H&E Equipment Services, Inc.

services fourth quarter 2021 earnings conference call. Today's call is being recorded. At this time, I'd like to turn it over to Mr. Jeff Chastain, Vice President of Investor Relations. Please go ahead.

Thank you, Keith, and welcome, everyone. We appreciate your participation on today's call and your continued interest in H&E Equipment Services. A copy of the press release covering our fourth quarter and full year 2021 results was issued this morning and can be found along with all supporting statements and schedules at the H&E website. That's www.he-equipment.com. Our discussion this morning is accompanied by a slide presentation, which can also be found at the H&E website under the investor relations tab and events and presentations. On slide two, you'll see a list of those from the senior management team participating on today's call. They include Brad Barber, chief executive officer, John Inquist, president and chief operating officer, and Leslie McGee, chief financial officer and corporate secretary. Proceeding to slide three, and before I turn the call over to Brad, I'll remind you once again, today's call contains forward-looking statements within the meaning of the federal securities laws. Statements about our beliefs and expectations and statements containing words such as may, could, believe, expect, anticipate, and 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 contained in the company slide presentation for today's call and also include the risks described in the risk factors discussion in the company's 2021 Form 10-K to be filed later today as well as other periodic reports. Investors, potential investors, and other listeners are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after the date of this conference call. Also, I'll note this morning that we are referencing non-GAAP financial measures and you can find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation as supporting schedules to our press release and in the appendix to today's presentation materials. And then finally, Unless specifically noted, our results and comparisons for the periods reported this morning are presented on a continuing operations basis. That concludes the initial details of the call today. I appreciate your patience, and I'll now turn the call over to Brad Barber, Chief Executive Officer of H&E Equipment Services.

