Q3 2024 H&E Equipment Services Inc Earnings Call

Thomson Reuters StreetEvents10-30

Participants Jeff Chastain; Vice President - Investor Relations; H&E Equipment Services Inc Bradley Barber; Chief Executive Officer, Director; H&E Equipment Services Inc Leslie Magee; Chief Financial ...

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Bradley Barber; Chief Executive Officer, Director; H&E Equipment Services Inc. Leslie Magee; Chief Financial Officer, Secretary; H&E Equipment Services Inc. John Engquist; President, Chief Operating Officer; H&E Equipment Services Inc. Good morning, and welcome to H&E Equipment Services third-quarter 2024 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.","collect":0,"end_time":0,"defaultTopTitle":"yahoo.com","property":["earning"],"viewcount":null,"language":"en","relate_stocks":{"HEES":"HE设备服务"},"translate_title":"2024年第三季度H&E Equipment Services Inc收益看涨期权","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"HEES":1},"content_text":"Participants\nJeff Chastain; Vice President - Investor Relations; H&E Equipment Services Inc\nBradley Barber; Chief Executive Officer, Director; H&E Equipment Services Inc\nLeslie Magee; Chief Financial Officer, Secretary; H&E Equipment Services Inc\nJohn Engquist; President, Chief Operating Officer; H&E Equipment Services Inc\nSteven Fisher; Analyst; UBS Securities LLC\nSteven Ramsey; Analyst; Thompson Research Group LLC\nTim Thein; Analyst; Citigroup Global Markets, Inc.\nAlex Rygiel; Analyst; B. Riley Securities, Inc.\nKatie Fleischer; Analyst; KeyBanc Capital Markets, Inc.\nPresentation\nOperator\n Good morning, and welcome to H&E Equipment Services third-quarter 2024 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.\nJeff Chastain\n Thank you, operator. Good morning and welcome to all our participants on today's call to review the third-quarter 2024 financial performance of H&E Rentals. A press release reviewing the company's results for the quarter was issued earlier today and can be found along with all supporting statements and schedules on the H&E Rentals' website, www.herentals.com. A slide presentation will accompany today's discussion and is also posted on our website under the Investor Relations tab in Events and Presentations. On slide 2, you'll see that Brad Barber, our Chief Executive Officer; as well as John Enquist, President and Chief Operating Officer; and Leslie Magee, Chief Financial Officer and Corporate Secretary are all joining me on today's call. 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 concludes the preliminary details for our call today. So I'll now turn the call over to Brad Barber, Chief Executive Officer of H&E Rentals.\nBradley Barber\n Thank you, Jeff. Good morning, and welcome to the review of our third-quarter 2024 financial results. As always, your participation and continued interest in H&E is appreciated. Proceed to slide 4. With the exception of the growing megaproject opportunity, spending levels across the nonresidential construction verticals remain mixed in the third quarter with total construction spending continuing to exhibit slower year-over-year growth. The spending environment led to further constraint of key industry measures as evidenced by lower physical utilization, an incremental decline in rental rates, and ample availability of certain equipment types. The weaker measure weighed on our financial performance in the quarter with the results generally trailing the year ago period. Despite these select near-term headwinds, we continue to execute our long-term strategic grants expansion program leading to a growing operational presence across our 32-state footprint. I'll provide more details on our third quarter key financial metrics as well as the performance of our rental business segment. Also, I want to give my thoughts on the rental equipment industry as we approach 2025 and identify some factors that give us confidence and lend support to a more positive industry assessment. Finally, I'll review the details behind our 2024 expansion achievements and some early thoughts on what comes next. Leslie will follow with an expanded commentary on our third quarter financial performance, and then, we will open the call for questions. On to slide 6 please. Our third-quarter key financial metrics were mixed. Total revenues declined 4% from the year ago quarter due primarily to a more than 47% reduction in sales of rental equipment. We lowered fleet sales by design to leverage both our young fleet age and record investment in 2023. Margins on the sales of rental equipment were again very strong and exceeded 60% in the quarter. Total equipment rental revenues improved 3.3% in the quarter as a 240-basis point decline in physical utilization was offset by the addition of 27 new locations since the close of the third quarter of 2023, including acquired branches. On a trailing 12-month basis, our equipment rental revenues improved 9.2% compared to the same trailing 12-month period in 2023. I have more to say about our impressive expansion achievements in a moment. Finally, our fleet size, as measured by original equipment cost or OEC, closed the third quarter at just below $3 billion, an increase of 8.1% compared to an OEC at the conclusion of the year ago quarter. The slower pace of growth in OEC in 2024 reflects our reduced gross CapEx expenditures compared to a record investment in each of the years, 2022 and 2023. Our 2024 gross fleet investment