H&E Equipment Services, Inc.

Good morning and welcome to H&E Equipment Services First Quarter 2022 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Jeff Chastain, Vice President of Investor Relations. Please go ahead.

Okay. Thank you, Betsy, and welcome, everyone. We appreciate you joining us today for our review of H&E's First Quarter 2022 results. A copy of the press release covering our first quarter results was issued this morning and can be found along with all the supporting statements and schedules at the H&E website, and 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 in Events and Presentations. On slide two, you'll see a list of the executive officers participating on today's call. They are Brad Barber, Chief Executive Officer, John Inquist, President and Chief Operating Officer, and Leslie McGee, Chief Financial Officer and Corporate Secretary. Brad will begin this morning's discussion, but before I turn the call over to him, I've been asked to remind you 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 include the risk described in the risk factors in the company's 2021 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 call. Also note we are referencing non-GAAP financial measures during today's call. You will find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation as supporting schedules to our press release and in the appendix to today's presentation materials. Finally, unless specifically noted, all results and comparisons for today's reported and discussed this morning are presented on a continuing operations basis. With the preliminary details complete, I'll now turn the call over to Brad Barber, Chief Executive Officer of H&E Equipment.

Thank you, Jeff. Good morning and welcome, everyone. We appreciate your participation as we review the first quarter 2022 results and your continued interest in H&E. As illustrated in our first quarter performance, 2022 is off to a strong start. We've begun the year with an abundance of opportunities, minimal seasonal impacts, and minimal seasonal impacts from weather. As a result, our first quarter financial results benefited from a healthy blend of strong demand, tight equipment supplies, rising rental rates, and fleet growth. On top of these impressive underlying fundamentals, we maintain our focus on operational excellence while realizing meaningful progress towards our stated growth initiatives. Proceed to slide four, please. I'll start this morning with our first quarter highlights that provide a glimpse at the excellent financial metrics posted in the quarter. I will then narrow my discussion to our rental segment and identify the key drivers of performance for the quarter. Also, I want to share some thoughts on the equipment rental industry as we consider the outlook for the remainder of 2022. Finally, I'll review our 22 growth initiatives and the excellent progress achieved during the first quarter. Lastly, we'll follow with a thorough discussion on first quarter financial results, including updates on our capital structure and liquidity. Then we will be happy to take your questions. On to slide six, please. First quarter highlights showed significant improvement across all of our important measures. We were encouraged by the continued strength of customer demand in the quarter that commonly experiences lower activity due to seasonal challenges. As I commented earlier, strong demand coupled with equipment shortages, rising rental rates, and fleet growth gave rise to an outstanding business environment, allowing us to achieve strong financial metrics. Consider our physical utilization in the first quarter of 70.4%, which was 630 basis points ahead of the year-ago quarter and represented the highest first quarter utilization in three years when measured on a continuing operations basis. The strong utilization measure combined with ongoing rental rate appreciation and fleet growth were key elements leading to a 30% increase in total equipment rental revenues. At $199.2 million, total equipment rental revenues were 73% of the consolidated revenues in the first quarter compared to 64% in the quarter year ago. The higher rental concentration follows the timely implementation of strategic steps taken in 2021 to expand our rental exposure, leading to higher, more sustained revenues and enhanced margins. Adjusted EBITDA increased 34.5% compared to the same quarter in 2021, posting a margin of 38% or an improvement of 600 basis points. Finally, our rental fleet, based on original equipment cost, or OEC, closed the first quarter of just over 1.9 billion, representing growth of 218.8 million, or 13% when compared to the year-ago quarter, and included gross expenditures in the first quarter of 22 of 76 million. Slide seven, please. Turning to our rental business. Revenues in the first quarter totaled 177.2 million, or 29.2% better than the same quarter in 2021. We continued to demonstrate strong margin appreciation with a rental gross margin in the first quarter of 49.9%, or 720 basis points ahead of the year-ago quarter. In addition to strong seasonal utilization and $76 million in gross fleet investment, our rental segment benefited from the positive trajectory of rental rates, which closed the first quarter 6.5% better than the year-ago quarter and up 1.6% sequentially. With these factors in place, dollar utilization in the first quarter increased to 37.6%, a 500 basis point improvement when compared to the same quarter in 2021. Our impressive start to 2022 is indicative of the operating advantages obtained from our increased rental concentration and an industry that remains fundamentally robust. With regard to the industry, sound fundamentals are likely to continue as we enter the seasonal strength of the equipment rental business cycle sustaining our encouraging outlook for 2022. Slide eight, please. Several factors suggest the equipment