H&E Equipment Services, Inc.

Good morning and welcome to the H&E Equipment Services second quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. 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 this event is being recorded. I would now like to turn the conference over to Mr. Jeff Chastain, Vice President of Investor Relations. Please go ahead.

Thank you, Operator, and good morning. Welcome to everyone on today's call to review our second quarter 2024 financial performance. A press release following our results for the quarter was issued earlier today and can be found along with all supporting statements and schedules on the H&E website, that's www.he-equipment.com. A slide presentation will accompany today's discussion and is also posted on our website under the Investor Relations tab in Events and Presentations. On slide two, you'll see joining me on today's call is 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 review, but before I turn the call over to him, please 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 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 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 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. With the initial details of our call complete, I'll now turn the call over to Brad Barber, Chief Executive Officer of H&E Equipment.

Thank you, Jeff. Good morning. Welcome to our review of second quarter 2024 financial results. As always, we appreciate your continued interest in H&E. Proceed to slide four. The further expansion of our branch network was a highlight in the second quarter as we demonstrated significant year-over-year growth in our branch count and increased our U.S. penetration to 31 states. The expansion served as an important catalyst for growth in the quarter. helping to offset a more challenging business environment as lower non-residential spending led to declines in key fundamentals. We experienced growth across most financial measures, but at a decreased rate of improvement compared to the second quarter of 2023. I'll expand my comments on key financial metrics and offer some observations on the performance of our rental business. Also, an update on the industry developments and opportunities is in order, given the transitory state of construction markets. I will close with a quick review of our progress to date on our expansion objectives and what lies ahead as we continue to demonstrate one of the industry's most successful growth profiles. Lastly, we'll follow with a more detailed review of our second quarter financial performance, and then we'll be happy to address any questions. Slide six, please. Second quarter results were generally mixed. Of note, total revenues increased 4.5%, with the improvement partially offset by an 11.9% decline in the sale of rental equipment. Margin on the sale of our rental equipment in the quarter remained near record levels. Total equipment rental revenues increased 7.2%, reflecting a modest rise in rental rates, with a more impactful support from expansion initiatives, which I'll discuss in greater detail in a moment. On a trailing 12-month basis, our equipment rental revenues improved 14.6% compared to the trailing 12 months ending June 30, 2023. Margins for both the second quarter and trailing 12 months were slightly lower. Finally, our fleet size, as measured by original equipment costs, increased 10.7%, representing the lowest reported year-over-year growth since the fourth quarter of 2021, a two-and-a-half-year period when we expanded our fleet by more than 55%. Slide 7, please. Turning to highlights from our rental operations, revenues in the second quarter improved 6.5% compared to the year-ago quarter, with margins of 51% compared to 51.8% over the same period of comparison. On a trailing 12-month basis ending June 30, 2024, rental revenues were 14.4% higher. The growth in revenues demonstrated the significant expansion of our branch network and continued gains from rental rates. Since the close of the second quarter in 2023, we opened 15 new locations through our accelerated new location program, including seven openings through the first six months of 2024. An eighth location was opened following the close of the second quarter. Also, since November 2023, eight additional branches were added, resulting from three separate acquisitions. Our focus on expansion is an ongoing multi-year effort positioning our company in attractive geographic regions with excellent opportunity for long-term growth. Rental rates in the quarter improved 1.9% compared to the year-ago quarter, with a decline of 0.1% on a sequential quarterly basis. Although year-over-year comparisons are becoming increasingly difficult, rate appreciation over the preceding 24 months ending June 30, 2024 was 7.1%. Physical fleet utilization in the second quarter averaged 66.4%, a decline of 290 basis points compared to the year-ago quarter. The decline largely related to a reduction in small and medium-sized construction projects and a slower pace of new project starts. The second quarter measure represents a 280 basis point improvement from physical utilization recorded in the first quarter of 2024. Finally, dollar utilization in the second quarter was 38.6% compared to 40.6% in the second quarter of 2023, with the lower outcome due largely to a decline in physical utilization. Next, I want to address our view