through September 30, 2024, was $327.8 million, a 45% decline compared to the same period in 2023. On to slide 7. Turning to our rental performance, revenues improved 2.8% in the third quarter compared to the year ago period with the addition of 27 new locations offsetting the decrease in utilization. Rental gross margins in the quarter were 51.2%, down 210 basis points from the third quarter of 2023, largely due to a decline in physical utilization in a lesser degree with rental rates. Rental rates in the quarter demonstrated resiliency, declining by only 0.1% on a year-over-year basis due in part to a continued shift of our rental fleet to megaproject work where greater price flexibility is matched with longer-term project assignments. Average rental rates through the nine months ending September 30, 2024, rose 1.5% compared to the same period in 2023. Physical utilization declined 240 basis points to 67.6%, reflecting lower project activity and some modest impact from the 27 new locations added over the last year. On a sequential quarterly basis, rental rates declined 0.6% while physical realization improved 120 basis points. Additionally, our branch expansion activity was responsible for a slight margin headwind in the quarter due to the misalignment of new branch costs and revenues generated that commonly occur before newly opened locations achieve our targeted performance metrics. As we have discussed and seen before, it is common for this misalignment to unwind over an average of 12 to 18 months. Finally, dollar utilization in the quarter was 39.4% compared to 41.5% in the third quarter of 2023. I now want to transition to discussing the equipment rental industry with some thoughts on the remainder of 2024, but more importantly, an early and increasingly encouraging evaluation of 2025. Slide 8, please. The 2024 equipment rental operating environment has largely developed without meaningful deviation from our expectations. Construction spending in the US continues to demonstrate the slowing rate of growth observed over the first half of 2024. Local project activity remains muted due in part to an extended period of elevated interest rates. And we continue to manage a slight oversupply of certain types of equipment. We believe a trend of moderating activity will persist through the remainder of the year with physical fleet utilization and rental rates expected to remain below year ago measures. Beyond the fourth quarter, the developing outlook for our industry is more encouraging into 2025 with many factors to consider. For example, the Dodge Momentum Index or DMI, a leading indicator of construction spending has exhibited gains for five of the last six months and remains at robust levels. Also construction employment remains on a steady upward trajectory with five consecutive months of growth through September 2024. Equally important, a cycle of easing interest rates is expected to have positive implications for local construction activity as projects are reevaluated under more favorable lending conditions. Furthermore, industry competitors continue to demonstrate a disciplined approach regarding rental rates and purchases of equipment. Finally, the strong expansion of megaprojects remains a significant driver of growth for our industry both today as well as into the future. An increasing number of these projects reside or are planned within our regions of operation. On to slide 9, please. As I've noted on previous calls, megaprojects are characterized by elevated equipment volumes and extended project durations leading to premium utilization metrics and excellent yield on deployed equipment. Due to their remarkable equipment needs, multiple large equipment rental providers are active on most projects. With visibility beyond 2025, megaprojects remain a stable base of demand for construction rental equipment. Slide 10. Our branch expansion and increased operational scale has led to greater exposure to megaprojects, including a growing presence on data centers, solar and wind farms, and LNG export facilities to name a few. Bidding activity continues to trend favorably as does equipment deployed as a percent of OEC. A recent evaluation of data from Dodge Construction Network and PEC found projects with a total estimated value of $537 billion currently reside in our regions of operation. An estimated 35% of these projects have commenced construction, and H&E Equipment is deployed on nearly half of these projects. The remaining balance of projects is indicative of the robust opportunity that lies ahead for H&E and the equipment rental industry. We believe H&E's participation in megaprojects opportunities will continue to grow as our disciplined approach to branch expansion and building scale evolves. I now want to bring you up to date on recent achievements in our strategic expansion initiatives. Slide 11, please. A record number of eight branches were added in the third quarter while the ninth branch was opened in the month of October. The strong outcome reflected the outstanding execution of our accelerated new location program, which has achieved a record 16 additional locations in 2024, exceeding our stated expansion expectation. The new locations have expanded our presence in several regions. Our US geographic coverage in 2024 has now grown to 157 locations across 32 states as of September 30. When accounting for both new locations and branches added through acquisition, our branch