rental industry is likely to experience further improvement. These factors include persistent customer demand, which is expected to support steady fleet utilization into the next two quarters as we absorb the largest portions of our rental investment. The steady utilization, together with the ongoing equipment supply limitations, caused by the OEM supply chain disruption, is expected to support an environment that is ripe for continued sequential quarterly rental rate improvement. Also, our end markets are displaying impressive growth, driven by non-residential construction and industrial activity, which accounted for 77% of H&E's revenues in 2021. The likelihood for further expansion in these end markets is supported by key industry measurements of future construction activity, including the Architectural Building Index, or ABI, as well as the Dodge Momentum Index, with both registering scores that forecast excellent growth prospects over the next 12 to 18 months. It is worth noting we have seen no discernible impact in these important markets, such as project delays or cancellations due to inflationary pressures or labor shortages. Demand from other markets, such as oil and gas, have begun to accelerate with the sharp increase of crude prices and several of our branches located in the Gulf Coast states are benefiting. Finally, infrastructure spending is likely to materialize by late 22 or early 23 with the commencement of state projects. Spending associated with the Infrastructure Investment and Jobs Act is expected to continue for several years. Before I turn the call over to Leslie for a review of our financial performance, I want to provide an update on our progress toward defined 2022 growth initiatives. On to slide nine, please. With regard to our planned 2022 gross capital investment in our rental fleet of 550 to 600 million, we recorded gross investment in the first quarter of 76 million. While we've seen some minor delays with isolated equipment deliveries, we remain confident in achieving our stated investment goal. As is typical for our industry, we're planning to receive the majority of our equipment purchases during the second and third quarters. Slide 10, please. In addition to growing our fleet through significant capital investment, the expansion of our branch network remains an important and effective part of our growth strategy as both initiatives position our company to advantageously address the expanding regional opportunities available in this highly resilient business environment. Following the addition of 10 branches in 2021, all of which are demonstrating strong performance, we concluded the first quarter with two new locations as we advance our goal to no fewer than 10 warm starts in Greenfield locations over this year. These new openings included Fairbairn, Georgia, representing H&E's sixth location in the state, and Philadelphia, where the company established its first branch in the state of Pennsylvania. The new Philadelphia location is currently our northernmost branch in the East Coast and will provide access to a growing base of non-residential construction and industrial projects in the region. Also, following the close of the first quarter, we expanded our presence in Arkansas to two locations, with the opening of a location in El Dorado. With these three additions, H&E has expanded its network of locations to 105 across 25 states, and we remain confident in achieving our stated goal for branch openings in 2022. Finally, we're confident that our expansion efforts can be supplemented through acquisition. We continue to evaluate opportunities that offer access to new geographies as well as further penetration into existing regions. As I complete my comments this morning, I want to reiterate the fundamentally robust nature of the equipment rental industry. Demand for our rental fleet remains strong. Our end markets continue to grow. The supply of equipment is constrained. infrastructure projects are an emerging source of demand, and rental rates are on a positive trajectory. Within this attractive environment, H&E is operating from an enhanced position with greater rental concentration, a strong equipment mix, a young and growing rental fleet, and an expanding branch network that we can further complement through acquisitions. We look forward to what the remainder of this year brings. On to slide 11, and I'll turn the call now 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 12. First quarter revenues of $272.5 million improved $32 million, or 13.3%, when compared to the first quarter of 2021. The combination of higher utilization and rental rates, along with fleet growth, were the primary drivers of the improvement. The same three factors supported rental revenues, which increased 29.2% to $177.2 million compared to $137.1 million in the year-ago quarter. As Brad remarked earlier, customer demand remained strong through the first quarter with few seasonal distractions, resulting in utilization of 70.4% or 630 basis points better than the first quarter of 2021. Rental rates responded to the strong utilization, rising 6.5% over the same period of comparison, while improving 1.6% on a sequential quarterly basis. We benefited from a larger rental fleet in the first quarter, with our fleet OEC growing 218.8 million, or 13% compared to the first quarter of 2021. Since the close of 21, OEC increased 41.3 million, or 2.2%. Used equipment sales of 21.5 million declined 17.3 million or 44.6% in the first quarter with lower sales across all product lines. Similar to the fourth quarter of 2021, the decline was largely due to the company's decision to capitalize on high equipment utilization in the quarter. New equipment sales of 26 million experienced a modest increase of 2.9 million or 12.4% led by higher sales of material handling and other equipment. Our consolidated gross profit in the first