H&E Equipment Services Inc
NASDAQ:HEES
Earnings Call Analysis
Q4-2023 Analysis
H&E Equipment Services Inc
H&E Equipment Services wrapped up 2023 on a high note, with their final quarter buoyed by an energetic construction market and solid industry groundwork. This foundation included continued rental rate gains, which buoyed both equipment rental operations and used equipment sales, leading to record-setting performance metrics for the company.
Total revenue for Q4 2023 rose by 9.3%, propelled by a significant 14.9% increase in equipment rental segment revenues and a stellar 34.3% surge in rental equipment sales. These gains can be attributed in part to an upward trend in rental rates, which grew on average by 5.6% year over year, building upon the prior year's average increment of 9.3%. The quarter witnessed rental rates that were 3.8% higher than the same period in 2022, with a sequential quarter-over-quarter improvement as well.
In terms of profitability, H&E Equipment Services saw their EBITDA climb 6.5%, with a 48% margin. This increase was relatively subdued due to a significant pre-tax gain from the previous year, following the sale of their Komatsu earthmoving business. Meanwhile, gross margins in their rental operations expanded by 110 basis points to 54.2%, underscoring the company's effective cost management and pricing strategy.
The company invested a record $737 million in their rental fleet over the year, resulting in an 18.3% increase in original equipment cost and bringing their fleet valuation to a monumental $2.8 billion. This investment reflects an impressive 58% growth over the last three years, positioning H&E with one of the youngest rental fleets in the industry, averaging at 39.7 months old. Moreover, H&E added a remarkable number of new branches, growing its network by 41% since 2021 and enhancing its reach across burgeoning construction markets in the United States.
Looking forward, H&E plans to moderate their growth by targeting $450 million to $500 million in fleet expenditures for 2024. The company anticipates this strategic adjustment, following a period of accelerated capital spending, will capitalize on their young fleet and position them to seize opportunities in the growing construction market. Furthermore, their branch network is set to expand with 12 to 15 new branches planned for opening, continuing their growth trajectory into strategic U.S. construction markets like Texas, Phoenix, and Denver.
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Good morning, and welcome to H&E Equipment Services Fourth Quarter 2023 Earnings Conference Call. Today's call is being recorded.At this time, I would like to turn the call over to Mr. Jeff Chastain, Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to a review of our financial performance over the fourth quarter and full year of 2023. Your participation on today's call is appreciated, and we thank you for your interest in H&E.A press release was issued earlier today providing a detailed review of our results 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 & Presentations.Joining me this morning 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 review, but before I turn the call over to him, please proceed to Slide 3 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 similar expressions constitute forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. A summary of these uncertainties is included in the safe harbor statement contained in the company's slide presentation for today's call and includes the risks described in the risk factors in the company's Annual Report on Form 10-K and other periodic reports.Investors, potential investors, and other listeners are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after the date of this conference call.Also, we are referencing non-GAAP financial measures during today's call. You will find 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.That completes our preliminary details, so I'll now turn the call over to Brad Barber, Chief Executive Officer of H&E Equipment Services.
