H&E Equipment Services Inc

NASDAQ:HEES

Earnings Call Transcript 2022-Q1

[Operator]

Good morning and welcome to H&E Equipment Services. First-quarter 2022, 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.

[Jeff Chastain, Vice President of Investor Relations]

Thank you, Betsy and welcome everyone. We appreciate you joining us today for our review of H&E First quarter 2022 results. A copy of the press release covering our first quarter results was issued this morning and can be found along with all the supporting statements and schedules at the H&E website, and 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 and Events and Presentations.

On Slide 2, you'll see a list of the executive officers participating on today's call they are Brad Barber Chief Executive Officer, John Engquist, President and Chief Operating Officer, and Leslie Magee, Chief Financial Officer and Corporate Secretary. Brad will begin this morning's discussion, but before I turn the call over to him, I've been asked to remind you 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 include the risks described in the risk factors in the company's 2021 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 call.

Also, note 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. Finally. Unless specifically noted, all results and comparisons for today's reported and discussed this morning are presented on a continuing operations basis. With the preliminary details complete, I'll now turn the call over to Brad Barber, Chief Executive Officer of H&E Equipment.

[Bradley Barber, Chief Executive Officer]

Thank you. Jeff. Good morning, and welcome everyone. We appreciate your participation as we review the first quarter 2022 results and you're continued interest in H&E. As illustrated, our first quarter performance 2022 was off to a strong start. We've begun the year with an abundance of opportunities, minimal seasonal impacts, and minimal seasonal impacts from weather. As a result, our first quarter financial results benefited from a healthy blend of strong demand, tight equipment supplies, rising rental rates, and fleet growth.

On top of these impressive underlying fundamentals, we maintained our focus on operational excellence while realizing meaningful progress towards our stated growth initiatives. Proceed to Slide 4, please. I'll start this morning with our first-quarter highlights that provide a glimpse at the excellent financial metrics posted in the quarter. I will then narrow my discussion to our rental segment and identify the key drivers of performance for the quarter. Also, I want to share some thoughts on the equipment rental industry as we consider the outlook for the remainder of 2022.

Finally, I'll review our '22 growth initiatives and the excellent progress achieved during the first quarter. Lastly, will follow with a thorough discussion on first-quarter financial results, including updates on our capital structure and liquidity. Then we will be happy to take your questions. To Slide 6, please. First-quarter highlights showed significant improvement across all of our important measures.

We were encouraged by the continued strength of customer demand in the quarter that commonly experienced is lower activity due to seasonal challenges. As I commented earlier, strong demand coupled with equipment shortages, rising rental rates, and fleet growth gave rise to an outstanding business environment, allowing us to achieve strong financial metrics.

Consider our physical utilization in the first quarter of 74.4%, which was 630 basis points ahead of the year ago quarter and represent the highest first quarter utilization in 3 years when measured on a continuing operations basis. The strong utilization measured combined with ongoing rental rate appreciation and fleet growth were key elements leading to a 30% increase in total equipment rental revenues at 199.2 million total equipment rental revenues were 73% of consolidated revenues in the first quarter compared to 64% in the quarter year ago.

The higher rental concentration follows the timely implementation of strategic steps taken in 2021 to expand our rental exposure, leading to higher, more sustained revenues and enhanced margins. Adjusted EBITDA increased 34.5% compared to the same quarter in 2021, posted a margin of 38% or an improvement of 600 basis points. Finally, our rental rates, our rental fleet based on original equipment cost or OEC, closed the first quarter of just over $1.9 billion representing growth of 218.8 million or 13% when compared to the year ago quarter and included gross expenditures in the first quarter of '22 up $76 million. Slide 7, please.

Turning to our rental business, revenues in the first quarter totaled $177.2 million or 29.2% better than the same quarter in 2021. We continue to demonstrate strong margin appreciation with a rental gross margin in the first quarter of 49.9% or 720 basis points ahead of the year ago quarter. In addition to strong seasonal utilization and $76 million in gross fleet investment, our rental segment benefited from the positive trajectory of rental rates, which closed the First quarter, 6.5% better than a year ago quarter, and up 1.6% sequentially, with these factors in place, dollar utilization in the first quarter increased to 37.6%, 500 basis point improvement when compared to the same quarter in 2021.

