H&E Equipment Services, Inc.

Good morning and welcome to H&E Equipment Services first quarter 2021 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Kevin Inda, Vice President of Investor Relations. Please go ahead.

Thank you, Kate, and welcome to H&E Equipment Services conference call. To review the company's results for the first quarter ended March 31st, 2021, which were released earlier this morning. The format for today's call includes a slide presentation, which is posted on our website at www.he-equipment.com. Please proceed to Slide 2. Conducting the call today will be John Inquist, Executive Chairman of the Board of Directors, Brad Barber, Chief Executive Officer, and Leslie Magee, Chief Financial Officer and Secretary. Please proceed to Slide 3. During today's call, we'll refer to certain non-GAAP financial measures, and we've reconciled these measures to GAAP figures in our earnings release and in the appendix to this presentation, each of which is available on our website. Before we start, let me offer the cautionary note that this call contains forward-looking statements within the meeting of federal securities laws, statements about our beliefs and expectations, and statements containing words such as may, could, believe, expect, anticipate, and similar 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 in any forward-looking statement. A summary of these uncertainties is included in the safe harbor statement in the company's slide presentation for today's call, and also includes the risk described in the risk factors on the company's most recent annual report on Form 10-K In 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. With that stated, I will now turn the call over to Brad Barth.

Brad Barth Kevin, and good morning, everyone. Welcome to H&E Equipment Services' first quarter 2021 earnings call. On the call with me today are John Inquist, Executive Chairman, Leslie McGee, our Chief Financial Officer, and Kevin Enda, our Vice President of Investor Relations. I will begin on slide four. I will briefly discuss our first quarter highlights, the performance and the trends in our rental business, and provide an update on our growth strategy. Leslie will review our financial results for the quarter in more detail. After, we will take your questions. Slide six, please. We're becoming increasingly optimistic that the cycle may be nearing a return to pre-pandemic levels. Demand in our end-user markets continued to improve throughout the first quarter, particularly with our rental utilization. The historic winter storm in February was an unexpected headwind for our business during the quarter, as approximately 40% of our branches were closed for nearly a week. Even after the weather cleared, the severity of the storm had an extended impact in some of the hardest hit areas. Despite the impact from the storm and lower than expected financial results from this disruption, we're pleased with our operational performance and continued forward momentum in our rental business. Total revenues in the first quarter were down 2.6% or 7.5 million from a year ago, and we're making significant strides towards further improvement as the year progresses. Slide seven, please. Now let me provide some additional color on the momentum in our rental business. To frame the cadence of improving customer demand during the quarter, look at our physical utilization trends during the period. As I said on our fourth quarter call, we started the year just under 60% and we expected utilization to be slightly challenging during the first quarter due to typical seasonality. From the end of December to the end of January, utilization increased 430 basis points. From the end of January to the end of February, utilization rose another 170 basis points, despite the impact from the winter storms. From the end of February to the end of March, we gained another 260 basis points. Also, in early March, physical utilization surpassed our 2020 levels, which was before we realized the full impact of COVID later in the month. Thus, we eventually landed at utilization of 63.5% for the first quarter, which was down just 80 basis points from a year ago. Currently, utilization is running significantly higher than this time a year ago, up nearly 1,000 basis points, ahead of the 2020 and within 370 basis points of the same period in 2019, which was a very good year for our rental business. We are pleased that our rental rates are also stabilizing, down 4% versus a year ago and 0.2% sequentially, an improvement from declines of 4.5% and 0.3% in the fourth quarter. As we progress into the stronger seasonal quarters, we expect to see rental rates show sequential positive increases. We are also encouraged by the recent rebound in several key industry indicators. The February Dodge Momentum Index rose 7.1% to 149 from the revised January reading of 139.1, the highest level in nearly three years. The March ABI increased to 55.6% from 53.3% in February, reaching the highest point since July 2007. The ABC Backlog Indicator and ABC Customer Competence Index have also shown solid improvement in recent months. This data certainly correlates with the sentiment of our customers, which continues to grow increasingly positive as we move into the year. As we know, a federal infrastructure proposal is on the table, and over time we will see how the potential bill unfolds. Any meaningful bill that passes would likely be a benefit to H&E. With earth moving comprising 23% or $400 million of our $1.8 billion total rental fleet and consisting of a wide range of dirt products, we're in a good position to benefit from an infrastructure-related project. Let me quickly provide some observations about the Gulf Coast. specifically Texas. The state fully lifted restrictions associated with COVID-19 much earlier than many others and our business there is doing well. Energy related work is coming back and new projects are abundant. Furthermore, Texas is not waiting on an infrastructure bill. Texas DOT recently announced it would let almost 10 billion in new construction projects in fiscal year 2021, which is up 27.5% year over year. Additionally, the winter storms wreaked havoc on Texas, as well as other adjoining states with mass power outages, water system failures, and other major problems. Correcting these issues will be a massive effort and could result in significant spending on projects to ensure these infrastructure failures never occur again. We remain very bullish about our opportunities in Texas and along the Gulf Coast. Overall, demand is solid. Industry indicators are positive and business conditions continue to improve. Our market position is strong, and we have an expansive and growing footprint in high-growth geographies. We like our exposure to a wide range of verticals in the non-residential construction segment and other healthy end markets. H&E has all the tools to capitalize on these improving conditions. Slide eight, please. Let me conclude by providing an update on our growth strategy. In terms of our organic growth plans, we believe that our expansion team is on track to accomplish our goal of opening eight to 10 starts this year. We opened two new branches in the first quarter in Lodi, California and Concord, North Carolina. With Lodi, we have 10 branches in California and further expect to expand our presence in this state. Our new branch in Concord, North Carolina will complement our existing branch in Charlotte and brings the number of H&E branches in the state to eight. Thus far in the second quarter, we have opened another five branches including Murfreesboro, Tennessee, Longview, Texas, Macon, Georgia, Knoxville, Tennessee, and Marietta, Georgia. Our Murfreesboro location positions us within a second branch just 25 miles from our existing Nashville facility to adequately support our current customer activity and new business from nearby municipalities. With Longview, we'll be able to capture new business and provide greater convenience to our customers in areas between the growing Dallas, Texas, and Shreveport, Louisiana markets. We now have 22 branches in Texas. Macon allows us to serve customers between central Georgia and existing facilities in Atlanta, Savannah, and Opelika. Marietta positions a third branch near Atlanta, one of the fastest growing cities in the past 10 years, and increases our total locations in the state to five. Knoxville is the third largest city in the state and gives us our fifth location in Tennessee. With seven new locations open year-to-date, we're clearly executing upon this component of our growth strategy. Lastly, our balance sheet remains strong and we're continuing to explore opportunities to deploy capital for acquisitions in the general rental and specialty segments that will complement our existing business and further expand our geographic scale and product offering. With this, I will now turn the call over to Leslie to discuss our first quarter financial results in more detail. Leslie?

