H&E Equipment Services, Inc. (HEES) Q4 2022 Earnings Call Transcript

H&E Equipment Services, Inc. (NASDAQ:HEES) Q4 2022 Earnings Conference Call February 22, 2023 10:00 AM ET

Company Participants

Jeff Chastain - Vice President of Investor Relations

Brad Barber - Chief Executive Officer

Leslie Magee - Chief Financial Officer and Corporate Secretary

John Engquist - President and Chief Operating Officer

Conference Call Participants

Seth Weber - Wells Fargo Securities

Steven Ramsey - Thompson Research Group

Steven Fisher - UBS

Brian Brophy - Stifel

Alex Rygiel - B. Riley

Operator

Good morning, and invited to H&E Equipment Services Fourth Quarter 2022 Earnings Conference Call. All participants will beryllium successful listen-only mode. [Operator Instructions] After today's presentation, location will beryllium an opportunity to inquire questions. [Operator Instructions] Today’s telephone is being recorded.

At this time, I would for illustration to move nan telephone complete to Mr. Jeff Chastain, Vice President of Investor Relations. Please spell ahead.

Jeff Chastain

Thank you, and bully morning, everyone. Welcome to a reappraisal of 4th fourth and full-year 2022 results. We admit your information connected today's telephone and your continued liking successful H&E equipment. A property merchandise reporting our results was issued earlier coming and tin beryllium recovered on pinch each supporting statements and schedules astatine nan H&E website www.he-equipment.com.

Our chat this greeting is accompanied by a descent presentation, which tin besides beryllium recovered astatine nan H&E website nether nan Investor Relations tab and Events and Presentations. Joining maine coming are Brad Barber, Chief Executive Officer; John Engquist, President and Chief Operating Officer; and Leslie Magee, Chief Financial Officer and Corporate Secretary.

Brad will statesman today's discussion. But earlier I move nan telephone complete to him, if you will please proceed to descent three, I'll punctual you that today's telephone contains forward-looking statements wrong nan meaning of nan national securities laws. Statements astir our beliefs and expectations and statements containing words such arsenic may, could, believe, expect, expect and akin expressions represent forward-looking statements.

Forward-looking statements impact known and chartless risks and uncertainties, which could origin existent results to disagree materially from those contained successful immoderate forward-looking statement. A summary of these uncertainties is included successful nan safe harbor statement contained successful nan company's descent position for today's telephone and includes nan risks described successful nan consequence factors successful nan company's yearly study connected Form 10-K and different periodic reports.

Investors, imaginable investors and different listeners are urged to see these factors cautiously successful evaluating nan forward-looking statements and are cautioned not to spot undue reliance connected specified forward-looking statements. The institution does not undertake to publically update aliases revise immoderate forward-looking statements aft nan day of this call.

Also, we are referencing non-GAAP financial measures during today's call. You will find nan required supplemental disclosure for these measures, including nan astir straight comparable GAAP measurement and an associated reconciliation arsenic supporting schedules to our property merchandise and successful nan -- to today's position materials. Finally, unless specifically noted, each results and comparisons for nan periods reported and discussed this morning, are presented connected a continuing operations basis.

I'll now move nan telephone complete to Brad Barber, Chief Executive Officer of H&E Equipment Services.

Brad Barber

Thank you, Jeff. Good morning, and invited to our reappraisal of 4th fourth and full-year 2022 financial results. We admit your information this morning, and I convey you for your continued liking successful H&E.

Please proceed to descent four. I will statesman this greeting pinch a reappraisal of financial and strategical highlights successful nan quarter, followed by an update connected cardinal capacity metrics successful our rental business segment. Also having conscionable concluded an outstanding twelvemonth for our business, I want to place immoderate expected drivers of activity successful 2023, including favorable trends that should support different twelvemonth of robust activity.