of current industry conditions and growing opportunities as we navigate the second half of 2024. Slide eight, please. We maintain our view of a more moderate pace for construction spending and projected starts. The shift in the business cycle, which we addressed during our last quarterly update, is indicative of an industry that is transitioning to a more normalized business environment compared to the years of 2022 and 2023. Recall, during those years, we observed a period of exceptionally strong growth in construction spending resulting in elevated industry fundamentals. The sharp acceleration in spending occurred during a period of extremely tight equipment availability, aggravated by material disruption in supply chains. In 2024, supply chains have recovered, leading to an ample supply of most equipment lines, while persistently elevated interest rates and more stringent lending standards continue to have an adverse effect on project activity, especially smaller projects, which are a component of local project opportunities. Despite this industry backdrop, we are encouraged by the continued expansion of megaproject activity across numerous locations in the U.S., representing a source of protracted demand for our equipment. Our participation in these multi-year projects continues to grow as our branch expansion efforts lead to increased density and scale. According to Dodd Construction Network, in fact, 342 projects with a projected value of $400 million or greater are planned or in progress in our 31-state branch network. Approximately 68% of these projects fall within our Gulf Coast, Southeast, and Mid-Atlantic regions, which together represent 65% of our current branch count. Megaprojects are a meaningful growth opportunity for H&E and our industry, and given their size and long duration, they provide a more stable base of demand in support of key fundamentals. key industry fundamentals. In addition to growth in megaprojects, further support is expected from infrastructure spending, with increased funding expected to lead greater project activity. With project expansion expected from both of these major sources of spending, you can see why the latest forecast of 2024 construction spending from Dodge Construction Data concludes an increased level of spending compared to the year-ago levels. Also, the DMI, which is Dodge's measure, of the value of non-residential projects going into planning has been flat or increased for the first six months of 2024, an encouraging indication for growth in project activity for 2025 and beyond. We are confident in the prospects for our industry and therefore remain committed to our growth objectives. Slide 9, please. We continued to successfully execute our growth strategy with near-record achievement in the second quarter. We opened six branch locations during the quarter, which followed a single branch opening in the first quarter, enhancing our presence in the Southeast, Gulf Coast, and Mid-Atlantic regions of the U.S. These areas represent attractive geographies with increased construction activity and excellent long-term potential. Also, the completion of our latest acquisition in May 2024 resulted in the addition of four branches in northern and central Montana, increasing our presence in the state to six locations while improving our exposure to a diverse set of project opportunities. We concluded the second quarter of 2024 with 149 branches across 31 states, representing a growth of approximately 45% in the last 36 months, ending June 30th, 2024. Our targeted goal of 12 to 15 new branch openings, excluding acquired branches, is well within reach as we move into the second half of the year. Since the close of the second quarter, we announced the opening of a location in Idaho Falls, Idaho, adding to our presence in the Internet Mountain region and increasing our total number of new locations year-to-date to eight. Our 2024 growth fleet expenditures, which we revised last quarter, remain in a range of $350 million to $400 million, as we leverage our record 2023 expenditures and our young fleet age to meet prevailing market demand. In closing, H&E has made tremendous strides over the last three years, growing our presence across the U.S. while establishing a solid record of achievement in supporting improving financial performance and value creation. We are a pure play rental company that has achieved an industry-leading 45% increase in branch growth since mid-2021, establishing a growing geographic presence in established and emerging regions of opportunity. With this expanded presence comes improving access to the rising megaproject activity, encompassing data centers, solar farm installations, advanced manufacturing projects, and LNG export facilities, to name a few. Our young fleet age and outstanding mix of equipment are important attributes of our company, as is our strong execution at the operating level. including advanced IT systems that cover the rental lifecycle while facilitating the needs of our customers. Expanding these other elements of our operating profile remains a core focus of our management as we position H&E to succeed in today's business environment, as well as for the next leg of the construction cycle. Now on to slide 10, and I'm going to turn the call over to Leslie, who will discuss our second quarter financial performance in greater detail. Leslie. Leslie.