quarter of $111.6 million improved $28.2 million, or 33.8%, when compared to the year-ago quarter. The increase was due mainly to higher margins on rental and used equipment. The improvement resulted in a gross profit margin of 41% or an increase of 630 basis points when compared to the same quarter in 2021. Gross profit margins by business segment with a comparison to the same quarter in 2021 included total equipment rental margins of 44.9% compared to 38%, while rental margins rose 720 basis points to 49.9% compared to 42.7%. Used equipment margins continued to improve, climbing to 41.7% compared to 32.2% with fleet-only margins, which excludes used equipment obtained through trade-in, of 45.2% compared to 33.7%. New equipment margins were slightly higher at 14.2% compared to 12%. And finally, parts and service margins Finish the quarter modestly lower at 27.1% and 65.4%, respectively, compared to 28.3% and 67.4%, respectively, in the first quarter of 21. Slide 13, please. Income from operations for the first quarter. of 2022 reached $34.7 million, or more than double the first quarter of 2021 total of $15.3 million. The first quarter margin improved to 12.7% compared to 6.4% in the year-ago quarter, with the increase driven by higher gross margins on rental and used equipment, partially offset by higher SG&A. Proceed to slide 14, please. Net income was $16.3 million in the first quarter of 2022, or $0.45 per diluted share compared to $1.9 million, excuse me, or $0.05 per diluted share in the year-ago quarter. The effective income tax rate in the first quarter of 2022 was 26.3% compared to 26.9% over the same period of comparisons. Proceed to slide 15, please. Adjusted EBITDA in the first quarter of 2022 totaled $103.4 million compared to $76.9 million in the first quarter of 2021. The first quarter result represented an increase of 34.5% compared to a 13.3% improvement in total revenues. The adjusted EBITDA margin for the first quarter rose 600 basis points to 38%, compared to 32% in the year-ago quarter, with the increase primarily due to favorable revenue mix and higher margins on rental and used equipment, partially offset by higher SG&A expenses. Next, on slide 16, please. SG&A expenses totaled $78.3 million in the first quarter of 2022, up 10.1 million or 14.9% when compared to the first quarter of 21. The increase was due primarily to employee salaries, wages, incentive compensation related to increased profitability and headcount, payroll taxes, and related employee costs, with less significant increases in facility expenses related to our branch expansion and professional fees. SG&A expenses in the first quarter of 2022 were 28.7% of revenues compared to 28.3% a year ago. Branch expansion costs in the first quarter of 22 were 3.6 million greater than the first quarter of 2021. Slide 17, please. Turning to capital expenditures and cash flow, gross fleet capital expenditures in the first quarter totaled $76 million including non-cash transfers from inventory. Net rental fleet capital expenditures in the quarter were $56.3 million. Gross PP&E capital expenditures for the first quarter were $10.7 million while net PP&E expenditures were $9 million. Our average fleet age as of March 31st, 2022 was 41.5 months and compared favorably to the industry average age of 53.7 months. Free cash flow in the first quarter was 4.8 million. Slide 18, please. On March 31st, 2022, the size of our rental fleet based on original equipment costs was just over $1.9 billion, an increase of $218.8 million or 13% larger than the close of on March 31st, 2021. And our average dollar utilization in the first quarter of 2021 improved to 37.6% compared to 32.6% in the prior year quarter. And slide 19, please. With regards to our capital structure, net debt at the close of the first quarter was $898 million compared to $893 million. close of the fourth quarter of 2021. Net leverage improved to 2.1 times compared to 2.3 times over the same period of comparison. And we have no maturities before 2028 on our $1.25 billion of unsecured notes. On to slide 20. Our liquidity position remains in excess of $1 billion with a cash balance on March 31, 2022 $351.8 million in borrowing availability under our admitted ABL facility of $740.3 million. Excess availability under the ABL facility was approximately $1.1 billion at the conclusion of the first quarter of 2022 with minimum availability as defined by the agreement of $75 million. And by definition, this excess availability is the measurement used to determine if our springing fixed charge covenant 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 27.5 cents per common share of stock in the first quarter of 2022. And while dividends are always subject to Board approval, it is our intent to continue to pay the dividends. Slide 21, please. In summary, we are encouraged by the strong start to 2022 and affirming industry fundamentals that support a healthy business climate, and clearly the key ingredients are in place to maintain a robust business cycle. Moreover, and as Brad noted earlier, H&E is approaching this dynamic environment from an enhanced posture, and you can see the results of this stronger position in many of our financial metrics as Revenue growth, margins, and operating cash flow respond positively to our increased focus on the equipment rental business. We continue to advantageously position the company for further improvement through our stated growth initiatives with excellent progress demonstrated in the first quarter. Furthermore, our strong balance sheet and ample liquidity represent material resources in support of further expansion and financial achievement. So it's a good time to be in the equipment rental business, and we look forward to updating you on further progress. And with that, we're ready to begin the Q&A session. Operator, please provide our instructions. Thank you.

