Q3 2023 H&E Equipment Services Inc Earnings Call

[music].

Good morning, and welcome to the <unk> equipment services third quarter 2023 earnings Conference call.

Today's call is being recorded at this time I would like to turn conference over to Mr. Jeff Chastain, Vice President of Investor Relations. Please go ahead Sir.

Good morning, and welcome. Thank you for your participation and ongoing interest in <unk> earlier today, we issued a press release, providing a review of our financial performance for the third quarter of 2023 of the release can be found along with all supporting statements and schedules on the <unk> website Ww.

W Dot H E dash equipment Dot com.

My presentation will accompany today's discussion and can be found on our website under the investor relations tab events and presentations.

Joining me today as Youll see on slide two.

Brad Barber, Chief Executive Officer, John Engquist, President and Chief operating Officer, and lastly, Magee Chief Financial Officer, and corporate Secretary.

Brad will begin this morning's discussion, but before I turn the call over to him I'll ask you to proceed to slide three as I remind you that today's call contains forward looking statements within the meaning of federal securities laws statements about our beliefs and expectations and statements containing.

Words, such as May could believe expect anticipate and other expressions constitute forward looking statements forward looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained.

And any forward looking statement.

A summary of these uncertainties is included in the Safe Harbor statement contained in the company's slide presentation for today's call and includes the risks described in the risk factors in the company's annual report on Form 10-K, and other periodic reports.

Investors potential investors and other listeners are urged to consider these factors carefully in evaluating the forward looking statements and are cautioned not to place undue reliance on such forward looking statements.

The company does not undertake to publicly update or revise any forward looking statements. After the date of this conference call.

Also we are referencing non-GAAP financial measures during today's call you will find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation as supporting schedules to our press release and in the appendix.

Today's presentation materials.

I'll now turn the call over to Brad Barber, Chief Executive Officer of <unk> equipment services.

Thank you, Jeff Good morning, and welcome to our third quarter 2023 Financial review, we appreciate your participation on today's call.

Please proceed to slide four.

Our financial performance in the third quarter continued a series of impressive results with record levels achieved across numerous metrics I'll begin this morning, covering our progress all key financial measures followed by more detailed review of our rental performance I'll follow with my current thoughts on the equipment rental industry, and how sturdy industry fundamentals and the emergence.

So certain compelling dynamics bode well for future demand.

Final point I'll review, our progress towards our growth initiatives and how our focused execution has positioned us to meet or exceed our strategic targets for 2023.

Slide six breaks.

Our third quarter financial performance was supported by a resilient industry fundamentals, including healthy physical fleet utilization and continued rental rate appreciation.

The contribution from these factors was magnified by the steady growth of our operations as demonstrated by a significant increase in fleet size and branch expansion together. These attributes lay the foundation for another quarter of outstanding financial performance as noted in our key financial metrics.

Some of the previous quarters. Most of these key financial metrics displayed strong year over year improvement for example, total revenues and total equipment rental revenues improved 23, six and 24, 5%, respectively compared to the year ago results, while adjusted EBITDA improved 36, 2% over the same period.

As a comparison.

Our adjusted EBITDA margin in the quarter rose to 47, 2%.

Each of these four metrics mentioned establish a new record level of performance in the quarter.

Total revenues were supplemented by used equipment sales, which increased more than two five times in the quarter compared to the third quarter of 2022. The increase was due to our resuming typical fleet management practices, which were disrupted in 2020 to buy equipment shortages, leading to extremely tight equipment availability.

With the challenges slowly on wide and in 2023, we have returned to our traditional approach to the fundamental management of our rental fleet, which includes the sale of our older assets.

It's worth noting that in the third quarter, we sold units with an average age of 75 months compared to 63 months in the year ago quarter, our used equipment sales in the quarter realized margins of 58, 5% or 480 basis points higher than a year ago period.

Also strong execution.

Our strategic growth objectives. Once again played a significant role in our financial achievements within the core.

Our fleet size as measured by original equipment cost or always see grew 27, 6% compared to the year ago quarter to just over $2 7 billion.

A portion of this fleet growth was used to supply equipment to our new branch additions as we continued our accelerated branch expansion program.

Since the third quarter of 2022, we added 14, new locations in eight additional locations through acquisition, representing 20% growth. We expect to see further expansion of our new locations in the fourth quarter.

I'll have more to say about the success of our growth strategy in a moment, but first I'd like to review our rental performance in greater detail.

Oh, the slots that are in place.

Rental revenue in the third quarter improved 25% compared to the year ago quarter rental gross margins were 53, 3% compared to 55, 6% over the same period of comparison when compared to the second quarter of 2023 rental gross margins improved 150 basis points.

As I have noted before the decline in our year over year rental gross margin reflected in part the impact of purchase price accounting following the October 2022 acquisition of one source.

Our robust nonresidential construction environment continue to support rental rate and fleet utilization in the third quarter rental rates improved four 9% compared to the third quarter of 2022, while increasing one 2% on a sequential quarterly basis.

Through September 32023 rental rates were 7% better than the same period in 2022, we believe these price of results remain among the best in the industry.

Physical utilization in the third quarter was 70% compared to 73, 3% in the third quarter of 2022, well when's the constrained supply of equipment pushed utilization in the quarter to uncommon levels for the industry.

A lot of like dollar utilization in the third quarter of 41, 5% compared to 42, 7% in the prior year quarter with the contribution from higher rental rates offset by lower utilization and a modest burden from our 2023 growth initiatives. However, the metric improved 90 basis points and a sequential basis.

Yes.

I now want to move my discussion to an industry outlook and elaborate on some emerging developments that we believe will sustain industry demand and facilitate a strong business environment in 2024.

Slide eight please.

Nonresidential construction remains resilient with emerging project opportunities, leading to expansion of backlogs and project visibility well into 2024.

Recent data from the U S census Bureau continues to demonstrate healthy year over year construction starts and spending trends mega projects, which we define as possessing construction values of $500 million in greater are expected to provide meaningful support for U S. Construction activity.

These projects, which include a variety of industrial and manufacturing construction opportunities continue to populate our geographic footprint and are characterized by substantial equipment requirements.

That'd be project completion schedules.

Review of data on Mega projects provided by Dodge construction network and pack indicated project with collective constructed valuable approximately approximately 287 billion that started in 2023 with more than 75% of that project value within our coverage area.

More importantly, and as it relates to future project visibility the data revealed an estimated 580 billion of project value was being bid for projects starts in 2023, and 2024 with an estimated 85% of these projects residing in our coverage area.

Although this data is subject to change it clearly implies the massive project opportunity that exists within our area of operations.

Additionally, the value proposition of rental compared with equipment ownership is expected to lead to further growth in rental penetration. The measure has increased each of the last two years. Following the post COVID-19 set back in 2020 is likely to experience further growth in 2023.

These positive factors were expected to reinforce industry fundamentals and should allow for continuation of modest rental rate improvement and solid physical utilization levels as we maintain our focus on branch expansion in fleet growth into 2024.

Finally, and before I turn the call over to Leslie for her review of the third quarter results I want to close with an update on our fleet growth and branch expansion objectives.

Slide nine fleets.

During the third quarter, we added greater branch density in the mid Atlantic South East Gulf Coast and Midwest regions. Following the addition of five new locations in the quarter and our sixth in October with Tel 12 branch additions through October 2023, where comp within our stated range of 12 to 15, new local.

<unk> for the year, and we anticipate more openings during the fourth quarter.

<unk> is now operating 132 branches in 30 states, including the addition of no fewer than 10 branches in each of the last three years.

Also our gross fleet expenditure in the third quarter contributed to our record investment through the first nine months of 2023, $595 2 million, resulting in a fleet size as measured by original equipment cost in excess of $2 7 billion.

And do you have are gross expenditures at the close of the third quarter. We are adjusting our expected range for 2023 gross fleet investment for the second time in consecutive quarters as customer demand remains elevated and availability of highly utilized equipment continues to improve our new gross expenditure range is 600.

$50 million to $700 million compared to our previously revised range of 600 million to $650 million.

In closing our strong financial performance in numerous strategic accomplishments in 2023 reinforce our competitive position in the equipment rental industry and places a journey on stable footing for future achievements.