Thank you, Brad. Good morning and welcome, everyone. I'll begin this morning with slide 11 and a review of second quarter revenues, gross profit, and profit margins. Revenues in the second quarter totaled $376.3 million, an improvement of $16.1 million, or 4.5%, compared to the second quarter of 2023. The growth was substantially due to higher rental revenues and sales of new equipment. Rental revenues grew $16.8 million or 6.5% to $275.5 million compared to $258.7 million in the year-ago quarter. Further expansion of our branch network was one of the several factors contributing to the improved outcome. Since the close of the second quarter of 2023, our branch count increased 18.3% or 23 locations with 15 of the locations a product of our warm start strategy and eight other locations resulting from the closing of three acquisitions. Also, our fleet original equipment cost, or OEC, increased $279 million, or 10.7%, over the same period of comparison, concluding the second quarter of 2024 at approximately $2.9 billion. Finally, rental rates in the quarter were 1.9% better than the year-ago quarter, while declining 0.1% on a sequential quarterly basis. Partially offsetting revenues in the quarter was lower physical utilization, which averaged 66.4%, or 290 basis points below the year-ago outcome. On a sequential quarterly basis, average physical utilization improved 280 basis points. Revenues from the sale of new equipment increased 20.5% to 10.7 million following a pickup in the sales of aerial work platforms and material handling equipment. Sales of rental equipment declined 11.9% compared to the year-ago quarter to 34.9 million. The result, which was 27% lower on a sequential quarterly basis, reflects an alignment of our fleet management strategy with prevailing industry fundamentals. The average age of equipment sold in a quarter was an estimated 71 months. Gross profit in the second quarter totaled $171.3 million, up 1.7% from the second quarter in 2023. The gross margin of 45.5% was 120 basis points below the year-ago result, as lower margins on rentals and an unfavorable revenue mix were partially offset by higher margins on sales of rental equipment. In the second quarter of 2024, total equipment rental margins were 45.5% compared to 46.7% with rental margins of 51% compared to 51.8%. Finally, margins on sales of rental equipment remained elevated at 62.4% compared to 59.1%. while margins on sales of new equipment improved to 16.9% compared to 14.9%. Slide 12, please. Income from operations of $62.8 million was $6.7 million lower in the second quarter compared to the same quarter of 2023. A 9.7% decrease resulted in a margin of 16.7% of revenues in the second quarter compared to 19.3% in the year-ago quarter, with the lower margin due primarily to higher SG&A expense, lower rental margins, and an unfavorable revenue mix. The decline was partially offset by higher gross margins on sales of rental equipment. Proceed to slide 13, please. Net income in the second quarter was 33.3 million, or 91 cents per deleted share, compared to net income of $41.2 million, or $1.14 per diluted share in the second quarter of 2023. Our effective income tax rate in the second quarter was 27.8% compared to 26.3% for the same quarter in 2023. Proceed to slide 14, please. Adjusted EBITDA in the second quarter increased 2.8%, 173.2 million, compared to 168.6 million in the year-ago quarter. Our adjusted EBITDA margin in the second quarter was 46%, compared to 46.8% in the year-ago quarter. Higher SG&A expenses were partially offset by an increase in gain on sales of PP&E and exceptionally high margins on sale of rental equipment. Next slide 15 please. SG&A expense in the second quarter totaled $111.8 million or 12.7% greater than $99.3 million in the year-ago quarter. The increase was largely due to our steady growth initiatives with 23 branches open since the close of the second quarter of 2023 contributing to increased employee salaries, wages, payroll taxes and other benefits and higher depreciation and amortization expense. Also, higher expenses relating to facilities, liability insurance, and professional fees contributed to the year-over-year increase. SG&A in the second quarter was 29.7% of revenues compared to 27.6% in the second quarter of 2023 and included $10.8 million of costs associated with our branch expansion and acquisition activities. Slide 16, please. Gross rental fleet capital expenditures in the second quarter totaled $122.1 million, with net rental fleet capital expenditures of $87.2 million. For the six months ended June 30, 2024, these figures were $196.5 million and $113.8 million, respectively. In addition, gross PP&E capital expenditures in the second quarter were $37.9 million, or 34.1 million net of sales of PP&E. And for the six months ended June 30th, 2024, gross PP&E capital expenditures totaled 77.1 million with net PP&E capital expenditures of 71.5 million. Free cash flow used was 82 million compared to free cash flow used of 134 million over the same period of comparison. and excluding acquisitions adjusted free cash flow for the six months ended June 30th, 2024 was 75.7 million. Slide 17 please. Based on our original equipment cost, our fleet size on June 30th, 2024 was approximately 2.9 billion, an increase of 279 million or 10.7% compared to our OEC on June 30th, 2023 and includes approximately 109 million in fleet acquired. We closed the second quarter with an average fleet age of 40 months compared to an industry average age of 48.1 months. Average dollar utilization in the second quarter of 2024 was 38.6% compared to 40.6% in the year-ago quarter. As Brad previously noted, the decline was due primarily to lower physical utilization. The measure was up 160 basis points on a sequential quarterly basis. Slide 18, please. A review of the balance sheet reveals the continuation of a solid capital position, including net leverage ratio of 2.2 times, which remains well within our target range of two to three times, and no debt maturities before December 2028 on our 1.25 billion of senior unsecured notes in our senior credit facility. Slide 19, please. Finally, we closed the second quarter with liquidity of $459 million, while excess availability under the ABL facility was approximately $1.7 billion compared to $1.8 billion on December 31, 2023. Our minimum availability as defined by the ABL agreement remains $75 million, and with our excess availability of $1.7 billion, we remain free of any covenant concerns. And finally, we paid our regular quarterly dividend of 27.5 cents per share of common stock in the second quarter of 2024. And while dividends are subject to Board approval, it is our intent to continue to pay the dividend. Moving to slide 20, please. And to conclude, I confidently say that H&E is a stronger company in 2024. possessing greater geographic reach, a larger, more diverse fleet, and a solid capital structure, and an experienced management team accustomed to managing a pivot in the business cycle. With these essential attributes in place, we move ahead in 2024, continuing our focus on the expansion of our geographic footprint, establishing increased scale in regions where construction spending and growth trends are exceptional. With 150 branches currently in operation, we intend to grow our participation in the multi-year mega project opportunity, which as Brad noted, has an expanding presence across our 31 state network. Also, our previously announced decision to reduce our 2024 gross fleet expenditures while leveraging both our record spending over the past two years and our young fleet age positions the company for meaningful free cash flow generation in 2024 when adjusted for transactions. When combined with available capital resources, we possess ample liquidity to pursue additional expansion opportunities in an industry with a 10% year-over-year growth expectation in 2024, according to Dodge Construction Network. Operator, we are now ready to begin the Q&A period. Please provide instructions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. 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 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Tim Stein with Raymond James. Please go ahead.