Good morning, everyone, and thank you, Brad. Let's proceed to slide 11 for more details of our financial results. As a reminder, the prior year's first quarter results included a non-cash goodwill impairment charge of $62 million identified in connection with an interim goodwill impairment test due to certain triggering events related to the impact to our business from the COVID-19 pandemic. Now let me move on to our first quarter 2021 results. We were pleased that total revenues were only down 2.6% or $7.5 million to $278.4 million compared to the same period a year ago, especially given the impact to our business from the winter storm. Rental revenues decreased 11.8% or $18.7 million to $139.9 million from $158.6 million a year ago. The size of our fleet decreased by 8.4% or $161 million compared with the prior year comparable period. Rental rates this quarter declined 4% year-over-year. However, rates were down only 0.2% sequentially. Even though the prior year comparable period was before significant impact to our business from COVID-19, Time utilization in the current quarter decreased only 80 basis points to 63.5% compared to a year ago. Consequently, our dollar returns decreased 110 basis points to 32% compared to last year. New equipment sales increased 22.3% to 37.7 million compared to 30.9 million last year. The improvement was primarily the result of a 72.3% or 6.1 million increase in new crane sales. Used equipment sales increased 33.8% or 10.5 million to 41.8 million and was primarily the result of higher sales in all product categories except crane. Sales from our rental fleet comprised 93% of total used equipment sales in both comparative periods. Our parts and service segments generated $40.1 million in revenue on a combined basis, which is down 13.9% from a year ago. Moving on to a discussion of gross profit and margins. Gross profit decreased 11.8% to $93 million from a year ago. Consolidated margins were 33.4% compared to 36.9% a year ago. primarily because of lower gross margins on rentals and used equipment sales combined with revenue mix. For gross margin detail by segment, rental gross margins were 42.1% during the quarter compared to 46.1% a year ago due to pressure on rates and time utilization. Also, the prior year comparable period included an additional billing day as a result of leap year on February 29, 2020, which we estimate accounted for approximately 60 basis points of the decline in the first quarter of 2021 real gross margin. Margins on new equipment sales increased to 11.4% during the first quarter compared to 11.2% a year ago, as margins were higher in all product lines, with the exceptions of new cranes and new other sales. Used equipment sales gross margins decreased to 32.1% from 34.5% last year, primarily due to lower margins in all categories except other used equipment gross margins. Margins on pure rental fleet only sales were 34% compared to 36.4% a year ago. And our parts and service gross margins on a combined basis were 41.6% compared to 41.1% a year ago. Slide 12, please. Income from operations for the first quarter of 2020 was 18.5 million or 6.6% of revenues, which is compared to a loss from operations of 31.9 million in the prior year period. Included in loss from operations for the first quarter of 2020 was a 62 million non-cash goodwill impairment charge. Excluding the impairment charge, income from operations was 30.1 million or 10.5% of revenues a year ago. The declines in income from operations and margins compared to prior year on an adjusted basis was primarily a result of a 2.6% decline in revenue, revenue mix, lower gross margin, and lower gain on sales of property and equipment of 4.1 million. Partially offsetting these declines in income from operations were lower SG&A costs of 7.1% or 5.7 million. Proceed to slide 13. Net income was 4.2 million or 11 cents per diluted share in the first quarter of 2021 compared to a net loss of 37 million or a loss of $1.03 per share in the first quarter of 2020. The effective income tax rate was 27.1% in the first quarter of 2021 and 21.9% in the first quarter of 2020. Excluding the prior year's impairment charge, net income was 10.8 million or 30 cents per diluted share in the first quarter of 2020. On an adjusted basis, the effective income tax rate was 26.2% in the first quarter of 2020. Please move to slide 14. Adjusted EBITDA was 83.2 million in the first quarter compared to 99.2 million a year ago, a decrease of 16.2%. Adjusted EBITDA margins were down 480 basis points to 29.9% this quarter compared to a year ago, largely as a result of revenue mix. In addition, adjusted EBITDA margins were negatively impacted by lower gross margins combined with lower gain on sales of property and equipment. As mentioned, SG&A expenses declined 5.7 million or 7.1%, partially offsetting the four mentioned declines to adjusted EBITDA margins. Next, slide 15. SG&A expenses for the first quarter of 2021 were $74 million compared with $79.6 million the prior year, a $5.7 million or 7.1% decrease. SG&A expenses in the first quarter of 2021 as a percentage of total revenues were 26.6% compared to 27.8% a year ago. Employee salaries, wages, payroll taxes, and related employee benefits and other employee-related expenses decreased 3.49, primarily as a result of lower commissions and incentive pay, combined with headcount reductions, decreases in health insurance costs, and worker compensation costs. And other employee cost reductions implemented subsequent to the first quarter of 2020 in response to COVID-19's impact to our business. Bad debt expense decreased $1.3 million, and liability insurance expense decreased $0.9 million. Legal and professional fees decreased $0.6 million. Partially offsetting these decreases was a $1 million increase in accrued litigation loss contingency. Approximately $2.2 million of the total increase in SG&A expenses was attributable to our Warm Start openings compared to a year ago. Next on slide 16. On this slide, you will find CAPEX, fleet CAPEX and cash flow for the 12-month period ending March 31st, 2021. And our gross fleet CAPEX in the first quarter was $71.7 million, including non-cash transfers from inventory. Our net rental fleet CAPEX for the first quarter was $32.9 million. Gross PP&E CAPEX for the first quarter was $7.3 million, and net was $7.1 million. Our average fleet age as of March 31st, 2021 was 41.5 months. Free cash flow for the first quarter of 2021 was 22.2 million compared to a free cash flow of 40.5 million a year ago. Next on slide 17, at the end of the first quarter, the size of our rental fleet based on OEC was 1.8 billion and 8.4% or 161 million decreased from a year ago Average dollar utilization was 32% compared to 33.1% a year ago, reflecting lower time utilization and rates. Proceed to slide 19, please. We continue to operate with ample liquidity and no near-term maturity. At the end of the first quarter, we had no borrowings under our amended ABL facility and more than $300 million of cash on hand at quarter end. We had $741.3 million of cash availability at quarter end, net of $8.7 million of outstanding letters of credit. Our excess availability was $968.5 million at the end of the first quarter, which is the measurement used to determine if our springing fixed charge covenant is applicable. With excess availability of nearly $1 billion, we have no covenant concerns. Also, our net leverage remains low at 2.4 times. We paid our regular dividend of 27.5 cents per common stock share again in the first quarter. And while dividends are always subject to board approval, it is our intent to continue to pay the dividend. Let's now get into questions. Operator, please provide instructions for the Q&A session.

We will now 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 speaker phone, please pick up your handset before pressing the key. To withdraw from the question queue, please press star then two. The first question comes from Steven Ramsey of Thompson Research Group. Please go ahead.

Hey, good morning.