I will past adjacent pinch a summary of our strategical achievements successful 2022, which included grounds results and rental fleet finance and description of our geographic coverage. I will besides place our strategical maturation initiatives for 2023. Leslie will travel pinch a broad reappraisal of 4th fourth financial results, including business conception capacity information and an update connected our superior and our superior building and liquidity, past we will beryllium happy to reside your questions.

Slide six, please. The 4th fourth of 2022 was 1 of our astir productive quarters connected record. We reported fantabulous financial results arsenic we person done each year, while reaching important achievements pinch important implications successful position of early operations and competitory positioning. Our fantabulous financial capacity was owed successful portion to resilient manufacture trends, which prevail passim nan period, while nan proviso of instrumentality remained constrained. These favorable factors produced patient fleet utilizations and further complaint appreciation resulting successful a 25.6% year-over-year betterment successful full revenues and a much than 35% summation successful instrumentality rental revenues.

In addition, EBITDA improved 56% complete nan aforesaid period. Each of these financial measures concluded 2022 astatine grounds levels. We besides recognized immoderate important strategical wins successful nan quarter, which included nan waste of our Komatsu earthmoving distribution business successful December of ‘22, efficaciously completing our translator to a pure-play rental business. This last measurement allows for greater gross stableness and separator appreciation passim nan cycle. The transaction resulted successful a summation connected nan sale, which Leslie will explicate arsenic portion of our financial review.

Further, we importantly precocious nan integration of One Source instrumentality pursuing nan closing of our acquisition successful October of ‘22, adding $139 cardinal successful fleet astatine OEC and 10 caller branches, six of which now places H&E successful nan Midwest. Other accomplishments see further occurrence pinch our accelerated branch description programme pursuing nan summation of 2 caller locations successful nan 4th quarter, bringing nan full number of caller locations added successful 2022 to 10. These branch additions successful operation pinch nan acquisition of One Source drove an 18% year-over-year summation successful our branch count, extending our operational scale.

Finally, we proceed to put successful our rental fleet pinch a gross finance of $128.3 cardinal successful nan quarter, resulting successful grounds gross expenditures for nan twelvemonth of $507.8 million. Our OEC concluded nan 4th astatine a grounds level of conscionable nether $2.4 cardinal aliases 26.8% greater than nan 4th fourth of 2021. I now want to delve deeper into nan results of our rental business.

On to descent seven, please. Strong halfway fundamentals successful nan quarter, mixed pinch our fleet growth, successful branch description programme and nan summation of One Source operations resulted successful a 34.6% year-over-year summation successful rental gross to $245 million. The result which was a caller grounds for nan rental business led to a gross separator successful nan 4th of 53.1% aliases 140 ground points up of nan twelvemonth agone quarter.

Rental rates successful nan quarter, which exclude One Source, remained impressive, improving 10.6% erstwhile compared to nan 4th fourth of ‘21 and 1.8% connected a sequential quarterly basis. Our mean rental complaint appreciation for nan full-year of '22 was arsenic impressive, finishing nan twelvemonth 9.3% amended than 2021. Each measurement remained among champion successful our industry. Our Smart Rate pricing platform, which is now utilized successful usage crossed each 10 One Source branch locations is expected to seizure valuable synergies successful early periods, owed to nan exertion of a move pricing methodology arsenic good arsenic improved instrumentality operation successful each location.

Physical utilization successful nan 4th fourth averaged a patient 72%, contempt unit from emblematic seasonal factors, including rainfall and wintertime conditions crossed respective geographic regions. These events contributed to a diminution successful nan measurement of 110 ground points, erstwhile compared to nan twelvemonth agone results and 130 ground points connected a sequential quarterly basis. Finally, dollar utilization successful nan 4th fourth was 41.9% aliases 260 ground points amended than nan aforesaid 4th successful 2021.

For nan year, dollar utilization averaged 40.9% aliases 410 ground points amended than nan erstwhile year, mostly demonstrating nan benefits from fleet management, including betterment successful fleet mix, higher rental rates and beardown beingness utilization.

