Q3 2024 H&E Equipment Services Inc Earnings Call
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Speaker Change: Good morning, and welcome to H&E Equipment Services' 3rd Quarter 2024 Earnings Conference Call.
Speaker Change: Today's call is being recorded. At this time, I would like to turn the call over to Mr. Jeff Chastain, Vice President of Investor Relations. Please go ahead.
Jeff Chastain: Thank you, Operator. Good morning and welcome to all our participants on today's call to review the third quarter 2024 financial performance of H&E Rentals.
Jeff Chastain: A press release reviewing the company's results for the quarter was issued earlier today and can be found, along with all supporting statements and schedules, on the H&E Rentals website, hnerentals.com.
Jeff Chastain: A slide presentation will accompany today's discussion and is also posted on our website under the Investor Relations tab in Events and Presentations.
Jeff Chastain: On slide two, you'll see that Brad Barber, our Chief Executive Officer,
Jeff Chastain: as well as John Inquist, President and Chief Operating Officer, and Leslie Magee, Chief Financial Officer and Corporate Secretary, are all joining me on today's call.
Jeff Chastain: Brad will begin this morning's review, but before I turn the call over to him, please proceed to slide 3 as I remind you that today's call contains forward-looking statements within the meaning of the federal securities laws.
Jeff Chastain: Statements about our beliefs and expectations and statements containing words such as may, could, believe, expect, anticipate, and similar expressions constitute forward-looking statements.
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.
Jeff Chastain: 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.
Jeff Chastain: 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.
Jeff Chastain: The company does not undertake to publicly update or revise any forward-looking statements after the date of this conference call.
Jeff Chastain: 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.
Jeff Chastain: and in the appendix to today's presentation materials.
Speaker Change: That concludes the preliminary details for our call today, so I'll now turn the call over to Brad Barber, Chief Executive Officer of H&E Rentals.
Brad Barber: Thank you, Jeff. Good morning and welcome to the review of our third quarter 2024 financial results. As always, your participation and continued interest in H&E is appreciated.
Brad Barber: With the exception of the growing megaproject opportunities, spending levels across the non-residential construction verticals remain mixed in the third quarter, with total construction spending continuing to exhibit slower year-over-year growth.
Brad Barber: The spending environment led to further constraint of key industry measures as evidenced by lower physical utilization, an incremental decline in rental rates, and ample availability of certain equipment types.
Brad Barber: The weaker measure weighed on our financial performance in the quarter, with the results generally trailing the year-ago period. Despite these select near-term headwinds, we continue to execute our long-term strategic branch expansion program, leading to a growing operational presence across our 32-state footprint.
Speaker Change: I'll provide more details on our third quarter key financial metrics as well as the performance of our rental business segment. Also, I want to give my thoughts on the rental equipment industry as we approach 2025 and identify some factors that give us confidence and lend support to a more positive industry assessment.
Speaker Change: Finally, I'll review the details behind our 2024 expansion achievements and some early thoughts on what comes next. Leslie will follow with the expanded commentary on our third quarter financial performance, and then we will open the call for questions.
Speaker Change: On to slide six, please.
Speaker Change: Our third quarter, key financial metrics were mixed. Total revenues declined 4% from the year ago quarter, due primarily to a more than 47% reduction in sales of rental equipment.
Speaker Change: We lowered fleet sales by design to leverage both our young fleet age and record investment in 2023. Margins on the sales of rental equipment were again very strong and exceeded 60% in the quarter.
Speaker Change: Total equipment rental revenues improved 3.3% in the quarter, as a 240 basis point decline in physicalization was offset by the addition of 27 new locations since the close of the third quarter of 2023, including acquired branches.
Speaker Change: On a trailing 12-month basis, our equipment rental revenues improved 9.2 percent compared to the same trailing 12-month period in 2023. I have more to say about our impressive expansion achievements in a moment.
Speaker Change: Finally, our fleet sizes measured by Original Equipment Cost, or OEC, closed the third quarter at just below $3 billion, an increase of 8.1% compared to an OEC at the conclusion of the year-ago quarter.
Speaker Change: The slower pace of growth in OEC in 2024 reflects our reduced gross capex expenditures compared to a record investment in each of the years 2022 and 2023.