No significant branch expansion has led to greater density throughout our geography, while exposing the company to more customers and projects possessing the increased business opportunities.

Also the branch growth is supported by our disciplined approach to fleet management, including a record investment in 2023 of more than 595 million to date, our fleet age of $41. One much remains among the youngest in the industry.

We met or exceeded our stated 2023 strategic objectives with a quarter to spare which is further evidence of our operational capabilities and exceptional execution as we turn our attention to 2024, we will again focus on strategic initiatives that continue to demonstrate our commitment to disciplined growth and expansion that lead.

To further achievements and value creation.

With this I'd ask you to proceed to slide 10, and I'm going to turn the call over to Leslie who will provide a review of our third quarter financial performance Leslie.

Thank you Brad good morning, and welcome everyone before I begin I want to remind you as stated in our press release third quarter results included a pretax noncash goodwill impairment charge in fact, we have been doing.

Which was identified in connection with an interim goodwill impairment test annually.

Uh-huh.

The segment experienced a decline in volume and actual revenues and earnings compared to our claim revenue and earnings corresponding to our most recent quantitative goodwill impairment analysis. These declines followed our business dispositions and strategic shift to rental tightness when required certain financial measures.

From the third quarter will be expressed as reported in Sandman, suggesting for the impact at the impairment charge, let's continue beginning with slide 11, and a review of third quarter revenues gross profit and profit margins.

Total revenues in the third quarter reached 407 million, an increase of $76 4 million or 23, 6% compared to the third quarter of 2020 the.

The increase was primarily due to higher revenues in our rental and used equipment sales business.

Rental revenues increased 25% to $290 3 million compared to $224 1 million in the year ago quarter.

As Brad noted earlier, our strong <unk> brand and further rental rate appreciation in the quarter were significant catalyst leading to the strong result.

In our rental fleet as measured by at least a grid and $589 9 million or 27, 6% suggest as our $2 7 billion compared to the year ago quarter, while rental rates were up four 9% on a year over year comparison, a one 2% sequentially.

Used equipment sales in the third quarter were $52 7 million compared to $20 3 million in the third quarter of 2020 team.

As equipment supply constraints in the year ago quarter continued to moderate in 2023, we captured attractive opportunities in the used equipment market by executing our fleet management objectives.

New equipment sales of $12 6 million debt climbed 46, 2% in the quarter compared to $23 5 million in the third quarter of 2022.

This decline reflects the impact of our December 2022 divestiture at the commodity earthmoving distribution business, which completed our exit from distribution activities.

Gross profit in the third quarter reached 188 4 million at $36 5 million compared to the year ago quarter. The 24% in prison that resulted in gross profit margin unit order at 47% compared to 46, 8% over the same period of comparison.

The margin increase was due primarily to favorable revenue mix and higher margins on used equipment sales, partially offset by lower rental margins, which were impacted by purchase accounting related to the one source fleet acquired in 10 of our 2022.

Capital equipment rental margins were 47, 4% in the third quarter compared to 55% in a year ago quarter, while rental margins finished the third quarter at 53, 3% compared to 55 extra seats.

The purchase accounting impact on our margins as it relates to higher depreciation expense, resulting from the fair value Mark up at the fleet acquired from one source.

Comparing margins for our business segments to the year that quarter used equipment margins increased 58, 5% compared to 53, 7% new equipment sales margins were 13, 2% compared to 13, 8%.

Operator: Good morning and welcome to the H&E Equipment Services third quarter of 2023 earnings conference call. Today's call is being recorded.

Parts sales margins were 27, 5% compared to 29% and lastly service margins were 59, 3% compared to 63, 2%.

Jeff Chastain: At this time, we would like to send a conference over to Mr. Jeff Chastain, vice president of Investor Relations. Please go ahead, sir.

Jeff Chastain: Good morning and welcome. Thank you for your participation and ongoing interest in H&E. Earlier today, we issued a press release providing a review of our financial performance for the third quarter of 2023. The release can be found along with all supporting statements and schedules on the H&E website www.HE-equipment.com. A slide presentation will accompany today's discussion and can be found on our website under the Investor Relations tab in events and presentations.

Slide 12 please.

Income from operations in the third quarter totaled $79 2 million or $84 9 million. Excluding the previously noted pretax noncash impairment charge of $5 7 million. The result, compared to 64 million in the third quarter of 2022.

Margin on operating income was 19, 8% or 21, 2%, excluding the impact of the goodwill impairment charge in compared to 19, 7% in the year ago quarter.

Jeff Chastain: Joining me today is you'll see on slide two, our Brad Barber, Chief Executive Officer, John Engquist, President and Chief Operating Officer, and Leslie Magee, Chief Financial Officer and Corporate Secretary. Brad will begin this morning's discussion, but before I turn the call over to him, I'll ask you to proceed to slide three as I remind you that today's call contains forward-looking statements within the meaning of the federal securities laws. Statements about our beliefs and expectations and statements containing words such as, may, could, believe, expect, anticipate, and other expressions constitute forward-looking statements.

Favorable revenue mix higher gross margins on used equipment sales and lower SG&A as a percent of revenues contributed to the improved margin. These factors were partially offset by lower rental margins, resulting from the one source acquisition.

Jeff Chastain: Forward-looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. A summary of these uncertainties is included in the state harbor statement contained in the company's slide presentation for today's call, and includes the risk described in the risk factors in the company's annual report on Form 10K and other periodic reports. Investors, potential investors, and other listeners are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.

Proceed to slide 13 please.

Net income from continuing operations in the third quarter totaled $48 9 million or $53 million adjusting for the goodwill impairment.

Adjusted measure was 38, 1% better than $38 4 million in the year in that quarter.

Diluted net income per share in the third quarter was $1 35 per share or $1.46 per share adjusted for the impairment charge and compared to diluted net income per share of $1 five in the third quarter of 2022.

Our effective income tax rate in the third quarter was 26, 1% or 26, 2% when adjusted for the goodwill impairment charge and compared to 25, 2% for the same quarter in 2022.

Proceed to slide 14.

Adjusted EBITDA in the third quarter improved train record $199 1 million compared to $138 9 million in the year ago quarter, representing an in prison at 36, 2% compared to a year over year increase in revenues of 23, 6%.

Jeff Chastain: The company does not undertake to publicly update or revise any forward-looking statements after the date of this conference call. Also, we are referencing non-gap financial measures during today's call. You will find the required supplemental disclosure for these measures, including the most directly comparable gap measure and an associated reconciliation as supporting schedules to our press release and in the appendix to today's presentation materials.

Adjusted EBITDA margin reached 47, 2% in the third quarter of 440 basis points better than the third quarter of 2022.

The higher margin was primarily due to improved revenue mix higher gross margins on used equipment sales and lower SG&A as a percentage of revenues.

Next slide 15 please.

SG&A expense in the third quarter increased $15 8 million or 17, 9% to $104 2 million compared to SG&A of $88 4 million in the year ago quarter.

Bradley Barber: I will now turn the call over to Brad Barber, Chief Executive Officer of H&E Equipment Services. Thank you, Jeff. Good morning and welcome to our third quarter of 2023 financial review. We appreciate your participation on today's call. Please proceed to slide four. A financial performance in the third quarter continue to series of impressive results with record levels achieved across numerous metrics. I will begin this morning covering our progress on key financial measures, followed by a more detailed review of our rental performance.

Bradley Barber: I'll follow up with my current thoughts on the Equipment Rail Industry and how sturdy industry fundamentals and the emergence of certain compelling dynamics both well for future demand. As a final point, I'll review a progress toward our growth initiatives and how our focused execution as positionists to meet, will exceed our strategic targets for 2023. Five, six, please. Our third quarter financial performance was supported by resilient industry fundamentals including healthy physical fleet utilization and continued rental rate appreciation.

The increase was due to employee salaries wages and variable compensation as well as increased head count.

Also higher depreciation expense facility expenses and professional fees contributed to the increase in the quarter.

Expressed as a percentage of revenues SG&A expenses in the third quarter were 26% down from 27, 3% in the prior year quarter. The increase in SG&A expenses in the quarter included an estimated $7 7 million as expenses attributable to 21 branches or.

Or acquired since the close of the prior year quarter.

Slide 16 please.