Next, I want to springiness a breakdown connected our position connected nan 2023 manufacture outlook. Given nan divergent thoughts and opinions addressing nan macro system successful ‘23, I tin corroborate our optimistic position of nan manufacture has not diminished arsenic favorable trends proceed to reenforce important extremity markets starring to an anticipation of patient request for our equipment.

On to descent eight, please. Customer feedback regarding non-residential and business task backlog continues to bespeak a robust scope of activity successful 2023, which is expected to thrust patient fleet utilization complete nan year. The encouraging customer feedback is reinforced by projections of early non-residential building activity arsenic measured by nan Dodge Momentum Index. The building backlog parameter reported by nan associated builders and contractors and AIA's Architectural Building Index. Although caller results from each of these indicators has declined from historical precocious readings, they proceed to bespeak robust non-residential building task backlogs and progressive readying agendas, which is apt to bode good for 2023 and beyond.

In addition, we expect instrumentality request successful 2023 to beryllium supplemented by an summation successful national spending addressing U.S. infrastructure, manufacturing capabilities and renewable energy. Many of these projects will require extended periods of clip to complete. Finally, maturation successful rental penetration should thrust caller request for instrumentality arsenic nan operation of unfavorable fiscal conditions, including rising liking rates and lingering delays successful instrumentality deliverability thin to promote a displacement by definite customers distant from ownership of equipment.

A caller study from nan American Rental Association disclosed that compared to 2021, rental penetration improved 150 ground points successful 2022 to 53.8%. We judge further rental penetration is likely. We expect these aggregate catalysts for accrued rental request to consequence successful nan continuation of patient instrumentality utilization and to lend to an charismatic pricing situation characterized by humble sequential quarterly complaint improvement. Non-residential and business building projects accounted for 75% of our full revenues successful 2022.

We judge nan occurrence of our maturation initiatives, including finance successful our rental fleet and geographic description of our operational beingness has advantageously positioned our institution for caller opportunities successful these and different extremity markets, while our beardown operation of instrumentality and nan young property of our fleet person been instrumental successful driving greater customer liking successful H&E. We stay focused connected further maturation initiatives successful 2022 and judge this fundamentally sound manufacture will proceed to create charismatic opportunities for description .

Slide nine, please. As I mentioned earlier, H&E successfully added 10 caller branch locations successful each of nan past 2 years. The occurrence of our branch description programme was a captious constituent to our semipermanent strategy we purpose to summation our footprint and location density successful cardinal geographic regions that connection awesome prospects for nonresidential and business building growth.

Being mindful of this important maturation initiative, we scheme to adhd nary less than 10 locations successful 2023 and arsenic galore arsenic 15 pinch nan escalation suggestive of our description team's continued occurrence successful identifying locations pinch impactful opportunities for growth. Also, we are targeting a gross fleet finance of $500 cardinal to $550 cardinal successful 2023 arsenic we proceed to support existing stores successful nan caller branch locations pinch some a young fleet and a diversified operation of equipment.

The scope amounts to different twelvemonth of grounds gross expenditures for our rental fleet. Although 2022 original gross expenditure target was reduced owed to nan nonaccomplishment of definite manufacturers to meet their commitments, we judge our OEM person a much realistic knowing of accumulation volumes successful ‘23, and that will consequence successful achievable target scope contempt nan persistent disruptions successful nan proviso chain. Finally, charismatic acquisition opportunities proceed to look successful our manufacture and an information of suitable targets remains an ongoing portion of our broad scheme for maturation successful ‘23.

Slide 10, please. We opened 2023 pinch 120 branches crossed 29 states, including caller markets successful nan Midwest, South and greater density successful nan Southeast, Gulf Coast and West Coast.

Before I manus nan telephone complete to Leslie, I will adjacent by reiterating nan value of galore accomplishments successful 2022. These see nan completion of our strategical modulation to a pure-play rental business, grounds gross finance successful our rental fleet, nan continuation of branch description programme and nan acquisition of One Source. It is besides important to constituent retired our team's exceptional operational execution, which I judge has produced nan industry's champion rental complaint capacity and highest levels of beingness utilization.