Our impressive start to 2022 is indicative of the operating advantages of tank farm increased rental concentration, and an industry that remains fundamentally robust with regard to the industry. Sound fundamentals are likely to continue as we enter the seasonal strength of equipment rental business cycle sustaining are encouraging outlook for 2022. Slide 8, please.

Several factors suggest the equipment rental industry is likely to experience further improvement. These factors include persistent customer demand, which is expected to support steady fleet utilization into the next two quarters, as we absorb the largest portions of our rental investment. A steady utilization, together with the ongoing equipment supply limitations caused by the OEM supply chain disruption is expected to support an environment that is right for continued sequential quarterly rental rate improvement.

Also, our end-markets are displaying impressive growth, driven by non-residential construction and industrial activity, which accounted for 77% of H&E's revenues in 2021. The likelihood for further expansion in these end market to support it by key industry measurement of future construction activity, including the Architectural Billings Index or ABI, as well as the Dodge Momentum Index, with both registering scores that forecast excellent growth prospects over the next 12 to 18 months. It is worth noting, we have seen no discernable impact from these important markets, such as project delays or cancellations due to inflationary pressures or labor shortages.

Demand from other markets such as oil and gas, have begun to accelerate with the sharp increase of crude prices in several of our branches located in the Gulf Coast states are benefiting. Finally, infrastructure spending is likely to materialize by late '22 or early '23 with the commencement of state projects spending associated with the infrastructure investment and Jobs as is expected to continue for several years. Before I turn the call over to Leslie for a review of our financial performance, I want to provide an update on our progress toward defined 2022 growth initiatives. On to Slide 9, please. With regard to our plan, 2022 gross capital investment in our rental fleet of $550 million to $600 million.

We recorded gross investment in the First quarter of $76 million while we've seen some minor delays with isolated equipment deliveries, we remain confident in achieving our stated investment goal. As is typical for our industry. We're planning to receive the majority of our equipment purchases during the second, third quarters. Slide 10 please. In addition to growing our fleet through significant capital investment, the expansion of our branch network remains an important and effective part of our growth strategy as both initiatives position our company to advantageous address the expanding regional opportunities available in this highly resilient business environment. Following the addition of 10 branches in 2021, all of which are demonstrating strong performance. We concluded the first quarter with 2 new locations as we advance our goal to no fewer than 10 more of Greenfield locations over this year.

These new openings included Fairburn, Georgia, representing H&E sixth location in the state, and Philadelphia, where the company established its first branch in the state of Pennsylvania. The new Philadelphia locations currently, our northern most branch in the east coast and will provide access to a growing base of nonresidential construction and industrial projects in the region. Also, following the close of the first quarter, we expanded our presence in Arkansas to two locations with the opening of a location in El Dorado. With these three additions, H&E has expanded it's network of locations to 105 across 25 states.

And we remain confident in achieving our stated goal for branch openings in 2022. Finally, we are confident that our expansion efforts can be supplemented through acquisition. We continue to -- we continue to evaluate opportunities static that offer access to new geographies as well as further penetration into existing regions. As I complete my comments this morning, I want to reiterate the fundamentally robust nature of the equipment rental industry. Demand for our rental fleet remains strong. Our end markets continue to grow.

The supply of equipment is constrained, Infrastructure projects or an emerging source of demand and rental rates are on a positive trajectory. Within this attractive environment, H&E is operating from an enhanced position with greater rental concentration. A strong equipment mix, a young and growing rental fleet, and expanding branch network that we can further complement through acquisitions. We look forward to what the remainder of this year brings. On to Slide 1 and I'll turn the call now over to Leslie Magee for our financial performance. Leslie.

[Leslie Magee, Chief Financial Officer & Secretary]

Thank you, Brad. And good morning, everyone. I'll begin this morning's financial review on Slide 12, first quarter revenues of $272.5 million improved $32 million. 30.3% when compared to the first quarter of 2021. The combination of higher utilization and rental rates along with fleet grades, were the primary drivers of the improvement. The same 3 factors supported rental revenues, which increased 29.2% to $177.2 million compared to $137.1 million in a year ago quarter.