Speaker Change: Our 2024 gross fleet investment through September 30, 2024 was $327.8 million, a 45% decline compared to the same period in 2023.
Speaker Change: On to slide seven.
Speaker Change: Turning to our rental performance, revenues improved 2.8% in the third quarter compared to the year-ago period, with the addition of 27 new locations offsetting the decrease in utilization.
Speaker Change: Rental gross margins in the quarter were 51.2 percent, down 210 basis points from the third quarter of 2023, largely due to a decline in physical utilization and a lesser degree with rental rates.
Speaker Change: Rental rates in the quarter demonstrated resiliency, declining by only 0.1% on a year-over-year basis due in part to a continued shift of our rental fleet to megaproject work, where greater price flexibility is matched with longer-term project assignments.
Speaker Change: Average rental rates through the nine months ending September 30, 2024, rose 1.5% compared to the same period in 2023. Fiscal utilization declined 240 basis points.
Speaker Change: 67.6%, reflecting low project activity and some modest impact from the 27 new locations added over the last year.
Speaker Change: On a sequential quarterly basis, rental rates declined 0.6%, while physical utilization improved 120 basis points.
Speaker Change: Additionally, our branch expansion activity was responsible for a slight margin headwind in the quarter due to the misalignment of new branch costs and revenues generated that commonly occur before newly opened locations achieve our targeted performance metrics.
Speaker Change: As we have discussed and seen before, it is common for this misalignment to unwind over an average of 12 to 18 months.
Speaker Change: Finally, dollar utilization in the quarter was 39.4% compared to 41.5% in the third quarter of 2023.
Speaker Change: I now want to transition to discussing the equipment rental industry with some thoughts on the remainder of 2024, but more importantly, an early and increasingly encouraging evaluation of 2025.
Speaker Change: Slide 8, please.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: The 2024 Equipment Rental Operating Environment has largely developed without meaningful deviation from our expectations.
Speaker Change: Construction spending in the U.S. continues to demonstrate the slowing rate of growth observed over the first half of 2024.
Speaker Change: Local project activity remains muted, due in part to an extended period of elevated interest rates, and we continue to manage a slight oversupply of certain types of equipment.
Speaker Change: We believe a trend of moderating activity will persist through the remainder of the year with physical fleet utilization and rental rates expected to remain below year-ago measures.
Speaker Change: Beyond the fourth quarter, the developing outlook for our industry is more encouraging into 2025.
Speaker Change: with many factors to consider. For example, the Dodge Momentum Index, or DMI, a leading indicator of construction spending, has exhibited gains for five of the last six months and remains at robust levels.
Speaker Change: Also, construction employment remains on a steady upward trajectory, with five consecutive months of growth through September 2024.
Speaker Change: Equally important, a cycle of easing interest rates is expected to have positive implications for local construction activity as projects are re-evaluated under more favorable lending conditions.
Speaker Change: Furthermore, industry competitors continue to demonstrate a disciplined approach regarding rental rates and purchases of equipment.
Speaker Change: Finally, the strong expansion of megaprojects remains a significant driver of growth for our industry both today as well as into the future. An increasing number of these projects reside or are planned within our regions of operation.
Speaker Change: On to slide nine, please.
Speaker Change: As I've noted on previous calls, megaprojects are characterized by elevated equipment volumes and extended project durations, leading to premium utilization metrics and excellent yield on deployed equipment. Due to their remarkable equipment needs, multiple large equipment rental providers are active on most projects.
Speaker Change: With visibility beyond 2025, megaprojects remain a stable base of demand for construction rental equipment.
Speaker Change: Watch it!
Speaker Change: Our branch expansion and increased operational scale has led to greater exposure to megaprojects, including a growing presence on data centers, solar and wind farms, and LNG export facilities, to name a few. Bidding activity continues to trend favorably, as does equipment deployed as a percent of OEC.
Speaker Change: A recent evaluation of data from Dodge Construction Network and PEC found projects with a total estimated value of $537 billion currently reside in our regions of operation.
Speaker Change: An estimated 35% of these projects have commenced construction, and H&E equipment is deployed on nearly half of these projects.
Speaker Change: The remaining balance of projects is indicative of the robust opportunity that lies ahead for H&E and the equipment rental industry.
Speaker Change: We believe H&E's participation in MAGA projects opportunities will continue to grow as our disciplined approach to branch expansion and building scale evolves.