Individually, each represents a important accomplishment for nan company. However, taken together, these strategical wins service to fortify sound guidelines for early operations and strategical maturation while escalating our competitory posture.

Now connected to descent 11, and I'll move nan telephone complete to Leslie for a broad reappraisal of our 4th fourth financial performance. Leslie?

Leslie Magee

Thank you, Brad. Good morning, and welcome, everyone. Before I statesman my reappraisal of nan 4th quarter, I want to first grow upon Brad's earlier comments relating to nan waste of our Komatsu earthmoving distribution business. The transaction pinch [Indiscernible] Payers Industries, LLC aliases WPI, which closed connected December 15, 2022, resulted successful rate proceeds of $29.2 million. A pretax summation of $15.4 cardinal was recognized successful nan quarter, including $12.9 cardinal recorded arsenic a summation connected nan waste of spot and instrumentality and $2.5 cardinal arsenic a summation connected different net.

As successful nan lawsuit of nan waste of 2 Arkansas distribution branches successful nan 3rd 4th of 2021, 4th fourth 2022 results were not adjusted for nan $15.4 cardinal summation connected nan waste arsenic nan transaction remains accordant pinch nan company's exit from each worldly business arrangements involving distribution. For nan liking of clarity, I will mention to nan WPI transaction during my review.

And pinch that, I'll statesman this greeting connected descent 12. Fourth 4th revenues totaled $353.1 cardinal improving $71.8 cardinal aliases 25.6%, erstwhile compared to nan 4th fourth of 2021. The betterment was led by our rental business, wherever gross roseate $63 cardinal aliases 34.6% connected a year-over-year basis. The business conception knowledgeable beardown support from a increasing fleet, fantabulous rental complaint capacity and publication from our acquisition of One Source.

We concluded nan 4th fourth pinch a fleet 5 arsenic measured by original instrumentality costs aliases OEC of astir $2.4 billion, representing a nett summation successful OEC of $498 million, erstwhile compared to nan 4th fourth of 2021. The fleet maturation included a grounds gross finance of $507.8 million, positive $139.2 cardinal resulting from nan acquisition of One Source.

Rental rates successful nan 4th quarter, excluding One Source, were 10.6% amended than nan twelvemonth agone 4th and 1.8% up of nan 3rd 4th of 2022. We closed 2022 pinch mean year-over-year rental complaint improvements of 9.3% among nan champion results successful our industry.

Average beingness fleet utilization successful nan 4th fourth was 72% was 110 ground beneath nan twelvemonth agone measurement pinch mean seasonal patterns successful nan quarter, modestly impeding results. Across different business segments, utilized instrumentality income successful nan 4th fourth saw its champion consequence successful 2022, improving to $30.2 million, compared to $29.5 cardinal successful nan 4th fourth of 2021.

Activity successful this conception has tally beneath historical levels, owed mostly to tight instrumentality supplies. Higher income of earthmoving and aerial activity platforms were mostly offset by little income of worldly handling equipment. New instrumentality income declined 4.5% to $21.5 cardinal compared to $22.5 cardinal successful nan aforesaid 4th of 2021.

Consolidated gross profit successful nan 4th fourth improved $41.2 cardinal aliases 34.8% to $159.4 million, compared to $118.2 cardinal successful nan twelvemonth agone quarter. With nan improvement, nan consolidated gross separator grew to 45.1%, compared to 42% complete nan aforesaid play of comparison. The 310-basis constituent betterment was owed mostly to higher rental margins and income of utilized equipment, on pinch a favorable gross mix.

Total instrumentality rental margins were 47.9% successful nan 4th fourth of 2022, compared to 46.3% successful nan year-ago quarter. Comparing different results to nan year-ago quarter, rental margins were 53.1%, compared to 51.7%. Used instrumentality margins were 51.2%, compared to 39.3%, pinch fleet-only margins, which exclude utilized instrumentality obtained done trade-in, coming successful astatine 54.5% compared to 41.9%.

