H&E Equipment Services, Inc.

Good morning and welcome to H&E Equipment Services' second quarter 2023 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, sir.

Thank you, and good morning, everyone. Welcome to our review of second quarter 2023 results, and thank you for your participation and continued interest in H&E. A press release reporting our second quarter results was issued earlier today 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 in Events and Presentations. On slide two, you will see a list of senior managers joining me today. They are Brad Barber, Chief Executive Officer, John Inquist, President and Chief Operating Officer, and Leslie McGee, Chief Financial Officer and Corporate Secretary. Before I turn the call over to Brad, I'll 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 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 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 attendance 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, and good morning, and welcome to our review of second quarter 2023 financial results. We appreciate your participation on today's call. Proceed to slide four, please. I will begin this morning with quarterly financial highlights and a high-level review of the strong financial progress achieved in the second quarter. I will then transition to our rental business and touch upon the major drivers of performance. Next, I want to discuss our perspective on the equipment rental industry, offering observations and identifying recent developments that have served to reinforce our optimism regarding the outlook for the remainder of 2023 and into 2024. Lastly, considering our continued confidence in the industry, I will bring you up to date with our revised 2023 strategic growth targets. Lastly, we'll follow with a review of second quarter financials, including business segment performance, and an update of our capital structure and liquidity. Then we'll be happy to address your questions. Slide six, please. H&E reported superb financial results in the second quarter. As expected, strong industry conditions prevailed throughout the period with healthy customer project backlogs yielding steady demand and further rate appreciation. We also benefited from the successful growth initiative launched in 2022. We were very focused on our 2023 strategic expansion targets and made significant progress in the quarter with substantial fleet growth and six new locations opened. Collectively, these important factors led to strong financial achievement. Our year-over-year growth was impressive, with total revenues and equipment rental revenues up significantly. Both measures reached record levels in the quarter. Total revenues included notable increase in revenue from used equipment sales, reflecting an effective fleet management effort as the market for used equipment remained robust. Record levels were also reported for gross profit and gross margin, while EBITDA, which grew 36%, approached a record level in the quarter, posting a 480 basis point increase in EBITDA margin to 46.2% compared to the year ago. These quarterly financial achievements were made possible by the successful execution of our strategic growth objectives, led by a nearly $602 million increase in our rental fleet OEC, ending the quarter at a record $2.6 billion. Our growing rental fleet was distributed across an expanding branch network, which included 12 new warm starts opened over the last 12 months, and as mentioned, six of these added in the current quarter. The performance of our rental business was equally impressive, so I want to review these major drivers. On to slide seven, please. Rental revenues in the second quarter of 2023 were up 28.6% compared to the year-ago quarter. Rental gross margins were 51.8% compared to 53.7% over the period of comparison. The modest decline in margin was largely due to the impact of purchase accounting following the acquisition of OneSource. Leslie will provide further detail in her financial review. When compared to the first quarter of 2023, rental gross margins achieved a solid gain of 340 basis points. Our rental operations benefited from another quarter of strong pricing performance. Excluding one source, rental rates in the second quarter were up 7.1% compared to the year-ago quarter and were 1.1% better on a sequential quarterly basis. Through the first six months of 2023, rental rates improved 8.2% compared to the same period in 2022 and remain among the best in the industry. Physical utilization in the second quarter of 69.3% represented a normal second quarter outcome when viewed historically, compared to 73.2% during the same period in 2022, a time of unusual tight supply in the industry. When compared to the first quarter of 2023, field of utilization improved 200 basis points. Finally, dollar utilization in the second quarter was 