Thank you, Jeff. Good morning, and welcome to our review of fourth quarter and full year 2023 financial results. We appreciate your participation on today's call.Proceed to Slide 4. We closed 2023 in strong fashion, with results in the fourth quarter supported by an active construction market and sound industry fundamentals, which included further rental rate appreciation. We recognized outstanding execution in our equipment rental segment and achieved record margins on the sale of rental equipment. And at a strategic level, we demonstrated further progress towards fleet growth and branch expansion objectives, resulting in record achievement in 2023.I'll provide more details on these important elements of our fourth quarter performance, beginning with a review of key financial metrics, followed by a review of rental operations and our strategic accomplishments for the quarter and the year. Before I close, I'll review some industry developments that are expected to provide fundamental support in 2024, contributing to our optimistic outlook.Slide 6, please. When compared to the year-ago quarter, total revenues in the fourth quarter of 2023 increased 9.3%, with strong support from total equipment rental revenues and sales of rental equipment. Revenues from our equipment rental business segment improved 14.9% in the quarter, with the increase due partly to further gains in rental rates, which demonstrated sequential quarterly improvement throughout the year and continued to build on average rental rate accretion of 9.3% achieved in 2022.Also, we recognized an 18.3% year-over-year increase in our original fleet equipment costs, representing another important catalyst for growth for rental equipment revenues in the quarter and for the year. I have more to say on that quarterly rate improvement and our fleet growth in a moment. Revenues from the sale of rental equipment increased 34.3% in the quarter as we continued to execute an effective fleet management strategy while capitalizing on persistent strength in the market for used rental equipment. Our sale of rental equipment achieved a record margin of 66% in the quarter.Finally, adjusted EBITDA in the quarter was up 6.5%, with margins of 48%. Year-over-year improvement in the quarterly measures were partially concealed by $15.4 million pre-tax gain included in the year-ago results. The gain followed the sale of our Komatsu earthmoving distribution business, which was the final step in completing our exit from distribution activities. Leslie will provide greater clarity on this matter during her review.Slide 7, please. Turning now to our rental performance, revenues in the quarter improved 14.5% compared to the year-ago quarter, while gross margins increased 110 basis points to 54.2% over the same period of comparison. Our performance was supported by the favorable rental rate environment with consistent annual cumulative improvement continuing to serve as a meaningful component for growth. Rates in the quarter were 3.8% ahead of the fourth quarter in 2022 and 0.8% better on a sequential quarterly basis.For the year, rental rates posted a year-over-year average improvement of 5.6%, adding to the average improvement of 9.3% in 2022. Strong revenue support was also realized through growth and expansion efforts. As I mentioned earlier, we grew our rental fleet 18.3%, or $432.6 million on a year-over-year basis. Also, we added a record number of new branch locations through the combination of our warm start program and a strategic acquisition. I'll expand my discussion on strategic accomplishments in a moment.Physical fleet utilization averaged 68.4% in the quarter, with the 360 basis point decline largely a function of further normalization of utilization in 2023 compared to the unsustainable measured during 2022. Finally, dollar utilization in the fourth quarter was 40.3% compared to the 41.9% in the fourth quarter of 2022. Support from higher rental rates in the quarter was offset by the decline in physical utilization and a modest headwind from our record expansion efforts.I now want to provide a more in-depth review of our strategic achievements in 2023. For the third consecutive year, H&E realized significant fleet growth and branch expansion against our targeted initiatives. These important strategic objectives support our broader plan of transition to pure-play rental focus, which began in 2021 and has been completed. Our growth of rental fleet and the addition of new branches have contributed to greater scale and increased customer engagement for our company, advancing our competitive position in the industry.Slide 8, please. We invested $737 million in our rental fleet during the year, exceeding the upper end of our revised range of $650 million to $700 million. The record investment, which included $141 million in gross expenditures in the fourth quarter, resulted in a fleet original equipment cost, or OEC, of a record $2.8 billion at year end, exceeding the previous year's record OEC by 18.3%.Following our investment in 2023, we have grown our fleet an estimated 58% over the trailing 36 months. During this time, we have worked to achieve an optimal fleet mix that complements our geographic and customer expansion, while maintaining 1 of the industry's youngest rental fleets. At the close of 2023, our average fleet age was 39.7 months compared to an industry average of 49 months, and 