Speaker Change: I now want to bring you up-to-date on recent achievements in our strategic expansion initiatives.
Speaker Change: Slide 11, please.
Speaker Change: A record number of eight branches were added in the third quarter, while a ninth branch was opened in the month of October. The strong outcome reflected the outstanding execution of our accelerated new location program, which has achieved a record 16 additional locations in 2024, exceeding our stated expansion expectation.
Speaker Change: The new locations have expanded our presence in several regions.
Speaker Change: Our U.S. geographic coverage in 2024 has now grown to 157 locations across 32 states as of September 30th.
Speaker Change: When accounting for both new locations and branches added through acquisition, our branch count is up over 14% following the close of 2023 and approximately 54% since the close of 2021. Both measures are a dominant accomplishment within our industry.
Speaker Change: Thank you.
Speaker Change: Our target range for 2024 gross fleet expenditures remains $350 to $400 million, with growth expenditures through the third quarter of $328 million.
Speaker Change: To conclude, our expansion achievements remain a significant highlight in 2024. Our growth trajectory remains among the best in the industry, as evidenced by a 54% increase in branch counts since the close of 2021.
Speaker Change: Our approach to expansion is disciplined and includes a thorough evaluation of long-term growth trends for each location under consideration.
Speaker Change: We know that with the addition of each new branch location, we fortify our competitive position in the equipment rental industry. At the same time, we grow our presence in attractive geographies with attractive long-term construction opportunities and establish a platform for future financial improvement.
Speaker Change: The modest headwind associated with our growth initiatives are insignificant when compared to the long-term financial contribution that is possible from a well-executed plan.
Speaker Change: Our expansion represents an investment in our future and will benefit H&E for decades to come. With this, I'm going to ask you to proceed to slide 12, and I will now turn the call over to Leslie, who will discuss the third quarter financial performance in greater detail. Leslie.
Leslie Magee: Thank you, Brad. Good morning and welcome, everyone. I'll begin this morning with slide 13 in a review of third-quarter revenues, gross profit, and profit margins.
Leslie Magee: Revenues in the third quarter totaled $384.9 million, down $15.8 million, or 4%, compared to the third quarter of 2023.
Leslie Magee: The decrease was primarily due to a $24.9 million decrease in sales of rental equipment, partially offset by a $10.4 million increase in equipment rental revenues.
Leslie Magee: Rental revenues improved $7.8 million in the quarter, or 2.8%, to $288.1 million, compared to $280.3 million in the year-ago quarter.
Leslie Magee: The improvement was driven in part by further expansion of our branch network, with 27 new locations added since the close of the third quarter of 2023.
Leslie Magee: A total of 19 branches resulted from our accelerated new location strategy with 8 branches added to acquisitions.
Leslie Magee: In addition, our Fleet Original Equipment Cost, or OEC, closed the third quarter up $220.1 million, or 8.1%, compared to the year-ago quarter, resulting in an OEC of just below $3 billion.
Leslie Magee: These increases were partially offset by lower demand and rental rates. Physical utilization of 67.6% was down 240 basis points from the year-ago measure, due largely to weaker demand and a modest oversupply of equipment.
Leslie Magee: On a sequential quarterly basis, physical utilization improved 120 basis points.
Leslie Magee: Rental rates in the quarter posted a slight decrease of 0.1% following three years of quarterly rate gains. Rates were down 0.6% on a sequential quarterly basis.
Leslie Magee: Sales of rental equipment totaled $27.8 million in the third quarter, down $24.9 million from the third quarter of 2023. Reduced fleet sales of nearly 50% follows our continued fleet management strategy.
Leslie Magee: Revenue from the sale of new equipment increased 11.2% in the third quarter to $14.1 million compared to $12.6 million in the year-ago quarter.
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Speaker Change: Gross profit in the third quarter declined 9% to $171.5 million compared to $188.4 million in the third quarter of 2023. Gross margin in the quarter was 44.5% compared to 47% in the year-ago quarter with a decrease due primarily to a decline in rental margins and an unfavorable revenue mix.
Speaker Change: As Brad explained earlier, our rental operations experience lower year-over-year margins due to headwinds resulting from lower utilization and rental rates in our branch expansion initiatives.