40.6% compared to 40.9% in the second quarter of 2022, or essentially unchanged. Despite the significant growth of our rental fleet, dollar utilization was 200 basis points better on a sequential quarterly basis due primarily to improved rental rates. I now want to address our perspective on the equipment rental industry, including some material developments that should lead to additional opportunities and prospects for growth. On to slide eight, please. Down industry fundamentals persisted through the second quarter, supported in part by resilient non-residential construction spending. Through May 2023, construction spending in this important segment was up 17% year over year, according to the U.S. Census Bureau. As a result, healthy project backlogs remain in place, and we expect them to sustain through 2023, with increasingly positive implications for 2024. Along with a solid base of demand, we're witnessing a steady escalation in the number of large-scale or mega-projects we expect to serve as a catalyst for further construction spending and expansion across the equipment rental industry. Construction of these private and federally funded projects, which include sizable manufacturing installations and public infrastructure programs, are active throughout the geographies we serve and are representing a growing component of our project mix. Also, leading indicators of non-residential construction spending have demonstrated increased stability in recent months and remain solidly ahead of year-ago measures, implying continued growth into 2024. We're encouraged by these attractive and dynamic forces and expect a combination of strong industry fundamentals and the stimulus from major projects to produce solid business opportunities throughout the balance of 2023 and into 2024. Finally, and before I turn the call over to Leslie, I want to address substantial progress achieved in the second quarter towards our growth and expansion objectives and disclose our revised 2023 targets as we position the company for future success. Slide 9, please. Our business expansion initiatives have been and will remain centered on our rental fleet and branch network. Regarding our fleet, gross capital investment in the second quarter totaled approximately $247 million, representing a record quarterly investment by the company, and resulted in capital expenditure of $375 million through June 30, 2023. As we close the second quarter, the size of our rental fleet as measured by original equipment costs totaled approximately $2.6 billion, representing a 30% increase when compared to the OEC on June 30, 2022, and was yet another company milestone. As mentioned earlier in my comments, we opened six locations in the quarter, improving our branch density in the Mid-Atlantic, Southeast, Gulf Coast, and Intermountain regions. Additional locations are set to open in the third and fourth quarters. As we concluded the second quarter, our branch count stood at 126 locations across 29 states, representing a year-over-year growth of 19%, inclusive of warm starts and acquired locations. A map of our current branch network with second quarter branch additions noted is included in the appendix of today's presentation. We follow a disciplined approach to growth and expansion, and we value strong execution. We have consistently demonstrated an ability to adapt to changing market conditions. Accordingly, we believe our decision to raise our 2023 growth initiatives is an appropriate response to our heightened level of confidence in the continuation of attractive industry fundamentals. We also believe it is essential as we position H&E properly for future growth and enhanced financial performance. Our 2023 capital expenditure target has increased to a range of $600 million to $650 million, up from $500 million to $550 million. Also, we have raised our anticipated 2023 branch additions to a range of 12 to 15 locations, up from 10 to 15 locations. In conclusion, our second quarter financial performance is further evidence of the capability and financial potential of H&E. Since we began our transition to a pure play rental focus in 2021, we have demonstrated consistent growth in revenues while significantly elevating operating margins. A commitment to growth and expansion combined with ample capital, robust technical systems, and a dedicated workforce represent the critical drivers of our rising potential. We're excited about the prospects for the equipment rental industry, and we are confident in our ability to address new opportunities as we continue to effectively execute our growth plans and demonstrate operational excellence throughout our expanding footprint. I look forward to updating you on our future achievements. Now on to slide 10, and I'll turn the call over to Leslie, who will provide a review of our second quarter financial performance. Leslie?