As describe by Brad earlier, customer demand remain strong to the first quarter with few seasonal distraction resulting in utilization of 74.4%. For 630 basis point better than the first quarter of 2021. Rental rates responded to the strong utilization rising 6.5% as the same period comparison while improving 1.6% on sequential quarterly basis. We benefited from a larger rental fleet OEC growing $218 million or 13% compared to the first quarter of 2021, since the close of 21 OEC increased 41.3 million or 2.2%. Used equipment sales up 21.5 million declined

17.3 million Or 44.6% in the first quarter with lower sales across all product lines. Similar to the fourth quarter of 2021, that decline was largely due to the company's decision to capitalize on high equipment utilization in the quarter. New equipment sales of 26 million experienced a modest increase of 2.9 million or 12.4% led by higher sales of material handling, and other equipment. Our consolidated gross profit in the first quarter of $111.6 million improved $28.2 million.

Our 33.8% when compared to the year-ago quarter, the increase was due mainly to higher margin bond rental and used equipment. The improvement resulted in a gross profit margin of 41% or an increase of 630 basis points when compared to the same quarter in 2021. Gross profit margins by business segment with a comparison to the same quarter in 2021 included total equipment rental margins of 44.9% compared to 38%, while rental margins raised 720 basis points to 49.9% compared to 42.7%.

The equipment margins continued to improve, climbing to 41.7% compared to 32.2% was fleet only margins, which excludes used equipment obtained through trade-in of 45.2% compared to 33.7%. New equipment margins were slightly higher at 14.2% compared to 12%. We finally parts and service margins finished the quarter modestly lower at 27.1% to 65.4% respectively, compared to 28.3% and 67.4% respectively. And the first quarter of '21, Slide 13, please.

Income from operations for the first quarter of 2022 reached $34.7 million or more than double the First quarter of 2021, total of $15.3 million. The first quarter margin improved to 12.7% compared to 6.4% in the year ago quarter, with the increase driven by higher gross margins on rental and used equipment, partially offset by higher SG&A. Proceed to Slide 14, please. Net income was $16.3 million in the first quarter of 2022 or $0.45 per diluted share compared to $1.9 million or $0.05 million per diluted share in the year ago quarter.

The effective income tax rate in the first quarter of 2022 was. 26.3% compared to 26.9% over the same period of comparison. Proceed to Slide 15, please. Adjusted EBITDA in the first quarter of 2022 totaled $103.4 million compared to $76.9 million in the first quarter of 2021. The first quarter result represented an increase of 34.5% compared to a 13.3% improvement in total revenue. The adjusted EBITDA margin for the first quarter rose 600 basis points to 38% compared to 32% in the year-ago quarter with the increase primarily due to favorable revenue mix and higher margins on rental and used equipment, partially offset by higher SG&A expenses.

Next on Slide 16, please. SG&A expenses totaled $78.3 million in the first quarter of 2022, up $10.1 million or 14.9% when compared to the first quarter of '21, the increase was due primarily to employee salaries, wages, incentive compensation related to increased profitability and headcount, favorable taxes, and related employee costs with less significant increases in facility expenses related to our branch expansion and professional fees. SG&A expenses in the first quarter of 2022 were 28.7% of revenues compared to 28.3% a year ago.

Branch expansion costs in the first quarter of '22 were $3.6 million greater than the first quarter of 2021. Slide 17, please. Turning to capital expenditures and cash flow, gross fleet capital expenditures in the first quarter totaled $76 million, including non-cash transfers from inventory. Net rental fleet capital expenditures in the quarter were $56.3 million. Gross PP&E $E capital expenditures for the first quarter were $10.7 million, while net PP&E expenditures were $9 million, our average fleet age as of March 31, 2022 was 41.5 months and compared favorably to the industry average age of 53.7 months.

Free cash flow in the first quarter was $4.8 million. Slide 18, please. On March 31, 2022 to the size of our rental fleet, based on original equipment costs was just over $1.9 billion, an increase of $219.8 million or 30% larger than the close of on March 31, 2021. And our average dollar utilization in the first quarter of 2021 improved to 37.6% compared to 32.6% in the prior year quarter.

And Slide 19, please. With regards to our capital structure, net debt at the close of the first quarter was $898 million compared to $893 million at the close of the fourth quarter of 2021. Net leverage improved to 2.1 times compared to 2.3 times over the same period of comparison. And we have no maturities before 2028 on our $1.25 billion of unsecured notes.

On to Slide 20, our liquidity position remains in excess of 1 billion with a cash balance on March 31, 2022 of $351.8 million in borrowings availability under our amended ABL facility of $740.3 million, excess availability under the ABL facility was approximately $1.1 billion, at the conclusion of the first quarter of 2022, with minimum availability as defined by the agreement of $75 million.