Maybe to start with, you know, fleet size down 8%, improving outlook, and obviously seasonality coming in. I mean, How do you think about CapEx for the rest of the year? Would you prefer your CapEx to be even higher, but the constraints at the manufacturer's level may be slowing you down from maybe what you would prefer to do on the CapEx front?

Yeah. Good morning, Stephen. The answer is I think we're very pleased with our CapEx that we have in the queue. There are some products, you know, we've really had an opportunity to pull forward, as Leslie mentioned, We had a little headwind in SG&A costs related to pulling forward. We've opened now seven of these greenfields slash warm starts for the year. That's been a little bit of a challenge, but generally speaking, we've been able to meet the expectations. If there would be anything different, isolated products, we would pull forward a little faster. But for the full year, we have no concerns. We got our orders in early. Price protected, very, very minimal, and in most cases, zero price increase. So we're satisfied that we've got the plan to fill our expectations.

Okay, great. And then thinking about the winter weather impact, maybe how that hits Q2, are you seeing any kind of catch-up work there? Is it already caught up, or do you expect higher fleet on rent? in Q2, partly from the winter weather catch-up?

That disruption we had had two specific impacts on our business. The one you're referring to is the pause it placed on our utilization. Having 40% of our locations shut down the better part of a week and then some of that extended impact certainly paused it. So to that part, to your question, we've resumed. We've recently run back up close to 68% utilization. So our trend on on-rent continuing to improve has resumed and we're satisfied with that. The area it had an impact to is not in Q2, but in Q1 that we can't really replace or resume on was in our parks and service business. When you lose those man hours, they're just lost. It's not pent up demand. We've got adequate demand on the parks and service side of our business, but it had more of a specific impact department service. But on the rental side, we're in good shape. Our utilization is trending back to our expectations, approaching 68%, and we expect that trend to continue.

Okay, great. One last quick one from me. Your outlook, you had discussed clearly the macros improving, and you talked some about what you're hearing from the sales force and customer feedback in the fields. Can you maybe share or clarify that and if what you're hearing from customers and from your sales force is more or less optimistic than what you're seeing in some of the macro data?

It's more optimistic, clearly. If you were talking to a group of my sales people and asked them, did we have adequate fleet coming to the extent they had a real view of the total plan, they would say, no, we need to buy much more. And so, you know, as we're going to continue to grow the fleet, will we see opportunities? That optimism is much higher in the field, but we're also trying to balance against these rate improvements that we expect to make for the remainder of the year.

Excellent. Thank you. Thank you.

The next question is from Stanley Elliott of Stiefel. Please go ahead.

Good morning, everyone. Thank you all for taking the question. So starting off, you know, thinking about the weather impact, do those items come off rent? You know, just curious kind of how that will flow through. You know, if you look at kind of that 40%, it seemed like maybe a 3% sort of a headwind, but just trying to make sure we were thinking about that correctly.

Yeah, some of them do come off rent. What you certainly don't get is you lose all your momentum going forward. As we pointed out, Our utilization had continued to step up. Every week in January, I think I covered on our fourth quarter call, every week in January was sequentially improving in physical utilization. When we had that call the second week in February, it was improved over the end of January. We talked about that cadence just continuing as well in my prepared comments. To answer your question, you do get some off rents. You certainly lose all your momentum. And you just kind of stand in place or tread water for a couple weeks in that broader geography. And so that hurts. Good news is that's since resumed and we're back off and running and as optimistic as we were before that storm hit us.

With the backlogs that a lot of OEMs are facing and some supply chain disruptions, things like that, do you guys have a view whether the rental channel could actually increase penetration you know, this cycle or even over the next 12 months relative to new equipment purchases?

I believe the rental, I think that is likely to occur. My view is that rental penetration in the short term and likely the longer term is going to continue to trend in the direction it's frankly been trending in for quite some time.

And lastly, in terms of the SG&A, lots of moving parts with, you know, kind of the slowdown and then some of the new ads that Is there any way we should think about that to the cadence or the balance of the year, especially with what, like, two more locations look to be opening?

Yeah, I'll let Leslie give a little more detail, but you nailed it, right? I mean, we had this slowdown. We've got these seven locations that we've opened in a pretty short period of time. Leslie, you want to give some tell on the cadence?

Sure. So on our last call, I stated that we ended the full year 2020 at 24.7% as a percent of revenues. And we expected some slight pressure as a percent of revenues compared to that for 2021. And that view is really unchanged. And that's really largely due to the warm start strategy that we have. And related to the cadence of that, Q1 is always the highest percent of revenue just because of the seasonality. So that should begin to settle down as the year progresses down to that overall guidance that I gave.

Perfect. Thank you, guys. Best of luck. Thank you. Thank you.

Our next question is from Ross Gilardi of Bank of America. Please go ahead.

Yeah, good morning, guys. Good morning, Ross. Awesome.

Hey, Brad, can you talk a little bit more about that Texas infrastructure spend and the timing of that as to when it should get spent and where and kind of the types of projects? Any color there would be helpful.

What I was referring to specifically in prepared comments was DOT spending, so roads and bridges primarily. Those projects will let throughout this year, and I do not have the schedule in front of me, but Generally, they're largely let earlier in the year as opposed to later in the year. So I would need to research a little bit more to give you firm assurance on that. But I would tell you that's the typical trend. And I think what's nice to see is, you know, their projected letting is going to be up about 30% year over year. Okay. Yeah. Okay.

Interesting. And then are you seeing any – signs that the smaller independent rental chains that maybe didn't order as early as you did are really struggling to obtain fleet and losing market share to yourselves and the national rental companies?

What I can tell you with certainty, if they did not have their orders in, they're not going to get product is what I believe. I don't have a lot of insight to most small rental competitors. but generally they order in a very short view, in a short horizon. So that would imply to me that they probably did not order early, and if they have not ordered at this point in time, I think they're going to get blocked out on the year. Got it. Okay.

And then just lastly, how are you thinking about specialty going forward? I mean, is it just kind of something you wish you had more of and will gradually build up, or are you feeling more urgency to address it either now by M&A or organic investment, and what areas of specialty are most compelling to an H&E? Yeah, good question.

You know, I think it's going to be a slow process for us here. What could move that needle faster would be an acquisition opportunity, and we are certainly open to investigating those as they come along. Anything we would consider, as you know and others know, we've talked about the trench safety space. That plays well with our existing 23, 24% of our earth moving products. So we would look for things that are synergistic to our existing customer base, bring us some more customers, but more importantly, allow us to penetrate them deeper. Over a period of time, specialty will still be a relatively small piece of the business here at H&E, and given enough years and the right acquisitions and organic growth, it'll become a larger piece. So we're serious, we're looking. Our sense of urgency in getting something done, I would just tell you, is going to be the same as every other part of our business. We're disciplined and we're focused, and we're not going to do anything crazy, but at the same time, we're optimistic.