Speaker Change: Total equipment rental margins were 45.3% compared to 47.4% in the year-ago quarter, while rental margins were 51.2% compared to 53.3% over the same period of comparison.
Speaker Change: Reviewing our business segments, margins on the sale of rental equipment remain near record levels at 60.2% compared to 58.5% in the year-ago quarter, while margins on the sale of new equipment were 19.8% compared to 13.2% over the same period of comparison.
Speaker Change: Slide 14 please. Income from operations in the third quarter was $60.7 million, a decline of 23.4% compared to $79.2 million in the third quarter of 2023.
Speaker Change: Adjusted income from operations excluding the third quarter 2023 impairment charge was $84.9 million.
Speaker Change: The margin for the third quarter of 2024 declined to 15.8% compared to 19.8% in the year-ago quarter, or 21.2% calculated using adjusted income from operation, which excludes the impairment charge.
Speaker Change: The lower margin was due primarily to higher SG&A expense, lower rental margins, and an unfavorable revenue mix.
Speaker Change: Proceed to slide 15, please.
Speaker Change: Net income in the third quarter was $31.1 million or $0.85 per diluted share compared to net income of $48.9 million or $1.35 per diluted share in the third quarter of 2023. Adjusted net income in the third quarter of 2023, excluding the goodwill impairment charge, was $53 million or $1.46 per diluted share.
Speaker Change: Our effective income tax rate in the third quarter was 28.3% compared to 26.1% for the same quarter in 2023.
Speaker Change: Proceed to slide 16, please.
Speaker Change: Adjusted EBITDA in the third quarter declined 8.4% to $175.3 million compared to $191.4 million in the year-ago quarter. The adjusted EBITDA margin was 45.6% compared to 47.8% in the third quarter of 2023.
Speaker Change: with a decline due primarily to higher SG&A expenses and lower margins on equipment rentals.
Speaker Change: Next slide, 17, please.
Speaker Change: SG&A expense in the third quarter totaled $112.4 million compared to $104.2 million in the third quarter of 2023. The $8.2 million, or 7.9 percent increase, was due to our previously mentioned branch expansion initiative.
Speaker Change: which contributed approximately $11 million in expenses following the 27 new locations over the period.
Speaker Change: New branch operating expenses, which incurred well ahead of the commencement of operations, led to an increase in facilities and depreciation and amortization expenses, as well as salaries, wages, and other employee expenses.
Speaker Change: SG&A in the third quarter was 29.2% of revenues compared to 26% in the third quarter of 2023, largely due to branch expansion costs combined with a 4% decrease in total revenues resulting from lower year-over-year fleet sales.
Speaker Change: Slide 18 please.
Speaker Change: Whereas rental fleet capital expenditures in the third quarter totaled $131.3 million with net rental fleet capital expenditures of $103.5 million.
Speaker Change: for the nine months and it's September 30th, 2024. These figures were 327.8 million and 217.3 million respectively.
Speaker Change: Our gross fleet investment through September 2024 was approximately 45% lower than the gross investment over the same period in 2023 in accordance with our fleet management strategy ahead of lower fleet utilization.
Speaker Change: Gross PP&E capital expenditures in the third quarter was $16.8 million or $14.9 million net of sales of PP&E.
Speaker Change: And for the nine months ended, September 30, 2024 gross PP&E capital expenditures totaled $93.9 million with net PP&E CapEx of $86.4 million.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Free cash flow used over the nine months ended September 30, 2024, was $56 million, compared to free cash flow used of $175.5 million during the same period in 2023. Excluding acquisitions, adjusted free cash flow totaled $101.8 million for the nine months ended September 30, 2024.
Speaker Change: next on slide 19
Speaker Change: We closed the third quarter with a fleet size based on our original equipment cost of just below $3 billion, representing an increase of 220.1 million, or 8.1%, compared to OEC on September 30, 2023.
Speaker Change: Fleet growth in 2024 includes nearly $100 million in fleet from acquisitions. Our average fleet age at the close of the quarter was 40.8 months compared to an industry average age of 47.9 months.
Speaker Change: Average dollar utilization in the third quarter was 39.4% compared to 41.5% in the same quarter of 2023 and 38.6% in the second quarter of 2024.
Speaker Change: The year-over-year decline of 210 basis points was indicative of lower physical utilization and rental rates and a slight impact from our new branch locations.