And by definition, that's excess availability is the measurement used to determine if our springing fixed charge covenant is applicable. And with our excess availability of more than a billion dollars, we continue to have no covenant concerns. And finally, we paid our regular quarterly dividend of ¢27.5 per common share of stock in the first quarter of 2022, and while dividends are always subject to board approval, it is our intent to continue to pay the dividend. Slide 21, please.

In summary, we are encouraged by the strong start to 2022 and a firming industry fundamentals that support a healthy business climate. And clearly the key ingredients are in place to maintain a robust business cycle. Moreover, and as Brad noted earlier, AC is approaching this dynamic environment from an enhanced posture and you can see the results of the stronger position in many of our financial metrics as revenue grows margins and operating cash flow respond positively to our increased focus on the equipment rental business.

We continue to advantageously position the company for further improvement. To our stated growth initiatives with excellent progress demonstrated in the first quarter. Furthermore, strong balance sheet and ample liquidity represent material resources in support of further expansion and financial achievement. So it's a good time to be in the equipment rental business and we look forward to updating you on further progress. And with that, we're ready to begin the Q&A session Operator, please provide our instructions Thank you.

[Operator]

[Operator Instructions] pressing the keys. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. The first question today comes from Steven Ramsey with Thompson Research Group. Please go ahead.

[Steven Ramsey, Thompson Research Group]

Hey, good morning. Maybe to start with utilization very high in the seasonally slow period, demand very strong. Do you view this as a sign of the times supply of fleet being tight relative to demand. And going forward, this seems to set up for a very high Q2 and Q3, but will Q3, be a bit lower as fleet comes in. Maybe you could just talk broadly, will traditional seasonality applied a time utilization, but maybe at higher levels.

[Bradley Barber, Chief Executive Officer]

Good morning, Steve and very good question. We were very pleased. We referenced the lack of season, seasonal weather in Q1, but just the most honest responses, it's a very robust market out there. We're continuing to see additional opportunity. We closed the quarter at 70.4%. We have been hovering in the 72% range, a little above 72% to the back part of your question, we have no concerns. We're executing well, we're going to have a nice year here.

But to the extent we may not see 73.5, 74 as we normally would September, October. We're thinking that utilization may start to level in that 72% to 73% range still very healthy. I belief best in class that we expect to deploy a lot of capital as we've talked about our $550 million to $600 million plan that we're still confident in. So the last thing I would want to indicate is that we're worried about utilization. I think we're going to lead on the industry on utilization.

And I think we're going to do so to time what we're going to deploy a lot of capital, but I do not think that, that metrics going to continue to ramp at necessarily ramp at the same pace. The last comment I want to make on that as we certainly expect to see sequential rate improvement while we're deploying this capital and running this 72, 73, maybe slightly ahead at times, best in class utilization.

[Steven Ramsey, Thompson Research Group]

Helpful and that leads into my next question on pricing and easier comp in the First quarter. Going forward on this sequential improvement from Q1 and the comps being a bit more challenging. Can you maybe bulky the range of year-over-year pricing on a year-over-year basis, given the comp factor?

[Bradley Barber, Chief Executive Officer]

Yes. I will let John respond to that, John.

[John Engquist, President and Chief Operating Officer]

Yes. Sure. So look, we fully expect to have sequential rate improvement in every quarter of this year to your point about tougher comps as the year progresses. That is a fact, I mean, when we get to Q3 of 2021, for example, our sequential rates were up 2.6%. As far as an exit rate for 2022, we feel really comfortable about the 5% range could be a little bit better than that, but I'd say we're comfortable with 5%.

[Bradley Barber, Chief Executive Officer]

Yes. I think our view of rates has only improved. We started and we stated on our last call that we were thinking low, mid-single-digits. And John, just stated, now we're thinking more squarely in the middle of the single digits. And could we do better? Maybe, but again, we're going to deploy a lot of capital. But we, you could absolutely expect us to execute on consistent price and improvement each quarter going forward.

[Steven Ramsey, Thompson Research Group]

Great. And a quick follow-on there, do you feel like your pricing is in line with peers in your market? It seems like at least the large companies that have reported pricing is strong, curious id how you feel your pricing aligns with others.