Well, just on that, just a quick follow-up in terms of how you define anything crazy. It just seems like it's hard to acquire. There's a lot of competition for these assets as a company. As we all know, I mean, most of these businesses seem to go for high single-digit, low double-digit EBITDA margins. I mean, are you... When I ask you about urgency, would you guys be willing to tolerate some upfront dilution to actually start to build a footprint or not? Just curious if you could respond to that.

It's possible, and I don't mean to be evasive. It's possible to the extent we would have to evaluate the opportunity in and of itself. You know, what we pay on day one... as opposed to what it may bring to us over a period of time, being able to grow that or bring that experience into our business and spread it across our footprint could allow us to pay maybe a price tag that, you know, otherwise we would not have considered in a general rental business. That being said, you know, we're not going to lean too far forward unless we have a high degree of certainty we can leverage that type of growth opportunity in that hypothetical example I just gave you.

Okay, fair enough. Thank you. Thank you, Ross.

The next question is from Steven Fisher of UBS. Please go ahead.

Thanks. Good morning, guys. I just wanted to start off on the rates. I know you talked about stabilization. I was just trying to frame the 4% decline. What was the exit rate on that as you left the quarter? Was it still down year over year, or were you actually flat or maybe up?

Well, sequentially, we were down two-tenths over last quarter in our measurement. So that's probably the only information I have that I could give you that kind of guides directionally to what you're looking for.

Okay. I guess I'm just kind of curious if you're anticipating that we'll start to see those rates up on a year-over-year basis in the second quarter at some point.

Yeah, let me speak about sequential, and if you have other questions, I'd be happy to try to answer those as well. It is my anticipation, it is our anticipation, that our rates will start to show sequential rate improvement on a quarterly cadence going forward in the near future. You know, we had stepped down for a number of quarters. I think we were down four-tenths of a percent in Q4 over Q3. We're down two-tenths of a percent, or excuse me, 20 basis points in Q1 over Q4, a seasonally tough time. And we believe that that cadence will start to move in a positive direction. How long it takes us to intersect that year over year is a different question that I don't think I'm prepared to answer to, but we certainly will get back to previous rates and eclipse previous rates. The question is, how long does it take us to do that? With the current supply and demand environment, again, I'm making these comments just coming out of Q1 and now starting to get the real momentum within our rental business. With the current supply and demand environment and the discipline that I've seen from our competitors in the marketplace and the discipline that exists in H&E, you know, we're going to be optimistic that we can push those a little quicker, but rates are very much supply and demand driven. And the good news is we're moving back into a position where we're going to see sequential rate improvement. Give me a quarter or so, and I'll be able to guide you better on year over year.

Got it. That's helpful. And you talked a little bit before about some of the optimism out on the field. I guess I'm just curious how you would characterize the visibility you have for the second half of at this point and how it compares to the visibility that you would typically have at this time of year?

Well, there are a few things. John Inquist, our present chief operating officer, has been conducting regional meetings, sales meetings, and otherwise, where we're really talking more specifically within the customer size, small, medium, large, the diversification customers by SIC code. We use a lot of data to support this, and then there's the anecdotal conversations that go along with our sales force, and, of course, what we call iConnect, our CRM tool. So that's all positive. It's probably more anecdotal. Something I can point out that's just a number, it's a statistic, is that our physical utilization on earth moving, Stephen, You're familiar, we've talked about earth moving as an early cycle indicator many times. Our earth moving utilization is exactly the same it was at this point in time in 2019. Our fleet's not much larger. I think it's maybe 25 million larger than it was in 2019. The point is, is we did not decline that fleet to catch it. It's just been somewhat of a stable, slightly larger fleet, and that physical utilization matches 2019, which was a nice year. That is an outstanding indicator to us internally about what's going to come behind the earth moving being done on these projects. So I don't want to oversell 2021, but the stability we see, I believe it's very real. And I think our opportunity for utilization to improve and rates to incrementally start to move the right direction, it's painted on everything we look at.

Makes sense. And then just lastly, you talked a little bit about infrastructure stimulus, and how you're just kind of watching to see how that plays out. What would you have to see to really start putting the orders in or trying to start fleeting up in advance of that so you're prepared for those dollars when they start flowing?

Yeah, we would want to see the bill and understand where the dollars are going to be spent. We may have to do some estimates on how many of those dollars are within our 23-state geography. but since we're in most of the high-growth markets, we would expect that a large percentile of those would be. So there are a variety of things we would have to consider. For this year, we still have an opportunity to bring on more fleet if we want to. I will tell you that we're very focused on discipline, improving our returns in every sense, and it would likely be more of a 2022 scenario for us on the infrastructure bill, just with the timings. I don't know that there are many shovel-ready projects, you know, as we sit here today.

Got it. Thanks a lot. Thank you.

As a reminder, if you have a question, please press star, then 1. The next question is from Barry Haynes of Sage Asset Management. Please go ahead.

Thanks very much. I had a couple questions. So the first one is, with the price of steel up a fair amount, You mentioned on your CapEx orders you've put in your price protected, but if you weren't, how much have prices gone up for equipment versus what you've got in your order book? And then how much would lease rates or rental rates have to go up to justify you guys increasing fleet at those higher price levels? So that was the first question.

Sure. So the price points really vary by the percent of steel in a particular product. I would generalize and say that we've probably seen 2.5% to 5% steel surcharges or had conversations around those levels with most of our manufacturers. That being said, some of them have maintained their position that there still today is no steel surcharge. So there's a range. To the second part of your question, if you just go down to the base level, for every 1% you pay more, you need to achieve 1% more rental revenue to obtain the return you were getting previously. And so, you know, obviously that has to flow through historically in the rental business. The good news for us, there's a blend of older products as well as the newer products, the newest product and everything in between. And so that's a target that moves over time. But you want to obtain the same rental revenue increase that you have in cost to protect your returns, basically.

Great, thanks. And then I had a question related to alternative energy. If you were to look at solar versus wind versus, let's say, a traditional gas-fired power plant, what would be the equipment intensity difference for the types of equipment you guys sell or rent in each of those three. Is it similar? Are there big differences? Just some sort of a feel for that. Thanks.

There are some differences. I'll tell you, we're agnostic as far as what type of power project goes on. They all consume large quantities of products. There is a product mix issue related between solar and Solar's closer to the ground while wind turbines are way up in the air. There's some obvious differences in those types of products. I will tell you the products that we deliver to the energy field are the same products that we deliver to our commercial construction sites. We've talked about the fungibility of our products across all product segments many, many times. We're not a specialist in any regard, and each of the three classifications you mentioned give us outstanding opportunity. We're participating on all of those today.

Great. Thanks very much. Appreciate the help. Thank you for the question.

This concludes our question and answer session. I would like to turn the conference back over to Brad Barber for closing remarks.