43.6 months at the conclusion of 2022.Also, our pace of branch expansion in 2023 was impressive. Our accelerated branch expansion program was responsible for a record 14 branch additions in the year, including 3 new locations in the fourth quarter. The branch additions established greater density throughout our geographic footprint, with increased emphasis on the Gulf Coast, Mid-Atlantic, Southeast, and Midwest regions. As a result, we have increased our exposure to a growing number of construction projects.In addition to our branch expansion program, we accomplished further growth and improved positioning through the acquisition of an attractive and well-managed business with operations in [ 4 ] metropolitan statistical areas of the U.S. One transaction, which closed in the fourth quarter, added 3 locations in California, increasing the number of branches in 2023 to 17, or 14% increase across our branch network when compared to the branch count at the end of 2022, and an impressive 41% since the beginning of 2021.Our focus on growth initiatives will be maintained in 2024, as indicated by our new growth objectives for the year, which I will turn to now. We plan to moderate our 2024 gross fleet expenditures to a range of $450 million to $500 million. The reduction follows our accelerated capital spending over the second half of 2023, when we elected to capitalize on improvements in equipment availability. We believe our record fleet expenditures in 2023 and young fleet age advantageously positioned the company to benefit from the ongoing growth in construction markets throughout 2024.Regarding our branch network, our strategic plans in 2024 will again include 12 to 15 new location openings from our branch expansion program. We have already begun our 2024 expansion, with a new location in Texas added in January. In addition, branch growth could be enhanced through attractive acquisition opportunities that offer access to vibrant construction markets in the U.S., as demonstrated by our latest acquisition, which closed last month, adding 1 location in each Phoenix and Denver. As of today, our branch network consists of 140 branches across 30 states, including our first quarter 2024 additions from the warm start program and our latest acquisition.Before I turn the call over to Leslie, I want to close with some thoughts on the outlook for 2024 and why we remain optimistic on industry fundamentals.Slide 9, please. We believe equipment rental industry fundamentals in 2024 are supported by several appealing factors. These factors include a forecast by Dodge Construction Network for 7% year-over-year improvement in construction starts, also a continuation of healthy nonresidential and industrial project backlogs, as conveyed by our customer base. These backlogs are expected to support our view of higher equipment demand as the year progresses.In addition, mega projects are increasingly responsible for the expected progression of demand in 2024 and beyond. These active and planned projects represent a significant catalyst of construction across our large expansive geography and underscores the importance of our branch expansion effort. H&E has excellent exposure across its 30-state geographic footprint, with many of these projects residing in our Gulf Coast, Mid-Atlantic, Midwest, and Southeast regions. These 4 regions collectively account for 71% of our branch network.As we had noted previously, mega projects typically require multiple years to complete and consume large quantities of equipment for extended periods of time. Finally, we remain confident that growing rental penetration will be a steady and meaningful catalyst for increased industry growth as the attractiveness of equipment rental ownership continues to evolve. Recently, the American Rental Association announced rental penetration improved to 56.4% in 2023, up from 53.5% in 2022. The measure is now a mere 30 basis points below the pre-pandemic high.To conclude, 2023 was another year characterized by strong and steady achievement throughout the company. We set new highs across many of our key financial metrics, with the record results supported by strong pricing discipline. Since the end of 2020, we have achieved cumulative price improvements of 15.8%, including 5.6% in 2023. We believe our performance is best-in-class.Over the trailing 36-month period, we have successfully expanded our branch location count by an impressive 41%, including 17 locations added in 2023. With the start of 2024, we have demonstrated further expansion, including an acquisition that adds 2 locations in large and growing markets, and our first warm start of the year, a new location in Texas that represents the 26th H&E branch in the state. We have reaffirmed our commitment in 2024 to further branch expansion, with a target of 12 to 15 new locations during the year.Also, over the last 36 months, we have effectively demonstrated our operational capabilities, as evidenced by our nearly 60% growth of our rental fleet OEC, while at the same time achieving steady growth in our margins and profitability. These accomplishments demonstrate our commitment to robust financial performance, disciplined growth, and operational excellence, while leading to a stronger competitive base.Slide 10, please. I'll now turn the call over to Leslie, who will provide a review of our fourth quarter financial performance. Leslie?