[Bradley Barber, Chief Executive Officer]

I think are price and is right in line with any of the other firms doing high-quality business. We use a lot of information that's supported by Rouse, not just anecdotal feedback, and we're very comfortable that our pricing is well aligned. And I would comment that the amount of discipline we continue to see, particularly among most of our larger public peers, is very encouraging. I think this is a disciplined environment and we are all looking to pass on any potential cost increases to the end-user. And I suspect that's going to happen across the board.

[Steven Ramsey, Thompson Research Group]

Okay. Helpful. And then last quick one for me, your EBITDA coverage of interest expense has increased meaningfully from strong levels already in 2021, and in the trailing 12 months. And with positive expectations for '22 in likely 2023. Is there an openness to taking on more debt for capital returns or special dividends?

[Bradley Barber, Chief Executive Officer]

That's not something we would be interested in doing at this point. We want to stay discipline. We want to use our available debt for growth. One area we've been a little disappointed at ourselves internally has been on the acquisition front. Some of these -- the pricing has been a little higher than we were willing to participate in. Clearly with our systems and our structure. And of course, our balance sheet we could perfect acquisitions that becoming another meaningful piece of our overall growth. So no, for those types of activities, we would not should we exhaust this billion dollars or a large portion of the billion in available capital that we would make the appropriate consideration but we are focused on growing the business.

[Steven Ramsey, Thompson Research Group]

Great. Thank you.

[Operator]

The next question comes from Stanley Elliott with Stifel. Please go ahead.

[Stanley Elliott, Stifel]

Hey, good morning, everyone. Thank you all for taking the question. Could you talk a little bit about what you're seeing in the labor market into what extent, if any -- is that had any impact on your ability to open stores in the quarter or even expectations for the rest of the year?

[Bradley Barber, Chief Executive Officer]

No. Stanley, it's not. I mean, look, the labor market's tight and we could complain as most everyone could, particularly last year, we saw inflation and wages. It continues to be a very tight market where there's still mild inflation and wages, but there's not a single location where employing a capable team to drive results has ever been part of our calculus to go or not go and nor to office, see that occur.

[Stanley Elliott, Stifel]

Kind of switching gears on -- on the -- the equipment side, one of the -- the companies we listened to earlier this morning, they -- they were talking about surcharges for equipment. You -- is that something you're seeing in conversations when you start to plan out capital expenditures on a go forward basis, or just kind of a one off, just curious, kind of the level of magnitude that -- that you're seeing that and -- and discussions.

[Bradley Barber, Chief Executive Officer]

It's been a discussion with several manufacturers. We deal with more than 100 manufacturers and of course it's probably a half dozen that make up the vast majority of our capital spend of the largest. Some have asked for no surcharge and confirmed that they're not going to ask for the year and those prices are protected. Some have asked for surcharges and we've negotiated somewhere in between where they started and zero a few of them have back down completely and said, okay, we want to fly surcharges will just talk about it on a go forward orders for '23, and a very few have kind of stuck to where they came out at here.

And this is very recent. I'm speaking in weeks, not months. And so for the few that we do have that ranges between 2% to 6% on average so that really minimal. We don't like it. We would prefer nothing. But it's not going to change our trajectory. And we will not impact our returns in any way that causes us concern.

[Stanley Elliott, Stifel]

When you're thinking about some of the brownfield locations, are you thinking about a similar size locations in terms of like the same amount of fleet? Are you thinking about maybe smaller amounts of fleet? Just curious kind of how you're positioning. Where do you want to open up and kind of the size of magnitude of these individual stores.

[Bradley Barber, Chief Executive Officer]

It's more of the same. I mean --

[Stanley Elliott, Stifel]

Yeah.

[Bradley Barber, Chief Executive Officer]

We've always talked about these locations. Typically, rule of thumb, year-one maturing around $10 million in inventory that could be a little less, it could be considerably more, but $10 million on average. And the profile of that fleet is very similar to what you will see in our existing operations or footprint.

[Stanley Elliott, Stifel]

Perfect everyone. Thank you very much and congratulations on the good start.

[Bradley Barber, Chief Executive Officer]

Thank you.

[Operator]

The next question comes from Steven Fisher with UBS. Please go ahead.

[Steven Fisher, UBS]

Thanks. Good morning. What did you could talk about your ability to pass along higher fuel costs and how that played out in the quarter as it as it progressed. I know you've ordered about a million dollars of gross profit in the rental other category. So I think that profit suggests that you stayed ahead of the higher fuel costs but curious how that played out and kind of what the trajectory there that we should expect is.