We will now begin our question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Steven Ramsey with Thompson Research Group. Please go ahead.

Hey, good morning. Maybe to start with utilization very high in the seasonally slow period, demand very strong. Do you view this as a sign of the time supply of fleet being tight relative to demand? And going forward, this seems to set up for a very high Q2 and Q3, but will Q3 be a bit lower as fleet comes in? Maybe you could just talk broadly. Will traditional seasonality apply to time utilization, but maybe at higher levels?

Sure. Good morning, Stephen. Very good question. We were very pleased. We referenced the lack of seasonal weather in Q1. But just the most honest response is it's a very, very robust market out there. We are continuing to see additional opportunity. We closed the quarter at 70.4%. We have been hovering in the 72% range, a little above 72%. To the back part of your question, we have no concerns. We're executing well. We're going to have a nice year here. But to the extent we may not see 73.5%, 74% as we normally would, you know, September, October, you know, we're thinking that utilization may start to level in that 72% to 73% range. Still very healthy. I believe still best in class. And we expect to deploy a lot of capital as we've talked about our, you know, $550 to $600 million plan that we're still confident in. So, The last thing I would want to indicate is that we're worried about utilization. I think we're going to lead the industry on utilization, and I think we're going to do so at a time when we're going to deploy a lot of capital. But I do not think that that metric is going to continue to necessarily ramp at the same pace. The last comment I want to make on that is we certainly expect to see sequential rate improvement while we're deploying this capital and running this 72, 73, maybe slightly ahead at times. best-in-class utilization.

Helpful, and that leads into my next question on pricing and easier comp in the first quarter going forward on this sequential improvement from Q1 and the comps being a bit more challenging. Can you maybe bogey the range of year-over-year pricing on a year-over-year basis given the comp factor?

Yeah, I'm going to let John respond to that. John?

Yeah, sure. So look, we fully expect to have sequential rate improvement in every quarter of this year. To your point about tougher comps as the year progresses, that is a fact. I mean, when we get to Q3 of 2021, for example, our sequential rates were up 2.6%. So as far as an exit rate for 2022, we feel really comfortable about the 5% range. Could be a little bit better than that, but I'd say we're comfortable with 5%. Yeah, yeah.

I think our view of rates has only improved. You know, we started and we stated on our last call that we were thinking low, mid, single digits. And, you know, as John just stated, now we're thinking more, you know, squarely in the middle of those single digits. And could we do better? You know, maybe. But, again, we're going to deploy a lot of capital, but you can absolutely expect us to execute well. on consistent pricing improvement each quarter going forward.