Granted rental fleet capital expenditures in the third quarter and close to that non cash transfers from inventory totaled 221 million net rental fleet capital expenditures were $167 7 million gross PP&E capital expenditures in the quarter were $22 million or 21 million net.

Bradley Barber: The contribution from these factors was magnified by the steady growth of our operations as demonstrated by our significant increase in fleet size and branch expansion. Together, these attributes laid a foundation for another quarter about standing financial performance as noted in our key financial metrics. Similar to previous quarters, most of these key financial metrics displayed strong year-over-year improvement. For example, total revenues and total equipment rental revenues improved 23.6 and 24.5% respectively compared to the year-go results.

Sales of PP&E.

Net cash provided by operating activities totaled 140 169 in the third quarter compared to 179 in the third quarter of 2022.

Free cash flow used in the quarter was $41 5 million compared to free cash flow you used a $47 1 million over the same period of comparison.

At the conclusion of the third quarter, our rental fleet remain among the youngest in the industry with an average age of 41 one months.

Bradley Barber: While adjusted EBITI improved 36.2% over the same period of comparison. Our adjusted EBITI margin in the quarter rose to 47.2%. Each of these four metrics mentioned establish a new record level of performance in the quarter. Total revenues were supplemented by used equipment sales which increased more than two and a half times in the quarter compared to the third quarter of 2022. The increase was due to our resuming typical fleet management practices which were disrupted in 2022 by equipment shortages leading to extremely tight equipment availability.

Measuring praise from an average age of $42 five months in the second quarter of 2023 and 43 six months at December 31st 2022.

Slide 17 please.

Based on original equipment cost on September 30 of 2023, our rental fleet fast was modestly up by $2 7 billion representing year over year granted that $589 9 million or an increase of 27, 6%.

Bradley Barber: With the challenges slowly unwinding in 2023, we have returned to our traditional approach to the fundamental management of our rental fleet which includes the sale of our older assets. It is worth noting that in the third quarter we sold units with an average age of 75 months compared to 63 months in the year-go quarter. Our used equipment sales in the quarter realized margins of 58.5% or 480 basis points higher than a year-go period.

Average dollar utilization in the third quarter of 2023, with 41, 5% compared to 42, 7% in the prior year quarter and 46% in the second quarter of 2023.

Brad explained earlier, how dollar utilization has been moderately impeded by our exceptional flagrant and branch expansion, even past year, including 13 warm starts and a acquired locations.

Bradley Barber: Also, strong execution of strategic growth objectives once again played a significant role in our financial achievements within the quarter. Our fleet size, as measured by original equipment cost or OEC, grew 27.6% compared to the year-go quarter to just over 2.7 billion. Fortunately, this fleet growth was used to supply equipment to our new branch additions as we continued our accelerated branch expansion program. Since the third quarter of 2022, we added 14 new locations and 8 additional locations to acquisition representing 20% growth.

Slide 18 please.

Our balance sheet metrics on September 30 of 2023 remained strong including net debt of approximately $1 4 billion and a net leverage measure of two one times.

Metrics compared to net debt of $1 2 billion and net leverage at two two times on December 31st 2020 team, we have no maturities before 2028 on our $1 two 5 billion of senior unsecured notes.

Slide 19 please.

Our liquidity position on September 30 of 2023 totaled $604 1 million, while excess availability under the ABL facility was approximately $1 8 billion up from $1 5 billion on December 31 2022.

Bradley Barber: We expect to see further expansion of our new locations in the fourth quarter. I will have more to say about the success of our growth strategy in a moment but first I would like to review our rental performance in greater detail. On to slide 7 please. Rental revenue in the third quarter improved 25% compared to the year-go quarter. Rental growth margins were 53.3% compared to 55.6% over the same period of comparison.

Our minimum availability as defined by the ABL agreement remains 75 million no debt excess availability is the measurement used to determine whether our screen fixed charges applicable with excess availability of $1 8 billion. We continue to have no covenant concerns.

Bradley Barber: When compared to the second quarter of 2023, rental growth margins improved 150 basis points. As I have noted before, the decline in our year-to-year rental gross margin reflected in part the impact of purchase price accounting following the October 2022 acquisition of one source. A robust non-residential construction environment continues to support rental rate and flea utilization in the third quarter. Rental rates improved 4.9% compared to the third quarter of 2022 while increasing 1.2% on a sequential quarterly basis.

And finally, we paid our regular quarterly dividend of <unk> 27, and half cents per share of common stock in the third quarter of 2023, while dividends are subject to board approval. It is our intent to continue to pay the dividend.

Slide 20 please.

In closing our impressive quarterly financial achievements continued in the third quarter of no title rental equipment revenues were up 24, 5%, representing the ninth consecutive quarter of 20% or greater revenue growth in our rental operations when compared to the year ago results.

Bradley Barber: Through September 30, 2023, rental rates were 7% better than the same period in 2022. We believe these price and results remain among the best in the industry. Physical utilization in the third quarter was 70%, compared to 73.3% in the third quarter of 2022, when the constraint supply of equipment pushed utilization in the quarter to uncommon levels for the industry. Finally, dollar utilization in the third quarter of 41.5%, compared to 42.7% in the prior year quarter with the contribution from higher rental rates offset by lower utilization and a modest burden from our 2023 growth initiatives.

I'll say, a new records were once again established in the quarter across several important financial measures, including gross profit adjusted EBITDA and adjusted net income.

These financial achievements have largely followed our transition to a pure rental and <unk>.

Corresponding exit strategy from distribution activities, and then supplemented by a focus on growth and expansion essentially.

Since we began to execute our strategic transition during the second quarter of 2021, we have grown our branch network nearly 25% to 132 branches currently compared to 106 at the close of the second quarter in 2021, while broadening our U S coverage to 30 states up from 'twenty.

Bradley Barber: However, the measure improved 90 basis points in a sequential basis. I now want to move my discussion to an industry outlook and elaborate on some emerging developments that we believe will sustain industry demand and facilitate a strong business environment in 2024. Slide 8, please. Non-residential construction remains resilient with emerging projects opportunities leading to expansion of backlogs and project visibility well into 2024. Recent data from the U.S. Census Bureau continues to demonstrate healthy year-over-year construction starts and spending trends.

Three over the same period.

In addition, our fleet size as measured by at least a S grand nearly 50% over the same period.

Our strategic decisions and growth objectives have possession date U S. One of the Mezz successful companies in the equipment rental industry with the outlook for our industry remain bright we will maintain our focus on profitable growth and expansion opportunities, we possess ample resources to pursue additional gratitude a strong net cash provided.

Bradley Barber: Mega projects, which we define as possessing construction values of 500 million and greater, are expected to provide meaningful support for U.S, construction activity. These projects, which include a variety of industrial and manufacturing construction opportunities, continue to populate our geographic footprint and are characterized by substantial equipment requirements and let me project completion schedules. A review of data on mega projects provided by Dodge construction network in tech indicated projects with collective constructed value approximately 287 billion have started in 2023 with more than 75% of that project value within our coverage area.

Aided by operating activities and robust liquidity, while our net debt leverage remains at the low end of our stated range of two to three times.

Our strong financial progression remains a highlight of our performance in 2023, and we look forward to updating you on future developments.

We are now ready to begin the Q&A period, operator would you please provide instructions to our call participants.

Yes. Thank you at this time, we will begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If you are using a speakerphone. Please pick up your handset before pressing the case to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble the roster.

Bradley Barber: More importantly, and as it relates to future project visibility, the data revealed an estimated 580 billion of project value was being bid for projects starts in 2023 and 2024 with an estimated 85% of these projects residing in our coverage area. Although this data is subject to change, it clearly implies the massive project opportunity that exists within our area of operations. Additionally, the value proposition of rental compared with equipment ownership is expected to lead to further growth in rental penetration.

And today's first question comes from Steven Ramsey with Thompson Research group.

Hey, Good morning. This is actually Brian Biros on for Steven Thank you for taking my questions.

First one on Capex.

Raising capex, even on lower time utilization and values utilization as you enter the slower season.

I'll check that told us that the better fleet delivery from Oems.

Just talk again to the logic behind this move and how much of it is.

Timing of increased deliveries how much is intentional stocking up 10 to 24, and then you're deferring deliveries.