Thank you, Brad. Good morning, and welcome, everyone. Before I begin my review, I wanted to remind you that results for the fourth quarter of 2022 included a $15.4 million pre-tax gain resulting from the sale of our Komatsu earthmoving distribution business. Since the transaction was consistent with our strategy to completely exit distribution activities, results for the fourth quarter of 2022 are presented with no adjustment for the gain on sale. My occasional reference to the prior year gain is intended to facilitate a more accurate basis when making a year-over-year comparison of financial performance.Let's continue beginning with Slide 11 and a review of fourth quarter revenues, gross profit, and gross margins.Slide 11, please. Total revenues in the fourth quarter were $385.8 million, an improvement of $32.7 million or 9.3% compared to the fourth quarter of 2022. The improvement was due largely to higher revenues from rentals and sales of rental equipment. Revenues from rentals increased 14.5% to $280.6 million compared to $245 million in the year-ago quarter. We experienced another quarter of impressive fleet growth and rental rate appreciation with these 2 factors contributing to the record outcome.As Brad reported, our rental fleet, as measured by OEC, concluded the quarter at approximately $2.8 billion, or 18.3% ahead of the year-ago measure. Rental rates displayed further improvement in the quarter, up 3.8% compared to the fourth quarter of 2022 and 0.8% sequentially. For the year, our average rental rate improvement was 5.6%.Sales of rental equipment in the fourth quarter reached $40.6 million, up 34.3% from the year-ago quarter. The increase was indicative of the continued strength of the used equipment market, combined with the success of our fleet management strategy. New equipment sales were $9.8 million, declining 54.5% in the quarter compared to $21.5 million in the fourth quarter of 2022. The year-over-year comparison continued to demonstrate the absence of the Komatsu earthmoving distribution business, which was sold in December 2022.Gross profit totaled $186.3 million in the fourth quarter, up $27 million, or 16.9% compared to the year-ago quarter. Gross margins in the quarter improved 320 basis points to 48.3% compared to the prior year quarter, with the improvement attributable to favorable revenue mix and higher margins on rentals and sales of rental equipment.Total equipment rental margins were 48.2% in the fourth quarter, up from 47.9% in the year-ago quarter, with rental margins improving to 54.2% compared to 53.1% over the same period of comparison. Margins on sales of rental equipment reached a record 66% compared to 51.2% in the year-ago quarter, and while margins on new equipment sales were 15.3% compared to 13.6% in the year-ago quarter.Slide 12, please. Income from operations in the fourth quarter totaled $81.2 million compared to $78.8 million in the fourth quarter of 2022. A margin of 21.1% was achieved in the fourth quarter of 2023 compared to 22.3% in the fourth quarter of '22. The year-ago results included the previously noted gain from the sale of the Komatsu earthmoving distribution business, with $12.9 million recorded as a gain on the sale of property and equipment, contributing 360 basis points to the prior year margin.Proceed to Slide 13, please. Net income from continuing operations in the fourth quarter totaled $53.5 million compared to $51.2 million in the fourth quarter of 2022. Results in the prior year included the $15.4 million gain from the sale of the Komatsu earthmoving business, diluted net income per share in the fourth quarter was $1.47 per share compared to diluted net income per share of $1.41 in the year-ago quarter. Certain discrete items in the fourth quarter reduced the effective income tax rate to 19.4% compared to 26.1% for the same quarter in 2022.Proceed to Slide 14, please. Adjusted EBITDA improved to $185.2 million in the fourth quarter compared to $173.9 million in the fourth quarter of 2022, which included $15.4 million resulting from the gain on the sale of the Komatsu earthmoving distribution business. Adjusted EBITDA margin in the fourth quarter was 48% compared to 49.2% in the fourth quarter of 2022 with a modest year-over-year decline due entirely to the gain on the sale in the prior year quarter, which contributed 440 basis points to the prior year margin.Next on Slide 15, please. SG&A expense in the fourth quarter increased $12.1 million to $106.6 million compared to $94.5 million in the year-ago quarter. The higher expenses were largely due to employee salaries, wages, payroll taxes, and other benefits, as well as an increase in facilities, promotional, and depreciation expenses. SG&A expense in the quarter included $6.3 million of expansion in acquisition costs compared to the same quarter in 2022. Fourth quarter 2023 expenses were 27.6% of revenues compared to 26.8% in the year-ago quarter.Slide 16, please. Gross rental fleet capital expenditures in the fourth quarter, including noncash transfers from inventory, totaled $141.4 million. Net rental fleet capital expenditures were $101 