Great. Thank you. Good morning. I guess the first question was just on the rate environment and how do you think about relative to your expectations how things have transpired. Obviously you have responded in terms of based back to the last quarter in terms of, of resetting your, your CapEx, uh, kind of outlook. I'm just curious how, how you've seen the industry as a whole, uh, you know, kind of respond and, and accordingly. So it's basically looking back in terms of how rates perform relative to, to your expectations and, and how you, how you're expecting that, uh, to, to play out as we look through the balance of the year. Um, Again, we'll start again on rental rates. Thanks.

Thank you, Tim, and good morning. Rental rates performed, you know, basically as expected. Our anticipation has been that there was an opportunity for them to continue to very incrementally improve, potentially be flat or slightly down, and, you know, I mean, 0.1% behind 0.02%, excuse me, in Q1 and 0.01%. This quarter, we accept rates where they are. Our utilization was slightly disappointing. We hoped that we would see a little bit more improvement in physical utilization within the quarter than we did. With that as a backdrop, not surprised by rates in the least. On a go-forward basis, as we're continuing to expand our presence on megaprojects on a weekly basis, I expect rates to come under more pressure. Now, I want to be clear, I don't expect any grand rate decreases on a go-forward basis, but I think the likelihood for rates to decrease on a sequential basis going forward absolutely exists, not because we're discounting at all in our local markets for the small and medium-sized work that we continue to participate on, just simply due to the weighting that we're starting to build up with megaprojects. As you know, megaprojects consume vast amounts of equipment for very elongated periods of time. In our view, when we do the calculations, that the yield result is still very positive for H&E. However, that could and is likely to lead to some slight degradation in rates on a sequential basis moving forward.

Got it. Okay. That's helpful. Brad, just on the How should we think about, as you look at the fleet growth of, call it 11%, relative to equipment revenue growth of closer to seven, how should we think about the dynamic of just cycling through higher cost equipment without a corresponding uplift in rental revenue in terms of the inflationary component? Is there a way to size that in terms of what that impact is? And I would expect we'll continue to be ahead when just given the amount of equipment inflation for the past couple of years.