Great. And a quick follow-on there. Do you feel like your pricing is in line with peers in your markets? It seems like at least the large companies that have reported pricing is strong. Curious how you feel your pricing aligns with others.

I think our pricing is right in line with, you know, any of the other firms doing high-quality business. You know, we use a lot of information that's supported by Rouse, not just anecdotal feedback, and we are very comfortable that our pricing is well aligned. And I would comment that the amount of discipline we continue to see, particularly among most of our larger public peers, is very encouraging. I think this is a disciplined environment, and we are all looking to pass on, you know, any potential cost increases to the end user, and I suspect that's going to happen across the board.

Okay, helpful. And then last quick one for me, your EBITDA coverage of interest expense has increased meaningfully from strong levels already in 2021 and in the trailing 12 months and with positive expectations for 22 and likely 2023. Is there an openness to taking on more debt for capital returns or special dividends?

That's not something we would be interested in doing at this point. You know, we want to stay disciplined. We want to use our available debt for growth. One area we've been a little disappointed in ourselves internally has been on the acquisition front. You know, some of the pricing has been a little higher than we were willing to participate in. Clearly, with our systems and our structure and, of course, our balance sheet, you know, we could perfect acquisitions and that become another meaningful piece of our overall growth. So, No, for those type of activities, we would not. Should we exhaust this billion dollars or a large portion of the billion in available capital, then we would make the appropriate consideration, but we are focused on growing the business.

Great. Thank you.

The next question comes from Stanley Elliott with CIFL. Please go ahead.

Hey, good morning, everyone. Thank you all for taking the question. Could you talk a little bit about what you're seeing in the labor market and to what extent, if any, did that have any impact on your ability to open stores in the quarter or even expectations for the rest of the year?

No, Stanley, it's not. I mean, look, the labor market's tight and we could complain as most everyone could. Particularly last year, we saw inflation in wages. It continues to be a very tight market. We're You know, there's still mild inflation in wages, but there's not a single location where employing a capable team to drive results has ever been part of our calculus to go or not go, and nor do I foresee that occurring.

And kind of switching gears on the equipment side, you know, one of the companies we listened to earlier this morning, they were talking about surcharges for equipment. Is that something you're seeing in conversations when you start to plan out capital for expenditures on a go-for basis, or is this kind of a one-off? Just curious, kind of the level of magnitude that you're seeing that in the discussions.

You know, it's been a discussion with several manufacturers. We deal with more than 100 manufacturers, and of course, there's probably a half dozen that make up the vast majority of our capital spend. Of the largest, some have asked for no surcharge, and confirmed that they're not going to ask for the year, and those prices are protected. Some have asked for surcharges, and we've negotiated somewhere in between where they started and zero. A few of them have backed down completely and said, okay, we won't apply surcharges. We'll just talk about it on go-forward orders for 23, and a very few have kind of stuck to you know, where they came out at here. And this is very recent. I'm speaking in weeks, not months. And so for the few that we do have, that ranges between 2% to 6% on average. So that, you know, really minimal. We don't like it. We would prefer nothing. But, you know, it's not going to change our trajectory and will not impact our returns in any way that causes us concern.

When you're thinking about some of the brownfield locations, are you thinking about similar-sized locations in terms of the same amount of fleet? Are you thinking about maybe smaller amounts of fleet? I'm just curious how you're positioning where you want to open up in the size and magnitude of these individual stores.

It's more of the same. We've always talked about these locations differently. Typically, rule of thumb, year one, maturing around $10 million in inventory. That could be a little less. It could be considerably more, but $10 million on average. And the profile of that fleet is very similar to what you would see in our existing operations or footprint.

Perfect, everyone. Thank you very much, and congratulations on a good start. Thank you.

The next question comes from Stephen Fisher with UBS. Please go ahead.