million. Gross PP&E capital expenditures in the quarter were $28.5 million or $26.5 million net of sales of PP&E.Net cash provided by operating activities totaled $129 million in the fourth quarter compared to $102 million in the year-ago quarter. And free cash flow used in the fourth quarter was $27.7 million compared to free cash flow used of $128 million over the same period of comparison. The company's rental fleet remained among the youngest in the industry with an average age of 39.7 months compared to an industry average age of 49 months. The fourth quarter measure continued a trend of steady improvement in 2023 compared to an average age of 41.1 months in the third quarter and 43.6 months on December 31, 2022.Slide 17, please. Based on our original equipment costs on December 31, 2023, our rental fleet size totaled approximately $2.8 billion, an increase of $432.6 million, a year-over-year growth of 18.3%. Average dollar utilization in the fourth quarter was 40.3% compared to 41.9% in the prior year quarter. Normalized fiscal fleet utilization, record fleet growth, and branch expansion over the year contributed to the modest decline in the measure.Slide 18, please. We maintained strong balance sheet metrics throughout 2023, closing the year with net debt of approximately $1.4 billion. Our net leverage measure of 2.1x remains at the low end of our target range, and our interest coverage ratio of 11.3x continues to improve, up from 10x at the end of 2022. With no maturities before December 2028 on our $1.25 billion of senior unsecured notes, our capital structure remains robust.Moving on to Slide 19, please. Finally, our liquidity position on December 31, 2023 totaled $564.5 million, while excess availability under the ABL facility displayed steady improvement throughout 2023, closing the year at approximately $1.8 billion, up from $1.5 billion on December 31, 2022. Our minimum availability as defined by the ABL agreement remains $75 million. And note that excess availability is the measurement used to determine whether our springing fixed charge is applicable. With excess availability of $1.8 billion, we continue to have no covenant concerns. And finally, we paid our regular quarterly dividend of $0.275 per share of common stock in the fourth quarter of 2023. And while dividends are subject to Board approval, it is our intent to continue to pay the dividend.Slide 20, please. Throughout 2023, H&E continued to redefine its improving financial potential, while strengthening its competitive position in the equipment rental industry. With persistent and sound industry fundamentals in place, we proceeded with a steady approach to growth and expansion, resulting in another year of record financial achievement.Our improved financial execution in 2023 was seen throughout numerous performance measures, with records established for total revenues of $1.5 billion, consolidated gross profit of approximately $685 million, gross profit margin of 46.6%, and adjusted EBITDA of $688 million. Also, revenues from equipment rentals exceeded $1 billion for the first time in our 62-year history, representing 24% growth over the previous year, while gross margins in the segment remained at better than 50%.As Brad noted earlier, fleet growth and branch expansion initiatives played a key role in our financial achievements by reinforcing our competitive position across much of our geographic footprint. With 18.3% growth in our fleet original equipment costs and 14% year-over-year expansion across our branch network, we conclude 2023 with the fleet size and mix and the branch density to better address an expected rise in construction activity.Our exit from distribution activities and transition to a pure rental focus has been a winning strategy for H&E, resulting in higher and more stable revenues and impressive margin appreciations. As we transition to 2024, we will maintain our focus on greater branch depth and measured fleet growth. We possess the financial resources needed to pursue further growth objectives, including a conservative capital structure with no debt maturities before 2028, improving debt metrics that remain at the low end of our target range and ample liquidity. Significant opportunities for growth are a reality of the equipment rental industry, and we expect our more robust position in the industry to drive further financial achievement and expansion.We are now ready to begin the Q&A period. Operator, would you please provide instructions to our call participants and assemble the queue?
[Operator Instructions] The first question today comes from Seth Weber with Wells Fargo.
Brad, I wanted to, I guess, dig in a little bit more on the CapEx guide for 2024 and just really try to unpack that a little bit, and try to understand how much of that is really a reflection of a pull forward that you just added more fleet in 2023 versus any kind of change that you're seeing from an end-market demand perspective? And whether you think this lower CapEx level for 2024 can support kind of more of a flattish fleet utilization level for 2024 and maybe a flattish dollar utilization level?
