H&E Equipment Services, Inc.

Good morning and welcome to the H&E Equipment Services Third Quarter 2023 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Jeff Testain, Vice President of Investor Relations. Please go ahead, sir.

Good morning and welcome. Thank you for your participation and ongoing interest in H&E. Earlier today, we issued a press release providing a review of our financial performance for the third quarter of 2023. The release can be found along with all supporting statements and schedules on the H&E website, www.he-equipment.com. A slide presentation will accompany today's discussion and can be found on our website under the Investor Relations tab in Events and Presentations. Joining me today, as you'll see on slide two, 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'll ask you to proceed to slide three as I 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 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 risk 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 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. 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 third quarter 2023 financial review. We appreciate your participation on today's call. Please proceed to slide four. Our financial performance in the third quarter continued a series of impressive results with record levels achieved across numerous metrics. I'll begin this morning covering our progress on key financial measures, followed by a more detailed review of our rental performance. I'll follow with my current thoughts on the equipment rental industry and how sturdy industry fundamentals and the emergence of certain compelling dynamics bode well for future demand. As a final point, I'll review our progress towards our growth initiatives and how our focused execution has positioned us to meet or exceed our strategic targets for 2023. Slide six, please. Our third quarter financial performance was supported by resilient industry fundamentals, including healthy physical fleet utilization and continued rental rate appreciation. The contribution from these factors was magnified by the steady growth of our operations as demonstrated by our significant increase in fleet size and branch expansion. Together, these attributes lay the foundation for another quarter of outstanding financial performance, as noted in our key financial metrics. Similar to previous quarters, most of these key financial metrics displayed strong year-over-year improvement. For example, total revenues and total equipment rental revenues improved 23.6% and 24.5% respectively compared to the year-ago results, while adjusted EBITDA improved 36.2% over the same period of comparison. Our adjusted EBITDA margin in the quarter rose to 47.2%. Each of these four metrics mentioned established a new record level of performance in the quarter. Total revenues were supplemented by used equipment sales, which increased more than two and a half times in the quarter compared to the third quarter of 2022. The increase was due to our resuming typical fleet management practices, which were disrupted in 2022 by equipment shortages, leading to extremely tight equipment availability. With the challenges slowly unwinding in 2023, we have returned to our traditional approach to the fundamental management of our rental fleet, which includes the sale of our older assets. It is worth noting that in the third quarter, we sold units with an average age of 75 months compared to 63 months in the year-ago quarter. Our used equipment sales in the quarter realized margins of 58.5% or 480 basis points higher than the year-ago period. Also, strong execution of strategic growth objectives once again played a significant role in our financial achievement within the quarter. Our fleet size, as measured by original equipment cost or OEC, grew 27.6% compared to the year-ago quarter to just over $2.7 billion. A portion of this fleet growth was used to supply equipment to our new branch additions as we continued our accelerated branch expansion program. Since the third quarter of 2022, we added 14 new locations and eight additional locations through acquisition, representing 20% growth. We expect to see further expansion of our new locations in the fourth quarter. I'll have more to say about the success of our growth strategy in a moment, but first I'd like to review our rental performance in greater detail. On to slide seven, please. Rental revenue in the third quarter improved 25% compared to the year-ago quarter. Rental gross margins were 53.3% compared to 55.6% over the same period of comparison. When compared to the second quarter of 2023, rental gross margins improved 150 basis points. As I have noted before, the decline in our year-over-year rental gross margin reflected, in part, the impact of purchase price accounting following the October 2022 acquisition of OneSource. A robust non-residential construction environment continued to support rental rate and fleet utilization in the third quarter. Rental rates improved 4.9% compared to the third quarter of 2022, while increasing 1.2% on a sequential quarterly basis. Through September 30, 2023, rental rates were 7% better than the same period in 2022. We believe these pricing results remain among the best in the industry. Physical utilization in the third quarter was 70% compared to 73.3% in the third quarter of 2022 when the constrained supply of equipment pushed utilization in the quarter to uncommon levels for the industry. Finally, dollar utilization in the third quarter of 41.5% compared to 42.7% in the prior year quarter with the contribution from higher rental rates offset by lower utilization and a modest burden from our 2023 growth initiatives. However, the measure improved 90 basis points in a sequential basis. I now want to move my discussion to an industry outlook and elaborate on some emerging developments that we believe will sustain industry demand and facilitate a strong business environment into 2024. Slide 8, please. Non-residential construction remains resilient, with emerging project opportunities leading to expansion of backlogs and project visibility well into 2024. Recent data from the U.S. Census Bureau continues to demonstrate healthy year-over-year construction starts and spending trends. Megaprojects, which we define as possessing construction values of $500 million and greater, are expected to provide meaningful support for U.S. construction activities. These projects, which include a variety of industrial and manufacturing construction opportunities, continue to populate our geographic footprint and are characterized by substantial equipment requirements and lengthy project completion schedules. A review of data on megaprojects provided by Dodge Construction Network and PEC indicated projects with collective construction values of approximately $287 billion were have started in 2023, with more than 75% of that project value within our coverage area. More importantly, and as it relates to future project visibility, the data revealed an estimated $580 billion of project value was being bid for project starts in 2023 and 2024, with an estimated 85% of these projects residing in our coverage area. Although this data is subject to change, it clearly implies the massive project opportunity that exists within our area of operations. Additionally, the value proposition of rental compared with equipment ownership is expected to lead to further growth in rental penetration. The measure has increased each of the last two years following the post-COVID setback in 2020 and is likely to experience further growth in 2023. These positive factors are expected to reinforce industry fundamentals and should allow for a continuation of modest rental rate improvement and solid physical utilization levels as we maintain our focus on branch expansion and fleet growth into 2024. Finally, and before I turn the call over to Leslie for her review of the third quarter results, I want to close with an update on our fleet growth and branch expansion objectives. Slide nine, please. During the third quarter, we added greater branch density in the Mid-Atlantic, Southeast, Gulf Coast, and Midwest regions following the addition of five new locations in the quarter and a sixth in October. With 12 branch additions through October 2023, we are comfortable within our stated range of 12 to 15 new locations for the year, and we anticipate more openings during the fourth quarter. H&E is now operating 132 branches in 30 states, including the addition of no fewer than 10 branches in each of the last three years. Also, our gross fleet expenditure in the third quarter contributed to a record investment through the first nine months of 2023 of $595.2 million, resulting in a fleet size as measured by original equipment costs in excess of $2.7 billion. In view of our gross expenditures at the close of the third quarter, we're adjusting our expected range for 2023 Gross fleet investment for the second time in consecutive quarters as customer demand remains elevated and availability of highly utilized equipment continues to improve. Our new gross expenditure range is $650 million to $700 million compared to a previously revised range of $600 million to $650 million. In closing, our strong financial performance and numerous strategic accomplishments in 2023 reinforce our competitive position in the equipment rental industry and places H&E on stable footing for future achievements. Of note, significant branch expansion has led to greater density throughout our geography, while exposing the company to more customers and projects possessing increased business opportunities. Also, the branch growth is supported by our disciplined approach to fleet management and including a record investment in 2023 of more than $595 million to date. Our fleet age of 41.1 months remains among the youngest in the industry. We met or exceeded our stated 2023 strategic objectives with a quarter to spare, which is further evidence of our operational capabilities and exceptional execution. As we turn our attention to 2024, we will again focus on strategic initiatives that continue to demonstrate our commitment to discipline growth and expansion that leads to further achievements in value creation. With this, I'd ask you to proceed to slide 10, and I'm going to turn the call over to Leslie, who will provide a review of our third quarter financial performance. Leslie? Leslie?