Speaker Change: 520 please.
Speaker Change: Our capital structure remains followed with steady debt measures, including a net leverage ratio of 2.2 times compared to a target range of 2 to 3 times. Additionally, we have no debt maturities before December 2028 on our $1.25 billion of senior unsecured notes and senior secured credit facility.
Speaker Change: Proceed to slide 21.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: We closed the third quarter with cash and borrowing availability or liquidity of $472.4 million, while excess availability under the $750 million dollar ABL facility was approximately $1.6 billion.
Speaker Change: Our minimum availability, as defined by the ABL agreement, remains $75 million. With excess availability of $1.6 billion, we remain free of any covenant concerns.
Speaker Change: Finally, we paid our regular quarterly dividend of 27.5 cents per share of common stock in the third quarter of 2024. While dividends are subject to board approval, it is our intent to continue to pay the dividend.
Speaker Change: Slide 22 please.
Speaker Change: To close, as expected, we continue to observe a slower pace of construction spending in the third quarter, resulting in lower demand for our services and financial performance that trailed our year-ago results.
Speaker Change: It is worth noting our decision in 2021 to transition our operating focus to a pure rental business model was driven by our motivation to improve the consistency of our financial performance
Speaker Change: meaning improved revenue and margin stability during cyclical weakness and material revenue and margin appreciation through periods of cyclical expansion.
Speaker Change: We have already demonstrated gains from our peer play focus, especially during the market expansion in 2022 and 2023, and the same is true as we manage the current market dynamics.
Speaker Change: Also, our commitment to the steady expansion of our business will continue to intensify our competitive position as we establish greater geographic diversification and operating scale.
Speaker Change: As Brad noted earlier, our expansion initiatives represent an investment in our future, providing substantial long-term financial benefit, but there is a near-term cost, as we have pointed out.
Speaker Change: Many of the 27 new locations added since the end of the third quarter of 2023 are already contributing to our financial performance.
Speaker Change: Additional expansion in 2025 will position H&E to capture new project opportunities as we continue to build our presence in attractive regions of the U.S. while further advancing our competitive position in the equipment rental industry.
Speaker Change: We are now ready to begin the Q&A period. Operator, please provide instructions. Thank you.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad.
Speaker Change: Thank you for watching!
Speaker Change: The first question is from Stephen Fisher with UBS. Please go ahead.
Stephen Fisher: Thanks, good morning all. I just want to start off with a clarification. Last quarter you talked about the decline in rental rates as a function of mix of megaprojects. Can you maybe just parse out what the rate impact would be excluding the megaproject impact? Would it still be negative year-over-year as a function of just...
Stephen Fisher: sort of the broader market conditions, and what's the expectation you have there for Q4?
Speaker Change: Stephen, good morning. We're not providing the rates at that level, but let me say that when we view our small and medium sized customer base, those rates still see some incremental gains.
Speaker Change: And it's a very fair conclusion that the entirety of our decrease is because of our moving product to these larger megaprojects for longer durations.
Speaker Change: No, no in-market, local market, small, medium-sized customer price degradation, none zero. And in some cases, still we're getting minimal gains. Our price decrease is clearly reflective of our transition of more OEC to megaprojects.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Okay, and then I guess just to follow on to that, when you have a more positive outlook for for 2025...
Speaker Change: you know, in theory, if the rental rates are still holding in their positive on
Speaker Change: the non-mayor projects
Speaker Change: I'm curious if you think that would continue in 2025, and really just more of the question about do you think you could see any stabilization of your rental rates overall, especially if you're...
Speaker Change: Or I guess in in light of the fact that you might have even more mega projects next year So just curious if if there's a path to stabilizing rental rates in 25
Speaker Change: Sure. I think there certainly can be. I have no doubt we're going to continue to deploy more product to megaprojects.
Speaker Change: And that's going to have some incremental pull on our rental rates, as you saw in this quarter.
Speaker Change: I have no reason to believe that the rate trajectory will be dissimilar to what we've seen here in the most recent quarter, so, you know, really small but likely incrementally down on a sequential basis.
Speaker Change: The question of, you know, when will we see an inflection so that it levels out completely and has no more downward trajectory, and more importantly, starts to increase, is difficult to answer. I think that's possible in the back half of 25.