count is up over 14% following the close of 2023, and approximately, 54% since the close of 2021. Both measures are a dominant accomplishment within our industry. Our target range for 2024 gross fleet expenditures remains $350 million to $400 million with growth expenditures through the third quarter of $328 million. To conclude, our expansion achievements remain a significant highlight in 2024. Our growth trajectory remains among the best in the industry, as evidenced by a 54% increase in branch count since the close of 2021. Our approach to expansion is disciplined and includes a thorough evaluation of long-term growth trends for each location under consideration. We know that with the addition of each new branch location, we fortify our competitive position in the equipment rental industry. At the same time, we grow our presence in attractive geographies with attractive long-term construction opportunities and establish a platform for future financial improvement. The modest headwind associated with our growth initiatives are insignificant when compared to the long-term financial contribution that is possible from a well-executed plan. Our expansion represents an investment in our future and will benefit H&E for decades to come. With this, I'm going to ask you to proceed to slide 12, and I will now turn the call over to Leslie, who will discuss the third-quarter financial performance in greater detail. Leslie?\nLeslie Magee\n Thank you, Brad. Good morning, and welcome. everyone. I'll begin this morning with slide 13 and a review of third-quarter revenues, gross profit, and profit margins. Revenues in the third quarter totaled $384.9 million, down $15.8 million or 4% compared to the third quarter of 2023. The decrease was primarily due to a $ 24.9 million decrease in sales of rental equipment, partially offset by a $10.4 million increase in equipment rental revenues. Rental revenues improved $7.8 million in the quarter or 2.8% to $288.1 million compared to $280.3 million in the year ago quarter. The improvement was driven in part by further expansion of our branch network with 27 new locations added since the close of the third quarter of 2023. A total of 19 branches resulted from our accelerated new location strategy with eight branches added to acquisitions. And in addition, our fleet original equipment cost or OEC closed the third quarter up $220.1 million or 8.1% compared to the year ago quarter, resulting in an OEC of just below $3 billion. These increases were partially offset by lower demand and rental rates. Physical utilization of 67.6% was down 240 basis points from the year ago measure, due largely to weaker demand and a modest oversupply of equipment. On a sequential quarterly basis, physical utilization improved 120 basis points. Rental rates in the quarter posted a slight decrease of 0.1%, following three years of quarterly rate gains. Rates were down 0.6% on a sequential quarterly basis. Sales of rental equipment totaled $27.8 million in the third quarter, down $24.9 million from the third quarter of 2023. Reduced fleet sales of nearly 50% follows our continued fleet management strategy. Revenue from the sale of new equipment increased 11.2% in the third quarter to $14.1 million compared to $12.6 million in the year ago quarter. Gross profit in the third quarter declined 9% to $171.5 million compared to $188.4 million in the third quarter of 2023. Gross margin in the quarter was 44.5% compared to 47% in the year ago quarter with the decrease due primarily to a decline in rental margins and an unfavorable revenue mix. As Brad explained earlier, our rental operations experienced lower year-over-year margins due to headwinds resulting from lower utilization and rental rates and our branch expansion initiatives. Total equipment rental margins were 45.3% compared to 47.4% in the year ago quarter while rental margins were 51.2% compared to 53.3% over the same period of comparison. Reviewing our business segments, margins on the sale of rental equipment remain near record levels at 60.2% compared to 58.5% in the year ago quarter, while margins on the sale of new equipment were 19.8% compared to 13.2% over the same period of comparison. Slide 14, please. Income from operations in the third quarter was $60.7 million, a decline of 23.4% compared to $79.2 million in the third quarter of 2023. The year ago result included a pretax $5.7 million noncash goodwill impairment charge. Adjusted income from operations, excluding the third quarter 2023 impairment charge, was $84.9 million. The margin for the third quarter of 2024 declined to 15.8% compared to 19.8% in the year ago quarter or 21.2% calculated using adjusted income from operation, which excludes the impairment charge. The lower margin was due primarily to higher SG&A expense, lower rental margins, and an unfavorable revenue mix. Proceed to slide 15, please. Net income in the third quarter was $31.1 million or $0.85 per diluted share compared to net income of $48.9 million or $1.35 per diluted share in the third quarter of 2023. Adjusted net income in the third quarter of 2023, excluding the goodwill impairment charge, was $53 million or $1.46 per diluted share. Our effective income tax rate in the third quarter was 28.3% compared to 26.1% for the same quarter in 2023. Proceed to slide 16, please. Adjusted EBITDA in the third quarter declined 8.4% to $175.3 million compared to $191.4 million in the year ago quarter. The