Thank you, Brad. Good morning and welcome, everyone. I'll begin with slide 11 and a review of second quarter revenues, gross profit, and profit margins. Second quarter revenues improved 65.6 million compared to the second quarter of 2022, reaching our highest quarterly level to date of 360.2 million. The 22.2% increase was led by higher revenues from rentals and used equipment sales. Rental revenues in the quarter improved 28.6% to 258.7 million, compared to $201.2 million in the year-ago quarter. Growth in our rental fleet, together with rising rental rates, contributed to the strong year-over-year results. In quantifying these impactful developments, I want to review some of Brad's comments. Our rental fleet, as measured by original equipment cost, or OEC, grew 30% from the second quarter of 2022. or 601.6 million to just over 2.6 billion. In addition, rental rates in the second quarter, excluding one source, were 7.1% better than the year-ago quarter, and we continue to demonstrate sequential quarterly rate improvement, gaining 1.1% in the quarter when compared to the first quarter of 2023. Physical utilization was 69.3% in the second quarter, below the year-ago measure of 73.2%. The second quarter outcome was modestly impeded by the 30% growth in our fleet and other expansion initiatives. However, as Brad stated, 69.3% is representative of a more normalized result when compared to the utilization in the year-ago quarter, which was intensified by a lingering equipment supply shortage. Used equipment sales in the second quarter improved 110.6% to $39.7 million, compared to $18.8 million in the year-ago quarter. We have seen a moderate improvement in the availability of certain types of equipment. Because of this change, we were able to capture attractive opportunities in a sound used equipment market. New equipment sales of $8.9 million declined 58.8% in the quarter compared to $21.5 million in the second quarter of 2022, with a decline resulting from the December 2022 divestiture of our Komatsu earth-moving distribution business, which completed our exit from distribution activities. Consolidated gross profit in the second quarter increased 36 million, or 27.2%, to 168.4 million, compared to 132.3 million in the year-ago quarter. As a result, gross profit margin in the quarter improved to 46.7% compared to 44.9% in the second quarter of 2022, with a 180 basis point increase due largely to a favorable revenue mix and higher gross margins on used equipment sales, partially offset by lower gross margins on rentals. Total equipment rental margins were 46.8% in the second quarter of 2023 compared to 48.6% in the year-ago quarter, and rental margins were 51.8% compared to 53.7%. These declines in rental margins were primarily due to the impact of purchase accounting and the associated higher depreciation expense resulting from the fair value markup of the fleet acquired from one source. In comparing other results to the year-ago quarter, used equipment margins increased to 59.1% compared to 47.6%, with fleet-only margins excluding used equipment obtained through trade-in improving to 59.3% compared to 50.9%. Margins on new equipment sales were largely unchanged at 14.9% compared to 15%. And finally, margins on parts sales improved to 29.6% compared to 26.8%, while service margins finished the quarter at 62.2% compared to 64.6%. Moving on to slide 12, please. Income from operations closed the second quarter at $69.5 million or a 37.2% increase when compared to $50.7 million in the second quarter of 2022. Operating income margin improved to 19.3% compared to 17.2% in the year-ago quarter. A favorable revenue mix, higher gross margins on used equipment sales, and lower SG&A as a percent of revenues contribute to the improved margin. These factors were partially offset by lower rental margins resulting from the one-source acquisition. Proceed to slide 13, please. Net income from continuing operations in the second quarter increased 47.9% to $41.2 million, or $1.14 per diluted share, compared to $27.9 million, or $0.76 per diluted share, in the year-ago quarter. Our effective income tax rate in the second quarter declined to 26.3% compared to 26.8% for the same quarter in 2022. Slide 14, please. EBITDA in the second quarter improved to $166.5 million compared to $121.9 million in the year-ago quarter, or an increase of 36.6% in comparison to a 22.2% improvement in total revenues in the quarter. At 46.2%, the EBITDA margin in the quarter was 480 basis points better than the margin in the second quarter of 2022, with the increase due primarily