Bradley Barber: The measure has increased each of the last two years following the post-COVID setback in 2020 is likely to experience further growth in 2023. These positive factors are expected to reinforce industry fundamentals and should allow for a continuation of modest rental rate improvement and solid physical utilization levels as we maintain our focus on branch expansion and fleet growth into 2024. Finally, and before I turn the call over to Leslie for her review of the third quarter results, I want to close with an update on our fleet growth and branch expansion objectives.

Sure. Good morning, Thank you for the question.

The reason is simple the assets that we plan to bring in in Q4.

That comprise the raise in our Capex, Scott or very highly utilized many of these assets are 75 to 80 plus percent utilized. So that's the reason it's not all products were bringing in this year. Unlike last year is starting to be more of a normal cadence last year, we ran an unsustainable and very.

The unusual.

Bradley Barber: Slide 9, please. During the third quarter, we added greater branch density in the Mid-Atlantic, Southeast, Gulf Coast, and Midwest regions following the addition of five new locations in the quarter in the sixth and October. With 12 branch additions through October 2023, we are comfortable within our state at range of 12 to 15 new locations for the year, and we anticipate more openings during the fourth quarter. H&E is now operating 132 branches in 30 states, including the addition of no fewer than 10 branches in each of the last three years.

Very unusually high physical utilization.

So I think its worth noting and remembering since we've started rate improvements in 2021, I believe we're up something north of 18%.

70% utilization is a healthy level certainly something we would like to further eclipse, but the capital we're bringing in in the fourth quarter is going to be basically replacement capital and it's only going to be capital deployed for extremely high physical physical utilize assets that we continue to get rate improvement.

Helpful. Thanks.

A follow up I guess it was on the overall market you talked about broad based strength.

Bradley Barber: Also, our gross fleet expenditure in the third quarter contributed to a record investment through the first nine months of 2023, a $595.2 million resulting in a fleet size has measured by original equipment cost and excess of $2.7 billion. And to you of our gross expenditures at the close of the third quarter, we're adjusting our expected range for 2023 gross fleet investment for the second time in consecutive quarters as customer demand remains elevated and availability of highly utilized equipment continues to improve.

Commercial is slowing that we're hearing too.

It is down.

Our rates are likely to pressure some non res construction activity here.

And some normal types of non res construction slows do you think that's enough to suppress volumes or rates or utilization clearly.

A matter of degree of movement, but how are you seeing the puts and takes at this point.

Well I think there are several things to consider first the discipline of the industry.

We have been and we will I believe we will continue to work in a very disciplined industry as far as our competitors go.

Bradley Barber: Our new gross expenditure range is 650 million to 700 million compared to a previously revised range of 600 million to 650 million. In closing, our strong financial performance and numerous strategic accomplishments in 2023 reinforce our competitive position in the equipment realm industry in places H&E on stable footing for future achievements of no significant branch expansion has led to greater density throughout our geography while exposing the company to more customers and projects possessing increased business opportunities.

Spoke about and tried to give some real transparency to what we see with Mega projects I think we're talking between 23 and 'twenty four something in the neighborhood of $850 billion.

We said that of the projects that have been so far 75% of those are within our trade territory and when we define a trade care. So we're talking about locations that can and will or in fact actively covering those projects more importantly, the larger balance is still yet to come and our estimate is approximately 85%.

Bradley Barber: Also, the branch growth is supported by our discipline approach to fleet management, including a record investment in 2023 of more than 595 million to date. Our fleet age is 41.1 months remains among the youngest in the industry. We met or exceeded our state of 2023 strategic objectives with a quarter to spare, which is further evidence of our operational capabilities and exceptional execution. As we turn our attention to 2024, we will again focus on strategic initiatives that continue to demonstrate our commitment to discipline growth and expansion that leads to further achievements in value creation.

That would set up within our trade territory I'll take it a step further and say that we continue to see no postponements or cancellations of our more traditional project work that exists within our territory. So you know a lot of times you need to go through people should really roll through the data in a little bit more detail if you will.

To only be operating in 30 States I think we can make an argument our third year.

Good as they come so that's where the majority of this Mega project money stimulus money is being spent we happen to be there, we're adding density and we feel very good about what's in front of us going into 2024.

Bradley Barber: With this, I'd ask you to proceed to slide 10 and I'm going to turn the call over to Leslie, who will provide a review of our third quarter financial performance. Leslie. Thank you, Brad. Good morning and welcome everyone. Before I begin, I want to remind you, as stated in our press release, third quarter results included a pre-tax non-cash goodwill impairment charge of 5.7 million, which was identified in connection with an interim goodwill impairment test.

Thank you.

Thank you and the next question comes from Seth Weber with Wells Fargo Securities.

Hi, guys good morning.

You know Brad I guess, you know a journey and some of your peers have had been.

Selling more old fleet for the last couple of quarters I kind of just wanted to get your view on.

Bradley Barber: And relates to our parts business segment. The segment experienced a decline in volume and actual revenue and earnings compared to our plan revenue and earnings corresponding to our most recent quantitative goodwill impairment analysis. These declines follow our business dispositions and strategic shift to our rental focus When required, certain financial measures from the third quarter will be expressed as reported and some as suggested for the impact of the impairment charge. Let's continue beginning with slide 11 and our review of third quarter revenues, fresh profit and profit margins.

Just sort of supply demand balance going forward.

Do you feel like.

We're in a position here, where we can start talking about fleet utilization to be up next year.

Or or maybe flat, but or could dollar utilization beyond just.

It not only for specific guidance numbers, but just directionally. How you how you are thinking about kind of supply demand across across the industry.

Yeah, Good morning, Seth.

I do believe things are coming back into more of a normal balance and operating at more of a normal cadence.

Uh huh.

We're in the middle of our forecasting for 2024, but but let me tell you.

Bradley Barber: Table revenues in the third quarter reached 400.7 million and improvement of 76.4 million or 23.6 percent compared to the third quarter of 2022. The increase was primarily due to higher revenues in our rental and use equipment sales business segments. Rental revenues increased 25 percent to 280.3 million compared to 224.1 million in the year of the quarter. As Brad noted earlier, strong plea growth in further rental rate appreciation in the quarter were significant catalysts leading to the strong result.

A couple of things number one we are focused on and feel very bullish about our opportunity to continue to stamp out 15 ish locations a year. So we're going to stick with our guidance of 10 to 15 locations and fully plan to open 15 as locations again in 2024 highly successful with that strategy.

We're going to continue to have some level of same store growth.

That being said and maybe more specific to your question. We believe we know we have operational capabilities of running much higher physical utilization. Then we're currently running at today and we plan to flex those capabilities next year and so as that will be part of our consideration as we look at the growth.

Bradley Barber: Our rental fleet, as measured by OEC, grew 589.9 million or 27.6 percent to just average 2.7 billion compared to the year of the quarter. While rental rates were up 4.9 percent on a year of a year comparison and 1.2 percent sequentially. Use equipment sales in the third quarter were 52.7 million compared to 20.3 million in the quarter of 2022. As equipment supply constraints in the year go quarter continued to moderate in 2023, we captured attractive opportunities in the used equipment market by executing our fleet management objectives.

We plan on 15 issued 10 to 15 locations next year.

We will be better and more clearly communicate once we're done with the plan, but we're going to have same store growth.

And we believe that and I will tell you our internal focus is to improve our physical utilization in 2024 over what we're going to achieve in 2023. So I hope that's helpful.

Yeah Super helpful. Thank you and then just.

Bradley Barber: New equipment sales of 12.6 million decline 46.2 percent in the quarter compared to 23.5 million in the third quarter of 2022. This decline reflects the impact of our December 2022 divestiture of the Kamatsu Earth moving distribution business which completed our exit from distribution activities. Gross profit in the third quarter grew 188.4 million up 36.5 million compared to the year go quarter. The 24 percent improvement resulted in gross profit margin in the quarter of 47 percent compared to 46.8 percent over the same period of comparison.

Just on these mega projects, maybe if you could help help frame it.

You know as <unk> typically.

The lead with HD would typically be a lead provider on these projects would you be a partner with some of the other rental companies, maybe just sort of frame up how.

