H&E Equipment Services, Inc.

Good morning, and welcome to H&E Equipment Services' fourth quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. 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.

Thank you and good morning, everyone. Welcome to a review of fourth quarter and full year 2022 results. We appreciate your participation on today's call and your continued interest in H&E Equipment. A press release reporting our results was issued earlier today and can be found, along with all supporting statements and schedules, at the H&E website, 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. Joining me today 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 today's discussion, but before I turn the call over to him, if you'll please proceed to slide three, I'll remind you that today's call contains forward-looking statements within the meaning of the federal securities laws. statements about our beliefs and expectations, and statements containing words such as may, could, believe, expect, anticipate, and 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's slide presentation for today's call and includes the risks described in the risk factors in the company's annual report on Form 10-K and other periodic reports. Investors, potential investors, and other listeners are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after the date of this call. Also, we are referencing non-GAAP financial measures during today's call. You will find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation as supporting schedules to our press release and in the attendance to today's presentation materials. Finally, Unless specifically noted, all results and comparisons for the periods reported and discussed this morning are presented on a continuing operations basis. I'll now turn the call over to Brad Barber, Chief Executive Officer of H&E Equipment Services.

Thank you, Jeff. Good morning and welcome to our review of fourth quarter and full year 2022 financial results. We appreciate your participation this morning and thank you for your continued interest in H&E. Please proceed to slide four. I will begin this morning with a review of financial and strategic highlights in the quarter, followed by an update on key performance metrics in our rental business segment. Also, having just concluded an outstanding year for our business, I want to identify some expected drivers of activity in 2023, including favorable trends that should support another year of robust activity. I will then close with a summary of our strategic achievements in 2022, which included record results in rental fleet investment and expansion of our geographic coverage. I will also identify our strategic growth initiatives for 2023. Lastly, we'll follow with a comprehensive review of fourth quarter financial results, including business segment performance data and an update on our capital structure and liquidity. Then we will be happy to address your questions. Slide six, please. The fourth quarter of 2022 was one of our most productive quarters on record. We reported excellent financial results, as we have done all year, while reaching important achievements with significant implications in terms of future operations and competitive positioning. Our excellent financial performance was due, in part, to resilient industry trends which prevailed throughout the period, while the supply of equipment remained constrained. These favorable factors produced healthy fleet utilization and further rate appreciation, resulting in a 25.6% year-over-year improvement in total revenues and a more than 35% increase in equipment rental revenues. In addition, EBITDA improved 56% over the same period. Each of these financial measures concluded 2022 at record levels. We also recognized some important strategic wins in the quarter, which included the sale of our Komatsu earth moving distribution business in December of 22, effectively completing our transformation to a pure play rental business. This final step allows for greater revenue stability and margin appreciation throughout the cycle. The transaction resulted in a gain on the sale, which Leslie will explain as part of her financial review. Further, we significantly advanced the integration of one source equipment following the closing of our acquisition in October of 22, adding 139 million in fleet at OEC and 10 new branches, six of which now place H&E in the Midwest. Other accomplishments include further success with our accelerated branch expansion program following the addition of two new locations in the fourth quarter, bringing the total number of new locations added in 2022 to 10. These branch additions, in combination with the acquisition of one source, drove an 18% year-over-year increase in our branch count, extending our operational scale. Finally, we continued to invest in our rental fleet with a gross investment of $128.3 million in the quarter, resulting in record gross expenditures for the year of $507.8 million. ROEC concluded the quarter at a record level just under $2.4 billion in or 26.8% greater than the fourth quarter of 2021. I now want to delve deeper into the results of our rental business. On to slide seven, please. Strong core fundamentals in the quarter combined with our fleet growth, successful branch expansion program, and the addition of one source operations resulted in a 34.6% year-over-year increase in rental revenue to $245 million. The outcome? which was a new record for the rental business, led to a gross margin in the quarter of 53.1%, or 140 basis points ahead of the year-ago quarter. Rental rates in the quarter, which exclude one source, remain impressive, improving 10.6% when compared to the fourth quarter of 21, and 1.8% on the sequential quarterly basis. Our average rental rate appreciation for the full year of 22 was equally impressive, finishing the year 9.3% better than 2021. Each measure remained among best in our industry. Our smart rate pricing platform, which is now in use across all 10 one-source branch locations, is expected to capture valuable synergies