Yeah. As Leslie stated in her prepared comments, what we sold out of the fleet was 71 months old. So there's certainly an incremental inflationary headwind. I don't want to... understated, but that's really minimal in the scheme of what we're facing. As our utilization, look, we've moderated our spending to allow us to come into a better balance with supply and demand and for physical utilization to improve. As I stated, we were a little dissatisfied and I've seen slightly more improvement in physical utilization during the quarter. That being said, that inflationary impact does not cause me any real concern. There's mix-it involved. There's certainly something there, but it's nothing that's going to hurt anyone's modeling. It's a minimal piece of what's occurring in the overall scheme. Okay.

Last quick one, Brad. What analysis, a hard one, and I guess probably the $64,000 question, but this whole dynamic of softness in the local accounts, which you're not alone in flagging, obviously a bit more rate sensitive in parts of that market. Has history shown any kind of relationship? And again, I know each cycle is different and very difficult to answer, but just in terms of if there were, if we were to start to see some cuts to benchmark rates, how those markets have historically responded in terms of a lag to changes in policy rates?

Let me answer it this way. I expect zero decline in small and medium, or let's just call it local work. We're not anticipating any decreases. In some cases, we're still getting incremental increases in certain regions with certain products. The discipline that exists, the data that we all possess, and I'm speaking of H&E and our larger peer group, which substantially dominate these marketplaces. We're all using the same set of data, and I believe we are very focused on assuring that we continue to give good returns on the invested capital. So if we go back to prior cycles, you said it right, each prior cycle has been characterized differently. I don't know that we would even consider COVID, but I think there was an extreme amount of discipline shown in the face of the substantial decline in COVID. And I think there, I have very little, I have basically no concern at this point that small and medium-sized work or small and medium-sized customers are going to start to enjoy any type of decline in rental rates. I think our rental rate output will be a product of how much product we put on mega projects on a go-forward basis.

Got it. Thank you for the time.

Yeah, thank you for your question.

The next question comes from Sharif El Sabahi with Bank of America. Please go ahead. Hi, good morning.

Thanks for taking my question. Just to begin, both you and a large peer have noted that 2024 is a transition type of year to more normalized growth. Do you expect 2025 to see another leg up in growth, or do you expect this to be the new normal type of growth rate for the medium term?

Sharif, it's really early to try to make that type of prediction. I'll tell you, we're fairly optimistic around here and believe that there's a lot of work to be done. The small and medium work that has been impacted by these higher for longer interest rates, I think that could pivot relatively quickly. So I think it's going to depend on when we see interest rates actually start to decline. Within that, I think, would be the answer to the outlook. I don't envision a 2025 declining from 2024 levels. And I think there's an opportunity that things could get substantially better if interest rates were to decline sooner and maybe more rapidly than our current view tells us. So it's to be seen. But we don't feel bad about 2025. I'm just not sure how bullish we are on 2025 just yet.

Understood. Just given some of your language around megaprojects, it seems like you're still seeing very good uptake on those types of projects. Just for the remainder of the year, what kind of incremental flow-through do you expect to see on EBITDA?

Leslie, can you help Sharif with the flow-through?

Sure. A lot of the drivers we've talked about here this morning, but we do expect some pressure on EBITDA flow-through margins. in the back half of 2024. And again, those themes are driven by moderating year-over-year rate increases, which we've talked about, continued expectations of lower year-over-year physical utilization. And then one thing to note is we also expect lower year-over-year fleet sales in the back half. And we spoke to that earlier in the year, and we haven't seen that play out in a big way, and we expect that to increase to a larger degree in the back half of the year. And then also, you know, we're going to have higher costs driven by our focus on our new store openings.

Thank you. The next question comes from Stanley Elliott with Stiefel. Please go ahead.

Hey, good morning, everybody. Thank you for the question. Brad, you talked a little bit on the utilization side. I was curious maybe, you know, how did that track through the quarter? And I guess I was trying to get a sense for, you know, if some of that disappointment was from weather impacting, you know, the availability of the equipment out in the market or, you know, if that really was kind of more of what we're seeing, which is some of the smaller local contractors softening a touch.

Yes, Stanley. This is John. I'll take that. And look, I don't think we're going to point to weather as a material impact to utilization. Really what we're seeing is fewer small and mid-sized jobs coming out of the ground. And as we continue to see a ramp up with the large megaprojects, our participation, we're very pleased with our participation rate on these large jobs. And we're seeing continued fleet on a weekly basis. more and more fleet are going out each and every week. But really what we saw was more of a decline in the small to mid-sized jobs, which had that impact on utilization.