We just want to thank everyone for taking the time to attend our first quarter 2021 earnings call. We look forward to revising this group next quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you. Thank you. Bye. Good morning, and welcome to H&E Equipment Services' first quarter 2021 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Kevin Inda, Vice President of Investor Relations. Please go ahead.

Thank you, Kate, and welcome to H&E Equipment Services' conference call. to review the company's results for the first quarter ended March 31st, 2021, which were released earlier this morning. The format for today's call includes a slide presentation, which is posted on our website at www.he-equipment.com. Please proceed to slide two. Conducting the call today will be John Inquist, Executive Chairman of the Board of Directors, Brad Barber, Chief Executive Officer, and Leslie Magee, Chief Financial Officer and Secretary. Please proceed to Slide 3. During today's call, we'll refer to certain non-GAAP financial measures, and we've reconciled these measures to GAAP figures in our earnings release and in the appendix to this presentation, each of which is available on our website. Before we start, let me offer the cautionary note that this call contains forward-looking statements within the meeting of federal securities laws. Statements about our beliefs and expectations and statements containing words such as may, could, believe, expect, anticipate, and similar 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 in any forward-looking statement. A summary of these uncertainties is included in the safe harbor statement in the company slide presentation for today's call. and also includes the risk described in the risk factors on the company's most recent 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. With that stated, I will now turn the call over to Brad Barton.

Brad Barton Kevin, and good morning, everyone. Welcome to H&E Equipment Services' first quarter 2021 earnings call. On the call with me today are John Inquist, Executive Chairman, Leslie McGee, our Chief Financial Officer, and Kevin Enda, our Vice President of Investor Relations. I will begin on slide four. I will briefly discuss our first quarter highlights, the performance and the trends in our rental business, and provide an update on our growth strategy. Leslie will review our financial results for the quarter in more detail. After, we will take your questions. Slide six, please. We're becoming increasingly optimistic that the cycle may be nearing a return to pre-pandemic levels. Demand in our end-user markets continued to improve throughout the first quarter, particularly with our rental utilization. The historic winter storm in February was an unexpected headwind for our business during the quarter as approximately 40% of our branches were closed for nearly a week. Even after the weather cleared, the severity of the storm had an extended impact in some of the hardest hit areas. Despite the impact from the storm and lower than expected financial results from this disruption, we're pleased with our operational performance and continued forward momentum in our rental business. Total revenues in the first quarter were down 2.6% or 7.5 million from a year ago, and we're making significant strides towards further improvement as the year progresses. Slide seven, please. Now let me provide some additional color on the momentum in our rental business. To frame the cadence of improving customer demand during the quarter, look at our physical utilization trends during the period. As I said on our fourth quarter call, We started the year just under 60% and we expected utilization to be slightly challenging during the first quarter due to typical seasonality. From the end of December to the end of January, utilization increased 430 basis points. From the end of January to the end of February, utilization rose another 170 basis points despite the impact from the winter storms. From the end of February to the end of March, we gained another 260 basis points. Also, in early March, physical utilization surpassed our 2020 levels, which was before we realized the full impact of COVID later in the month. Thus, we eventually landed at utilization of 63.5% for the first quarter, which was down just 80 basis points from a year ago. Currently, utilization is running significantly higher than this time a year ago, up nearly 1,000 basis points. ahead of the 2020 and within 370 basis points of the same period in 2019, which was a very good year for our rental business. We are pleased that our rental rates are also stabilizing, down 4% versus a year ago and .2% sequentially, an improvement from declines of 4.5% and .3% in the fourth quarter. As we progress into the stronger seasonal quarters, we expect to see rental rates show sequential positive increases. We are also encouraged by the recent rebound in several key industry indicators. The February Dodge Momentum Index rose 7.1% to 149 from the revised January reading of 139.1, the highest level in nearly three years. The March ABI increased to 55.6% from 53.3 in February, reaching the highest point since July 2007. The ABC Backlog Indicator and ABC Customer Competence Index have also shown solid improvement in recent months. This data certainly correlates with the sentiment of our customers, which continues to grow increasingly positive as we move into the year. As we know, a federal infrastructure proposal is on the table, and over time we will see how the potential bill unfolds. Any meaningful bill that passes would likely be a benefit to H&E. With earth moving comprising 23% or 400 million of our 1.8 billion total rental fleet and consisting of a wide range of dirt products, we're in a good position to benefit from an infrastructure-related project. Let me quickly provide some observations about the Gulf Coast, specifically Texas. The state fully lifted restrictions associated with COVID-19 much earlier than many others, and our business there is doing well. Energy-related work is coming back and new projects are abundant. Furthermore, Texas is not waiting on an infrastructure bill. Texas DOT recently announced it would let almost $10 billion in new construction projects in fiscal year 2021, which is up 27.5% year-over-year. Additionally, the winter storms wreaked havoc on Texas, as well as other adjoining states with mass power outages, water system failures, and other major problems. Correcting these issues will be a massive effort and could result in significant spending on projects to ensure these infrastructure failures never occur again. We remain very bullish about our opportunities in Texas and along the Gulf Coast. Overall, demand is solid. Industry indicators are positive and business conditions continue to improve. Our market position is strong and we have an expansive and growing footprint in high growth geographies. We like our exposure to a wide range of verticals in the non-residential construction segment and other healthy end markets. H&E has all the tools to capitalize on these improving conditions. Slide eight, please. Let me conclude by providing an update on our growth strategy. In terms of our organic growth plans, we believe that our expansion team is on track to accomplish our goal of opening eight to 10 starts this year. We opened two new branches in the first quarter in Lodi, California and Concord, North Carolina. With Lodi, we have 10 branches in California and further expect to expand our presence in this state. Our new branch in Concord, North Carolina will complement our existing branch in Charlotte and bring the number of H&E branches in the state to eight. Thus far in the second quarter, we have opened another five branches including Murfreesboro, Tennessee, Longview, Texas, Macon, Georgia, Knoxville, Tennessee, and Marietta, Georgia. Our Murfreesboro location positions us within a second branch just 25 miles from our existing Nashville facility to adequately support our current customer activity and new business from nearby municipalities. With Longview, we'll be able to capture new business and provide greater convenience to our customers in areas between the growing Dallas, Texas and Shreveport, Louisiana markets. We now have 22 branches in Texas. Macon, allows us to serve customers between central Georgia and existing facilities in Atlanta, Savannah, and Opelika. Marietta positions a third branch near Atlanta, one of the fastest growing cities in the past 10 years, and increases our total locations in the state to five. Knoxville is the third largest city in the state and gives us our fifth location in Tennessee. With seven new locations open year to date, we're clearly executing upon this component of our growth strategy. Lastly, our balance sheet remains strong and we're continuing to explore opportunities to deploy capital for acquisitions in the general rental and specialty segments that will complement our existing business and further expand our geographic scale and product offering. With this, I will now turn the call over to Leslie to discuss our first quarter financial results in more detail. Leslie?