in future periods due to the application of a dynamic pricing methodology, as well as improved equipment mix at each location. Physical utilization in the fourth quarter averaged a healthy 72% despite pressure from typical seasonal factors, including rain and winter conditions across several geographic regions. These events contributed to a decline in the measure of 110 basis points when compared to the year-ago results and 130 basis points on a sequential quarterly basis. Finally, dollar utilization in the fourth quarter was 41.9%. or 260 basis points better than the same quarter in 2021. For the year, dollar utilization averaged 40.9% or 410 basis points better than the previous year, largely demonstrating the benefits from fleet management, including improvement in fleet mix, higher rental rates, and strong physical utilization. Next, I want to give a breakdown on our perspective on the 2023 industry outlook. Given the divergent thoughts and opinions addressing the macro economy in 23, I can confirm our optimistic view of the industry has not diminished as favorable trends continue to reinforce important end markets, leading to an expectation of healthy demand for our equipment. On to slide eight, please. Customer feedback regarding non-residential and industrial project backlogs continues to indicate a robust scope of work in 2023. which is expected to drive healthy fleet utilization over the year. The encouraging customer feedback is reinforced by projections of future non-residential building activity as measured by the Dodge Momentum Index, the construction backlog indicator reported by the associated builders and contractors, and AIA's architectural building index. Although recent results from each of these indicators has declined from historic high readings, they continue to reflect robust non-residential construction project backlogs and active planning agendas, which is likely to bode well for 2023 and beyond. In addition, we expect equipment demand in 2023 to be supplemented by an increase in federal spending addressing U.S. infrastructure, manufacturing capabilities, and renewable energy. Many of these projects will require extended periods of time to complete. Growth in rental penetration should drive new demand for equipment as the combination of unfavorable fiscal conditions, including rising interest rates and lingering delays in equipment deliverability, tend to encourage a shift by certain customers away from ownership of equipment. A recent report from the American Rental Association disclosed that compared to 2021, rental penetration improved 150 basis points in 2022 to 53.8%. We believe further rental penetration is likely. We expect these multiple catalysts for increased rental demand to result in the continuation of healthy equipment utilization and to contribute to an attractive pricing environment characterized by modest sequential quarterly rate improvement. Non-residential and industrial construction projects accounted for 75% of our total revenues in 2022. We believe the success of our growth initiatives, including investment in our rental fleet and geographic expansion of our operational presence, has advantageously positioned our company for new opportunities in these and other end markets, while our strong mix of equipment and the young age of our fleet have been instrumental in driving greater customer interest in H&E. We remain focused on further growth initiatives in 2022 and believe this fundamentally sound industry will continue to create attractive opportunities for expansion. Slide 9, please. As I mentioned earlier, H&E successfully added 10 new branch locations in each of the last two years. The success of our branch expansion program is a critical component to our long-term strategy, and we aim to increase our footprint and location density in key geographic regions that offer impressive prospects for non-residential and industrial construction growth. Being mindful of this important growth initiative, we plan to add no fewer than 10 locations in 2023 and as many as 15, with the escalation indicative of our expansion team's continued success in identifying locations with impactful opportunities for growth. Also, we are targeting a gross fleet investment of $500 million to $550 million in 2023 as we continue to support existing stores and the new branch locations with both a young fleet and a diversified mix of equipment. The range amounts to another year of record gross expenditures for our rental fleet. Although 2022 original gross expenditure target was reduced due to the failure of certain manufacturers to meet their commitments, we believe our OEMs have a more realistic understanding of production volumes in 23, and that will result in achievable target range, despite the persistent disruptions in the supply chain. Finally, attractive acquisition opportunities continue to appear in our industry, and an evaluation of suitable targets remains an ongoing part of our comprehensive plan for growth in 23. Slide 10, please. We opened 2023 with 120 branches across 29 states, including new markets in the Midwest, South, and greater density in the Southeast, Gulf Coast, and West Coast. Before I hand the call over to Leslie, I will close by reiterating the importance of numerous accomplishments in 2022. These include the completion of our strategic transition to a pure play rental business, record gross investment in our rental fleet, the continuation of our branch expansion program, and the acquisition of OneSource. It is also important to point out our team's exceptional operational execution, which I believe has produced the industry's best rental rate performance and highest levels of physical utilization. Individually, each represents a significant achievement for the company. However, taken together, these strategic wins serve to fortify a sound base for future operations and strategic growth while escalating our competitive posture. Now on to slide 11, and I'll turn the call over to Leslie for a comprehensive review of our fourth quarter financial performance. Leslie.