Thank you, Jeff, and good morning, everyone. I also want to welcome you to a review of our financial results for the fourth quarter of 2021, which was another quarter of strong financial performance and excellent operations execution. Thank you for your participation on today's call and for your interest in H&E. I'll begin my comments on slide four. I want to begin this morning with some fourth quarter financial highlights, including expanded observations on the excellent performance of our equipment rental business. Also, I'll address the favorable industry trends that remain in place as we begin 22, and how our execution of key strategic initiatives in 21 has advantageously positioned H&E to benefit from a broadly more vigorous industry recovery. Growing our business remains a guiding principle in 2022, and I want to cover some of the key growth drivers. Once I've completed my comments, Leslie will follow with a thorough review of our fourth quarter financial results. Along with an update on our capital structure and liquidity, then we'll be happy to take your questions. Slide six, please. Fourth quarter financial results were impressive on both the year-over-year and sequential quarterly basis. Results were supported in part by elevated customer demand for our rental fleet that extended well into the fourth quarter with limited impact from the customary seasonal quarterly slowdown. Also embedded in our results were early benefits from the divestiture of the distribution activities in 21. The benefits included improved revenue mix and margin appreciation as we shifted operations to greater rental intensity and additional growth through expansion of our branch network. Time utilization and rental rates continued their rise in the fourth quarter from the pandemic-influenced lows set early in the year. For example, fiscal utilization in the fourth quarter of 73.1% was the highest level achieved in any quarter over the past three years. representing a 750 basis point improvement from the year-ago quarter and 120 basis point better on a sequential quarterly basis. The measure was 440 basis points ahead of the fourth quarter of 2019. On a four-year basis, fiscal utilization averaged 69.7%, or 680 basis points better than the 2020, and was only 30 basis points below average fiscal utilization in 2019. As utilization remained elevated, rental rates in the fourth quarter grew by 4.7% on a year-over-year basis. The strength of this important industry benchmark drove impressive quarterly performance across our key performance metrics. Total revenues in the fourth quarter improved by 5.1% from the year-ago quarter to $281.3 million. Total rental revenues reached $203.7 million, or 25.1% better than a year-ago quarter, and 3.3% better on a sequential quarterly basis. Adjusted EBITDA grew by 18.4% on a year-over-year comparison to $110.4 million, or a margin of 39.3%, which was 450 basis points better than the same quarter in 2020. I also want to highlight our fleet growth in 2021, as we ended the year with approximately $1.9 billion, or 10% larger than 2020, with gross capital expenditures totaling $436.8 million. We achieved this fleet growth despite manufacturing challenges driven by supply chain issues. On to slide seven, please. Addressing our rental business, fourth quarter 2021 revenues totaled $182 million, up 24.7% from the year-ago quarter, and were 3% better on a sequential quarterly basis. Rental gross margin in the fourth quarter grew to 51.7%, 620 basis points better than a year ago, while registering an 80 basis point improvement on a sequential quarterly basis. With physical utilization of 73.1% in the fourth quarter, rental rates experienced further appreciation, climbing 4.7% when compared to the fourth quarter of 2020, with sequential quarterly improvement of 1.5%. Finally, our dollar utilization in the fourth quarter rose to 39.3%, or 520 basis points better than the year-ago quarter of 34.1%. The equipment rental industry staged an impressive recovery in 2021, considering the lingering presence of COVID-19 and its variants. Our company managed the challenges well, while maintaining a focus on improving the enterprise. I believe our recent financial performance highlights the inherent value of the significant steps taken in 2021 that supported our transition to a pure play rental business. H&E exits 2021 on a solid foundation for the future, and we're prepared to continue growing our rental business in 22 as the industry continues to remain robust. On to slide eight, please. We are confident in the continuation of a strong business environment due to some sensible observations. For example, discussions with customers regarding their project visibility suggest that elevated demand for our rental equipment will likely continue through 22. This customer feedback is consistent in each market we serve. We continue to witness strength in non-residential construction activity and believe the acceleration of activity in the industrial markets could be propelled further with the recent rise in commodity prices serving as a meaningful catalyst. Strong performance in 2021 of key industry measures of future construction activity support the likelihood for future expansion of non-residential and industrial activity in 22. Finally, the recently passed infrastructure bill serves as an additional source of future demand for our fleet. We hope to see this additional demand materialize in the second half of 22 or early 23. Elevated utilization, improving rental rates, and equipment constraints represent the features of a healthy business environment that is ripe for expansion. As such, in 22 we plan to grow H&E through significant investment in our rental fleet, further penetration of our existing markets, as well as expansion into new markets. Before I turn the call over to Leslie, I want to provide some details on our plan for growth. On to slide nine, please. Our growth plan underscores H&E's ongoing focus on greater intensity in the equipment rental business following a significant reduction in our exposure to the distribution business. These measures have allowed us to end the year with a pure focus on equipment rental operations in 23 of the 24 states we operate. On our last call, I commented planned capital expenditure for 2022, noting that the likelihood of a significant gross investment in our fleet. Today, I can provide greater clarity on this and report our plans for gross fleet investment in 22 of 550 to 600 million. The investment represents the largest annual gross capital spent in the company's 60-year history and suggests our confidence in a fundamentally robust cycle. This investment will also provide the equipment needed to support another growth initiative, the continued expansion of our branch network with additional Warm Start and Greenfield locations. Slide 10, please. During 2021, H&E added nine Warm Start branch locations and one Greenfield location in Kansas City, Missouri, ending the year with 102 locations across 24 states. You may recall five branches were subtracted in 2021 following the October sale of our crane business. In 22, we plan to expand our reach in the U.S. by adding no fewer than 10 locations representing further penetration into existing markets as well as expansion into new geographies. We have already begun the planned expansion with an opening a new Fairbairn, Georgia location expected early March, our sixth location in the state, and the expected opening of a Greenfield location by the end of the first quarter, increasing our coverage to 25 states. Slide 11, please. I'll conclude my comments this morning where I began, on strategic advances. I want to emphasize the importance of our initiatives in 21, led by reduction in distribution activities and a greater rental exposure. Our efforts drove transformative change with regard to our business model. Higher, more stable revenues through the business cycle should arise from this transition, and I believe margin appreciation is already evident. The implementation of this strategy will dovetail nicely with our growth plans for this new year. As we begin 2022, H&E is well positioned to continue our new strategic growth initiatives. Our young fleet, expanded geographic reach, operational exits, and brand recognition are core to our success. In addition, our conservative balance sheet and strong liquidity profile support our ongoing efforts to supplement our growth through acquisition. On to slide 12, and I'll now turn the call over to Leslie McGee for our financial performance. Leslie?