And with the scale that you guys have kind of built over the past several years, unless you kind of mentioned it on the free cash flow side, how should investors think about H&E's ability to generate stronger free cash flow through the cycle?

Yes. Well, you know, through the cycle, a great question. Obviously, this year, we're going to generate nice, very healthy free cash flow at the growth. As you know, we've continued to pay our dividend and are going to continue paying our dividend. Our focus on these 12 to 15 new locations is ironclad. Unless we were to see a real, not a transition, but a real disruption, we're going to continue to open those up. And as you know, we continue to peck away at tuck-in acquisitions. So we've only been able to perfect four of those since 2021, but three of them more recently. So we're still actively pursuing those. All of that mashed together with our traditional spending makes it a challenge for us to be free cash flow positive on an annual basis. That being said, we will be approaching a scale in our modeling that probably in the four- to five-year range with the type of growth profile that we have illustrated over the last few years that we'll be generating free cash flow. So, you know, in the short run, when we're opportunistic and the markets are heating up and growing, we're going to grow with them. But, you know, this year we're certainly going to produce free cash flow, so we'll have some puts and takes depending on the given year for the next few years, and we should settle into a nice rhythm that allows us to be free cash flow positive throughout the cycle.

And with kind of the larger megaprojects out there, your ability to add scale, not only service those projects, but probably cuts down on your delivery costs just from the ability to share. It would seem like that with that megaproject dynamic still looking to accelerate, that we should continue to think about you all remaining pretty focused on the growth platforms that you guys are putting out there.

That's right. we're just going to be disciplined and measured about doing so, and I think that's reflected in our CapEx reduction this year. We're always going to focus on returns, and we're going to focus on the bottom line profitability while we balance that against growth opportunity, but we have substantial growth opportunity in front of us with our 150 location, 31 state geography.

Perfect, guys. Thanks so much, and best of luck.

Thank you, Stanley.

The next question comes from Steven Ramsey with Thompson Research Group. Please go ahead.

Hi, good morning. I'm curious for you guys, or if you're seeing it, competitors, the movement of fleet around the network to optimize your positioning to capture activity in good markets and maybe reduce exposure to slower markets. I know that's normal course of business, but maybe how does it compare year to date versus those normal times?

Steven, this is John. There's nothing terribly different this year compared to any previous years. Moving fleet from low demand areas to those with higher demand is just basic fleet management. We do that every year. What I can tell you is we have moved a considerable amount of fleet around in the first half of the year from some areas that are a little bit softer to capitalize on this mega project opportunity. Again, nothing really unique there from what we've done on any other given year.

Steven, let me add, and Leslie mentioned in her comment we're talking about flow through. We are absolutely going to throttle down on fleet sales, just thinking about fleet management. Fleet sales in the back half of the year will see a nice decrease compared to the front half of the year that we've just completed. And that's a part of that product of fleet management. In a nutshell, we have got the fleet allocated where we want it, and what we have left coming is going to go very strategically to the locations who are performing at the highest level and ensure that we continue to participate and get exposure to these megaproject opportunities.

Okay, that's helpful. And then thinking about megaprojects, clearly H&E, more gen rent-focused, some larger public peers involved, have a larger base of specialty gear. Do you feel like you're capturing all of the opportunity on these mega projects that you could, or do you feel like your business serving these types of projects gives you a right to win with specialty equipment and maybe spurs you to invest more in that type of fleet?

Look, I don't know that we've ever run across a project where we've gotten enough that we didn't want more. And your question is very fair, and that is could we provide more if we had more. For us, specialty still continues to fit in the nice to have and not need to have. We have a small element of specialty. We're growing it organically. At the level it's at currently, it's not really worth speaking about on calls. but we will continue to grow it over a period of time. We view that as future or pent-up opportunity. That being stated, there's general rental product on every single megaproject in every single geography we serve, and within that lies a lot of opportunity for H&E to continue to expand our exposure.

Okay, that's helpful. Thank you.

Thank you, Steve. The next question comes from Avi Yaroslavich with UBS. Please go ahead.

Hey, good morning, guys. So just a quick question here on your CapEx. I know you held the guide this quarter, but how are you thinking about CapEx for the rest of the year? And have your plans changed at all between same-store spending versus new branches? As in, have you shifted any of the spend that you're planning on from the same stores to new locations? And also, how confident are you that we – won't need to cut CapEx here further this year.