Speaker Change: The discipline we see with our competitors, buying product, you know, we're all focused on one thing, and that is continuing to get returns for our investors.
Speaker Change: So, I don't see a lack of disciplined behavior.
Speaker Change: At some point in time, these decrease in interest rates will make local project work more desirable from a cost standpoint. And when that happens, you know, we fully expect to see price increases start to improve. But I anticipate, let me answer it one more way.
Speaker Change: We anticipate zero price decreases with our small and medium customers.
Speaker Change: We're not going to invest and grow our business in the face of declining rates with our traditional customer base. And as we've talked about many times, and I think most folks understand, megaprojects come with an attribute of this long-term, large quantity of products deployed on a particular job, which still gives a very positive yield.
Speaker Change: That's very helpful. Thanks very much.
Speaker Change: Thank you for the question.
Speaker Change: The next question is from Steven Ramsey with Thompson Research Group. Please go ahead.
Steven Ramsey: Good morning. I wanted to think about megaprojects a bit more. Kind of two questions on that. Is the competitive backdrop on megaprojects?
Steven Ramsey: still favorable? Are competitive pressures evolving in a way that maybe makes the returns not as attractive as early on? And then, secondly, as you think about capturing this opportunity from a strategic standpoint,
Steven Ramsey: Do you think you need to limit your exposure here in any way, or is it just go full throttle at megaprojects until local markets come back and then you shift a bit to capture that?
Speaker Change: Sure. Well, let me take the first question first. From a competitive standpoint, no change. Their competitive rate is a substantial factor for their cost.
Speaker Change: But we're not seeing any more aggression or further declines in rental rates, so it's more of the same. To the second part of your question, there are a variety of things we consider. It's certainly not foot on the gas and just take all we can get.
Speaker Change: Frankly, we could lower pricing a little bit more and achieve a little bit more. So we want to be measured in what we're going after. When we talk about this $537 billion that's addressable within our opportunity,
Speaker Change: You know, we're talking about projects that are really close to our existing facilities. We're not stretching out and talking about things hundreds of miles away. We're talking about things that are very close and that we plan to call on.
Speaker Change: It depends on the geography, it depends on the nature of the project, it depends on the customer that we may be dealing with. So we are very selective, and there are many other variables, but those are the three primary variables we consider as we're pricing these projects out. But no more aggression, it's more of the same.
Speaker Change: I don't think anyone's going to become inherently more aggressive going forward. So, I think we understand the environment very well and we're going to pick the ones that fit our variables as best as possible.
Speaker Change: Okay, that's helpful. And then, what to think about your intrinsic growth strategy long-term with this kind of backdrop, if the demand environment in 2025
Speaker Change: days like this mixed between locals lagging and megas growing. Does this change your view on increasing locations at the 12 to 15
Speaker Change: kind of pace to position yourself for the longer term. Just kind of curious how you assess your growth strategy in a world where the sluggishness stays a bit longer.
Speaker Change: We certainly don't like the current sluggishness or the pace that it's slown to the level it has. It's a lot more fun to open locations in a more robust environment. That said...
Speaker Change: And to your question, if we see the same type of environment going forward, we're going to continue to open 12 to 18 locations a year.
Speaker Change: We just opened our 16th location of the year, which we're basically done for this year's opening based off of our schedule.
Speaker Change: But with the same environment that we're looking at today, you can expect us to open 12 to 18 locations in 2025. If we were to see, you know, a real decline, of course we would be more measured in doing so.
Speaker Change: But as I said in my prepared statements...
Speaker Change: These are long-term investments.
Speaker Change: These are going to serve to give us returns for decades to come. And, you know, we announce them all individually, but we're going to the highest profile, most durable markets that contain substantial long-term growth opportunity for construction. So we're really comfortable with what we're doing. In this current environment, we're going to do more of the same.
Speaker Change: If we see something shift more negatively, which is not our current view, then we certainly could and would slow down. But at this level, this is a very safe investment. It's going to pay a return for a long time.
Speaker Change: That's helpful, Brad. Thank you.
Speaker Change: The next question is from Tim Fine with Citigroup. Please go ahead.
Speaker Change: Subs by www.zeoranger.co.uk
Tim Fine: Oh, formally, I guess. Good morning. Just the first question is on, maybe preliminary at this point, but just kind of a high-level, your...