Thank you, Brad, and good morning, everyone. I'll begin this morning's financial review on slide 13. As Brad noted earlier, revenue in the fourth quarter improved $13.5 million or 5.1% to $281.3 million compared to $267.7 million in the fourth quarter of 2020. The improvement was due largely to excellent rental performance, which experienced strong seasonal trends in utilization and rental rates. With the strong industry backdrop in place, rental revenues improved to $182 million a 24.7% increase when compared to the 146 million in the fourth quarter of 2020. Utilization of 73.1% with 750 basis points ahead of the year-ago quarter, while rental rates appreciated 4.7% of the same period of comparison. In addition, we closed the quarter with 10% growth in OEC when compared to the fourth quarter of 2020. Used equipment sales totaled $29.5 million in the fourth quarter of 2021, a decline of 34.3% when compared to the year-ago quarter, while new equipment sales of $22.5 million declined 33.3% over the same period of comparison. The decline in used equipment sales, which occurred in all product lines, was largely due to the company's decision to capitalize on high equipment utilization in the quarter. The decline in new equipment sales was partially due to lower sales of earth-moving equipment following the September 2021 sale of two distribution branches in Arkansas and lower sales of other equipment. Gross profit in the fourth quarter totaled $118.2 million, an improvement of 25.6% compared to $94.1 million in the year-ago quarter. High rental gross margins and favorable revenue mix shifts to rental revenues was primarily responsible for the consolidated gross margin appreciation, which finished the quarter at 42% compared to 35.2% in the year-ago quarter. Within our business segments, total equipment rental margins improved to 46.3% compared to 40.7% in the year-ago quarter, with rental margins improving 620 basis points to 51.7% compared to 45.5% over the same period of comparison. Despite the decline in equipment sales, margins for used equipment sales improved 770 basis points to 39.3% compared to 31.6% with margins on fleet-only sales up 930 basis points to 41.9% compared to 32.6%. In addition, margin on New equipment sales improved 430 basis points to 14.5% compared to 10.2%. And finally, fourth quarter 2021 margins on parts and service business segments were 25.8% and 63.5% respectively compared to 25.9% and 67.6% respectively in the year-ago quarter. Slide 14, please. Income from operations for the fourth quarter of 2021 totaled $41.6 million compared to $30.1 million in the fourth quarter of 2020. Higher rental gross margin and favorable revenue mix in the fourth quarter of 21 largely contributed to margin improvement of 360 basis points to 14.8% compared to 11.2% in the year-ago quarter. The margin improvement was partially offset by higher SG&A expenses. Let's proceed to slide 15 please. Net income was 21.7 million or 59 cents per diluted share in the fourth quarter of 21 compared to a loss of 21.3 million or 59 cents per diluted share in the year-ago quarter. Adjusting for a pre-tax 44.6 million non-recurring charge resulting from the early extinguishment of debt, the company would have reported fourth quarter 20 net income of 12.3 million or 34 cents per diluted share. The effective income tax rate was 25.8% in the fourth quarter of 2021 compared to 21.7% in the fourth quarter of 2020 adjusted for the non-recurring charge. Proceed to slide 16 please. Adjusted EBITDA in the fourth quarter of 2021 reached 110.4 million or 18.4% better than 93.3 million in the year-ago quarter. The outcome, which was achieved on a total revenue increase of 5.1%, resulted in adjusted EBITDA margin of 39.3%, compared to 34.8% in the year-ago quarter. Favorable revenue mix and improvement in rental margins mostly contributed to the 450 basis point increase in margin, partially offset by higher SG&A expenses. Next, on slide 17, SD&A expenses totaled $76.9 million in the fourth quarter of 2021 compared to $65.5 million in the year-ago quarter. The $11.4 million increase was largely due to a $9.2 million increase in employees' salaries, wages, incentive compensation related to increased profitability, payroll taxes, and related employee benefits. Fourth quarter SG&A costs also increased due to a $1.4 million increase in facilities and promotional expenses. SG&A expenses in the fourth quarter of 2021 were 27.3% of revenues compared to 24.4% in the fourth quarter of 2020, with branch expansion costs in the fourth quarter of 2021 $3.7 million greater than the year-ago quarter. Slide 18, please. Next I'll cover fourth quarter 2021 fleet capital expenditures and cash flow. Our gross fleet capital expenditures were $79.8 million, including non-cash transfers from inventory, and our net rental fleet capital expenditures for the three-month period were $52.4 million. Gross PP&E CapEx for the fourth quarter were $9.9 million, while net PP&E capital expenditures were $9 million. Our average fleet age as of December 31, 2021 was 40.3 months and compared favorably to the industry average fleet age of 53 months. Our free cash flow in the fourth quarter was $132.2 million and included proceeds of $135.9 million from the closing of the sale of the crane business in October. Slide 19, please. At the close of 2021, the size of our rental fleet based on OEC was approximately 1.9 billion, 169.7 million or 10% greater than the close for the previous year. And average dollar utilization in the fourth quarter of 2021 improved to 39.3% compared to 34.1% in the year-ago quarter. For the year, average dollar utilization improved to 36.8% up from 32.6% in 2020. Let's move to slide 20, please. And turning to our capital structure, our net debt at the close of 2021 was $893 million compared to $1 billion at the close of the previous quarter in 2021, with the net sequential improvement due to an increase in cash following the sale of the crane business in October. We closed 2021 with a net leverage measure of 2.3 times, down 40 basis points from 2.7 times on a sequential quarterly basis. We have no maturities before 2028 on our 1.25 billion of senior unsecured notes. And slide 21, please. Our liquidity position remains robust with a cash balance at December 31st, 2021 of 357.3 million and borrowing availability under our amended ABL facility of $741.3 million, or our total liquidity position of approximately $1.1 billion. Excess availability under the ABL facility was approximately $1.1 billion at the conclusion of 2021, with minimum availability as defined by the agreement of $75 million. By definition, our excess availability is the measurement used to determine if our springing fixed charge is applicable And with our excess availability of more than $1 billion, we continue to have no covenant concerns. And finally, we paid our regular quarterly dividend of 27 and a half cents per common share of stock in the fourth quarter of 2021. And while dividends are subject to board approval, it is our intent to continue to pay the dividend. Slide 22, please. In closing, 2021 will be remembered for the completion of transformative steps that position H&E for greater financial performance and increased stability through the business cycle. Our reduced exposure to the distribution business has delivered immediate improvement in our financial performance, including better revenue mix and significant margin appreciation, both of which were evident in our financial results covering the second half of the year. And looking forward, the company has defined a path for growth, which in the interim calls for a planned fleet investment of up to $600 million in modern and versatile equipment, as well as further growth of our branch profile through both existing and new market expansion. And our strong capital structure, together with an excellent liquidity profile, which concluded 21 at $1.1 billion, provides the capital and flexibility to execute our 2020 22 growth strategy, as well as future strategic initiatives. And so this concludes my financial review this quarter. So operators, we are ready to begin the Q&A period. If you could please provide our instructions.