Some of these contracts get lat and how youre, just the competitive environment within your footprint. Thanks.

Sure.

We're both.

We're all in a large majority of the projects that have been let within them that are active within our footprint. So I think that's the most important thing to note.

There are more than just a few that we're the leader we have the majority of them will have the majority of the products, but there are also many more that we have a secondary or tertiary position on but that still could mean hundreds of machines and so we participate at all elements. Obviously, we have considerations to make we've got it.

Bradley Barber: The margin increase was due primarily to favorable revenue mix and higher margins on used equipment sales, partially offset by lower rental margins which were impeded by purchase accounting related to the one source fleet acquired in October 2022. Total equipment real margins were 47.4 percent in the third quarter compared to 50.5 percent in the year go quarter. While rental margins finished the third quarter at 53.3 percent compared to 55.6 percent. The purchase accounting impact on our margins relates to a higher depreciation expense resulting from the fair value markup of the fleet acquired from one source.

Discipline, we're focused on right certainly focused on returns.

In these large projects that consume in some cases thousands of machines dependent on that particular project.

And certainly for a much longer than average duration require some level of discounting.

We look more yield, but you can see with our 1.2% sequential gain that we continue to push forward that we're continuing to get rates within the mix of what's going on at HMA.

Bradley Barber: Comparing margins for our business segments to the year go quarter used equipment margins increased to 58.5 percent compared to 53.7 percent. New equipment sales margins were 13.2 percent compared to 13.8 percent. Part sales margins were 27.5% compared to 29% and lastly service margins were 59.3% compared to 63.2%. Slide 12, please. Income from operations in the third quarter totaled 79.2 million or 84.9 million, excluding the previously noted pre-tax non-cash impairment charge of 5.7 million.

We will lead on more mega projects going forward and we will be in the number two and number three position on others.

There is a dynamic that that does not favor our overall objectives for utilization rate and yield then we will certainly won't participate on some projects, but we're very selective and we're in good position with the projects that are within our footprint.

Super helpful. Thank you thanks, Brett.

Thank you.

Thank you and then last question comes from Stanley Elliott with Stifel.

Good morning, everybody. Thank you for taking the question.

Brad first off just for point of clarification. In addition to the commentary about utilization I thought I heard you say modest rate.

Bradley Barber: The result compared to 64 million in the third quarter of 2022. The margin on operating income was 19.8% or 21.2% excluding the impact of the goodwill impairment charge and compared to 19.7% in the year goes quarter. A favorable revenue mix, high-aggress margins on used equipment sales, and lower SGNA as a percent of revenues contributed to the improved margin. These factors were partially offset by lower rental margins resulting from the one-source acquisition.

Improvement as well was that for the fourth quarter or were you talking more specifically about 24.

Well I think it's I think 24 is hard to say I can tell you. There's no thought of us a banding that our focus on rate improvement John do you want to add some color for sure.

Winter weather.

Stanley as Brad stated on these large mega jobs pricing is more aggressive.

Bradley Barber: Proceed to slide 13, please. Net income from continued operations in the third quarter totaled 48.9 million or 53 million adjusted for the goodwill impairment. The adjusted measure was 38.1% better than 38.4 million in a year go quarter. Deleted net income for share in the third quarter was $1.35 for share or $1.46 for share adjusted for the impairment charge and compared to deleted net income for share of $1.5 in the third quarter of 2022.

These projects or materializing as we speak I mean, we have fleet on these jobs, we have more fleet that will be deployed in the fourth quarter and then next year. We have a considerable amount of these projects that are going to break ground. So.

As we put more fleet on these jobs, obviously at lower more aggressive pricing.

There is going to be an impact to our overall rates what that looks like it's difficult to say at this point what I can tell you is for Q4, we do expect incremental rate improvement and looking to next year we.

We do expect demand to remain healthy so our opportunity for rate improvement is going to be there I think the question for for us.

Bradley Barber: Our effective income tax rate in the third quarter was 26.1% or 26.2% when adjusted for the goodwill impairment charge and compared to 25.2% for the same quarter in 2022. Proceed to slide 14. Adjust the debit on the third quarter improved to a record 189.1 million and compared to 138.9 million in the year go quarter representing an improvement of 36.2% compared to a year of a year increase in revenues of 23.6%. Adjust the debit on margin reached 47.2% in the third quarter or 440 basis points better than the third quarter of 2022.

Need to do some more digging on is how are these large jobs can impact rates as these projects continue to ramp up.

Sadly, let me add in.

Fully support everything John just said that spot on for our collective view.

No.

We're moving into more of a normal trajectory with utilization hypothetically in Q1, if we were to suffer an extreme winter situation in smaller projects or below or delayed or postponed due to weather.

And.

We believe these large mega projects will continue to go at a more steady pace, we could see a situation, where we see rates flatten out or to be clear that is not our prediction that's not our goal internally that's not what we're managing to it.

Bradley Barber: The higher margin was primarily due to improved revenue mix. Higher gross margins on used equipment sales and lower SGNA as a percentage of revenues. Next slide 15 please. SGNA expense in the third quarter increased 15.8 million or 17.9% to 104.2 million compared to SGNA of 88.4 million in the year go quarter. The increase was due to employee salaries, wages and variable compensation as well as increased to headcount. Also higher depreciation expense facility expenses and professional fees contributed to the increase in the quarter.

We would simply be talking about a mix issue, but for now we're planning on incremental rental rate improvement going forward.

And with all the concerns around the Abi numbers and everything else.

What are you guys watching to say, maybe we should pivot or pause from some of the growth plans that.

You have got on the table I mean, so far the growth plans it turned out quite nicely, but just curious kind of how youre thinking about that as kind of the.

Uh huh.

Okay.

Longer term view.

Sure well, yeah as Leslie stated in our prepared comments, we just concluded our ninth quarter of greater than 20% growth.

Bradley Barber: Express as a percentage of revenues SGNA expenses in the third quarter or 26% down from 27.3% in the prior year. The increase in SGNA expenses in the quarter included an estimated $7.7 million of expenses attributable to 21 branches that have been to org wire since the close of the prior year quarter. Slide 16, please. Gresh Rinsley Capital expenditures in the third quarter, inclusive of non-cash transfers from inventory, totaled $220.1 million. Net Rinsley Capital expenditures were $167 million.

We did one tuck in acquisition.

Having an anniversary this month with one source last year, we're certainly not abandoning future tuck in acquisition opportunity.

We never we never overreact to the Abi and I don't want to say, we don't pay attention. We certainly do but we look more at Dodge construction put in place dollars. We certainly consider the feedback from the field and what we see going on so.

I gave some feedback basically saying we are very focused on improving our physical utilization incrementally next year over what we will achieve in 'twenty three I want to tell you.

Bradley Barber: Gresh Ppne capital expenditures in the quarter were $22 million or $21 million net of sales of Ppne. Net cash provided by operating activities totaled $141.6 million in the third quarter compared to $107 million in the third quarter of 2022. Free cash flow used in the quarter was $41.5 million compared to free cash flow used to $47.1 million over the same period of comparison. At the conclusion of the third quarter, our rental fleet remained among the youngest in the industry with an average age of $41.1.

I'm, nothing but very proud of our team's accomplishment in 'twenty three to stamp out this number of locations on all of our small molecule has to start from while we raised rates and expand our margins I believe is quite impressive and shows what they're capable of so we're not going to abandon that.

Healthy growth levels.

Bear in mind as we opened 12 to 15 locations next year. These are premium marketplace, we're not going to the only place we can find a facility.

We're going where the market is most robust and likely to be for the longest period of time and so at our current scale. This is absolutely to our advantage while awareness 12 to 15 locations a year.

Bradley Barber: The measure improved from an average age of 42.5 months in the second quarter of 2023 and 43.6 months at December 31, 2022. Slide 17, please. Based on original equipment cost on September 30, 2023, our rental fleet size was modestly above $2.7 billion, representing year-of-year growth of $589.9 million or an increase of 27.6%. Average dollar utilization in the third quarter of 2023 was 41.5% compared to 42.7% in the prior year quarter and 40.6% in the second quarter of 2023.

But if you were to see a slower fleet growth a little bit next year on a same store basis to ensure that we achieve physical utilization improvement that wouldn't be surprised.