adjusted EBITDA margin was 45.6% compared to 47.8% in the third quarter of 2023 with the decline due primarily to higher SG&A expenses and lower margins on equipment rentals. Next, slide 17, please. SG&A expense in the third quarter totaled $112.4 million compared to $104.2 million in the third quarter of 2023. The $8.2 million or 7.9% increase was due to our previously mentioned branch expansion initiatives, which contributed approximately $11 million in expenses following the 27 new locations over the period. New branch operating expenses which incurred well ahead of the commencement of operations led to an increase in facilities and depreciation and amortization expenses as well as salaries, wages, and other employee expenses. SG&A in the third quarter was 29.2% of revenues compared to 26% in the third quarter of 2023, largely due to branch expansion costs combined with a 4% decrease in total revenues resulting from lower year-to-year fleet sales. Slide 18, please. Gross rental fleet capital expenditures in the third quarter totaled $131.3 million with net rental fleet capital expenditures of $103.5 million. For the nine months ended September 30, 2024, these figures were $327.8 million and $217.3 million respectively. Our gross fleet investment through September 2024 was approximately 45% lower than the gross investment over the same period in 2023, in accordance with our fleet management strategy ahead of lower fleet utilization. Gross PP&E capital expenditures in the third quarter was $16.8 million or $14.9 million net of sales of PP&E. And for the nine months ended September 30, 2024, gross PP&E capital expenditures totaled $93.9 million with net PPZ&E CapEx of $86.4 million. Free cash flow used over the nine months ended September 30, 2024, was $56 million compared to free cash flow used of $175.5 million during the same period in 2023. Excluding acquisitions, adjusted free cash flow totaled $101.8 million for the nine months ended September 30, 2024. Next, on slide 19. We closed the third quarter with a fleet size based on original equipment cost of just below $3 billion, representing an increase of $220.1 million or 8.1% compared to OEC on September 30, 2023. Fleet growth in 2024 includes nearly $100 million in fleet from acquisitions. Our average fleet age at the close of the quarter was 40.8 months compared to an industry average age of 47.9 months. Average dollar utilization in the third quarter was 39.4% compared to 41.5%. In the same quarter of 2023 and 38.6% in the second quarter of 2024. The year-over-year decline of 210 basis points was indicative of lower physical utilization and rental rates and a slight impact from our new branch locations. Slide 10, please. Our capital structure remained solid with steady debt measures, including a net leverage ratio of 2.2 times compared to a target range of 2 to 3 times. Additionally, we have no debt maturities before December 2028 on our $1.25 billion of senior unsecured notes and senior secured credit facility. Proceed to slide 21. We closed the third quarter with cash and borrowing availability or liquidity of $472.4 million while excess availability under the $750 million ABL facility was approximately $1.6 billion. Our minimum availability as defined by the ABL agreement remains $75 million. With excess availability of $1.6 billion, we remain free of any covenant concerns. Finally, we paid our regular quarterly dividend of $0.275 per share of common stock in the third quarter of 2024. While dividends are subject to board approval, it is our intent to continue to pay the dividend. Slide 22, please. To close, as expected, we continue to observe a slower pace of construction spending in the third quarter resulting in lower demand for our services and financial performance that trailed our year ago results. It is worth noting our decision in 2021 to transition our operating focus to a pure rental business model was driven by our motivation to improve the consistency of our financial performance, meaning improved revenue and margin stability during cyclical weakness and material revenue and margin appreciation through periods of cyclical expansion. We have already demonstrated gains from our pure play focus especially during the market expansion in 2022 and 2023. And the same is true as we manage through the current market dynamics. Also, our commitment to the steady expansion of our business will continue to intensify our competitive position as we establish greater geographic diversification and operating scale. As Brad noted earlier, our expansion initiatives represent an investment in our future, providing substantial long-term financial benefit, but there is a near term cost as we have pointed out. Many of the 27 new locations added since the end of the third quarter of 2023 are already contributing to our financial performance. Additional expansion in 2025 will position H&E to capture new project opportunities as we continue to build our presence in attractive regions of the US while further advancing our competitive position in the equipment rental industry. We are now ready to begin the Q&A period. Operator, please provide instructions. Thank you.\nQuestion and Answer Session\nOperator\n (Operator Instructions) Steven Fisher, UBS.