Yes, certainly. Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble the roster. And the first question comes from Stephen Ramsey with Thompson Research Group.

Hi, good morning. Maybe to start with the CapEx topic, I'm curious if fleet is coming in early enough to benefit from the expected busy season, or does some of that get pushed? And then as you think about this CapEx, how much of the purchasing already or that you're doing now how much of that is kind of opportunistic uh based on what fleet is available uh and in a timely manner or how much of that is is broad-based increases across the board on fleet types yeah good morning stephen the uh our capex timing is going to be very typical uh i'll tell you we still believe we're going to get

100% of our capital where we plan to achieve it at. In any typical year, that means we're heavier in Q2 and Q3, as you referred to the seasonality and getting the product in early enough to be able to utilize it. We feel like that's going to be the same in 22, so we feel comfortable with that. As it pertains to opportunity or opportunistic situations to acquire more fleet, Not so much. While we're happy that we're going to get the fleet when we plan to get the fleet, and it's going to be typical, we're not yet seeing much opportunity to source more product from manufacturers. There have been some isolated cases, but I think it would be a little misleading to present those in a way that makes it seem like it's material. It's not. We're really comfortable with the cadence that's coming in. It's typical. We're going to get the benefit of Could opportunity present itself as we move forward? We certainly believe it could, but as we sit here today at the end of February, we're sticking to our current plan.