Margins connected caller instrumentality income were 13.6%, compared to 14.5%. And finally, margins connected parts income improved 28.6%, compared to 25.8%, while work margins vanished nan 4th astatine 63.9%, compared to 63.5%.

Slide 13, please. Income from operations accrued $37.2 cardinal successful nan 4th fourth of 2022 aliases 89.4% to $78.8 million, compared to $41.6 cardinal successful nan 4th fourth of 2021. The separator successful nan 4th fourth improved to 22.3%, compared to 14.8% successful nan twelvemonth agone quarter. The betterment was owed chiefly to gains connected nan waste of property, works and instrumentality totaling $13.9 million, of which $12.9 cardinal related to nan antecedently mentioned transaction pinch WPI. In addition, higher gross margins connected rentals, utilized instrumentality income and a favorable gross operation of revenues contributed to nan separator improvement.

Let's proceed to descent 14. Net income successful nan 4th fourth totaled $51.2 cardinal aliases $1.41 per diluted share, compared to $21.7 cardinal aliases $0.59 per diluted stock successful nan twelvemonth agone quarter. Our effective income taxation complaint successful nan 4th fourth was 26.1%, compared to 25.8% for nan aforesaid 4th successful 2021.

Proceed to descent 15, please. EBITDA successful nan 4th fourth accrued $61.7 cardinal to $171.5 million, compared to $109.9 cardinal successful nan 4th fourth of 2021. The 56.1% increase, compared to a 25.6% betterment successful gross and resulted successful an EBITDA separator of 48.6% successful nan 4th quarter, compared to 39.1% successful nan year-ago quarter.

Our transaction pinch WPI contributed 440 ground points to our 4th fourth margin, owed to nan pretax $15.4 cardinal gains recorded connected nan waste of PP&E and different net. Of greater significance, nan separator benefited from an improved operation of revenues, higher margins connected utilized instrumentality income and rentals and a favorable consequence from SG&A, which decreased successful nan 4th arsenic a percent of revenue.

Next descent 16, please. Regarding SG&A, expenses successful nan 4th fourth totaled $94.5 million, an summation of $17.1 cardinal aliases 22%, compared to nan 4th fourth of 2021. The summation was owed chiefly to worker salaries, wages and adaptable compensation, arsenic good arsenic accrued headcount. In addition, higher installation expenses, master fees and depreciation added to nan quarter-over-quarter increase.

As a percent of revenue, SG&A expenses successful nan 4th fourth declined 80 ground points to 26.8%, compared to 27.5% successful nan anterior twelvemonth quarter. Approximately $3.3 cardinal of nan accrued disbursal successful nan 4th was attributable to nan summation of One Source pinch different $3.6 cardinal related to our branch description efforts, which added 10 caller branches complete nan year.

Slide 17. Capital expenditures successful nan 4th fourth totaled $128.3 million, including non-cash transfers from inventory, resulting successful a full gross superior finance for nan twelvemonth of $507.8 million. Net rental fleet superior expenditures successful nan 4th fourth were [$100.3] (ph) million, pinch nett rental fleet expenditures for nan twelvemonth totaling $424.1 million.

Gross PP&E superior expenditures for nan 4th fourth were $15.1 million. Following nan transaction pinch WPI, we recorded nett PP&E proceeds of $4.9 million. And our mean fleet property arsenic of December 31, 2022, accrued to 43.6 months, compared to 40.3 months successful nan twelvemonth agone 4th and 40.6 months successful nan 3rd 4th of 2022. Despite nan increase, which followed nan acquisition of nan One Source fleet, our fleet property proceed to comparison favorably to nan manufacture mean fleet property of 53.3 months.

Net rate provided by operating activities totaled $102 cardinal successful nan 4th fourth and $313.2 cardinal for nan twelvemonth and free rate travel utilized successful nan 4th fourth and full-year of 2022 was $128 cardinal and $233.3 million, respectively, demonstrating nan company's attraction connected fleet maturation and description done caller branch locations and acquisitions.

