some overlap in projects among these four data sets, but no matter how you look at it, for companies with the safety record, product breadth, technologies and capabilities to service customers at the national account level, the opportunities for growth remain significant. Turning to Slide 11. I'll state the obvious. Diversification is an important strategy for fostering sustainable growth and navigating economic cycles. As Herc is diversified into new end markets, geographies and products and services over the last nine years, we have reduced our reliance on a single industry or customer. We've become more resilient to downturns and more adaptable to emerging opportunities like the mega project developments, technology advancements that support customer productivity and the secular shift from ownership to rental, especially in the specialty category classes. We believe we're well positioned to manage dynamic markets and the integration of H&E will further bolster our capabilities and therefore, our opportunities. With that, I'll pass the call on to Mark.

Thanks, Aaron, and good morning, everyone. I'm starting on Slide 13 with a summary of our key metrics for the first quarter. For clarification, these are our GAAP results that include Cinelease, which, as has been discussed is classified as assets held for sale. I'll just make a couple of quick points here before turning the focus to the core results. In the first quarter, rental revenue increased 2.8% and adjusted EBITDA was flat at $339 million. We recorded a net loss in the first quarter related to $74 million of H&E transaction costs. However, on an adjusted basis, net income was $37 million. We have nothing new to report on the sale of Cinelease as we continue our negotiations toward a deal. Let's move to Slide 14. Here, we outline our core financial results, which exclude Cinelease from both periods in order to give you a better sense of how the base business performed in the quarter. A full reconciliation of quarterly performance metrics can be found on Slide 24 in the appendix of our presentation. For the first quarter, equipment rental revenue was up 4.9% year-over-year, in line with our internal expectations, made up of increases in both rate and OEC fleet on rent, partially offset by an unfavorable mix primarily resulting from equipment inflation year-over-year. For clarification, when it comes to revenue, fleet inflation is in the mix to adjust the volume measured at OEC dollars to a unit metric. REBITDA during the first quarter was up slightly, but REBITDA margin and flow-through were under pressure from one less calendar day in February compared with 2024 and a greater contribution this year from less efficient acquisitions in greenfields versus last year. Also, the local market weakness hadn't started until the second quarter last year, so we had a tougher comp this first quarter managing the fixed cost absorption including the increased insurance expense year-over-year. We'll anniversary that in the second quarter. Adjusted EBITDA increased by 2.7% compared with last year’s first quarter benefitting from higher total revenue. Adjusted EBITDA margin was impacted by higher revenue from sales of used equipment, which generate a lower margin and rental revenue. Trailing 12-month ROIC for the core business declined 110 basis points to 9.8% at the end of the quarter. The variance year-over-year relates to the impact of the local market slowdown and inefficiencies associated with new acquisitions in greenfields. Over time, the maturation of newer locations, greater fleet efficiency from our prudent onboarding of new fleet and the recovery in the local market will drive ROIC improvement. Shifting to capital management on Slide 15. You can see that we generated $49 million of free cash flow in the first quarter on higher operating cash flow and disciplined net capital expenditures. Our current leverage ratio is 2.5 times. We remain confident in our business model and are committed to increasing shareholder value. In first quarter, we declared a quarterly dividend of $0.70 which represents a 5% increase in our annual dividend to $2.80 per share. If we flip to Slide 15 you can see that our standalone 2025 guidance is unchanged. As noted our guidance excludes the performance of Cinelease. Despite the weather related choppiness to demand in the first quarter, March rebounded nicely and April want to be is meeting our expectations for growth. Acquisitions completed in mega projects launched in the back half of last year will continue to provide incremental upside in the second quarter this year and will lap the local market slowdown that began last year for a better comp. For net CapEx, we're tracking to our guide and expect by mid-year we'll have executed on approximately 45% of our gross CapEx plan given the seasonal ramp in the second quarter heading into the peak season. Overall, the strong demand we're experiencing for large projects in the manufacturing, industrial, and infrastructure markets, along with the stability that comes from industrial and commercial maintenance projects, provides plenty of opportunity to continue to grow even through the slower phase of the cycle. Finally, on Slide 17, I thought I'd reiterate our confidence in the value creation opportunity that the H&E acquisition brings to Herc. The two most frequently asked questions we're getting from investors are about the durability of the revenue synergy target and the path to deleveraging post close. When it comes to revenue synergies and evaluating these opportunities we brought to our M&A experience over the past five years where we’ve been successful in integrating our specialty fleet across our acquired general rental customer base, supporting improved returns. On fully integrated acquisitions, we have achieved our target synergized multiple. Like those businesses, H&E's offering is predominantly general rental, which provides a substantial cross-selling white space where we can bring our specialty fleet and expertise in rental solutions to their customers. We also have general rental opportunities that, combined with H&E's expanded location network, propels a better valuation proposition across customer accounts. For our base case, we're confident in our ability to achieve the revenue synergies over the three-year integration period with the expectation of 20% captured in year one, primarily focused around general rental cross-selling and then ramping up to 60% in year two with specialty cross-selling and the balance in year three. Regarding the path to deleveraging, the revenue and cost synergies are also expected to drive higher free cash flow conversion given that our EBITDA flow-through will be meaningfully higher than existing margins with relatively lower capital to achieve that EBITDA, reflecting better utilization of existing fleet and a purchasing shift to higher utilization specialty fleet. The combined entity will be capitalized to maintain financial strength and flexibility. All in all, we're excited about all of the opportunities ahead and believe the combination with H&E will create benefits for shareholders, employees and customers. With that, operator, we'll take our first question.