Okay, great. And then, you know, I guess the thinking about rates, the exit rate on rates in Q4 21, seasonally slow but very strong. I guess we think about this slow period Does that give you a higher base to launch from getting into the busy season and do you expect rates to continue at sort of this 4% plus level or to moderate but still be positive?

Sure. I'm going to let John provide more detail on that. What I want to say is that 1.5% sequentially and 4.7% was very much in line with what our expectations were Our rate tool, the information we use, our marketing, it's paying off, and so we continue to gain confidence on our ability to continue to perform with rates going forward. John, do you wanna elaborate in more detail?

Yeah, look, as Brad mentioned, the 4.7% year-over-year in the fourth quarter and the strong sequential performance, we were pleased with that. As we enter 22, with our utilization tracking, you know, ahead of our expectations with, you know, fleet levels are still, you know, progressing obviously. But, you know, we do expect to see, you know, quarterly sequential increases in rental rate. You know, for the full year, we would expect to be in the, you know, mid to low single digits on a year-over-year basis. And, you know, we're pretty confident in our plans.

Great. Excellent. Then probably, you know, similar driver for this with time utilization being so strong in a slower seasonal period. Can you talk to if that was broad-based strength or certain areas geographically or verticals that were robust? And I guess thinking about how that leads to Q2 and Q3 as fleet comes in during that period. Are you planning for utilization to moderate a bit into that mid-60s range or so as it takes time to deploy that new fleet?

So, look, as it pertains to geography, I mean, you know, we are seeing broad-based, you know, utilization really across our entire footprint. So, it's not particularly, you know, seasonality is obviously a factor in some of the states that are more you know, prone to experience the winter weather. But, you know, what I can tell you is we are seeing, you know, utilization, you know, is really strong across all of our regions for the most part. You know, by product type, you know, my comments would be the same. You know, we're seeing, you know, really strong utilization across all of our product types. And, you know, look, as we get into the, you know, the heat of the season and, you know, when we have our CapEx coming in in the second and third quarter, You know, we would expect to see our, you know, utilization level out. You know, does that mean that we're going to achieve the same levels in the fourth quarter that we saw in 21? You know, probably not. But, you know, we're very comfortable with our plan. You know, the record capex speaks to our, you know, comfort with, you know, our ability to maintain utilization.

Yeah. Steve, let me add, and I agree with everything John just characterized. Last year was a year where we had accelerating utilization throughout the year. Very uncommon for Q4 to exceed Q3 in physical utilization. I've been in the business closer to 30 years than 25 at this point. That does not happen often. We had a lot of momentum. As you asked the question, we're going to have this product coming in. There's always a headwind associated with with bringing in product, particularly that much product. Now, as we continue to grow out our number of locations, we're not uncomfortable at all. We don't think we're leaning too far forward with that 550 to 600 million, but it will moderate. We had those 10 locations we opened last year. Some of those are operating at exceptionally high utilization, while others are operating more typical to a new location. They're all operating very well. And then as we've said, we're gonna open no fewer than 10 this year. So those take a little while to ramp up. I guess what I'm saying to you is last year we started low, we finished exceptionally high. This year we're starting off better. We're probably going to level off a little sooner, albeit at a very healthy level. And my best guess right now would be on a year over year basis, we may achieve similar physical annual utilization. but we're going to do so on a much larger fleet. We're going to do so with consistent incremental improvement in rental rates, and it's going to make for a nice year at H&E.

For sure, for sure. And then thinking about rental or just margins overall being strong and favorable mix being a driver, can you clarify if that was rental revenue versus selling fleet, or was it mixed within rental revenues?