Tim Fine: how you're thinking about capital in 25.
Tim Fine: relative to the target this year from a gross perspective of $350 to $400 million.
Tim Fine: On the one hand,
Tim Fine: it's to the extent you go backwards to some degree on time.
Tim Fine: this year, but based on the optimism that you outlined and the potential for further rate hikes.
Tim Fine: and what that may spur in 25. I guess you kind of have competing forces there. So maybe just some initial thoughts in terms of what you and the board are thinking about from a capital perspective in 25.
Speaker Change: Thank you for the question, Tim. Our CAFX for the remainder of this year is going to be, and I know you're speaking to 25, is going to be primarily replacement. Our growth capital is now spent for the year.
Speaker Change: So, in Q4 we'll have replacement capital. We're in the middle of our budgeting process as we speak. So, we're just not in position to comment.
Speaker Change: on CapEx going forward. I can tell you that we're seeing better pricing for manufacturers in selected cases. So we'll get a little bit better rental power on what we do spend next year. But it's just really too early to comment.
Speaker Change: Again, bear in mind we're planning on 12 to 18 new locations in 2025.
Speaker Change: I think everyone's familiar with what we deploy in capital to open a location where they typically mature in the first 12 months.
Speaker Change: Those locations are continuing to exceed our expectations. Again, we're going to the best markets we can find that, you know, independently are offering plenty of opportunity. But as far as 25 CapEx, it'll be, you know, we'll be talking about that as we wrap the year up.
Speaker Change: Got it, okay. And maybe just from the gleaning, what you may be able to from the...
Speaker Change: From a time perspective, you're different, obviously, being heavy in the earth-moving category.
Speaker Change: which I think, you know, tended to be a little bit more early cycle, whereas...
Speaker Change: can tend to be utilized more later in the project lifecycle. I'm just curious as to what you can or maybe can't glean in terms of
Speaker Change: where we are just across that construction cycle, if there are any notable trends you're seeing across utilization of your major product classes.
Speaker Change: Yeah, we've actually seen Earthmoving make some improvements year over year. That's a product where we've not invested as much in this calendar year as we have before, to your question.
Speaker Change: And at this point in time, I can tell you when we look forward to 2025, we're not looking unfavorably at any particular product, and certainly Earthmoving is going to continue to be an opportunity for us. John, do you have anything to add to that?
John Inquist: You know, the only thing I would add, Tim, and to Brad's point, we have shown some improvement in earth moving utilization.
John Inquist: And while we don't give specifics on each and every product line that we cover, they're not all equal. I mean, obviously, we have different utilization levels with different product lines. But, you know, again, moving forward, 2025 is going to be interesting, but it is a good sign to see, you know, earth moving.
John Inquist: not only improving but up on a year-over-year basis.
Speaker Change: Yeah, all right, maybe I'll sneak in one last one on the
Speaker Change: These new stores that you opened, you talked about kind of a typical 12 to 18 months.
Speaker Change: misalignment is as you kind of ramp up and the revenues lag, the cost. As you've done more of it, you continue to do more of these, is that...
Speaker Change: I guess, you know, shortening that time horizon, just as you, you know, there's some learnings along the way, maybe you become more efficient.
Speaker Change: obviously the market backdrop is a little softer so I'm just curious if there's and maybe it's a location by location thing but if you've seen any any trend in terms of of that timeline as you bring on more of these new locations.
Speaker Change: Yeah, we have seen the timeline compressed, you know, years ago we used to talk in terms of 18 to 24 months to
Speaker Change: for these locations to operate it, you know, kind of like business metrics, you know, time utilization, maintenance costs, what have you.
Speaker Change: We've seen that compressed. You know, the thing that's been different for us since June of 23, in the last 17 months, we've opened 30 locations. And so on a base of locations that we started on,
Speaker Change: It's certainly been part of what weighs incrementally on our utilization and incrementally on our SG&As.
Speaker Change: But it's to your question of how we progress.
Speaker Change: We're really comfortable in that 12 to 18 months. We're always looking to improve, but that's what we've grown to expect through our performance and improvements, and of course we look to shorten that as best as possible. We're very comfortable that we can be productive and produce like business metrics and then continue to grow over a number of years depending on the marketplace.
Speaker Change: Got it. All right. I appreciate it. Thank you. Thank you.