Good morning, everyone, and thank you, Brad. Let's proceed to slide 11 for more details of our financial results. As a reminder, the prior year's first quarter results included a non-cash goodwill impairment charge of $62 million identified in connection with an interim goodwill impairment test due to certain triggering events related to the impact to our business from the COVID-19 pandemic. Now let me move on to our first quarter 2021 results. We were pleased that total revenues were only down 2.6% or $7.5 million to $278.4 million compared to the same period a year ago, especially given the impact to our business from the winter storm. Rental revenues decreased 11.8% or $18.7 million to $139.9 million from $158.6 million a year ago. The size of our fleet decreased by 8.4% or $161 million compared with the prior year comparable period. Rental rates this quarter declined 4% year-over-year. However, rates were down only 0.2% sequentially. Even though the prior year comparable period was before significant impact to our business from COVID-19, Time utilization in the current quarter decreased only 80 basis points to 63.5% compared to a year ago. Consequently, our dollar returns decreased 110 basis points to 32% compared to last year. New equipment sales increased 22.3% to 37.7 million compared to 30.9 million last year. The improvement was primarily the result of a 72.3% or 6.1 million increase in new crane sales. Used equipment sales increased 33.8% or 10.5 million to 41.8 million and was primarily the result of higher sales in all product categories except crane. Sales from our rental fleet comprised 93% of total used equipment sales in both comparative periods. Our parts and service segments generated $40.1 million in revenue on a combined basis, which is down 13.9% from a year ago. Moving on to a discussion of gross profit and margins. Gross profit decreased 11.8% to $93 million from a year ago. Consolidated margins were 33.4% compared to 36.9% a year ago. primarily because of lower gross margins on rentals and used equipment sales combined with revenue mix. For gross margin detail by segment, rental gross margins were 42.1% during the quarter compared to 46.1% a year ago due to pressure on rates and time utilization. Also, the prior year comparable period included an additional billing day as a result of leap year on February 29, 2020, which we estimate accounted for approximately 60 basis points of the decline in the first quarter of 2021 rental gross margin. Margins on new equipment sales increased to 11.4% during the first quarter compared to 11.2% a year ago, as margins were higher in all product lines, with the exceptions of new cranes and new other sales. Used equipment sales gross margins decreased to 32.1% from 34.5% last year, primarily due to lower margins in all categories except other used equipment gross margins. Margins on pure rental fleet only sales were 34% compared to 36.4% a year ago. And our parts and service gross margins on a combined basis were 41.6% compared to 41.1% a year ago. Slide 12, please. Income from operations for the first quarter of 2020 was 18.5 million or 6.6% of revenues, which is compared to a loss from operations of 31.9 million in the prior year period. Included in loss from operations for the first quarter of 2020 was a 62 million non-cash goodwill impairment charge. Excluding the impairment charge, income from operations was 30.1 million or 10.5% of revenues a year ago. The declines in income from operations and margins compared to prior year on an adjusted basis was primarily a result of a 2.6% decline in revenue, revenue mix, lower gross margin, and lower gain on sales of property and equipment of 4.1 million. Partially offsetting these declines in income from operations were lower SG&A costs of 7.1% or 5.7 million. Proceed to slide 13. Net income was 4.2 million or 11 cents per diluted share in the first quarter of 2021 compared to a net loss of 37 million or a loss of $1.03 per share in the first quarter of 2020. The effective income tax rate was 27.1% in the first quarter of 2021 and 21.9% in the first quarter of 2020. Excluding the prior year's impairment charge, net income was 10.8 million or 30 cents per diluted share in the first quarter of 2020. On an adjusted basis, the effective income tax rate was 26.2% in the first quarter of 2020. Please move to slide 14. Adjusted EBITDA was 83.2 million in the first quarter compared to 99.2 million a year ago, a decrease of 16.2%. Adjusted EBITDA margins were down 480 basis points to 29.9% this quarter compared to a year ago, largely as a result of revenue mix. In addition, adjusted EBITDA margins were negatively impacted by lower gross margins combined with lower gain on sales of property and equipment. As mentioned, SG&A expenses declined 5.7 million, or 7.1%, partially offsetting the aforementioned declines to adjusted EBITDA margins. Next, slide 15. SG&A expenses for the first quarter of 2021 were $74 million compared with $79.6 million the prior year, a $5.7 million or 7.1% decrease. SG&A expenses in the first quarter of 2021 as a percentage of total revenues were 26.6% compared to 27.8% a year ago. Employee salaries, wages, payroll taxes, and related employee benefits and other employee-related expenses decreased 3.4 million, primarily as a result of lower commissions and incentive pay, combined with headcount reductions, decreases in health insurance costs, and worker compensation costs. And other employee cost reductions implemented subsequent to the first quarter of 2020 in response to COVID-19's impact our business. Bad debt expense decreased 1.3 million and liability insurance expense decreased 0.9 million. Legal and professional fees decreased 0.6 million. Partially offsetting these decreases was a 1 million increase in accrued litigation loss contingency. Approximately 2.2 million of the total increase in SG&A expenses was attributable to our Warm Start openings compared to a year ago. Next on slide 16. On this slide, you will find CAPEX, fleet CAPEX and cash flow for the 12-month period ending March 31st, 2021. And our gross fleet CAPEX in the first quarter was $71.7 million, including non-cash transfers from inventory. Our net rental fleet CAPEX for the first quarter was $32.9 million. Gross PP&E CAPEX for the first quarter was $7.3 million, and net was $7.1 million. Our average fleet age as of March 31st, 2021 was 41.5 months. Free cash flow for the first quarter of 2021 was 22.2 million compared to a free cash flow of 40.5 million a year ago. Next on slide 17, at the end of the first quarter, the size of our rental fleet based on OEC was 1.8 billion and 8.4% or 161 million decreased from a year ago. Average dollar utilization was 32% compared to 33.1% a year ago, reflecting lower time utilization and rates. Proceed to slide 19, please. We continue to operate with ample liquidity and no near-term maturity. At the end of the first quarter, we had no borrowings under our amended ABL facility and more than $300 million of cash on hand at quarter end. We had $741.3 million of cash availability at quarter end, net of $8.7 million of outstanding letters of credit. Our excess availability was $968.5 million at the end of the first quarter, which is the measurement used to determine if our springing fixed charge covenant is applicable. With excess availability of nearly $1 billion, we have no covenant concerns. Also, our net leverage remains low at 2.4 times. We paid our regular dividend of 27.5 cents per common stock share again in the first quarter. And while dividends are always subject to board approval, it is our intent to continue to pay the dividend. Let's now get into questions. Operator, please provide instructions for the Q&A session.

We will now 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 speaker phone, please pick up your handset before pressing the key. To withdraw from the question queue, please press star then two. The first question comes from Steven Ramsey of Thompson Research Group. Please go ahead.

Hey, good morning.