Seth, I think there are a few things to consider. You started off by asking, is any of it a pull forward? We clearly brought in more capital in Q4, including late Q4 than we would traditionally. Partly those were assets that were currently highly utilized throughout the majority of the fourth quarter. They're assets that are historically highly utilized throughout the year. And it kind of paints a picture of our view of the market in front of us here in 2024. So, I think it's fair to think, we pulled a little CapEx forward in that respect. Otherwise, we didn't need all of that in late November and December, but we're looking forward in that respect. So that's that piece of it.Secondarily, supply is certainly catching up with demand, and we're starting to see a more normalized environment in many regards. I think the crux of the whole question is, where is our utilization going to be for the year? We're really disciplined on rates. We're going to remain disciplined on rates. We know this advent and evolution of mega projects could weigh on rates a little bit as we continue to do more of that type of work and less of our spot rate work.All of those things come into a combination where we had a harsher-than-expected January with weather. There were a few days we had about 25% to 30% of our locations closed. In the last few weeks, that weather seemingly has passed us. We've seen incremental utilization increases each week, and almost every day of each week, so we're headed in the right direction. I think our utilization is going to be slightly pressured here in the first half of the year, on a year-over-year, keeping in mind, coming out of 2022 and early 2023, we were still up against some difficult comps.In the back half of the year, we are managing, and we expect to show some leverage. And it was stated differently to show positive year-over-year physical utilization improvements in the back half of this year. I've said a lot to say, we're moderating our capital spend. We can get what we need from manufacturers in a much more reasonable timeline with good predictability, and we're managing for a normal environment that's going to allow for nice growth, particularly in rental revenues, while we continue to increase returns.
Okay. And so, do you think -- so rental rate then, I think it was high 3s here in the fourth quarter. Do you think it settles in, I don't know, 2.5% -- 2% to 3%? Is that a good way to think about it for the year? Can you talk about -- does that offset inflation costs for you guys?
Yes. I'm going to let John speak more to the rental rates broadly. I can tell you, we're expecting no inflation in pricing in '24 compared to '23. So that's 1 part of that conversation. I think it's difficult. I mean, Q1 is always the most difficult quarter due to our seasonality to predict where we're going with rates. We feel very good about rates, rates are stable, rates are likely to improve at some level. To the extent we get pressure on rates, it's going to be around mega projects. And again, if you look at rates in isolation without understanding the weighting of the mix, I think be a little misleading because I would not want you or anyone else on this call to believe that we expect declining returns as we participate more on mega projects, quite the contrary.John, do you want to add anything else on that?
Yes, Seth. Just to add on to what Brad said, going back to his opening comments, 15.8% rate improvement cumulative over the last 3 years, that's exceptionally strong. Looking forward, we don't expect to have rate increases at that same pace. We think rates are going to moderate. We do expect rates to be positive for the year.Now, what does that mean? We expect incremental improvement. I don't want to put a number out there today. As Brad stated, these mega projects are going to have an impact on our rental rates, but there is a tradeoff, large volumes of equipment on rent for extended periods of time. So, as we get further into the year, I think we'll have a better view of that, but we are expecting positive rates for the year.
Okay. And then, maybe just, Leslie, just a quick follow-up. With the lower CapEx, fair to assume that free cash flow should be positive for 2024?
Yes. I think that's a good assumption, with the normalized environment, normalized CapEx spending that we've talked about and guided to, we expect to be free cash flow positive.
The next question comes from Steven Fisher with UBS.
Congrats on a nice finish to the year. I know you tend to keep your formal guidance fairly focused, but maybe just a follow-up on some of Seth's questions. Just trying to discern whether you think this is a year where EBITDA can grow. Maybe to start, with your lower gross CapEx, is your overall fleet expected to grow, stay steady or shrink? I think you said rental revenues expect to grow, but there's also some -- it sounds like maybe flat to lower utilization, but also slightly higher rates. So, trying to just put all those pieces together to see if there's a picture on EBITDA direction that we can put together.
Yes. Our EBITDA is absolutely going to grow. Our rental revenue is absolutely going to grow, and our fleet is absolutely going to grow. What's changing is -- and I like the way Seth asked the question. We pulled a little CapEx forward in Q4. We still have a healthy number in front of us, although it's not a record number. Our rental fleet is sitting at 39.7 months. We're going to sell a little bit less this year. We just have less need. We really caught up on our fleet rotation that was stifled during 2022 due to lack of manufacturer availability.So, you're going to see growth capital. We're going to open 12 to 15 locations. Rates, if they go anywhere other than solidly up, will only be tampered by high utilization, large volumes of equipment on mega projects. And then, we're going to get the benefit, of course, this year, as we do in any year, of our fleet growth. I think 18.3%, some of that came in the back half of the year. We'll get, just to characterize it, a full-year benefit. So, yes, expect our rental revenue and the associated EBITDA of the overall business to continue to grow. We'll have a little bit less contribution from fleet sales, but otherwise we're going to have a really nice year with continued growth and increased profitability.