[Bradley Barber, Chief Executive Officer]

Your yeah, it was you saw we've turned positive year-over-year and our margin and so we're very pleased with that. There are a lot, there are several variables within that Steven that we look at. I mean, certainly fuel is one of them. Also logistics, use of third-party haulers, how efficient we are with our existing trucks and use of third-party haulers. So there's been a lot of data that we've been that we utilize to continue to make gains. And we're certainly passing on higher fees. No, we're not doing it in the form of surcharges was on fuel.

There's some complications about how you are required to do so, but we're just taken a really simple and direct approach and we're charging more for the average hall and the net result is we've turned those margins positive where we're going to stay focused, I'll -- I'll go further and say we see no reason that fuel or any other broad category will not be able to get passed on to our end-user going forward. So it's real time. We're responding fast and we're getting the results that we expected.

[Steven Fisher, UBS]

Great in terms of your new branches. I'm sure there's a typical ramp up period for any of these operations as you get the people in place, the equipment, and build a book of business. I guess I'm curious, as you're opening these into a pretty strong market, are they getting absorbed and utilized faster than you might typically expect or about the same?

[John Engquist, President and Chief Operating Officer]

Steven, I will say, it depends on the market, right? We're very pleased with the performance of our new stores. They don't all ramp at the same pace. Obviously, the better the market, the faster our store is going to ramp. But all-in-all, as Brad spoke about the 10 locations we opened last year, I mean, our performance is outstanding in the two locations that we've started within the first quarter thus far, are so far ramping according to plan. So we're very pleased with our results of our new locations.

[Bradley Barber, Chief Executive Officer]

Yeah let me add, in this environment, we're picking the right markets for the right reasons, and that to John's point, and we’ve been pleasantly surprised to exceed our expectations, many, and many more times than we have been concerned about achieving them. So it's a great environment for us to be opening locations in these selected markets.

[Steven Fisher, UBS]

Okay. Then lastly, Brad, I think if I heard you correctly, you said the last thing you are concerned about is utilization and it does seem like you're off to a really strong start across the business. What are the things, the biggest things that you're concerned about it at this point?

[Bradley Barber, Chief Executive Officer]

There is not a lot real-time today to be concerned about. I mean, we have got an excellent team of operators who we're executing very well. We're selecting the right markets. We've got the right products on order from the right manufacturers at the right pricing. We have the systems that are providing this information on market pricing. And that is clearly showed up at that 6.5% year-over-year and maybe more important to John and I, that 1.6% sequentially coming out of Q4 into the First quarter of the year. We're showing the strength of our platform here.

If I have concerns there not unique to H&E or to our geography, they would be about around interest rates and inflationary pressures, and does that creep into business? I had stated my prepared comments. We have seen no postponements or cancellations due to material price or people shortages. And look, frankly, we don't expect to see any here in the near-term, but if I had to give you something, I'm thinking about, that's where it's as far as the near-term we're going to execute on our plans.

[Steven Fisher, UBS]

I'm good. Thanks a lot.

[Bradley Barber, Chief Executive Officer]

Thank you.

[Operator]

The next question comes from Seth Weber with Wells Fargo Securities. Please go ahead

[Seth Weber, Wells Fargo Securitties]

Hey, everybody, good morning. I guess, I wanted to stick on the cost side, if we could. The incremental margins were really good here in the first quarter. Do you think that you can sustain an incremental margin for the year, in sort of the 60 +% range? And Leslie, maybe just some thoughts on SG&A? Do you think SG&A leverage should be -- you should get some operating leverage on the SG&A line this year? Thanks.

[Leslie Magee, Chief Financial Officer & Secretary]

Good morning, Seth. So as far as incremental more -- incremental margins, we do expect to see some moderation from the spur's quarter level throughout the course of the year, particularly in the back half. I see that 60 - ish% range. If you just talked about, I think that's reasonable. Just to give you a little bit of color, I made some comments on our last call that our current year drivers are shifting to different buckets. But while also driving good tourists, we expect strong flow through from fleet growth and rate this year. Last year the drivers were primarily utilization and rate which combined just really generate strong flow-through and create a more challenging comp, especially in the back half of the year.