Yeah, Avi, thank you for the question. You know, we've got a similar case. We may be a little front end loaded on CapEx, but we're going to have a very traditional cadence regarding our CapEx to the question of are we moving from same store to New location, that's not, we view these all in separate channels of spending and we plan associated. So we're not taking from one to give to the other. As Leslie said, our access to capital, our cost to capital, we are not worried about capital constraints. We're purely focused on performance and returns. So that being stated, that's not an issue for us. Going forward, how comfortable are we with our CapEx guidance? Listen, we are going to be disciplined. Currently, we're comfortable with the reduced $350 million to $400 million. If we see a reason to decrease, we would do so. I just don't feel like that's going to be an issue for us. If someone were to say, what are the chances you go above your high end of your guidance, I'm going to tell you that's not going to happen this year. We're focused on being disciplined. We're in a seasonal business. Q3 is always the peak of the seasonality. I suspect it will be again next here in 2024, and we're comfortable with the guidance we've put forth.

Okay, that makes sense. And then just getting back into utilization for a second here. So last quarter, you noted that time utilization was just north of 70% start of Q2, I believe. So it seems like there was a big deceleration in May and June. I know warm starts are a headwind, but I think you added the same amount in Q2 last year. So can you just talk to us about what you saw with the utilization trend in Q2 throughout the quarter? Was it lower utilization across the board, or were certain verticals or regions having an outsized impact there?

I'm going to let John add some context, but the quote we made at the time is our utilization was just approaching or a touch 67%. The simple answer is it's remained in a very similar profile since that point in time. We've had some incremental growth in fleet. John, do you want to talk about any puts or takes geographic? I mean, I know it's fairly consistent.

Yeah, it's fairly consistent. I mean, obviously we've had, you know, some areas have had a little more of a struggle than others. But generally speaking, it's been fairly consistent. I mean, we've seen incremental improvement Obviously, since that Q2 average of 66.4%, we're north of 67% today. When you look at Q2 of last year, it's 69.3%. Our third quarter average was 70%, so up about 70 basis points quarter over quarter. As we sit here this year, we would expect to see at least that same type of a bump on an average for Q3. And, of course, as we get into the fourth quarter, seasonality sets in. That one's a little more challenging to speak about today, but I suspect we'll have an update on our next call.

I think you probably caught in our prepared comments and the press release, but we're down 290 basis points year over year, but up 280 basis points over Q1. So as candidly as we have stated it, we would like to be up a little more. We were hoping for a little more. But we understand the environment we're in. We're encouraged by our go-forward opportunities, and we've adjusted our capital spending accordingly to these metrics.

Yep, no, appreciate that, and appreciate the correction there. That's my bad. I'll turn it over. Thank you.

Thank you. The next question comes from Alex Reigel with B Reilly. Please go ahead.

Thank you, and good morning, gentlemen. Could you help us to understand what percentage of your fleet is targeted to megaprojects today and or kind of what percentage of revenue is tied to megaprojects today?

Alec, partly I wish I could. I mean, obviously we know, we measure the amount of OEC that's on megaprojects, the amount of OEC that we add on a weekly basis. And I'll tell you, While I can't provide you a number, we're not going to start providing guidance. We are very happy with the cadence of what we're seeing in the marketplace, and it's a meaningful amount that we're adding on a weekly basis. So it's a nice piece of our business. It'll continue to be a growing piece of our business, and I do not anticipate a quarter where we're not making nice gains of deploying more of our OEC to mega projects than we had the preceding quarter.

And maybe if you can't quantify it exactly, but you've talked a lot about sort of the pipeline or backlog of megaprojects sort of growing. Is there a way to think about kind of what that growth rate has looked like maybe in this current quarter or over the last, you know, 12 months or so? Is it up sort of 20% or is it up 100%? How might you kind of bracket that growth in backlog from megaprojects?

Yeah, I don't have a percent, but I can tell you year over year it's up substantially. It's up substantially, and I think that in a year from now I'll be able to make the same comments about this year. These projects are certainly not just emerging. They've been emerging. They're advancing, and more new projects are being announced and breaking ground almost on a daily basis. So it's a substantial improvement in the last 12 months, and my anticipation is that in 12 months from now I'll be able to say the same thing again about 2025 as compared to 2024.