Thanks. Good morning. I wonder if you could talk about your ability to pass along higher fuel costs and how that played out in the quarter as it progressed. I know you've afforded about a million dollars of gross profit in the rental other category. So I think that profit suggests that you stayed ahead of the higher fuel costs. But I'm curious how that played out and kind of what the trajectory there that we should expect is.

Sure. Yeah, well, as you saw, we've turned positive year over year in our margin, and so we're very pleased with that. There are several variables within that, Stephen, that we look at. I mean, certainly fuel is one of them. Also, logistics, use of third-party haulers, how efficient we are with our existing trucks, and use of third-party haulers. So there's been a lot of data that we utilize to continue to make gains, and we are certainly passing on higher higher fees. Now, we're not doing it in the form of surcharges on fuel. There's some complications about how you are required to do so, but we're just taking a really simple and direct approach, and we're charging more for the average haul. And the net result is we've turned those margins positive, and we're going to stay focused. I'll go further and say we see no reason that fuel or any other broad category is will not be able to get passed on to our end user going forward. So, you know, it's real time, we're responding fast, and we're getting the results that we expected.

Great. In terms of your new branches, I'm sure there's a typical ramp-up period for any of these operations as you get the people in place, the equipment, and kind of build the book of business. I guess I'm curious, as you're opening these into a pretty strong market. Are they getting absorbed and utilized faster than you might typically expect or about the same?

You know, Stephen, I would say it depends on the market, right? You know, we're very pleased with the performance of our new stores. They don't all ramp at the same pace. Obviously, the better the market, the faster a store is going to ramp, but You know, all in all, you know, as Brad spoke about the ten locations we opened last year, I mean, our performance is outstanding, and the two locations that we've started with in the first quarter thus far are so far ramping according to plan. So, you know, we're very pleased with our results of our new locations.

Yeah, and let me add, in this environment, we're picking the right markets for the right reasons, and that's to John's point. Yeah. we've been pleasantly surprised to exceed our expectations many, many more times than we have been concerned about achieving them. So it's a great environment for us to be opening locations in these selected markets.

Okay. Then lastly, Brad, I think if I heard you correctly, you said the last thing you're concerned about is utilization. And it does seem like you're off to a really strong start across the business. What are the things, the biggest things that you're concerned about at this point?

there is not a lot real-time today to be concerned about. I mean, you know, we have got an excellent team of operators who are executing very well. We're selecting the right markets. We've got the right products on order from the right manufacturers at the right pricing. We have the systems that are providing us information on market pricing, and that is, you know, clearly showing up at that 6.5% year-over-year. And maybe more important to John and I that 1.6% sequentially coming out of Q4 into the first quarter of the year. We're showing the strength of our platform here. If I have concerns, they're not unique to H&E or to our geography. They would be around interest rates and inflationary pressures, and does that creep into business? I had stated in my prepared comments, we have seen no postponements or cancellations due to material price or people shortages And look, frankly, we don't expect to see any here in the near term. But if I had to give you something I'm thinking about, that's where it's at. As far as the near term, we're going to execute on our plan. Sounds good. Thanks a lot. Thank you.

The next question comes from Seth Weber with Wells Fargo Securities. Please go ahead.

Hey, everybody. Good morning. I guess I wanted to stick on the cost side, if we could. The incremental margins were really good here in the first quarter. Do you think that you can sustain an incremental margin for the year in sort of the 60-plus percent range? And, you know, Leslie, maybe just some thoughts on SG&A. Do you think SG&A leverage should be – you should get some operating leverage on the SG&A line this year? Thanks.

Okay. Good morning, Seth. So as far as incremental margins, we do expect to see some moderation from this first quarter level throughout the course of the year, particularly in the back half. I think that 60-ish percent range that you just talked about, I think that's reasonable. Just to give you a little bit of color, I made some comments on our last call that Our current year drivers were shifting to different buckets, but while also driving good for us, we expect strong flow-through from fleet growth and rate this year. Last year, the drivers were primarily utilization and rate, which combined just really generate strong flow-through and create a more challenging comp, especially in the back half of the year. And then is it really... Right, right. Yeah. And then as it relates to SG&A, I wouldn't really, don't really follow the thought that we would have leverage necessarily this year, particularly with like our warm start strategy. It generally puts a little drag on our SG&A. But, you know, I would tell you that our estimates have not really changed for the full year of 2022. We expect that our costs will settle in closer to the full year of 2021 of SG&A as a percentage of revenues, which was 27.3%. So somewhere close to that. You know, it'll kind of begin to tick down towards the back half of the year and work down closer to that number.