\nSteven Fisher\n Thanks. Good morning, all. I just want to start off with a clarification. Last quarter, you talked about the decline in rental rates as a function of mix of megaprojects. Can you maybe just parse out what the rate impact would be excluding the megaproject impact? Would it still be negative year over year as a function of just the broader market conditions? And what's the expectation you have there for Q4.\nBradley Barber\n Steven, good morning. We're not providing the rates at that level. But let me say that when we view our small- and medium-sized customer base, those rates still see some incremental gains. And it's a very fair conclusion that the entirety of our decrease is because of our moving product to these larger megaprojects for longer duration. So no end market, local market, small-, medium-sized customer price degradation to -- none, zero. And in some cases, still, we're getting minimal gains. Our price decrease is clearly reflective of our transition of more OEC to mega projects.\nSteven Fisher\n Okay. And then I guess just to follow on to that, when you have a more positive outlook for 2025. In theory, if the rental rates are still holding in there positive on the non-megaprojects, I'm curious if you think that would continue in '25? And really just more of the question about, do you think you could see any stabilization of your rental rates overall, especially, if you're -- I guess, in light of the fact that you might have even more megaprojects next year? So just curious if there's a path to stabilizing rental rates in '25.\nBradley Barber\n Sure. I think there certainly can be. I have no doubt we're going to continue to deploy more product to megaprojects. And that's going to have some incremental decline or incremental pull on our rental rates, as you saw in this quarter. I have no reason to believe that the rate trajectory will be dissimilar to what we've seen here in the most recent quarter., so really small but likely incrementally down on a sequential basis. The question of when will we see an inflection so that it levels out completely and has no more downward trajectory, and more importantly, starts to increase is difficult to answer. I think that's possible in the back half of '25. The discipline we see with our competitors buying product -- we're all focused on one thing and that is continuing to get returns for our investors. So I don't see a lack of disciplined behavior. At some point in time, these decrease in interest rates will make local project work more desirable from a cost standpoint. And when that happens, we fully expect to see price increases start to improve. But I anticipate -- let me answer one more way. We anticipate zero price decreases with our small and medium customers. We are not going to invest and grow our business in the face of declining rates with our traditional customer base. And as we've talked about many times, and I think most folks understand, megaprojects come with an attribute of this long-term large quantity of products deployed on a particular job, which still gives a very positive yield.\nOperator\n Steven Ramsey, Thompson Research Group.\nSteven Ramsey\n Good morning. Wanted to -- think about megaprojects a bit more. Kind of, two questions on that. Is the competitive backdrop on megaprojects still favorable or competitive pressures evolving in a way that maybe makes the returns not as attractive as early on? And then, secondly, as you think about capturing this opportunity from a strategic standpoint, do you think you need to limit your exposure here in any way? Or is it just go full throttle at megaprojects until local markets come back and then you shift a bit to capture that?\nBradley Barber\n Sure. Well, let me take the first question first. From a competitive standpoint, no change. Their competitive rate is a substantial factor for their cost, but we're not seeing any more aggression or further declines in rental rates. So it's more of the same. To the second part of your question, there are a variety of things we considered. It's certainly not foot on the gas and just take all we can get. Frankly, we could lower pricing a little bit more and achieve a little bit more. So we want to be measured in what we're going after. When we talk about this $537 billion that's addressable within our opportunity, we're talking about projects that are really close to our existing facilities. We're not stretching out and talking about things hundreds of miles away. We're talking about things that are very close and that we plan to call on. It depends on the geography. It depends on the nature of the product -- project. It depends on the customer that we may be dealing with. So we are very selective, and there are many other variables. But those are the three primary variables we consider as we're pricing these projects out. But no more aggression. It's more of the same. I don't think anyone's going to become inherently more aggressive, going forward. So I think we understand the environment very well and we're going to pick the ones that fit our variables as best possible.\nSteven Ramsey\n Okay. That's helpful. And then want to think about your intrinsic growth strategy long term with this kind of backdrop. If the demand environment in 2025 stays like this, mixed between locals lagging and mega's growing, does this change your view on increasing locations at the 12 to 15 kind of pace to position yourself for the longer term? Just kind of curious how you assess your growth strategy in a world where the sluggishness stays a bit longer.