That's great. Thank you very much. Thank you. The next question comes from Sean Wondrak with Deutsche Bank. Please go ahead.

Hi there. Thank you for taking my question. Sorry, I don't mean to beat a dead horse, but just a couple more on the megaproject. Are there certain gating factors that are preventing some of these smaller firms such as breadth of equipment or national presence or your proprietary tech. Could you just comment on that, please?

Yeah. Well, there certainly can be. You know, look, it's important with mega projects. I think people confuse this sometimes. I've had an individual investor ask me, you know, without a meaningful specialty, you're really disadvantaged. And that's certainly true. holistically not true. It's not the case. There are certain contractors on mega projects who use specialty products. And in those cases, H&E would be disadvantaged. I can't supply someone power generation or trench or HVAC maybe on a particular job. However, there are various trade types who don't ever use those types of products. They only use the general rental, the aerial work platforms, the telehandlers, earth moving products, air compressors, things of that nature. And we're not disadvantaged. Now, your question is, how do you become disadvantaged outside of that? Technology would be number one. I mean, our technology is second to no one. Again, I believe many times it's misunderstood because at our size and scale, folks may just assume that we don't have advanced technology, but in fact we do. Our customers pay their bill online. They requisition equipment online. They manage their account. They're reporting their telematic data. The list goes on and on and on. So we're at disadvantage and no respect. If you don't have telematic data, if you do not have a portal, if you don't have an ability for your customers to consolidate their billing, pay it online, to view and manage their account more broadly, you're absolutely going to get excluded. So, you know, it's probably the topic. five, six companies by volume in the U.S. who are participating. If you drive on these projects, that's what you're going to see, and you're not going to see smaller participants.

Right. That's very helpful, and it kind of leads into my follow-up. When you just think about the top five or six players sort of doubling their share over the last 10 years and a lack of access to these megaprojects, does this create opportunities to acquire some of these mom-and-pops that maybe weren't going to sell themselves earlier but don't have access to this market demand here?

The answer is yes. We have actually purchased companies that two or three years ago said they may never sell their business, and their realities change. The cost of technology is just a hurdle they can't handle. I mean, for a number of years, the cost of capital, the access to equipment, the price that they pay compared to to H&E or larger competitors. It's just an extreme disadvantage for them. And many more companies have come to the realization that they're either going out of business slowly or that they're going to have to sell their business. And yes, we have seen those opportunities.

Great. I appreciate that. If I could squeeze in one more, just on the infrastructure side, and I'm not sure if you have an answer to this, but Do you have an idea of maybe what inning we're in relative to the infrastructure spend? I mean, the funds came in a few years ago. There was sort of a slow rollout the past couple of years. It seems to be accelerating a little bit. It's difficult to tell kind of from where we're sitting.

Yeah, I'll take that question. Look, I think we're in the early innings. You know, while we have seen funds released, and look, these projects are breaking ground every day. I mean, from looking at the road work, bridges, airports, seaports, I mean, you name it. The infrastructure work is really starting to pick up steam, and we see this as a multi-year opportunity. So, you know, short answer is early innings.

That's great. Thank you for answering my question. Appreciate it. Thank you, Sean.

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

Thank you, Operator. Before we conclude today's call, I want to reiterate a couple things, not the least of which is our strategic commitment to growth and our strong track record of success. As we stated earlier, H&E has established one of the most attractive growth profiles in the industry, led by our highly successful Accelerate New Location programs. By the end of this year, I expect H&E will be nearing 50 or more new location openings since we implemented this strategy in 2021. Over the same period of time, we've completed four tuck-in acquisitions, adding 16 additional locations. And while we've been focused on achieving the significant growth in locations, we also have been pleased with our same-store growth and margin improvement. Our shift away from distribution to pure play rental focus has proven to be a winning strategy. providing us with greater durability in our revenues and associated margins. We remain fully committed to our Accelerate New Location strategy with an expectation of 12 to 15 branch additions per year as we continue to pursue additional tuck-in acquisitions that meet our criteria. We possess both the people and the capital necessary to support our ongoing growth plans, and we look forward to updating you on our future achievements. With this, we'll conclude today's call. And we appreciate your continued interest in H&E Equipment Services and look forward to speaking to you again soon. Thank you.

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