Right. Okay. either for Brad or John, I guess, just from a CapEx perspective, the second quarter is usually your strongest quarter, but are the OEM constraints kind of creating an environment where third quarter is going to be your heaviest CapEx quarter, or do you think you could still kind of, you know, like typical normal seasonality and have second quarter be the heaviest quarter for CapEx?

Yes, Seth. Well, clearly the second and third quarter combined will be the heaviest by far. But I do think it could be weighted a little heavier to Q3 than Q2. And that's been part of our plan with the cadence we were planning for on warm starts as well as some of our growth. So, yes, Q3, I believe, will be heavier than Q2.

Okay, thank you. And then lastly, on the M&A, it seems like you've been talking about M&A a little bit. Are you going to start to go down the specialty road a little bit more, or do you think you'll stick to GenRent?

We certainly could. I don't want to lead you to believe that we have something that's eminent, but we continually evaluate a variety of types of acquisitions, and we We evaluate specialty in the same pipeline that we're evaluating the gen rent businesses. So we're interested in both, and we're looking for the right fit at the right valuation, and we're hoping we'll find something soon. I can tell you we talk about it a lot internally, and we're working it diligently, and there's an equal focus on both opportunities.

Got it. Okay. Thanks, everybody. Appreciate it.

Thank you.

As a reminder, if you would like to ask a question, please press star and send one to be joined for the question queue. The next question comes from Ross Gilardi with Bank of America. Please go ahead.

Good morning, guys. Good morning. Hey, Brad, I think you talked about seeing a pickup in some of the oil and gas projects, and I'm wondering if you could give us a little more color on that? I'm like the nature of the project. Is it, is it more upstream? Is it, is it pipeline? Is it, is it refinery maintenance? You know, just any additional detail that you can share that will be, will be interesting.

Well, you know, refinery maintenance seems to be accelerating before we've seen the uptick in, in, in oil. As far as oil goes, it's, it's primarily around rig count, moving rigs and things of that nature. You know, we're, We are not re-diverting assets to those markets. I know you are aware, and I believe most folks are, the products we rent within the oil field are fungible across our entire footprint. They're the same products, maybe a different mix of those products, but the same product we rent on typical commercial markets. and other industrial type sites. It's certainly helping us. I think maybe more important is the bleed over to the broader markets of South Texas and South Louisiana. I hope that's helpful. If there's something specific within that, I'd be happy to try to dig in further for you.

What about pipeline activity? Have you seen anything much there?

I can't say that I've seen, there's pipeline activity, but there has been pipeline activity. And I think that the driver for there to be more pipeline activity is there. I would say that additional capacity and pipeline is probably like the infrastructure bill. There's a larger delay than you see with the, than the spike in price that's, you know,

pronounced or prolonged so i do believe that what has occurred here will lead to an acceleration of that but right now it's just more of the same there's nothing unusual okay got it and then what are the markets that you feel like it's still not really benefited as much as they should from reopening that you're most um excited about uh kind of in the aftermath of COVID, if it ever really fully goes away, we'll see. But just, you know, anything that really is still well below where it was, like pre-COVID at this point, or just has that outsized growth potential just, you know, based on timing or whatnot.

Yeah. Well, listen, there's not much. I mean, you know, you look across our footprint with the product types and project types, they're all They're all healthy and improving. If there were a geography, it would probably be the northwest from Seattle down to San Francisco, where there's been probably more disruption more consistently or for a prolonged period of time. But even there, those markets and activities have resumed at closer to normal than abnormal. So I don't think I could call any one area out. As far as where we hope to continue to do better, that's also broad-based. But we see a lot of opportunity right now, and there's not a particular area of concern for us.

