H&E Equipment Services, Inc.

Good morning, and welcome to H&E Equipment Services' first quarter 2023 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. Please note, 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 H&E Equipment Services' first quarter 2023 results. Your participation this morning and continued interest in H&E is appreciated. 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. Slide two, please. I'm joined this morning by members of our senior management team, including 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 call, and I will be turning the call over to him after I call your attention to slide three and 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 other 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 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, we are referencing non-GAAP financial measures during today's call. You will find a 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. 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 first quarter 2023 financial results. We appreciate your participation and continued interest in H&E. Our first quarter performance was very encouraging, demonstrating strong contribution from our exceptional pricing gains achieved in 2022, with further progress already shown in 2023. Also, our robust fleet growth and branch expansion provided support to our strong year-over-year performance. Please proceed to slide four. I'll begin today with a brief review of some key financial metrics in the quarter before I shift the discussion to an update of our rental performance. Next, I'll share my thoughts on the equipment rental business and why we remain confident in the prospects for 2023. Finally, I'll provide an update on our strategic objectives, including fleet growth and branch expansion goals, and our achievements in the first quarter. Lastly, we'll follow with a review of first quarter financials, including business segment performance data, and update you on our capital structure and liquidity. Then, we'll be happy to take your questions. Slide six, please. Excellent rental rates, fleet growth, branch expansion, the addition of one source, and and the continuation of a fundamentally strong business environment were all significant components of our first quarter growth. Compared to the first quarter of 2022, these factors were primarily responsible for the better than 18% improvement in total revenues. Improvement was partially offset by lower new equipment sales revenues and, to a lesser degree, part sales and service revenues. The lower sales from these three business segments were largely due to the December 2022 divestiture of our last exposure to the low-margin distribution business. Equipment rental revenues increased 31.5% in the first quarter as we captured strong year-over-year rental rate improvement with our exceptional rate achievement from 2022 carrying into the new year. Rates in the first quarter, excluding one source, were up 9.5% from the year-ago quarter, despite an expected year-over-year decline in first-quarter fiscal utilization. I'll provide additional details on fleet utilization in a moment. Also, our rental fleet experienced rapid growth with the first quarter original equipment cost, or OEC, of 28.1%, or $534 million when compared to our fleet OEC in the first quarter of 2022. Additionally, we benefited from 14 more branches operating in the first quarter of 2023 compared to a year ago, which followed the record growth in 2022 of our branch network, This growth was achieved through our accelerated branch expansion program and the acquisition of OneSource. The 14-branch increase reflects an adjustment for a recent branch consolidation. Finally, used equipment sales experienced a meaningful increase in the quarter as part of our fleet management strategy. Leslie will cover this point and others during our financial review. These same factors drove a strong year-over-year growth Increase in EBITDA, which totaled $140.1 million in the first quarter, up 35.4%, while an EBITDA margin of 43.4% was 540 basis points ahead of the same quarter in 2022. I will now cover some highlights from our rental business. Slide 7, please. Rental revenues, when compared to the year-ago quarter, improved an impressive 31% to $232.1 million. Rental gross margins for the quarter were 48.4% compared to 49.9% over the same period of comparison with higher depreciation, the primary cause for the decline. Leslie will explain this further during her financial discussion. I noted earlier the positive impact on rental rates in the quarter as we continue to demonstrate excellent relative pricing performance across the equipment rental industry. In addition to the 9.5% year-over-year improvement, rental rates, excluding one source, were up 0.7% on a sequential quarterly basis. Our expectation for modest sequential quarterly rate improvement in 2023 remains unchanged. Consistent with our first quarter expectation, fleet utilization of 67.3% was in line with the typical first quarter measure. The 310 basis point decline compared to the year-ago quarter was largely due to persistent disruptive weather across several of our geographic regions. Finally, dial utilization in the first quarter was 38.6%, a 100 basis point improvement when compared to the first quarter of 2022. This favorable result, which has demonstrated strong improvement since late 2021, highlights our ability to effectively address critical factors for success. These success factors include rental rate discipline, fleet growth and effective fleet management, continued branch expansion, and other areas of operational excellence. We also benefited from a resilient business environment, and we remain confident that sound fundamental conditions will persist in 2023. Next, I want to provide some facts behind our positive industry thesis. On to slide eight, please. Construction activity remains strong, contributing to the robust in-market backlogs, especially the non-residential and industrial segments. These two important in-markets accounted for 77% of our revenues over the last 12 months. We are witnessing an abundance projects across our operating footprint entering various stages of execution and planning, and several key industry measures of future non-residential construction activity continue to support a positive outlook. Although certain measures have softened from peak levels in recent months, they continue to signal healthy activity throughout the balance of 2023 and into 2024. Also, large private and federally funded construction projects addressing a variety of manufacturing, and infrastructure building programs are increasingly apparent across our operating footprint. These projects include, but are not limited to, LNG export terminals along the Gulf Coast, solar farms and chip factories, chip fabrication plants in the central and western U.S., electric vehicle battery facilities in the east, central, and western regions of the country, and data centers across all regions. Our participation in these extensive opportunities is expected to increase throughout the year. Lastly, a continued equipment supply imbalance and the likelihood of further improvement in rental penetration represent favorable dynamics that reinforce a positive industry outlook. On the latter point, rental penetration is estimated to have exceeded 53% at the conclusion of 2022 as this important measure approaches its pre-pandemic highs. These numerous sources of customer demand are expected to support favorable business conditions, including higher physical fleet utilization and modest sequential rental rate improvements as the year proceeds. Finally, and before I turn the call over to Leslie, I'll provide an update on progress towards our growth and expansion strategy. Slide 9, please. Significant improvement in our rental fleet, continued expansion of our branch network, and opportunistic M&A remain principal components of our growth strategy in 2023. Our gross fleet capital expenditure in the first quarter totaled approximately $128 million, with an expected expenditure for the full year remaining $500 million to $550 million. This sizable first quarter outlay attractively positions our existing branches with the equipment needed to address escalating customer demand and as the seasonal expansion and construction activity begins, while ensuring we have the optimal fleet mix required to seamlessly execute our new location strategy. Regarding new locations, our previously reported goal in 2023 of no less than 10 new locations and possibly as many as 15 remains unchanged. We remain focused on greater density in key geographic regions. No new branches were added in the first quarter. However, we currently expect to open as many as six new branches during the second quarter. Slide 10, please. We closed the first quarter with 119 branches across 29 states. The modest reduction in branches from our year-end 2022 total reflects the consolidation of a one-source branch as we finalized our integration process. In summary, the combination of rental rate discipline, Substantial fleet growth, effective fleet management, meaningful branch expansion, and superior operational execution concisely describes the storyline for the first quarter, leading to another successful quarterly result. With a continued focus on these and other critical factors, we fully expect to demonstrate further financial improvement and operational achievement in 2003 while we advance our strategic growth objectives. Now on to slide 11, and I'm going to turn the call over to Leslie for an extensive review of our first quarter financial performance. Leslie.