That's very helpful. And then, in terms of how you see the year playing out on the nonresidential construction markets, how are you thinking about what's happening in the first half of the year on a year-over-year basis versus the second half of the year, year-over-year? I mean, you mentioned a number of times about perhaps increased focus on mega projects. Just curious about the cadence and timing. Are these things that you expect to really be a big factor in the first half, or is that more kind of second half weighted?
Well, they're a factor currently, but they're a growing factor, and that factor will only increase with every passing month and every passing quarter. So, they will be a bigger impact in the back half of the year than they are this year. From a seasonality standpoint, we always see, again, some folks have been, and I know you're not one of them, you know the business very well, but some people have been focused on the unsustainable level of utilization we ran in '22. With almost 30 years in the business, we've never seen an environment like that.What we're in today is a normalized environment where we're going to continue to get incremental gains on physical utilization. And as I stated to the previous questioner, we fully expect to show some leverage in our physical utilization on the back half of this year while we're growing our rental fleet and improving our returns.
The next question comes from Steven Ramsey with Thompson Research Group.
I wanted to continue that conversation on the demand outlook. First of all, on the local markets, do you expect basically non-mega project demand to grow? And then thinking about mega projects, appreciate the cadence for this year, it looks like mega project attributable revenue will be higher this year than last. Could you maybe talk order of magnitude, the year-over-year increase that could come from mega projects?
The first part of the question is, we do expect to see the non-mega project activity continue to grow. All the construction data for the 30-state geography, we cover points to that. Feedback from our customers points to it. And our activity on a daily basis is substantiating it literally as we speak. As far as the cadence of mega projects, I know we're fairly vague, it's not intended to be that way, but in our last quarterly update, I talked about some of these projects we lead on. While we're the fourth largest rental company in the U.S., or fifth largest depending on what ranking you look at, we can be hyper competitive on any of these particular projects that are within our geography with more than 60,000 machines we have in our rental fleet.That being stated, there are times we dominate or lead on the project, there's times we take the secondary position, and then sometimes we slide in a tertiary or third or fourth position depending on the opportunity. It's difficult to paint the picture. What we know is, there are large volumes of equipment being sent out every day from us and our competitors. I feel like we're in an incredibly disciplined environment with how we're all viewing our opportunities going forward. And mega projects will be a bigger part each quarter going forward of our revenue. That's great stability. It will be great yield, as John talked about with the rental rate tradeoff. And we'll try to give you more clarity as we go forward.
Okay. Great. And then, on the acquired companies, you had a very disciplined history in doing M&A. Maybe talk to why now with these companies and the considerations and opportunities for pricing, general margin improvement, and strengthening geographic positioning in these areas.
Yes. Our team has just done a nice job of finding the right types of opportunities that better align with us. If we go back just a year, 1.5 years ago, I stated publicly, if there was anything we were disappointed or very frustrated with was our inability to do more acquisitions. We've got the balance sheet. We've got the systems. We've got the teams to integrate them. We've got a great track record of buying these businesses, integrating them efficiently, and for those businesses to produce to our expectations. And it's been nice to see 2 or 3 acquisitions here in the last 18, 24 months.The good news is, our funnel is full of more quality, small acquisitions. You can never perfectly handicap what your ratio of closes will be on these deals. But I will tell you, we're very pleased that more of these deals are check in the box for us. They fit our profile. We can deploy more capital. They have good teams. They're in great markets. And we look forward to more acquisitions like that going forward.
Okay. Helpful. And then, on specialty equipment, you've clearly done very well without that being a large part of your equipment portfolio. But I assume it's maybe still on the strategic radar. Could you update us on how you're thinking about specialty equipment as part of the H&E fleet over time?
Sure. I'm going to let John respond to that.
Yes, Steven. So, obviously, specialty is on our radar and is part of our plan. We're currently executing today the strategy to roll out a pump and power division. As we sit here today, we ended the year with 10 locations. Most of these are shared facilities with existing operations. But we have grown that fleet from essentially nothing to a meaningful piece of the business in a relatively short amount of time. As we're looking forward, we're going to continue to add locations on an annual basis. And we think there's a really nice opportunity for specialty in our future.