Then as it relates as it relates to SG&A. I wouldn't really fall afar that we would have leveraged necessarily this year, particularly with like our warm start strategy, generally, puts a little drag on our SG&A, but I would tell you that our estimates of not really changed for the full year 2022. We expect that our costs will settle and closer to the full year 2021, as SG&A has a percentage of revenues, which was 27.3%, so somewhere close to that. A little kind of began to tick down towards the back half of the year and work down closer to that number

[Seth Weber, Wells Fargo Securitties]

Right. Okay. Either for Brad or John, I guess, just from a CapEx perspective for the second quarter is usually your strongest quarter, but are the OEM constraints creating an environment where third quarter is going to be your heaviest CapEx quarter or do you think you could still like typical normal seasonality aHnd have second quarter be the heaviest quarter for CapEx?

[Bradley Barber, Chief Executive Officer]

Yeah, Seth that will clearly the second and third quarter combined will be the heaviest by far. But I do think it could be weighted a little heavier to Q3 than Q2. And that's been part of our plan with the cadence we were planning for a warm start as well as some of our growth. So yes, Q3, I believe will be heavier than Q2.

[Seth Weber, Wells Fargo Securitties]

Okay. Thank you. And then just lastly, on the M&A, it seems like you've been talking about M&A a little bit. Is that -- are you going to start to go down the specialty road a little bit more or do you think you'll stick to gen rent?

[Bradley Barber, Chief Executive Officer]

We certainly could I don't want to lead you to believe that we have something that's eminent, but we continually evaluate a variety of types of acquisitions and we evaluate specialty in the same pipeline that we're evaluating of gen rent businesses. So we're. It's didn't both and we're looking for the right fit at the right valuation and we're hoping we'll find something soon. I can tell you. We talked about a lot internally. We're working it diligently, and there's an equal focus on both opportunities.

[Seth Weber, Wells Fargo Securitties]

Got it. Okay. Thanks, everybody. Appreciate it.

[Bradley Barber, Chief Executive Officer]

Thank you.

[Operator]

[Operator Instructions].

[Operator]

Our next question comes from Ross Gilardi with Bank of America. Please go ahead.

[Ross Gilardi]

Good morning, guys.

[Bradley Barber, Chief Executive Officer]

Good morning.

[Ross Gilardi]

Brad, I think you talked about seeing a pickup in some of the oil and gas projects and I'm wondering if you could give us a little more. Color on that and like the nature of the projects is it more upstream? Is it pipeline, is it refinery maintenance could just any additional detail you can share that will be interesting.

[Bradley Barber, Chief Executive Officer]

Refinery maintenance seems to be accelerating before we've seen the uptick in oil. As far as oil goes, it's primarily around rig count, moving rigs and things of that nature. We're not read diverting assets to those markets as you are aware of fleet, most folks are the products we rent within the oil field or fungible across our entire footprint.

They're the same products, maybe a different mix of those products, but the same product we read on typical commercial and other industrial type site. So it's certainly helping us. I think maybe more important is the bleed over to the broader markets to South Texas and South Louisiana. But I hope that's helpful if there's something specific within that, I'd be happy to try to dig in further for you.

[Ross Gilardi]

What about pipeline activity? You seen anything much there?

[Bradley Barber, Chief Executive Officer]

I can't say that. There's -- there's pipeline activity, but there has been pipeline activity. And I think that the driver for there to be more pipeline activity is there. I would say that additional capacity and pipeline is probably like the infrastructure bill. There's a larger delay than you see with the -- the spike in price that's, pronounced or prolonged. So I do believe that what has occurred here will lead to an acceleration of that. But right now it's just more of the same there is nothing unusual.

[Ross Gilardi]

Okay. Got it. And -- and then one -- one of the markets that -- that you feel like it's still not really benefited as -- as much as they -- they should from reopening that --- that you're most excited about. Kind of in the aftermath of COVID EBITDA really fully goes away. We'll see, but just anything that really is -- is still well below where it was like pretty pre-Covid at this point or just has got out sized growth potential just based on timing or what not.

[Bradley Barber, Chief Executive Officer]

Listen, there's not much. You look across our footprint with the product type and project types, they're all healthy and improving. If there were a geography, would probably be that the Northwest from Seattle down to San Francisco, where there has been probably more disruption more consistently, or for a prolonged period of time. But even there, those markets and activities have resumed at closer to normal than abnormal. So I don't think I could call any one area out as far as where we hope to continue to do better. That's also broad-based, but we see a lot of opportunity right now and there's not a particular area of concern for us.