All right. And then just it's interesting you mentioned Pacific Northwest. I mean, your branch footprint map certainly seems to be sort of drifting more northerly. And just like longer term, I mean, do you see H&E becoming – more of a true like national player over time? Or, or do you see if we're looking out, you know, five to 10 years, is the company still predominantly more of a regional player in your, your strongholds around the Gulf coast and the, and the, and the Southeast?

Yeah, well, I absolutely believe H&E in 10 years will be a national player, a true national player. Um, Again, you know, oftentimes we talk about our investment in systems and technology, and that is really to say that we have the ability to serve these markets and we could run a business multiple to our current size with our existing infrastructure. You know, everyone's aware of our balance sheet. Everyone's aware of our fundamentals. They've watched our progress, you know, certainly if not before since we took the company public in February of 2006. And so we have shown over the cycles that, our ability to manage the business very appropriately. And I think maybe most important was really getting rid of that disruption we had with the crane business. The crane business is a good business, and we're happy for Manitowoc to be the owner of that business. It was, for us, very low margin. It was cyclical or lumpy, difficult to predict, and clouded up our focus. And what I would say to you today is, is we are maniacally focused on growing the rental business we love the sunbelt that we that we operate in we love warm starts filling in existing geography but we also like new geography and we plan on expanding okay and just just lastly um i think stan asked you about surcharges but

We just got off the Oshkosh call, and they're talking more about moves to just formula-based pricing, more specifically for 2023. And I'm wondering, are you seeing consistency in approach for future pricing in future years as opposed to just surcharges on the ground? Now, or is it, you know, are different supply, like amongst your major sort of top five or six suppliers, is it more varied, as you said before, with the approach to surcharge? I'm just trying to understand, like, how consistent is the approach on just making these, like, automatic pass-throughs if you order equipment and you get cost inflation from the time of order to the time of delivery? Are the contracts in the future going to be protecting the suppliers better than they have in the past?

Yeah, that's a good question, and the answer is it's really different by manufacturer. I will tell you that Oshkosh and JLG, in our respect, is very focused, takes a measured approach, and I think they want to be consistent, you know, consistent supplier to all of those that they sell product to. And I think that makes a lot of sense. In general, the more sophisticated companies take that approach in times like this, and the less sophisticated companies just respond to and make kind of near-term decisions based off of what's going on currently. So I'm not going to list manufacturers, but I will say since you brought up Oshkosh that JLG takes a thoughtful approach to how they price their customers so that it's a win-win situation, and I would like to see other manufacturers do the same.

Well, in those situations, if costs actually go down, do you benefit if costs go down from the point of order to the point of delivery as well? Or are they just really adding these clauses to protect them from further cost inflation in the future?

Well, if we're talking today, we have so minimal, the magnitude is so minimal on price increases for us with the surcharges from these select folks. It only goes one way right now, but it's almost not worth mentioning, although it's just a fact and we do have some minimal surcharges. Over history, manufacturers aren't generally about giving you a decrease. At the same time, there's been very few cycles we've been in where we've seen real cost reductions that come You know, it seems like everything's always offset with something else coming. It's either labor, it's technology with, you know, you remember the Tier 4 interim, Tier 4 final, and that, you know, these things continue to evolve. It's been steel multiple times. Now it's steel and logistics and basic componentry and many manufacturers. Not only are they fighting pricing, they're fighting getting all of the products together so that they don't have a lot of unfinished product that they can't ship until it's 100% complete. So, you know, no, in my career, I've not seen people come back and give price decreases. At the same time, that's a very logical approach when people can approach it and basically have an index that you work from that's understood.

Well, I would just think if you guys are going to agree to formula-based pricing for the suppliers, you'd also be protected to the downside. That's kind of what I was getting at, to sort of accept that approach.

And if we did, that's exactly how it would work. It's not a new concept. It may become new in practice, and it will be a 2023 item, and we'll negotiate once we understand more. But it's logical to us is what I would say.

Okay. Thank you very much, Brad. Thank you.

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

Okay, then we'll conclude the call today, and we appreciate everyone taking the time to join us and for your continued interest in HCD equipment. We look forward to speaking with you again. Betsy, thank you for your assistance today, and good day, everyone.

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