We will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Jerry Revich with Goldman Sachs. Jerry, please go ahead.

Yes, good morning, everyone.

Good morning, Jerry.

Mark, 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 dollar utilization turned north of 40%. In April, can you just comment on that? Is that the magnitude of recovery that you saw in April because that's what -- to get the full year run rate if that's linear over the coming quarters. I think that's what the math would imply. So is that what you saw in April? Or are you banking on a continued --

Great question, Jerry, and that's really spot on. I guess maybe I'd go a step further and say that really the dollar utilization improved in March to that at the levels that we're sort of comping against from prior year. So that is essentially what's carried through at least through the first half-ish of April. And so I think then you would expect sort of the normalized cadence of dollar utilization as you work your way through the quarters where you would have a normal build from Q1 into Q2 and to build from Q3 into Q4 and then sort of stabilizing at or around that level for 4Q.

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

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

Thank you.

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

Hi, thanks, good morning. I wonder if you could talk a little bit more about your -- your EBITDA margin performance in the quarter. And maybe give us a range of revenue scenarios that you need in order to post positive margin. Maybe 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 that's the day in February, maybe that's great. Maybe that's -- let me just talk to about margin dynamics on different revenue scenarios. Thanks.

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

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

I don't think there's any signaling in it. It was just sort of reacting to the quarter and how it plays out, right? We talked about sort of the choppiness of the demand profile in both January and February. And so I think gross CapEx adds to -- from an OEC perspective were about $75 million in Q1. I don't think there's anything to read through to that because at the end of the day, I think by the end of the second quarter, we'll probably be somewhere in that 45% of the CapEx guide. So it's that actually halfway through it. As a reminder, two and three are the big CapEx adds as we build into season and 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.

Thank you.

And your next question comes from the line of Tami

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

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

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

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

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

Ask me that question 1 more time, Tami?

Is that 10% churn that you just mentioned baked into the synergy target, is that the normal rate of churn? Or is that elevated versus what you see normally?

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

Great. Thank you.

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

Good morning. I wanted to think about mega projects being key to supporting the 5% growth outlook in the mega project start level being over 2 times the last couple of years, leading to my question, megaprojects when you are the primary supplier or a large supplier with the starts pick up. What you have in hand, is that enough to support a sustained sort of mid-single-digit growth outlook beyond this year?

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

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

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

Okay, that’s helpful. Thank you.

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

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

Well, I'll answer in two different ways. First, from the larger national accounts that are doing the big projects, especially like mechanical, general contractors, electric contractors. They have plenty of work. That's going to continue on. We believe the local markets, of course, have slowed down. So if you have local contractors, they're probably feeling a slower pace of construction activity. As it relates to the tariff activity, it's really early for us to get that kind of pull. So we're 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, but we're paying close attention to that. And it's -- as we all know, it's a moving target right now, but we're paying close attention to it.

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

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

Got it. Thank you, guys.

Thank you.

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

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

Yeah, I think that's fair to say. I think that like it's sort of -- it falls into place once sort of the demand normalizes, which we saw in March, and that was sort of the results sort of across the board, probably I mentioned earlier, flow through, et cetera.

Got it. That's helpful. And then for my follow-up, I did want to ask what's driving the confidence that local account activity stays stable through year-end? I think you guys are acknowledging that the visibility within that market still remains kind of choppy. You're not seeing -- it seems somewhat stable. My guess is that local account rental revenue was down year-over-year in 1Q and if that's right, I think it's the first time since 2020. So one, is that the right way to think about it? And then secondly, what's driving the confidence that, that stays stable through year-end?

Yeah. Look, I think our confidence comes to the diversification of our business. And the new verticals and the new markets that we've entered as well as the addition of our specialty business into the local genre companies that we've acquired that give us ample opportunity to continue seeing that be positive for us. And I don't think it was down over last year Q1. So we are -- look, it's a -- we're operating at a relatively low level. And I think we continue to add capability as well as diversification that will keep us in good stead there.

Okay, thanks.

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

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

No, it is not. I think sort of the mega project profitability profile is right in line with, as we've talked about it now for, I don't know, probably four or five quarters at a minimum. I think the margin pressure in Q1 is right -- is back to what I said earlier in terms of sort of the not crossing over anniversarying over a couple of things that happened in -- or didn't happen in Q1 last year that sort of happened in Q2 through Q4 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 overcome in that in a slowing M&A and acquisition environment.

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

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

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

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

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

Thank you, good luck.

Thanks.

That concludes our question-and-answer session. I will now hand it over to Leslie Hunziker for closing remarks. Leslie?

Thank you for joining us on the call today. We look forward to updating you on our progress in the quarters to come. Of course, if you have any further questions, please don't hesitate to reach out to us. Have a great day.