Yes. Steven, let me add. The 10 locations John is referring to, this is not embedded in the 12 to 15 guidance or in the 14 that we opened last year. He also stated that we're just taking this really practical approach. We're using shared facilities, separate teams, separate assets. It's a branch within a branch, if you will. So it's nice. We're bringing on assets and high-quality people and deploying them. This organic growth is not the fastest way to grow your business, but it's certainly safe and it's certainly profitable. And it's no different with specialty than it is with the 14 warm starts or the 34, I think, we've opened in the last couple of years.
The next question comes from [ Jamie Wilen with Wilen Management ].
Yes. Good to see that your demand is growing both for national accounts and local markets. Can you tell us what percentage of your business is national accounts? What was it in 2023 and what would you expect it to be in 2024?
Thank you for the question. We do not disclose our ratios of a national account or a large account or a single source, but the thing I'm very comfortable giving you is that our large customer base continues to grow, and we're happy about that. Those larger customers generally characterize greater stability, larger volumes of equipment for longer periods of time, notwithstanding mega projects, right? So aside from mega projects, that's been a focus of ours. But unfortunately, we do not disclose those ratios.
Okay. Given the free cash flow you expect to achieve in the current fiscal year, what are your thoughts on a stock buyback moving forward?
Yes. A stock buyback is always a potential. We've talked about capital allocation. We consistently meet both our finance committee and, of course, our full Board and make these considerations. But what we're focused on is looking for acquisition opportunities and further growing H&E Equipment Services. So, I wouldn't want to lead anyone to a likelihood of a stock buyback. What's 100% likely is, we continue to pay our dividend. We continue to step out these 15-ish locations a year. We continue to see same-store growth as we deploy capital to the existing previously matured locations. And we are aggressively looking for acquisitions that fit the profile we need. Those are where you're going to more likely see us deploy capital. Never going to rule out a stock buyback, but right now we're in growth mode.
Excellent. And lastly, your fleet age is obviously the youngest in the industry. But is your target level for what your fleet age would be to optimize the profitability of the business?
Of course, we have levels within fleet management with product mix. What I can tell you is our fleet age is well below an optimum age. We were just managing a steady state of business. You've got your numerator and denominator. When you grow at the levels we have been growing our rental fleet, it pushes your fleet age down. So, we're happy about that. That's just a pent-up opportunity for us to age it further if we need to or elect to. But if you were asking in a normal cycle when we've matured in scale where we would be, it certainly could be much older than where we are today.As Leslie and I both pointed out, I think the industry average is close to 50 months, and we're under 40. So we're in a great position there.
Is part of the decline, the number of new branches you're opening up?
The decline in fleet age or what decline [indiscernible]?
In fleet age.
That's a part of it. It's fleet rotation, it's fleet replacement, it's growth at same stores. And certainly we've deployed primarily brand-new product to these locations. I mean, we may move some existing assets, but when your utilization is running as high as ours does on an annual basis, we're deploying primarily new capital to these locations.
Excellent. Nice job, fellas.
[Operator Instructions] The next question comes from Seth Weber with Wells Fargo.
Brad, on used equipment pricing, used equipment margins were surprisingly high here in the fourth quarter. Any guidance on how we should be thinking about used sale margins for 2024 and just what you're seeing in the market?
Yes. Seth, we're going to stick with our 50%-plus gross margin expectation on the year. At some point in time, we expect to see moderation. It's been interesting as we've deployed technology to help us isolate the assets to sell, the pricing to sell them, and the markets to sell them through. We've at some level exceeded our own initial expectations and we've recalibrated those expectations. I suspect that Q1 will probably be closer to 60%, but our view for the full year is 50%-plus.
This concludes the question-and-answer session. I would like to turn the conference back over to Jeff Chastain for any closing remarks.
Okay, then. With that, we'll conclude today's call. We do appreciate everyone taking the time to join us today and for your continued interest in H&E. We look forward to speaking with you again. And [ Betsy ], thank you for your assistance on today's call. Good day, everyone.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.