Maybe to start with, you know, fleet size down 8%, improving outlook, and obviously seasonality coming in. I mean, How do you think about CapEx for the rest of the year? Would you prefer your CapEx to be even higher, but the constraints at the manufacturer's level may be slowing you down from maybe what you would prefer to do on the CapEx front?

Yeah. Good morning, Stephen. The answer is I think we're very pleased with our CapEx that we have in the queue. There are some products, you know, we've really had an opportunity to pull forward, as Leslie mentioned. We had a little headwind in SG&A costs related to pulling forward. We've opened now seven of these greenfields slash warm starts for the year. That's been a little bit of a challenge, but generally speaking, we've been able to meet the expectations. If there would be anything different, isolated products, we would pull forward a little faster. But for the full year, we have no concerns. We got our orders in early. Price protected, very, very minimal, and in most cases, zero price increase. So we're satisfied that we've got the plan to fill our expectations.

Okay, great. And then thinking about the winter weather impact, maybe how that hits Q2, are you seeing any kind of catch-up work there? Is it already caught up, or do you expect higher fleet on rent? in Q2, partly from the winter weather catch-up?

That disruption we had had two specific impacts on our business. The one you're referring to is the pause it placed on our utilization. Having 40% of our locations shut down the better part of a week and then some of that extended impact certainly paused it. So to that part, to your question, we've resumed. We've recently run back up close to 68% utilization. So our trend on on-rent continuing to improve has resumed and we're satisfied with that. The area it had an impact to is not in Q2, but in Q1 that we can't really replace or resume on was in our parks and service business. When you lose those man hours, they're just lost. It's not pent up demand. We've got adequate demand on the parks and service side of our business, but it had more of a specific impact department service. But on the rental side, we're in good shape. Our utilization is trending back to our expectations, approaching 68%, and we expect that trend to continue.

Okay, great. One last quick one from me. Your outlook, you had discussed clearly the macros improving, and you talked some about what you're hearing from the sales force and customer feedback in the fields. Can you maybe share or clarify that and if what you're hearing from customers and from your sales force is more or less optimistic than what you're seeing in some of the macro data?

It's more optimistic, clearly. If you were talking to a group of my sales people and asked them, did we have adequate fleet coming to the extent they had a real view of the total plan, they would say, no, we need to buy much more. And so, you know, as we're going to continue to grow the fleet, will we see opportunities? That optimism is much higher in the field, but we're also trying to bounce against these rate improvements that we expect to make for the remainder of the year.

Excellent. Thank you. Thank you.

The next question is from Stanley Elliott of Stiefel. Please go ahead.

Good morning, everyone. Thank you all for taking the question. So starting off, you know, thinking about the weather impact, do those items come off rent? You know, just curious kind of how that will flow through. You know, if you look at kind of that 40%, it seemed like maybe a 3% sort of a headwind, but just trying to make sure we were thinking about that correctly.

Yeah, some of them do come off rent. What you certainly don't get is you lose all your momentum going forward. As we pointed out, Our utilization had continued to step up. Every week in January, I think I covered on our fourth quarter call, every week in January was sequentially improving in physical utilization. When we had that call the second week in February, it was improved over the end of January. We talked about that cadence just continuing as well in my prepared comments. To answer your question, you do get some off rents. You certainly lose all your momentum. And you just kind of stand in place or tread water for a couple weeks in that broader geography. And so that hurts. Good news is that's since resumed and we're back off and running and as optimistic as we were before that storm hit us.

With the backlogs that a lot of OEMs are facing and some supply chain disruptions, things like that, do you guys have a view whether the rental channel could actually increase penetration this cycle or even over the next 12 months relative to new equipment purchases?

I think that is likely to occur. My view is that rental penetration in the short term and likely the longer term is going to continue to trend in the direction it's frankly been trending in for quite some time.

Lastly, in terms of the SG&A, lots of moving parts with the slowdown and then some of the new ads. Is there any way we should think about that to the cadence or the balance of the year, especially with what, like, two more locations look to be opening?

I'll let Leslie give a little more detail, but you nailed it, right? I mean, we had this slowdown. We've got these seven locations that we've opened in a pretty short period of time. Leslie, you want to give some follow-up?

Sure. So on our last call, I stated that we ended the full year 2020 at 24.7% as a percent of revenues. And we expected some slight pressure as a percent of revenues compared to that for 2021. And that view is really unchanged. And that's really largely due to the warm start strategy that we have. And related to the cadence of that, Q1 is always the highest percent of revenue just because of the seasonality. So that should begin to settle down as the year progresses down to that overall guidance that I gave.

Perfect. Thank you, guys. Best of luck. Thank you. Thank you.

Our next question is from Ross Gilardi of Bank of America. Please go ahead.

Yeah, good morning, guys. Good morning, Ross. Awesome.

Hey, Brad, can you talk a little bit more about that Texas infrastructure spend and the timing of that as to when it should get spent and where and kind of the types of projects, any color there will be helpful.

What I was referring to specifically in prepared comments was DOT spending, so roads and bridges primarily. Those projects will let throughout this year, and I do not have the schedule in front of me, but Generally, they're largely let earlier in the year as opposed to later in the year. So I would need to research a little bit more to give you firm assurance on that. But I would tell you that's the typical trend. And I think what's nice to see is, you know, their projected letting is going to be up about 30% year over year. Okay. Yeah. Okay.

Interesting. And then are you seeing any – that the smaller independent rental chains that maybe didn't order as early as you did are really struggling to obtain fleet and losing market share to yourselves and the national rental companies?

You know, what I can tell you with certainty, if they did not have their orders in, they're not going to get product is what I believe. So I don't have a lot of insight to most small rental competitors but generally they order in a very short view, in a short horizon. So that would imply to me that they probably did not order early, and if they have not ordered at this point in time, I think they're going to get blocked out on the queue. Got it.

Okay. And then just lastly, how are you thinking about specialty going forward? I mean, is it just kind of something you wish you had more of and will gradually build up, or are you feeling more urgency to address it either now by M&A or organic investment, and what areas of specialty are most compelling to an H&E? Yeah, good question.

You know, I think it's going to be a slow process for us here. What could move that needle faster would be an acquisition opportunity, and we are certainly open to investigating those as they come along. Anything we would consider, as you know and others know, we've talked about the trench safety space. That plays well with our existing 23, 24% of our earth moving products. So we would look for things that are synergistic to our existing customer base, bring us some more customers, but more importantly allow us to penetrate them deeper. Over a period of time, specialty will still be a relatively small piece of the business here at H&E, and given enough years and the right acquisitions and organic growth, it'll become a larger piece. So we're serious, we're looking. Our sense of urgency in getting something done, I would just tell you, is going to be the same as every other part of our business. We're disciplined and we're focused, and we're not going to do anything crazy, but at the same time, we're optimistic.