And that's kind of bridging into my last question.

Ramp capital spend here pretty meaningfully the past several years.

Some of your peers are generating free cash through the cycle I feel like you guys have enough scale now with all the growth in the locations that you have in the marketplace.

Maybe share some thoughts with investors on on kind of.

So at what point do you think you guys can start generating free cash flow through the cycle.

Absent these larger fleet purchases have been bringing in.

Bradley Barber: Brad explained earlier how dollar utilization has been moderately impeded by our exceptional fleet grids and brand expansion over the past year, including 13 warm starts and eight acquire locations. Slide 18, please. Our balance sheet metrics on September 30, 2023 remain strong, including net debt of approximately $1.4 billion and a net leverage measure of $2.1 times. The metrics compared to net debt of $1.2 billion and net leverage of $2.2 times on December 31, 2022.

Yeah very good question.

Obviously, we could generate some free cash right now today. If we saw elected we have decided it is best for the valuation of the company fits within our operational capabilities clearly does not stressing our balance sheet and the lease as our leverage has continued to go down year over year, while we're growing and continuing to pay the dividend.

So you know for the foreseeable future.

As we grow we could continue to be slightly free cash flow negative, but if we want to change that dynamic. It's easy we just grow it a little bit slower pace and we generate cash maybe to the broader context of your question I think we're within two to three years at the type of growth that we have been at where we will be at a balance where we were more consistently.

Bradley Barber: We have none maturities before 2028 on our $1.25 billion of senior unsecured net. Slide 19, please. Our liquidity position on September 30, 2023 total $604.1 million while excess availability under the ABL facility was approximately $1.8 billion up from $1.5 billion on December 31, 2022. Our minimum availability is defined by the ABL agreement remains $75 million. Note that excess availability is the measurement used to determine whether our springing six charges applicable. With excess availability of $1.8 billion, we continue to have no covenant concerns.

And naturally.

<unk> free cash flow. So you know its something we look at it it's something we've talked about internally.

I don't want to set an expectation of free cash flow on an annual basis going forward.

I'll say this we could clearly achieved that if that was a primary objective, but for today, we're going to grow while we lower our leverage and our move into these hot markets that are going to pay dividends for decades ago.

Perfect. Thanks, so much and best of luck.

Thank you and the next question comes from Steven Fisher with UBS.

Bradley Barber: And finally, we paid our regular quarterly dividend of 27.5 cents per share of common stock in the third quarter of 2023. While dividends are such a subordinate approval, it is our intent to continue to pay the dividend. Slide 20 please. In closing, our impressive quarterly financial achievements continued in the third quarter. Avinatan total rental equipment revenues were up 24.5 percent, representing the ninth consecutive order of 20 percent or greater revenue growth in our rental operations when compared to the year-go results.

Hi, Thanks, Good morning, just wanted to try and calibrate the profit from used equipment sales going forward.

We think about maybe that normalizing is there any kind of like historical periods, you look back to.

Kind of going back to maybe pre pandemic levels, but then you have to adjust for your kind of your fleet size and the normalized margin just how do we think about that kind of normalizing of used equipment profit generation.

Bradley Barber: Also, new records were once again established in the quarter across several important financial measures, including growth profit, adjusted EBITDA and adjusted net income. These financial achievements have largely followed our transition to a pure rental focus and of course finding exit strategy from distribution activities and have been supplemented by a focus on growth and expansion. Since we began to execute our strategic transition during the second quarter of 2021, we have grown our branch network nearly 25 percent to 132 branches currently compared to 106 at the close of the second quarter in 2021.

Steve and I think as we've said before we've had this question before and you know our expectation is to maintain that 50 plus percent gross margin on used sales.

As far as any historical period to compare to.

It's a little bit more challenging considering that we were heavy in the distribution business years ago with the exit from distribution and really more predictable fleet sales as we move forward.

We're going to focus on selling off the back end of our fleet is.

As Leslie and Brad discussed in their prepared comments the age of the fleet assets that we sold in the third quarter was 72 months.

75 months excuse me when you go back and compare that to prior periods.

There's really nothing grades compare that too. So I think as we look forward a 50 plus percent is going to be our bogie and that's what our expectation is going to be moving forward yes.

Bradley Barber: While broadening our US coverage to 30 states out from 23 over the same period. In addition, our fleet sizes measure by OEC has grown nearly 50 percent over the same period. Our strategic decisions and growth objectives have positioned H&E as one of the most successful companies in the equipment rental industry. With the outlook for our industry remaining bright, we will maintain our focus on profitable growth and expansion opportunities. We possess ample resources to pursue additional growth through strong net cash provided by operating activities and robust liquidity while our net debt leverage remains at the low end of our stated range of two to three times. Our strong financial regression remains a highlight of our performance in 2023 and we look forward to updating you on future developments.

Operator: We are now ready to begin the Q&A period.

If we see a softening in the used equipment markets.

With our balance sheet with the age of our fleet. We can just slow our fleet sales. We do not have we are not going to give inventory way and as John outlined.

We're just a different business today being a pure rental model as opposed to also chasing market share for that downstream parts and service business, which was part of the distribution. So we're going to we're going to we're going to go with 50% right now and if we see a need to change that and we certainly want to make sure we advise everyone.

Got it and then.

Then on the just a follow up on the competitive environment question.

The extent do you see OEM dealer rental fleets ramping up and what impact are they having on the market.

Operator: Operator, would you please provide instructions to our call participants? Yes, thank you. At this time, we will begin the question in an intercession. To ask a question, you may press star then one on your touch-tone phone. If you are using a speaker phone, please pick up your hands that before pressing the keys. To address your question, please press star then two.

I'm, not seeing or hearing anything measurable about any OEM dealer rental fleet.

The dealer rental fleets or no more significant today than they have been in any prior period. So I don't see any change there.

However action.

Okay, and then just lastly related to the Mega projects, how should we think about the mix of fleet.

Operator: At this time, we will pause momentarily to assemble the roster.

Brian Biros: And today's first question comes from Stephen Rasey with Thomson Research Group. Hey, good morning. This is actually Brian Byros on for Stephen. Thank you for taking my questions. First of all, I'll cut back your raising cutbacks even on lower time utilization and dollars utilization.

They require do you see them as being balanced between aerial and earthmoving are is there any particular waiting shifts that you see in your fleet purchasing.

Yes, nothing's going to change our purchasing actually we don't disclose this but as we look at it internally the mix of products. When you collect when you aggregate a variety of Mega projects is very similar to what we offer in the traditional construction process for smaller jobs. So.

Bradley Barber: As you enter the slower season, final check has told us that there's been better fleet delivery from OEMs. Can you just talk again to the logic behind this move and how much of it is the timing of increased delivery, how much is intentional stocking up into 24 and did you prefer deliveries? You're a good morning. Thank you for the question. The reason is simple, the assets that we plan to bring in in Q4 that comprise the raise in our capex guys are very highly utilized.

We've seen no shift there whatsoever, we like our mix.

It served us well will continue to work on it and refine it through our fleet management practices, but the Mega projects will not change how we are investing in product types.

Got it thank you very much.

Keep safe.

Thank you and once again. Please press Star then one if you would like to ask any question.

Bradley Barber: Many of these assets 75 to 80 plus percent utilized. So that's the reason. It's not all products we're bringing in. This year, unlike last year, it's starting to be more of a normal cadence. Last year, we ran it unsustainable and very unusual, very unusually high physical utilization. So I think it's worth noting and remembering since we started rate improvements in 2021, I believe we're up something north of 18 percent. 70 percent utilization is a healthy level.

Yeah.

And the next question comes from Alex Rygiel with B Riley.

Thank you very much nice quarter, gentlemen is there any specific end market or as it relates to mega projects that is more advantageous to you all.

Not particularly I mean, obviously when we look through our footprint. There are some areas that inherently have incrementally more incremental more opportunity with the number of these mega projects that we're defining this 500 million or greater.

Bradley Barber: Certainly something we would like to further eclipse, but the capital we're bringing in in the fourth quarter is going to be basically replacement capital and it's only going to be capital deployed for extremely high physical, physically utilized assets that we continue to get rate improved.

But may be stated better there arent any areas that are that are broadly excluded from those types of opportunities we're seeing it broad base.