to improved revenue mix, higher gross margins on used equipment sales, and lower SG&A as a percentage of revenues. Slide 15, please. SG&A expense in the second quarter increased 16.6 million, or 20.1%, to 99.3 million, compared to SG&A of 82.7 million in the year-ago quarter. The increase was attributable to employee salaries, wages, and variable compensation, as well as increased headcount. Higher facility expenses, professional fees, and depreciation were secondary contributors to the quarter-over-quarter increase. Expressed as a percentage of revenues, SG&A expenses in the quarter were 27.6% down from 28.1% in the prior year quarter. Approximately 7.4 million of the expense increase in the quarter was attributable to branches opened or acquired since the close of the prior year quarter. Slide 16. Gross rental fleet capital expenditures in the quarter, inclusive of non-cash transfers from inventory, totaled $247.4 million. Net rental fleet capital expenditures for the quarter were $208 million. Gross PP&E CapEx in the quarter was $21 million or $20.4 million net of sales of PP&E. Net cash provided by operating activities totaled $91.7 million in the quarter, compared to $65.7 million in the second quarter of 2022. Free cash flow used in the quarter was $120.8 million, compared to free cash flow used of $63 million over the same period of comparison. The average age of our rental fleet on June 30, 2023, was 42.5 months, down from 3.7 months in the first quarter of 2023, and the average continued to compare favorably to the industry average fleet age of 50.3 months. Slide 17, please. Our river fleet size, based on our original equipment cost on June 30th, 2023, exceeded 2.6 billion and was approximately 601.6 million, or 30% larger than our fleet size at the conclusion of the second quarter of 2022. Average dollar utilization in the second quarter of 2023 was 40.6% compared to 40.9% in the prior quarter and 38.6% in the first quarter of 2023. Slide 18, please. Net debt on June 30th, 2023 was approximately 1.3 billion, up slightly from 1.2 billion on December 31st, 2022. We concluded the second quarter with net leverage measure of 2.2 times unchanged from December 31st, 2022. We have no maturities before 2028 on our 1.25 billion of senior unsecured notes. Slide 19 please. Our liquidity position on June 30th, 2023 totaled 658.5 million. While excess availability under the ABL facility was approximately $1.6 billion, up from $1.5 billion on December 31, 2022. Our minimum availability as defined by the ABL agreement remains $75 million. And note that excess availability is the measurement used to determine whether our springing fixed charge coverage is applicable. And with our excess availability of 1.6 billion, we continue to have no covenant concerns. Finally, we pay our regular quarterly dividend of 27.5 cents per share of common stock in the second quarter of 2023. While dividends are subject to Board approval, it is our intent to continue to pay the dividend. Slide 20, please. In summary, we continue to demonstrate strong execution of our defined growth objectives And with our fleet OEC and branch locations up 30% and 19% respectively over the last year, our financial metrics have improved significantly over this period. They include income from operations and EBITDA, both of which were up over 30%, and net cash provided by operating activities, which was up approximately 40%, with net income from continuing operations up almost 48%. Several measures achieved record levels in the second quarter, while others are approaching new highs. The 12 warm starts added in the last 12 months, including six in the second quarter, have been strategically located in high-growth areas of the country and have yet to reach their full financial potential. As Brad stated earlier, industry fundamentals remain sound or increasingly underpinned by a growing backlog of major projects. that are expected to add to the impressive non-residential backlogs already in place. We are accelerating our gross capital expenditures and branch expansion plans because we are encouraged by these industry developments, and as a top five participant in the equipment rental industry, as measured by annual revenues, we have a successful strategy for growth in the financial resources and determination to achieve further success. We're now ready to begin the Q&A period. Would you please provide instructions to our call participants and assemble the queue? Thank you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Stephen Ramsey with Thompson Research Group. Please go ahead.