Speaker Change: The next question is from Alex Reigiel with B Reilly FBR. Please go ahead.
Alex Reigiel: Good morning. A couple quick questions here. First up, can you expand upon your comment that there is a slight oversupply of certain types of equipment?
Speaker Change: Thank you for having me. Thank you.
Speaker Change: Just broadly, I mean, look, our utilization being down year over year is probably the best single indicator. You know, we talked early in the year and every quarter we've been, you know, slightly disappointed. We always want more product on rent, but that is a product of a slight oversupply of a variety of products. There's not one product type that we're...
Speaker Change: that we're personally well overweight on, nor is there one product type that we think the overall industry's particularly overweight on. And you've seen everyone reduce their CapEx this year. Most folks who give CapEx, guys, have reduced somewhere between 30 and 40%.
Speaker Change: And we'll continue to do so until we think that supply overlap is gone. But, you know, what we're really saying is...
Speaker Change: For our utilization to go up, there needs to be a little bit more work or a little bit less supply.
Speaker Change: We think, we know mega-projects are continuing to unfold. We are hopeful that we will see the interest rate reduction start to spur the local market work pickup, you know, in the second half of next year.
Speaker Change: And in the interim, you know, we're going to be very disciplined as our competitors in what we're purchasing.
Speaker Change: And then used equipment sales for down year over year and sequentially, can you talk a bit about the strategy there that's driving that?
Speaker Change: Alex, really, it's just basic fleet management. You know, looking at our fleet age, under 41 months today.
Speaker Change: We just don't have the volume of equipment that's aged out that we really need to get rid of. So, really, that's the main reason. We have seen some softening, obviously, in certain categories for used equipment sales.
Speaker Change: auction values have continued to decline. You know, we think that they're going to be reaching a bottom soon, but while that's not, you know, our number one priority to sell fleet through auctions.
Speaker Change: It is one piece of the puzzle. We've seen some leveling off and some steadiness with retail and wholesale, but if there's one area that's been a little concerning, it would be auction values.
Speaker Change: Topal, thank you.
Speaker Change: The next question is from Katie Slicer with KeyBank Capital Markets. Please go ahead.
Katie Slicer: Hey, good morning, guys.
Speaker Change: Thank you all.
Katie Slicer: I wanted to see if you could give any sort of commentary on how end markets trended throughout the quarter. Sounds like local accounts are still pretty depressed and you haven't quite seen any recovery there, but just curious if you saw any incremental either improvement or decline as you move throughout the quarter.
Speaker Change: We see certainly more strength, as you just characterized, with mega-projects and deploying more. We have not seen any further degradation in our local markets, but it would be un...
Speaker Change: It's fair to say that they're picking up at the same time, but, you know, quarter over quarter, that 120 basis point utilization improvement, you know, tells you that things continue to adjust easily and that there was greater opportunity. So, yeah, I think we're pretty steady as we go from here forward.
Speaker Change: Okay, my last question is just on used equipment margins. Those have been a little bit more resilient than I would have expected this year. Just curious how you're thinking about those going into next year. Is it fair to assume that you can continue that above 60% level going forward?
Speaker Change: As far as next year, we've stated on previous calls that we do expect to be able to maintain that 50 plus percent gross margin. The past several quarters, we've achieved north of 60 percent. That's more a reflection of the age of the fleet that we're selling.
Speaker Change: I believe the age of our fleet sold in Q3 was about 75 months.
Speaker Change: which is on par with what it was in Q3 of the previous year.
Speaker Change: But looking forward, I mean, our dispositions are going to be dependent upon, you know, what fleet meets our age criteria to sell within a particular quarter. So we still stand firm that we can achieve that 50-plus percent gross margin moving forward.
Speaker Change: Okay, that's helpful. Thank you.
Speaker Change: Again, if you have a question, please press star then 1. Please stand by as we poll for questions.
Speaker Change: Showing no further questions, this concludes our question and answer session. I would like to turn the conference back over to Jeff Chastain for any closing remarks.
Jeff Chastain: Okay, Gary. Well, thank you. We appreciate everyone taking the time to join us today and for your continued interest in H&E Rentals. We look forward to speaking with you again. Gary, thanks for the assistance on today's call. Good day, everyone.
Speaker Change: Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.