And then can you talk a little bit about capital allocation towards <unk>.

Bradley Barber: Thanks, and follow-up I guess is on the overall market, you've talked about broad-based strengths, some commercial is slow and that we're hearing to, you know, ABI is down, higher rates are likely to pressure some non-res construction activity here, so if some normal types of non-res construction slow, do you think that's enough to suppress volumes or rates or utilization, you know, clearly it's a matter of degree of movement, but how are you seeing the push and take to this point? I think there are several things to consider, first the discipline of the industry.

Purchasing a new rental equipment versus maybe a buyback or dividend.

Well.

We have shown in let me reaffirm we are committed to the dividend as we state in our remarks that requires board approval on a quarterly basis, but we are dedicated to that dividend.

With our leverage and available and our liquidity position with our ABL as Leslie pointed out you know.

We challenge ourselves just on improving returns and improving mix as to improve the overall value and EBITDA generation for our shareholders.

Bradley Barber: We have been, and we will, I believe will continue to work in a very disciplined industry as far as our competitors go. We spoke about and tried to get some real transparency to what we see with mega projects. I think we're talking between 23 and 24 something in the neighborhood of $850 billion. We said that of the projects that have bid so far 75% of those are within our trade territory, and when we define a trade territory, we're talking about locations that can and will, or in fact actively covering those projects.

As it pertains to the potential stock buybacks I mean, we consider you know everything on behalf of capital allocation periodically and work with our board closely on that but for now I can report to you that everyone should expect more of the same we're going to pay our dividend, we're going to invest where we can continue to improve returns on rental asked.

And grow.

12 to 15 locations a year, while we had same store growth and we will always take into consideration other aspects that could become available to us.

Very helpful. Thank you.

Bradley Barber: More importantly, the larger balance is still yet to come, and our estimate is approximately 85% of that is within our trade territory. I'll take it a step further and say that we continue to see no postponements or cancellations of our more traditional project work that exists within our territory. So, you know, a lot of times you need to go, people should really roll through the data in a little bit more detail, if you were going to only be operating in 30 states, I think we could make an argument our 30 or as good as they come.

Thank you.

Thank you and the next question is a follow up from Seth Weber with Wells Fargo Securities.

Yes.

Hi, Thanks for taking the follow up I just wanted to go back to the Mega project pricing comps.

Competition discussion.

And in a more challenging rate environment can you just talk to.

I would margins be affected by that or do you or the margin or does it kind of wash out.

On the margin line, because there's less because you have more surety of demand.

Bradley Barber: So, it's where the majority of this mega project money stimulus money is being spent. We happen to be there, we're adding density, and we feel very good about what's in front of us going into 2024. Thank you.

Equipment sitting on site Theres less pick up drop off that kind of thing I'm, just trying to think through how.

I understand the right potential rate impact, but is there a is there a potential margin impact as well or does that kind of get washed out.

No. It gets washed out we're not planning on participating in any type of work that we say it is going to deteriorate our margins.

Seth Weber: And the next question comes from Seth Webber with Bargo Securities. Hi guys, good morning. You know, Brad, I guess, you know, H&E and some of the peers have been, you know, selling more old fleet for the last couple quarters. I kind of just wanted to get your view on, you know, just sort of supply demand balance going forward. You know, do you feel like, you know, that we're in a position here where we could start talking about fleet utilization to be up next year, or maybe flat, but or could dollar utilization be up?

In fact, I will say that we think we have some incremental operative improves rental margins and improved dollar utilization. While we include this is very much a yield conversations.

Yes.

The amount of products and mix of products the discount that's required and the length of therapy. So.

No we do not anticipate a degradation to our margins due to participation of larger projects that yield is going to be positive.

Okay. That's helpful. Thanks, guys.

Thank you.

Thank you and this concludes our question and answer session I would like to turn the call Jeff <unk> for any closing comments.

Seth Weber: You know, just not only for specific guidance numbers, but just directly how you're thinking about kind of supply demand across across the industry. Thanks. Yeah, good morning, Seth. I do believe things are coming back into more of a normal balance and operating at more of a normal cadence. We're in the middle of our forecasting for 2024, but let me tell you, I was a couple of things. Number one, we're focused on and feel very bullish about our opportunity to continue to stamp out 15 niche locations a year.

Okay, well if there are no other questions. We'll go ahead and conclude today's call. We do appreciate everyone, taking the time to join US today and for your continued interest in HD. We look forward to speaking with you again good day everyone.

Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Seth Weber: So we're going to stick with our our guidance of 10 to 15 locations and fully planned to open, you know, 15 niche locations again in 2024 highly successful with that. Strategy. We're going to continue to have some level of same-store growth. That being said, and maybe more specific to your question, we know we have operational capabilities of running much higher physical utilization than we're currently running at today, and we plan to flex those capabilities next year.

Seth Weber: And so that will be part of our consideration as we look at the growth. So plan on 15, you know, 10 to 15 locations next year. We'll be, you know, better and more clearly communicate once we're done with the plan, but we're going to have same-store growth. And we believe that, and I will tell you our internal focus is to improve our physical utilization in 2024 over what we're going to achieve in 2023. So I hope that's helpful to you. Yep, super helpful. Thank you.

Bradley Barber: And then just, you know, just on these mega projects, maybe if you could help frame it, you know, is H&E typically the lead, would H&E typically be a lead provider on these projects? Would you be a partner with some of the other rental companies? Maybe just sort of frame up how some of these contracts get that, and, you know, how you're just the competitive environment within your footprint. Thanks. Sure. We're both.

Bradley Barber: We're on a large majority of the projects that have been left within our, and that are active within our footprint. I think that's the most important thing to know. There are more than just a few that we're the leader. We have a majority and we'll have the majority of the products. But there are also many more that we have a secondary or tertiary position on, but that still could mean hundreds of machines.

Bradley Barber: And so we participated all elements. Obviously we have considerations to make. We're going to remain disciplined. We're focused on rate, certainly focused on returns. And these large projects that consume, in some cases thousands of machines, depending on the particular project. And certainly for much longer than average duration, require some level of discounting. And we look more yield. But, you know, you can see with our 1.2 percent sequential gain that we continue to push forward, that we're continuing to get rates within the mix of what's going on in H&A.

Bradley Barber: We will lead on more mega projects going forward, and we will be in the number two and number three position on other. And if there's a dynamic that does not favor our overall objectives for utilization rate and yield, then we certainly won't participate on some projects. But we're very selective, and we're in good position with the projects that are within our footprint. Super, super helpful. Thank you. Thanks, Fred. Thank you.

Stanley Elliott: And then ask questions from Stanley Elliott with Steve.

Stanley Elliott: Good morning, everybody. Thank you for taking the question. Hey, Brad. First off, just for point of clarification, in addition to the commentary about utilization, I thought I heard you say you modest rate improvement as well. Was that for the fourth quarter or re-talking more specifically about 24? Well, I think it's, I think 24 is hard to say. I can tell you there's no thought of what's banning in our focus on rate improvement.

Stanley Elliott: John, do you want to ask in color for? Stanley is Brad stated on these large mega jobs. Pricing is more aggressive. These projects are materializing as we speak. We have fleet on these jobs. We have more fleet that will be deployed in the fourth quarter. And then next year we have a considerable amount of these projects that are going to break ground. And so as we put more fleet on these jobs, obviously at lower, more aggressive pricing, there is going to be an impact to our overall rates.

Stanley Elliott: You know, what that looks like, it's difficult to say at this point. What I can tell you is for Q4, we do expect incremental rate improvement. And looking to next year, we do expect demands remain healthy. So our opportunity for rate improvement is going to be there. You know, I think the question for for us and you know, what we need to do some more digging on is how are these large jobs going to impact rates as these projects continue to ramp up?

Stanley Elliott: Stanley, let me add, and I fully support everything John just said, that's vital for our collective youth. You know, we're moving into more of a normal trajectory with utilization. Hypothetically, in Q1, if we were to suffer an extreme winter situation and smaller projects are delayed or postponed due to weather. And we believe these large mega projects will continue to go at a more steady pace. You know, we could see a situation where we see rates flat now.