[Ross Gilardi]

All right. And then just it's interesting, you mentioned the Pacific Northwest. And your branch footprint map certainly seems to be to drifting more northerly. And just longer term, I mean, do you see H&E becoming more of a true like national player over time or do you see if we're looking out five to ten years, is the company still predominantly more of a regional player in your strongholds around the Gulf Coast and the Southeast?

[Bradley Barber, Chief Executive Officer]

Well, I absolutely believe H&E and 10 years will be a national player true national player. Again. Often times we talked about our investment in systems and technology. And that is really to say that we have the ability to serve these markets. We could run a business multiple that our current size with our existing infrastructure. Everyone aware of our balance sheet, everyone's aware of our fundamentals.

They've watched our progress. Certainly, if not before, since we took the company public in February of 2006. We have shown over the cycles our ability to manage the business very appropriately. I think maybe most important was really getting rid of that disruption we had with the crane business. The crane business is a good business and we're happy from Manitowoc to be the owner of that business. It was for us, very low margin. It was cyclical or lumpy, difficult to predict and clouded up our focus. And what I would say to you today, is we are maniacally focused on growing the rental business. We love the Sunbelt that we operate in. We love warm starts filling in existing geography, but we also like new geography and we plan on expanding.

[Ross Gilardi]

Okay. And just lastly, I think Stan asked you about surcharges, but we just got off the Oshkosh call and they're talking more about moves to just formula-based pricing, more specifically, for 2023. I'm wondering, are you seeing consistency in approach for future pricing in future years as opposed to just surcharges on the ground. Now for or is it I different supply like your amongst your major sort of top five or six supply or is it more varied as, as you said before what their approach to surcharge.

I'm just trying to understand like how consistent is the approach on just making these like automatic pass-through. If you order equipment and you get cost inflation from the time of order to time of delivery. Are the contracts in the future going to be protecting the suppliers better than they have in the past?

[Bradley Barber, Chief Executive Officer]

Yes. That's a good question and the answer is it's really different by manufacturer. I will tell you that Oshkosh and JLG and our respect is much focused, takes a measured approach. And I think they want to be consistent, consistent supplier through all of those that they sell product. And I think that makes a lot of sense. In general, the more sophisticated companies take that approach in times like this, and the less sophisticated companies just respond to make kind of near-term decisions based off of what's going on currently. So I'm not going to list manufacturer but I will say since you brought up Oshkosh, that JLG takes a thoughtful approach to how they price their customers. So it's a win-win situation and we'd like to see other manufacturers do the same.

[Ross Gilardi]

Well in those situations, like if costs actually go down or do you view benefit of costs go down from the point of borders to even the point of delivery as well? Or are they just really like writing, adding these clauses to protect them from further cost inflation in the future.

[Bradley Barber, Chief Executive Officer]

If we're talking today, we have so minimal. The magnitude is so minimal on price increases for us with the surcharges from these select folks, it only goes one way right now, but it's almost not worth mentioning, although it's just the fact that we do have some minimal surcharges over history manufacturers or generally about giving you a decrease at the same time, there's been very few cycles we've been in what we've seen, real cost reductions that come.

It seems like everything's always offset with something else come in. It's either labor is technology with, you remember the Tier four interim -- Tier four final and that's these things continue to evolve. It's been still multiple times. Now at still and logistics and basic componentry and many manufacturers, not only are they fighting pricing, they're fighting getting all of the products together so that they don't have a lot of unfinished product that they can't ship until it's a 100% complete.

No, in my career, I've not seen people come back and give price decreases. At the same time, that's a very logical approach. When people can approach it, basically have an index that you worked from that's understood.

[Ross Gilardi]

We will I would just think if you guys are going to agree to formula-based pricing for the suppliers, you'd also be protected from downside. That's kind of what I'm getting at if it adopt that approach.

[Bradley Barber, Chief Executive Officer]

And if we did, that's exactly how it would work. It's not a new concept. It may become new in practice and it will be a 2023 item and we'll negotiate once we understand more, but it is it's logical to us, is what I would say.

[Ross Gilardi]

Okay. Thank you very much, Brad.

[Bradley Barber, Chief Executive Officer]

Thank you.

[Operator]

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

[Jeff Chastain, Vice President of Investor Relations]

Okay, then. We'll conclude the call today, and we appreciate everyone taking the time to join us, and for your continued interest in H&E Equipment. We look forward to speaking with you again, Betsy. Thank you for your assistance today and good day, everyone.

[Operator]

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