The fourth quarter was a strong one for H&E Equipment Services. The finalization of the sale of its Komatsu earthmoving distribution business in December of 2022 effectively completed its transformation from being a mixed distribution-rental business to a “pure-play” rental business.
“This final step allows for greater revenue stability and margin appreciation throughout the cycle,” said CEO Brad Barber on a conference call with investors. “The transaction resulted in a gain on the sale.”
H&E also significantly advanced the integration of One Source equipment following the closing of its acquisition in October 2022, adding $139 million in fleet at OEC and 10 new branches, six of which placed H&E in the Midwest.
“Other accomplishments include further success with our accelerated branch expansion program following the addition of two new locations in the fourth quarter, bring the total number of new locations added in 2022 to 10,” said Barber. “These branch additions in combination with the acquisition of One Source drove an 18-percent year-over=year increase in our branch count, extending our operational scale.”
Also, H&E continued to invest in its rental fleet with a gross investment of $128.3 million in the quarter, resulting in record gross expenditures for the year of $507.8 million. “Our OEC concluded the quarter at a record level of just under $2.4 billion of 26.8-percent greater than the fourth quarter of 2021,” Barber said.
H&E posted a 34.6-percent year-over-year increase in rental revenue to $245 million, Barber noted. The outcome, which was a new record for the rental business led to a gross margin in the quarter of 53.1 percent or 140 basis points ahead of the year-ago quarter.
Rental rate boom in ‘22
“Rental rates in the quarter, which exclude One Source, remained impressive, improving 10.6 percent when compared to the fourth quarter of ’21 and 1.8 percent on a sequential quarterly basis,” Barber said. “Our average rental rate appreciation for the full year of ’22 was equally impressive, finishing the year 9.3 percent better than 2021. “Each measure remained among the best in our industry. Our Smart Rate pricing platform, which is now used across all 10 One Source branch locations is expected to capture valuable synergies in future periods, due to the application of a dynamic pricing methodology as well as improved equipment mix in each location.”
Barber said despite diverging opinions on the macro economy in 2023, H&E is strongly optimistic. “Customer feedback regarding non-residential and industrial project backlog continues to indicate a robust scope of work in 2023, which is expected to drive healthy fleet utilization over the year,” he noted. “The encouraging customer feedback is reinforced by projections of future non-residential building activity as measured by the Dodge Momentum Index, the construction backlog indicator reported by the Associated Builders and Contractors and AIA’s Architectural Building Index. Although recent results from each of these indicators has declined from historic high readings, they continue to reflect robust non-residential construction project backlogs and active planning agendas, which is likely to bode well for 2023 and beyond.”
Barber said H&E expects equipment demand in 2023 to be supplemented by an increase in federal spending addressing U.S. infrastructure, manufacturing capabilities and renewable energy. “Many of these projects will require extended periods of time to complete,” Barber said. “Finally, growth in rental penetration should drive new demand for equipment as the combination of unfavorable fiscal conditions, including rising interest rates and lingering delays in equipment deliverability tend to encourage a shift by certain customers away from ownership of equipment.”
Barber referenced a recent report from the American Rental Association that said rental penetratipon improved 150 basis points in 2022 to 53.8 percent. “We believe further rental penetration is likely,” he said. “We expect these multiple catalysts for increased rental demand to result in the continuation of healthy equipment utilization and to contribute to an attractive pricing environment characterized by modest sequential quarterly rate improvement. Non-residential and industrial construction projects accounted for 75 percent of our total revenues in 2022.”
Barber said the fundamentally strong industry will continue to create attractive opportunities for expansion. “We plan to add no fewer than 10 locations in 2023 and as many as 15 with the escalation indicative of our expansion team’s continued success in identifying locations with impactful opportunities for growth,” he added. “Also we are targeting a gross fleet investment of $500 million to $550 million in 2023 as we continue to support existing stores in the new branch locations with both a young fleet and a diversified mix of equipment.”
Barber added that the inability of some manufacturers to meet their commitments kept fleet expenditures somewhat restrained in 2022, but he expects OEMs to be able to increase production volumes in 2023. He added that attractive acquisition opportunities continue to appear in the rental industry and “an evaluation of suitable targets remains an ongoing part of our comprehensive plan for growth in 2023.”
For a full view of H&E Equipment Services’ fourth quarter and full year 2022 results, go to:https://www.rermag.com/home/article/21260610/he-equipment-services-grows-equipment-rental-revenue-353-percent-in-fourth-quarter