Stanley Elliott: I want to be clear, that is not our prediction. That's not our goal internally. That's not what we're managing to. We would simply be talking about a mix issue. But for now, we're planning on incremental real rate improvement going forward. And you know, with concerns around ABI numbers and everything else, what are you guys watching to say? Maybe we should pivot or pause from some of the growth plans that we've got on the table.

Stanley Elliott: I mean, so far, the growth plans have turned out quite nicely. But just curious kind of how you're thinking about that as kind of like the longer term view. Sure. Well, yeah, it's mostly stated in our prepared comments. We just concluded our ninth quarter of greater than 20% growth. We did one tuck-in acquisition that's having an anniversary this month with one source last year. We're certainly not abandoning future tuck-in acquisition opportunity.

Stanley Elliott: We never, we never overreact to the ABI and I don't want to say we don't pay attention. We certainly do, but we look more at dots, construction, put in place dollars. We certainly consider the feedback from the field and what we see going on. So, you know, I gave Seth some feedback, basically saying we are very focused on improving our physical utilization incrementally next year over what we will achieve in 23.

Stanley Elliott: I want to tell you, I'm nothing but very proud of our teams accomplishment in 23 to stamp out this number of locations on our small nucleus to start from while we raise rates and expand our margins. I believe it's quite impressive and shows what they're capable of. So, we're not going to abandon that, you know, healthy growth levels. But bear in mind as we open, you know, 12 to 15 locations next year, these are premium marketplace.

Stanley Elliott: We're not going to the only place we can find a facility. We're going where the market is most robust and likely to be for the longest period of time. And so, at our current scale, this is absolutely to our advantage, you know, while we're in this 12 to 15 locations a year. But if you were to see us slow, our fleet growth a little bit next year on the same store basis to ensure that we achieve physical utilization improvement, that wouldn't be surprised.

Stanley Elliott: And that's kind of reason to my last question. You know, you've ramped capital spend here pretty meaningfully the past several years. Some of your peers are generating free cash through the cycle. I feel like you guys have enough scale now with all the growth in the location that you have in the market place. Maybe share some thoughts with investors on kind of, at what point do you think you guys can start generating free cash through the cycle?

Stanley Elliott: You absent kind of these larger fleet purchases that you've been bringing in. Yeah, very good question. Obviously we could generate some free cash right now today if we so elected. We have decided it's best of the valuation of the company fits within our operational capabilities. Clearly it is not stressing our balance sheet in the least as our leverage test continues to go down year over year while we grow and it continues to pay the dividend.

Stanley Elliott: So you know for the foreseeable future as we grow we could continue to be slightly free cash flow negative but if we want to change that dynamic it's easy we just grow with a little bit slower pace and we generate cash. Maybe to the broader context of your question, I think we're within two to three years at the type of growth that we have been at where we will be at a balance where we will more consistently and naturally can produce free cash flow.

Stanley Elliott: So you know it's something we look at it's something we talk about internally. I don't want to set an expectation of free cash flow on an annual basis going forward but I will say this we could clearly achieve that if that was a primary objective. But for today we're going to grow while we lower our leverage and move into these hot markets that are going to pay dividends for decades to come.

Stanley Elliott: Perfect, thanks so much and best of luck.

Stephen Fisher: Thank you and the next question comes from Stephen Fisher with UBS. Thanks good morning. I just want to try and calibrate the profit from used equipment sales going forward. As we think about maybe that normalizing is there any kind of like historical period you'd look back to kind of going back to maybe pre pandemic levels but then you have to adjust for your kind of your fleet size and the normalized margin.

Stephen Fisher: How do we think about that kind of normalizing of use equipment profit generation? Stephen I think as we've said before we've had this question before and you know our expectation is to maintain that 50 plus percent gross margin on use sales. You know as far as any historical period to compare to you know that's a little bit more challenging considering that we were you know heavy in the distribution business years ago with the exit from distribution and really more predictable fleet sales as we move forward.

Stephen Fisher: You know we're going to focus on selling off the back end of our fleet you know as Leslie and Brad discussing their prepared comments the age of the fleet assets that we sold in third quarter of 72 months. You know we 75 months excuse me when you go back and compare that to prior periods you know you would there's really nothing great to compare that to so I think as we look forward 50 plus percent is going to be our bogey and that's what our expectation is going to be moving forward.

Stephen Fisher: Yeah look if we see a softening in the in the use equipment markets you know with with our battle sheet with the age of our fleet we can just slow our fleet sales. We do not have we are not going to give them into a way that John outlined we're just a different business today being a pure rental model as opposed to also chasing market share for that downstream parts of service business which was part of the distribution. So you know we're going to we're going to go with 50% right now and if we see a need to change that we certainly will make sure we advise there.

Bradley Barber: And then on the, just to follow up on the competitive environment question, just to what extent do you see OEM geeler rental fleets ramping up and what impact are they having on the market? Okay, then just last related to the mega projects, how should we think about the mix of fleet that they require? Do you see them as being balanced between aerials and earth moving, or is there any particular weighting shift that you see in your fleet purchasing?

Bradley Barber: Yeah, nothing's going to change our purchasing, actually, you know, we don't disclose this, but as we look at it internally, the mix of products when you collect, when you aggregate a variety of mega projects is very similar to what we offer in the traditional construction process for smaller jobs. So we've seen no shift there whatsoever, we like our mix, it serves as well, we'll continue to work on it and refine it through our fleet management practices, but the mega projects will not change how we're investing in product tax. Got it, thank you very much. Thank you. And once again, please press star then one if you would like to ask a question.

Alex Rygiel: And the next question comes from Alex for you with B Riley.

Bradley Barber: Thank you very much, nice quarter gentleman. Is there any specific end market or as it relates to mega projects that is more advantageous to you all? Not particularly, I mean obviously when we look through our footprint, there are some areas that inherently have incremental more opportunity with the number of these mega projects that we're defining as 500 million or greater. But maybe stated better, there aren't any areas that are broadly excluded from those types of opportunities, we're seeing it broad base.

Bradley Barber: And then can you talk a little bit about capital allocation towards purchasing new rental equipment versus maybe a buyback or a dividend? Well, we have shown in, let me reaffirm, we're committed to the dividend as we state in our remarks, it requires forward approval on a quarterly basis, but we're dedicated to that dividend with our leverage and available in our liquidity position with our AVLs, less likely pointed out. We challenge ourselves just on improving returns and improving mix as to improve the overall value and EBITDA generation for our shareholders.

Bradley Barber: As it pertains to the potential stock buyback, I mean we consider everything on behalf of a capital allocation periodically and work what are more closely on that. But for now, I can report to you that everyone should expect more the same. We're going to pay our dividend, we're going to invest where we can continue to improve returns on rental assets. These, you know, 12 to 15 locations a year while we have same-store growth and we'll always take into consideration other aspects that could become available.

Operator: Very helpful.

Operator: Thank you.

Seth Weber: And the next question is a follow up from Seth Weber with Wells Fargo Securities. Hi, thanks for taking the follow up. I just wanted to go back to the mega project pricing competition discussion in a more challenging rate environment. Can you just talk to like would margins be affected by that or do you or are the margins margin or does it kind of wash out, you know, on the margin line because there's less, you know, because you have more security of demand, the product, the equipment sitting on site, there's less pickup drop off that kind of thing.

Seth Weber: I'm just trying to think through how I understand the rate potential rate impact, but is there is our potential margin impact as well or does that kind of get washed out? So it gets washed out. We are we are not planning on participating in any type of work that we think is going to deteriorate our margins. In fact, I will say that we think we have some incremental opportunity to improve real margins and improve dilulations while we include this.

Seth Weber: It's very much a yield conversation, Seth, you know, of the amount of products, the mix of products, the discount that's required in the list of terms. So, no, we do not anticipate degradation to our margins due to participation on larger projects. That yield is going to be positive.

Bradley Barber: Okay, that's helpful. Thanks, guys. Thank you.

Operator: And this concludes the question and answer session. I would like to return the card you're testing when it closing comments. Okay, well, if there are no other questions, we'll go ahead and include today's call. We do appreciate everyone taking the time to join us today and for your continued interest in H&E, we look forward to speaking with you again. Good day, everyone. Thank you.

Operator: The conferences are concluded.

Operator: Thank you for attending today's presentation and we're now to connect.