Good morning. I have a few questions that revolve around the larger fleet size and maybe to start with time utilization down 300 to 400 bps year over year in each of the past two quarters. Should we expect the second half to show similar time utilization declines or could it be more pressured as CapEx is deployed?

Good morning, Steve. I appreciate the question, and I think the answer is we fully expect to see a seasonal increase. We started the week here just north of 70% utilization, so we've crept up a little bit since the Q2 average. When we look over history, and as we referred, our second quarter was actually pretty typical when we look at a 10-year window of time, and 2022 was anything but typical with extreme supply constraints. So we expect to see a seasonal uptick. We are not done. We have not peaked on utilization today. We will not have peaked tomorrow. We will continue to get incremental improvement throughout the quarter. Now, I wouldn't want to lead you to believe that we're going to end back up at last year's physical utilization. That's just not possible, nor is it practical under the circumstances. We've never achieved those levels before. So, you know, as we're bringing in more capital, we're very happy that we're going to see a typical seasonal trend, continued incremental rental rate improvement, and substantial fleet growth that's going to provide a lot of positive flow through for the business.

Okay, helpful. And this larger CapEx level, clearly meaningfully higher growth. When do you expect this fleet to be delivered? And what I'm getting at is, will this have much impact on 2023 results or a greater impact on 2024?

Well, it certainly will have a greater impact on 2024 because we'll get a four-year impact. But I don't want to lead you to believe that we're going to take the majority of the remaining guided CapEx and Q4. That's not the case. Q2, excuse me, our second quarter was by far a record. It's been pretty traditional in our business that Q3 typically holds the record, but the vast majority of your CapEx comes in in Q2 and Q3. That will not change this year. Q2 is going to be the high level for gross CapEx for the year, but the majority of what we will bring in for the remainder of the year will come in Q3, and that's just typical business. So we're going to get some impact and some benefit this year. But, of course, we will get, you know, greater four-year impact next year.

Okay, helpful. And then last one for me on a similar topic. It appears delivery times are improving from the OEMs. And as more rental companies can get a larger number of orders delivered over the next few quarters, do you expect any incremental rate pressure from in the second half of this year or early 2024? Basically, do you expect the rate environment to stay as favorable as it has been?

I fully expect it's going to remain as stable as it is today. We increased pricing seven-tenths of a percent in Q1 sequentially. I think we just reported 1.1 percent. John, do you have any comments on pricing kind of on a go-forward basis?

Yes, Stephen, on a go-forward basis, we do expect more sequential rate improvement in the third and fourth quarter. Now, not at the same levels as last year. Going back to last year, our third quarter sequential rate improvement was about 3.2%. We do not expect to be at those same levels. What we do expect is a more seasonal uptick from the second quarter into Q3. And then rounding out Q4, we're going to see that typical seasonal impact. But, you know, we are comfortable with consistent sequential rate improvement for the next two quarters.

Excellent. Thank you.

Thank you. And our next question today comes from Seth Weber with Wells Fargo. Please go ahead.

Hi. Good morning, guys. This is Larry Stavitsky on for Seth this morning. Thanks for taking my questions. So I wanted to go back to the gross CapEx raise. Is it a function of more availability, equipment availability from the OEMs, or is it, you know, greater project activity?

Well, the project activity is absolutely there. We fundamentally wouldn't take more CapEx. So, you know, we have no concerns about the continuation of these emerging large projects and the continuation of our more traditional or typical projects. So that fundamental basis, we've checked that box with a big, bold check. As it pertains to the raise, Larry, last year we were forced to reduce our CapEx guidance when a handful, I think about three of our manufacturers, had a very large impact on our ability to secure enough product to support the CapEx guidance. Again, I'm speaking of 2022. As we entered this year, we were very strategic with who we partnered with, how we timed the purchases, as to ensure that this product was showing up on time when we needed it. And I've got to tell you, I've been very pleased with our internal team. I'm pleased with our manufacturer partners. No one is letting us down. They're meeting expectations. I wouldn't want to lead you to believe that they're calling us up and saying, we have more product, do you want it? That's just not the case. What we had decided to do was to ensure that we did not overstate our ability to bring in the CapEx with the 5 to 550. Now with, you know, half the year behind us and knowing that these manufacturers can and will produce as expected, we're comfortable with this $100 million raise on both ends of that guide. And, again, the fundamentals of the market are there. We're going to deploy this product.

Okay, great. Thank you for that. And what type of fleet are you adding, you know, with the – I guess just what is the fleet that you're at, the additional fleet?

It's typical. There's nothing unique about the mix of product that has come in or will come in for the remainder of the year. It fits squarely into the typical percentiles of our current investment. So nothing unique on a mix standpoint.

Got it. Thanks a lot, guys. Appreciate it.

Thank you, Larry.

Thank you. And our next question today comes from Alex Regal with B. Reilly Securities. Please go ahead.