\nBradley Barber\n We certainly don't like the current sluggishness or the pace that it's slowing to the level it has. It's a lot more fun to open locations in a more robust environment. That said, and to your question, if we see the same type of environment going forward, we're going to continue to open 12 to 18 locations a year. We just opened our 16th location of the year, which we're basically done for this year's openings, based off of our schedule. But with the same environment that we're looking at today, you can expect us to open 12 to 18 locations in 2025. If we were to see, you know, a real decline, of course, we would be more measured in doing so. But as I said in my prepared statements, these are long-term investments. These are going to serve to give us returns for decades to come. And we announced them all individually. But we're going to the highest profile, most durable markets that contain substantial long-term growth opportunity for construction. So we're really comfortable with what we're doing in this current environment. We're going to do more of the same. If we see something shift more negatively, which is not our current view, then we certainly could and would slow down. But at this level, this is a very safe investment. It's going to pay a return for a long time.\nOperator\n Tim Thein, Citigroup.\nTim Thein\n Formally, I guess -- good morning. Just the first question is on -- and it maybe preliminary at this point, but just high level, how you're thinking about capital in '25 relative to the target this year that -- from a gross perspective of $350 million to $400 million? On the one hand, to the extent you go backwards to some degree on time this year but based on the optimism that you outlined and the potential for further rate hikes and what that may spur in '25, I guess, you have competing forces there. So maybe just some initial thoughts in terms of what you and the Board are thinking about from a capital perspective in '25.\nBradley Barber\n Sure. Well, let me -- thank you for the question, Tim. Our CapEx for the remainder of this year is going to be -- and I know you're speaking to '25. It's going to be primarily replacement. Our growth capital is now spent for the year. So in Q4, we'll have replacement capital. We're in the middle of our budgeting process as we speak. So we're just not in a position to comment on CapEx, going forward. I can tell you that we're seeing better pricing for manufacturers in selected cases. So we'll get a little bit better rental power on what we do spend next year, but it's just really too early to comment. Again, bear in mind, we're planning on 12 to 18 new locations in 2025. I think everyone's familiar with what we deploy in capital to open a location where they typically mature in the first full 12 months. Those locations are continuing to exceed our expectations. Again, we're going to the best markets we can find that independently are offering plenty of opportunity. But as far as '25 CapEx, it will be -- we'll be talking about that as we wrap the year up.\nTim Thein\n Got it. Okay. And, maybe just from the gleaning, what you may be able to from a time perspective. You're different, obviously being heavy in the earthmoving category, which, I think, tends to be a little bit more early cycle whereas aerials can tend to be utilized more later in a project life cycle. I'm just curious as to what you can or maybe can't glean in terms of where we are just across that construction cycle. If there are any notable trends you're seeing across utilization of your major product classes?\nBradley Barber\n Yeah, we've actually seen earthmoving make some improvements year over year. That's a product where we've not invested as much in this calendar year as we have before, to your question. But it's showing nice signs of improvement. Traditionally or typically, it's our highest dollar utilization category. And at this point in time, I can tell you when we look forward to 2025, we're not looking unfavorably at any particular product and certainly earthmoving is going to continue to be an opportunity for us. John, do you have anything to add to that?\nJohn Engquist\n The only thing I would add, Tim, and to Brad's point, we have shown some improvement in earthmoving utilization. And while we don't give specifics on each and every product line that we cover, they're not all equal. I mean, obviously, there's -- we have different utilization levels with different product lines. But again, moving forward, 2025 is going to be interesting, but it is a good sign to see earthmoving not only improving but up on a year-over-year basis.\nTim Thein\n All right. Maybe I'll sneak in one last one. On these new stores that you opened, you talked about typical 12- to 18-month misalignment as you kind of ramp up and the revenues lag the cost. As you've done more of it, you continue to do more of these. Is that shortening that time horizon, just as you -- there's some learnings along the way, maybe you become more efficient. Obviously, the market backdrop is a little softer. So I'm just curious if there's -- and maybe. it's a location by location thing. But if you've seen any trend in terms of that timeline as you bring on more of these new locations?