Well, obviously, the rental margin in and of itself, Q4 landing north of 51% is going to be a big piece of that, if I understand your question. The other thing, I'll take a stab at it, and then let's make sure I'm clearly responding to you, is we have had a downward shift in U sales. Fleet sales are the majority of our U sales, right? And that's by design. I mean, we're not going to stop selling fleet, but with the age of our rental fleet, the young age of our rental fleet, and our opportunity to maintain it on rent at improving returns, we're just slowing the pace that we're selling out of the fleet and that'll continue through the year.

Excellent. And then last question for me, peers have talked about incremental margins, 55% and upwards for this year. How do you think about H&E now that you're more pure play? Do you feel like this is an attainable incremental margin level for you guys this year or in the coming years?

Leslie may have some additional comments. Obviously, I think some of that incremental margin is heavily influenced. They're big categories, utilization being one of them. I fully believe that H&E runs the highest utilization of any of our peer group. I tell you, I think while we're going to grow the fleet, we'll probably run similar utilization. I don't know that we have a lot of leverage left in utilization. Leslie, would you add anything else to that?

Sure. Good morning. I would just point out that our flow through margins as I'm speaking of the rental business were exceptionally high this year. And that was really driven primarily by much higher time utilization and better rates. So looking forward into 2022, we also expect strong incremental rates, but I would say that they're expected to come down from that 2021 high. yet remain strong. And that's because the drivers are shifting to different buckets to positive flow through from a larger fleet and rate. So that's just going to, you know, drive different metrics, but still strong.

Excellent. Thank you for the color.

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

Thanks. Good morning. You mentioned that you're comfortable with the timing of getting the fleet in the typical fashion. I guess I'm just curious kind of what underlies that confidence. Are you, you know, kind of what kind of conversations are you having with your suppliers in that regard?

Yeah, we have daily conversation. I mean, obviously, we don't speak to every manufacturer every day, but We speak to every manufacturer on a weekly basis on a variety of topics, and maybe most specific to the question, just affirmation of their commitment to us. I can tell you, to a manufacturer, not one manufacturer has backed up an inch on their commitment to delivery. The further we get into the year, the higher our confidence grows. you know, with the relationships we have, the consistency these manufacturers have shown us, you know, through other cycles and different times, you know, continues to lead us to believe we should be very confident in getting the fleet at the timing that they have proposed. And we've got fleet flowing through every day at this point. So it'll certainly ramp up in Q2 and Q3, but we have a high degree of confidence as we sit here today.

Great. And then it sounds like if you're able to, you might want to upsize the fleet spending, and if you do, it's probably a similar message or sentiment across the industry, given how strong the demand is. Do you think that would necessarily mean a loosening of supply-demand balance overall in the industry, or do you think maybe that just will enable more projects to happen, keeping the market pretty tight for equipment?

I suspect the market stays pretty tight for equipment. My best speculative guess would be that if products were to come available, they would be coming available from small regional or even smaller than regional rental players who may have placed orders but decide to do something different at a point in time. I don't think that availability will come from H&E or any of our larger peer group. I think we're pretty confident in what we're seeing. We've shown discipline. We have the systems. So I don't anticipate there's going to be much product coming available. Now, what happens in Q4, I guess we'll make those decisions on a shorter horizon. But as we sit here for the next quarter or two, I feel comfortable with where we are, and there's not likely to be excess product available.

Great. And just one last market-based question. I guess I'm wondering what you're seeing in the pipeline for bigger types of construction projects and what kind of things you're bidding on. I don't think that's typically been a very large part of your business, but I'm wondering if anything is different this time around and how that could be part of a mix of your business as the cycle unfolds.

Sure. I think the biggest worth noting is that the bipartisan infrastructure bill, and we're not seeing any of that product yet or any of those opportunities materialize yet. We are hoping that we see those based on feedback from our customers late in this year, maybe early next year before they start. As we've continued to grow out our earth moving product, we're at 27% of our fleet is in earth moving. And that certainly ranges from many excavators to larger earth-moving projects. We do participate a fair amount. I will tell you, any geography we're in, if there is a stadium, a hospital, a school, a levee, a data center, H&E is going to be participating at some level. So we certainly have exposure. We're selective on how much of that exposure we want to take on, but we are participating on those large projects on a daily basis.