Well, just on that, just a quick follow-up in terms of how you define anything crazy. It just seems like it's hard to acquire. There's a lot of competition for these assets as a company. As we all know, I mean, most of these businesses seem to go for high single-digit, low double-digit EBITDA margins. I mean, when I ask you about urgency, would you guys be willing to tolerate some upfront dilution to actually start to build a footprint or not? Just curious if you could respond to that.

It's possible, and I don't mean to be evasive. It's possible to the extent we would have to evaluate the opportunity in and of itself. You know, what we pay on day one as opposed to what it may bring to us over a period of time, being able to grow that or bring that experience into our business and spread it across our footprint could allow us to pay maybe a price tag that, you know, otherwise we would not have considered in a general rental business. That being said, you know, we're not going to lean too far forward unless we have a high degree of certainty we can leverage that type of growth opportunity in that hypothetical example I just gave you.

Okay, fair enough. Thank you. Thank you, Ross.

The next question is from Steven Fisher of UBS. Please go ahead.

Thanks. Good morning, guys. I just wanted to start off on the rates. I know you talked about stabilization, but just trying to frame the 4% decline. What was the exit rate on that as you left the quarter? Was it still down year over year, or were you actually flat or maybe up?

Well, sequentially, we were down two-tenths over last quarter in our measurement. So that's probably the only information I have that I could give you that kind of guides directionally to what you're looking for.

Okay. I guess I'm just kind of curious if you're anticipating that we'll start to see those rates up on a year-over-year basis in the second quarter at some point.

Yeah, let me speak about sequential, and if you have other questions, I'd be happy to try to answer those as well. It is my anticipation, it is our anticipation, that our rates will start to show sequential rate improvement on a quarterly cadence going forward in the near future. You know, we had stepped down for a number of quarters. I think we were down four-tenths of a percent in Q4 over Q3. We're down two-tenths of a percent, or excuse me, 20 basis points in Q1 over Q4, a seasonally tough time. And we believe that that cadence will start to move in a positive direction. How long it takes us to intersect that year over year is a different question that I don't think I'm prepared to answer to, but You know, we certainly will get back to previous rates and eclipse previous rates. The question is how long does it take us to do that? With the current supply and demand environment, again, I'm making these comments just coming out of Q1 and now starting to get the real momentum within our rental business. With the current supply and demand environment and the discipline that I've seen from our competitors in the marketplace and the discipline that exists in H&E, you know, we're going to be optimistic that we can push those a little quicker, but rates are very much supply and demand driven, and the good news is we're moving back into a position where we're going to see sequential rate improvement. Give me a quarter or so, and I'll be able to guide you better on year over year.

Got it. That's helpful. And you talked a little bit before about some of the optimism out on the field. I guess I'm just curious how you would characterize the visibility you have for the second half of at this point and how it compares to the visibility that you would typically have at this time of year?

Well, there are a few things. John Inquist, our present chief operating officer, has been conducting regional meetings, sales meetings, and otherwise, where we're really talking more specifically within the customer size, small, medium, large, the diversification customers by SIC code. We use a lot of data to support this, and then there's the anecdotal conversations that go along with our sales force, and, of course, what we call iConnect, our CRM tool. So that's all positive. It's probably more anecdotal. Something I can point out that's just a number, it's a statistic, is that our physical utilization on earth moving, Stephen, You're familiar, we've talked about earth moving as an early cycle indicator many times. Our earth moving utilization is exactly the same it was at this point in time in 2019. Our fleet's not much larger. I think it's maybe 25 million larger than it was in 2019. The point is, is we did not decline that fleet to catch it. It's just been somewhat of a stable, slightly larger fleet, and that physical utilization matches 2019, which was a nice year. That is an outstanding indicator to us internally about what's going to come behind the earth moving being done on these projects. So I don't want to oversell 2021, but the stability we see, I believe it's very real. And I think our opportunity for utilization to improve and rates to incrementally start to move the right direction, it's painted on everything we look at.

Makes sense. And then just lastly, you talked a little bit about infrastructure stimulus, and how you're just kind of watching to see how that plays out. What would you have to see to really start putting the orders in or trying to start fleeting up in advance of that so you're prepared for those dollars when they start flowing?

Yeah, we would want to see the bill and understand where the dollars are going to be spent. We may have to do some estimates on how many of those dollars are within our 23-state geography. but since we're in most of the high-growth markets, you know, we would expect that a large percentile of those would be. So there are a variety of things we would have to consider. You know, for this year, we still have an opportunity to bring on more fleet if we want to. I will tell you that we're very focused on discipline, improving our returns in every sense, and it would likely be more of a 2022 scenario for us on the infrastructure bill, just with the timings. I don't know that there are many shovel-ready projects, you know, as we see here today.

Got it. Thanks a lot. Thank you.

As a reminder, if you have a question, please press star, then 1. The next question is from Barry Haynes of Sage Asset Management. Please go ahead.

Thanks very much. I had a couple questions. So the first one is, with the price of steel up a fair amount, You mentioned on your CapEx orders you've put in your price protected, but if you weren't, how much have prices gone up for equipment versus what you've got in your order book? And then how much would lease rates or rental rates have to go up to justify you guys increasing fleet at those higher price levels? So that was the first question.

Sure. So the price points really vary by the percent of steel in a particular product. I would generalize and say that we've probably seen 2.5% to 5% steel surcharges or had conversations around those levels with most of our manufacturers. That being said, some of them have maintained their position that there still today is no steel surcharge. So there's a range. To the second part of your question, if you just go down to the base level, for every 1% you pay more, you need to achieve 1% more rental revenue to obtain the return you were getting previously. And so obviously that has to flow through. Historically in the rental business, the good news for us is there's a blend of older products as well as the newer products, the newest product and everything in between. And so that's a target that moves over time. you want to obtain the same rental revenue increase that you have in cost to protect your returns, basically.

Great, thanks. And then I had a question related to alternative energy. If you were to look at solar versus wind versus, let's say, a traditional gas-fired power plant, what would be the equipment intensity difference for the types of equipment you guys sell or rent in each of those three. Is it similar? Are there big differences? Just some sort of a feel for that. Thanks.

There are some differences. I'll tell you, we're agnostic as far as what type of power project goes on. They all consume large quantities of products. There is a product mix issue related between solar and Solar's closer to the ground while wind turbines are way up in the air. There's some obvious differences in those types of products. I will tell you the products that we deliver to the energy field are the same products that we deliver to our commercial construction sites. We've talked about the fungibility of our products across all product segments many, many times. We're not a specialist in any regard, and each of the three classifications you mentioned give us outstanding opportunity. We're participating on all of those today.

Great. Thanks very much. Appreciate the help. Thank you for the question.

This concludes our question and answer session. I would like to turn the conference back over to Brad Barber for closing remarks.

We just want to thank everyone for taking the time to attend our first quarter 2021 earnings call. We look forward to revising this group next quarter. Thank you.

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