Good morning and very nice quarter. A few questions here. First, gross profit in the Southwest seems a bit below national average. I suspect it's due to a limited number of branches. Can you talk about your plans to improve that gross profit in that territory and maybe expand your branch count?

Alex, I suspect you're speaking to the percent of gross profit we derive, and that's just a product of how big those particular locations may be. It is not at all indicative of a gross margin or the quality of revenues. It's just more about the unit count basis, obviously. You know, with 126 locations, they vary in size of invested OEC. And so you're just looking at a percent that's representative. But those locations perform very well.

Sorry about that. But could you also expand upon sort of some regional trends that you're seeing or identify some obvious outliers in either strength of utilization across the regions or gross profits or anything of that nature? Sure.

Yeah, great question, and that's the beauty of the position we're in. There are no outliers right now. I mean, you know, if we want to get granular and talk about a single location in one particular geography that may be incrementally flattish or something like that, I guess we could get to that level. But when we look at these aggregated groups, everyone is running strong utilization, traditional utilization, Everyone is achieving rate improvements. Every product is achieving rate improvements, which are leading to better returns. It's just a really nice picture across the board. So there is nothing specific to call out. Strength across the board.

Great.

Thank you.

Thank you.

And, ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star then 1. Our next question comes from Stanley Elliott. It's default. Please go ahead.

Good morning, everyone. Thank you for the question. On terms of the store locations, you bumped it up a little bit at the low end, kind of 12 to 15. I would imagine there's an amount of legwork going in in terms of real estate and things along those lines. Should we expect a similar sort of an organic growth strategy into next year? When do you have to make those commitments? How should we think about that?

Yes, Stanley, good morning to you. Facilities are the biggest hurdle we have with entering the market. I mean, it's facilities, people, and product. You know, with the manufacturer, again, the lead times are far from normal. Most manufacturer lead times still kind of start with a six-month window and expand from there with a few isolated exceptions. People, we generally need about a six-month window to onboard and train people. for these warm start locations. And facilities are the big one. You know, as Leslie mentioned in her prepared comments, we're only going to the best markets when we plan to be for extended periods of time. And so in some cases, we're actually doing build to suits to ensure that we're properly located, not just for 2022, or excuse me, 2023 or 24, but decades to come. To the broader question, the answer is yes. You should fully expect to see us continue to produce 10 to 15 locations on a go-forward basis. And our ability to ramp that up, if we so elect, absolutely exists. These are low-cost, low-risk, very high returns. And as you know, with our 29-state footprint and our current density, we have tremendous opportunity to expand and add density.

It's fair to assume, I guess, maybe can you talk a little bit about the M&A environment, what you're seeing out there? You hope that still kind of ranks up there in terms of the organic growth opportunities that you're planning on?

It does rank. You know, many times I think we end up talking about M&A. We simply will not overpay for an acquisition. When we look at the quality of the fleet, maybe the age of the fleet, that's all part of our calculation for the investment. I can tell you we're working acquisition opportunities right now. We'll be working them next quarter and the next quarter. We have a team that's dedicated to that. And I would love to point forward and say I expect to do one, two, three, or four acquisitions a year because we can digest that within our business with no disruption to our focus and it just adds to our growth. But the truth is they're going to have to be a little more opportunistic than some of the deals we have seen out there. So our hope is to perfect one to two tuck-in acquisitions a year, and when you see us do one, you can know we paid a fair price and we feel good about it in the interim. We end up kind of frustrated at some of the levels we've seen poorly run or poorly invested upon businesses transact at. We're not going to participate at those levels.

And then lastly, just kind of a point of clarification, in terms of the rate piece, I think you guys talked about sequential improvement kind of through the balance of the year. I think on prior calls, we talked about kind of maybe like a mid-single digit sort of a price increase. Is that, or pardon me, on a year-over-year basis, is that still kind of where we think we might end up on the year? Could it be higher than that? Just curious kind of what the market's telling you right now.