Terrific, thank you. Thank you.

Thank you. And once again, please press star then one if you would like to ask a question. And the next question comes from Stanley Elliott with Stifel.

Hi, good morning. This is Brian Brofion for Stanley. I just wanted to ask, what are your plans on the specialty side of the business in terms of your fleet purchases for this year?

Good morning, Brian. Slow. Slow. We initiated organically growing a trench safety business. And I think about the same time we initiated growing that business, steel started to take an upward swing and continued to do so for some period of time. At this point, it's leveled off, but with that product being almost entirely commodity steel related, the pricing is just at a level where we're not going to continue to advance growing it. Now, we are dedicated to the specialty business, we're dedicated to that organic specialty business, and as we've spoken before, to significantly grow our exposure and specialty it would more quickly, it would more likely come through an acquisition opportunity. And so we continue to make those types of considerations. But at this point, our entry into specialty is pretty narrow. And due to current commodity pricing, it's pretty slow. But that's a short-term issue, and we're just going to remain disciplined until it's time to advance ourselves further.

Thanks. And that kind of plays to my next question. A lot of OEMs are talking about getting pricing this year. What are you guys seeing on the inflationary side in terms of your fleet purchases for 2022?

Yeah, so we've before said that we had, you know, low single digit on average, and that that is the case. We placed our orders early on. Yeah, there's always puts and takes within that. But, you know, two, three, maybe 4% on the high side, but certainly not as an average is what we've seen as it pertains to ordering and making considerations for 2023, those conversations could be a little different. But today, our products, that $550 to $600 million, we're planning on low single-digit inflation year over year.

Thanks. That's really helpful. I'll pass it on.

Thank you. Thank you. And the next question comes from Jeffrey Campbell with Allianz Global Partners.

Good morning. You mentioned that you're going to aim for 10 additional locations in 2022. I think you touched on this on slide 10, but I just wondered if you could add some color on the drivers of these expansions.

You know, with 102 locations currently in 24 states, and in my prepared comments I shared that we're fixing, within weeks we'll have a 25th state exposure with a new green field that we're opening. There are a lot of markets where H&E either does not participate or can certainly participate with greater density. So, you know, we take a very quantitative, analytical approach to the markets. You know, if we open 10 locations a year, we're probably going to have eight or nine of those will be what we define as warm starts, just adjacent or we're filling in a geography where we have name recognition, customer base, very important, just an employee base. you know, one or two of those will end up being a green field where we enter a new market, relatively unknown, and we come with a new team. And so we like doing both, but, you know, when you look across, we have an outstanding geography. We've got ample opportunity to continue to fill in and just tremendous opportunity to grow outside of our existing geography. And I'll tell you that, you know, that's heavily driven by analysis. And that's, in general, our approach to expansion and As you said, we're saying we're going to open no fewer than 10 or maybe 11 or 12 this year. We'll see what happens as the year materializes. Okay, thanks for that.

Although I imagine it must be a nascent concern at this point, can you discuss any current or future ESG efforts that are being undertaken at H&E?

It's actually a... very relevant and hot topic currently. We have formed actually a committee of our board to address ESG. We are working currently to select a partner to work with us on our initial steps for ESG, and we'll be talking more about that plan, our expectations, as we go forward. I think maybe the only other thing I would add in addition to the board level involvement oversight is that we have an internal task force that's also been selected and assigned. So you'll be hearing more about ESG as we go forward in subsequent quarters.

Okay. Well, we'll look forward to that. Thanks very much. Thank you, Jeff.

Thank you. And once again, as a reminder, please press star then 1 if you would like to ask a question. And as there is nothing at the present time, this concludes our question and answer session. I would like to turn the conference back over to Jeff Chastain for any closing remarks.

Okay. Well, then we'll conclude today's call. We appreciate you taking the time to join us today and for your continued interest in H&E equipment. We look forward to speaking with you again. Keith, I want to thank you for your assistance with today's call. Good day, everyone.

Thank you. The conference has now concluded. Thank you for attending today's presentation. We now disconnect your lines.