\nBradley Barber\n Yeah, we have seen the timeline compress. Years ago, we used to talk in terms of 18 to 24 months for these locations to operate it, kind of like business metrics, time utilization, maintenance costs, [what have you]. We've seen that compress. The thing that's been different for us since June of '23, in the last 17 months, we've opened 30 locations. And so on a base of locations that we started on, it's certainly been part of what weighs incrementally on our utilization and incrementally on our SG&A. But to your question of how we progress, we're really comfortable in that 12 to 18 months. We're always looking to improve. But that's what we've grown to expect through our performance and improvements. And, of course, we look to shorten that as best possible. We're very comfortable that we can be productive and produce like business metrics, and they continue to grow over a number of years depending on the marketplace.\nOperator\n Alex Rygiel, B. Riley FBR.\nAlex Rygiel\n Good morning. A couple of quick questions here. First up, can you expand upon your comment that there is a slight oversupply of certain types of equipment?\nBradley Barber\n Just broadly, I mean, look, our utilization being down year over year is probably the best single indicator. We talked early in the year, and every quarter, we've been slightly disappointed. We always want more product on rent. That is a product of a slight oversupply of a variety of products. There's not one product type that we're personally well overweight on. Nor is there one product type that we think the overall industry is particularly overweight on. And you've seen everyone reduce their CapEx this year. Most folks who give CapEx guides have reduced somewhere between 30% and 40%. And we'll continue to do so until we think that supply overlap is gone. But what we're really saying is for our utilization to go up, there needs to be a little bit more work or a little bit less supply. We think -- we know megaprojects are continuing to unfold. We are hopeful that we will see the interest rate reduction start to spur, the local market work pick up in the second half of next year. And in the interim, we're going to be very disciplined as our competitors and what we're purchasing.\nAlex Rygiel\n And then used equipment sales are down year over year, sequentially. Can you talk a bit about the strategy there that's driving that?\nJohn Engquist\n It's really -- it's just basic fleet management. Looking at our fleet age under 41 months today, we just don't have the volume of equipment. That's aged out that we really need to get rid of. So really, that's the main reason. We have seen some softening obviously in certain categories for used equipment sales. Auction values have continued to decline. We think that they're going to be reaching a bottom soon. But while that's not our number one priority to sell fleet through auctions. It is one piece of the puzzle. We've seen some leveling off and some steadiness with retail and wholesale. But if there's one area that's been a little concerning, it would be auction values.\nOperator\n Katie Fleischer, KeyBanc Capital Markets.\nKatie Fleischer\n Hey. Good morning, guys. I wanted to see if you could give any commentary on how end markets trended throughout the quarter. Sounds like local accounts are still pretty depressed. And you haven't quite seen any recovery there. But just curious if you saw any incremental, either improvement or decline as you move throughout the quarter.\nBradley Barber\n Yeah. Well, we saw incremental improvement. Our utilization was up 120 basis points quarter over quarter. We see certainly more strength as you just characterized with megaprojects and deploying more. I don't -- we have not seen any further degradation in our local markets, but it would be unfair to say that they're picking up at the same time. But quarter over quarter, that 120 basis point utilization improvement tells you that things continue to adjust easily and that there was greater opportunity. So I think we're pretty steady as we go from here forward.\nKatie Fleischer\n Okay. And then my last question is just on used equipment margins. Those have been a little bit more resilient than I would have expected this year. Just curious how you're thinking about those going into next year. Is it fair to assume that you can continue that above 60% level, going forward?\nJohn Engquist\n Yeah, I think 60% going forward is going to be challenging. As I mentioned, we have seen some softening in used equipment values. As far as next year, I mean, we've stated on previous calls that we do expect to be able to maintain that 50%-plus gross margin. The past several quarters, we've achieved north of 60%. That's more a reflection of the age of the fleet that we're selling. I believe the fleet -- the age of our fleet sold in Q3 was about 75 months, which is on par with what it was in Q3 of the previous year. But looking forward, I mean, we're -- dispositions are going to be dependent upon what fleet comes -- meets our age criteria to sell within a particular quarter. So we still stand firm that we can achieve that 50%-plus gross margin, moving forward.\nOperator\n (Operator Instructions) Showing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Chastain for any closing remarks.\nJeff Chastain\n Okay, Gary. Well, thank you. We appreciate everyone taking the time to join us today and for your continued interest in H&E Rentals. We look forward to speaking with you again. Gary, thanks for the assistance on today's call. Good day, everyone.\nOperator\n Thank you. The conference is now concluded. Thank you for attending today's presentation. 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