Yes, Stanley, I'll take that. So, you know, as I said earlier, you know, much tougher comps in the second half. You know, we feel comfortable with a, you know, 1% sequential increase for you know, the third quarter and, you know, hopefully, you know, something after seasonality sets in, something, you know, in the mid single digits for the second or for the fourth quarter, I should say. But what you mean by the exit rate, you know, I'm going to say we're going to feel comfortable somewhere in that four-ish percentage range for an exit rate for the full year.

Yeah. Dan, let me add to that if I could. You know, we started improving our rental rates in the second quarter of 2021. Since the second quarter of 2021, we have increased our rental rates an impressive 17% as we sit here today. So I don't want to give anyone an indication that rates are softening because that's not the case. You should expect to see us produce consistent incremental price improvements going forward. That being said, I feel very certain that we're leading the industry with 17% price improvements. since the second quarter of 2021. And there is a market out there that, you know, we can only chip away at. So, you know, we're reaching a point where we're going to continue to get these incremental gains as we have the last two quarters. And, you know, you can try to calculate that exit rate. And as John said, 4-ish percent may be the case. But that's one fantastic number when you context against all the weight we're carrying from 21.

Yeah, no, absolutely. You guys have done a great job. Thanks so much for the time and best of luck.

Thank you, Stephen.

Thank you. Our next question comes from Oliver Leal with Evercore ISI. Please go ahead.

Hi, this is actually David Rasso from Evercore. Hi, a quick question. The time you, the comment about you're getting some traditional seasonal time you'd improvement from the end of last quarter to start this quarter, unless something happens dramatic in the fourth quarter, it it appears your time mute for the year is still going to be well into the upper 60s. Can you give us a sense of where that is versus history? And the spirit of the question is, at that level of time mute, how is that influencing how you think about CapEx as a base case for next year? Obviously, always balance against how you're thinking about rates. And obviously, I just heard the conversation about the exit rate of up 4%. But I'm just kind of curious, just thinking bigger picture, last year, obviously, every quarter time you was above 70%, which is very unique. Just trying to get a sense of how you view a high 60s time you going into next year balancing CapEx versus rate. Thank you.

David, thank you for the question. We view it positively. I mean, obviously, you know, higher is always better. A lot of folks focus on 2022 or half focused on 2022 and You know, we do more of a 10-year window of time. H&E has traditionally ran the highest physical utilization in the industry. Our mix has not substantially changed over the last three, four years. We've weighted ourselves a little more to earth moving, which carries a lower physical utilization, yet a higher dollar return. It's also really a nice, you know, entry first product on the job. There are other attributes, easier to manage the backside and the fleet complexion when you need to. But if the question is, are we going to be comfortable exiting this year at typical physical utilization levels, and will that dampen our enthusiasm for next year? It will not. We are very enthusiastic as we sit here today and look forward. And if we achieve the numbers we fully expect to achieve for the balance of the year, unless there's a shift, we're going to enter 2024 with momentum and enthusiasm, and our CapEx will match that.

Well, that's what I'm trying to balance. At that level of time use, it would appear, at least base case, if you said historically, if I'm exiting a year where time use is still that high and there's at least a general comfort level with demands at a minimum similar for the next year, is it fair to say you think you can raise CapEx next year and still get a little rate with it? Because that's always the trade-off to some degree, right? A little more... you know, art than science when you're starting a year. But is that a fair way to represent that level of time you and the thoughts on 24 get a little CapEx and a little rate?

Yeah, what I'm not comfortable doing is really talking about CapEx for 2024. What I can tell you is that our fundamentals exist here and that if we have that type of utilization that we expect or better, and we continue to raise rental rates as we're clearly stating we expect to continue to do, then we're going to invest and grow in our rental business. And when we get a narrower window of time, we'll start to talk about CapEx for 2024.

I appreciate that. Thank you so much for the question. Thank you.

Thank you. And, ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Jeff Chastain for any closing remarks.

Okay, well, then we'll conclude today's call, and we appreciate everyone taking the time to join us today and your continued interest in H&E. We look forward to updating you again, and Rocco, we appreciate your assistance today. Good day, everyone.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.