Slide 18. As I noted earlier, our rental fleet size based connected original instrumentality costs closed 2022 astatine astir $2.4 cardinal an summation of $498.5 cardinal aliases 26.8% larger than our fleet size astatine nan adjacent of 2021 and a grounds level for H&E. Average dollar utilization successful nan 4th fourth of 2022 improved to 41.9%, compared to 39.3% successful nan anterior twelvemonth quarter.

Let's move to descent 19, please. Net indebtedness astatine December 31, 2022, was astir $1.2 billion, compared to $892.7 cardinal astatine December 31, 2021. The summation was owed to a diminution successful rate and rate equivalents pursuing nan acquisition of One Source and our continued finance successful nan rental fleet. Net leverage successful nan 4th fourth was 2.2 times, fundamentally unchanged from nan twelvemonth agone quarter. We person nary maturities earlier 2028 connected our $1.25 cardinal of elder unsecured notes.

Slide 20, please. Our liquidity position astatine December 31, 2022, totaled $820.7 million, including a rate equilibrium of $81.3 cardinal and borrowing readiness nether our amended ABL installation of $739.4 million. Excess readiness nether nan ABL installation improved to astir $1.5 cardinal astatine December 31, compared to astir $1.1 cardinal astatine December 31, 2021.

The summation successful readiness reflects nan continued finance successful our fleet and our minimum readiness arsenic defined by nan ABL statement remains $75 million. By definition, excess readiness is nan measurement utilized to find if our springing fixed complaint is applicable. And pinch our excess readiness of $1.5 billion, we proceed to person nary covenant concerns. Also, we precocious completed an hold of our ABL installation pinch nan $750 cardinal in installments installation extended 5 years to February 2028.

Finally, we paid our regular quarterly dividend of $0.275 per stock of communal banal successful nan 4th fourth of 2022. And while dividends are taxable to Board approval, it is our intent to proceed to salary nan dividend.

Slide 21. In summary, H&E reached a caller level of financial capacity successful 2022 arsenic our timely displacement to greater rental strength served arsenic a highly influential catalyst for improvement. This successful modulation together pinch a move business situation led to galore execute movements complete nan year. They included records successful nan categories of full revenues, full rental revenues, gross separator and rental gross margin.

And successful addition, EBITDA long surpassed nan $0.5 cardinal level, closing nan twelvemonth astatine a grounds EBITDA separator of 43% aliases 600 ground points amended than 2021. These financial accomplishments together pinch grounds fleet finance and an 18% summation successful our branch count were important contributors to a twelvemonth of singular growth.

With caller strategical initiatives established for 2023, our maturation targets will beryllium supported by ample resources and a blimpish superior structure, including a liquidity position of astir $800 million. Also, we person nary elder unsecured statement maturities until 2028, and astatine 2.2 times, our leverage ratio remains astatine nan debased extremity of our guidance scope of 2 times to 3 times. We are prepared to build from our successes successful 2022, and we judge superior operational instauration is successful spot arsenic we participate 2023.

With that, operator, we are fresh to statesman our Q&A period.

Question-and-Answer Session

Operator

We will now statesman nan question-and-answer session. [Operator Instructions] Our first mobility is from Seth Weber pinch Wells Fargo Securities. Please spell ahead.

Seth Weber

Hey, guys. Good morning. Thanks for taking nan question. I conjecture possibly for Brad. Just trying to deliberation done really we should beryllium reasoning astir your rental gross separator successful nan lens of nan acquisitions that you've been doing and nan caller branch openings. Is that -- does that create a near-term headwind connected rental margin? Or conscionable really should we beryllium reasoning astir afloat twelvemonth incremental guidance aliases incremental targets for nan rental business? Thanks.

Brad Barber

Good morning, Seth. I'll return nan first portion of that Leslie whitethorn person thing to add. But your presumption is correct. Between nan acquisition accounting associated pinch nan fleet wherever we person immoderate further depreciation for a play of clip pinch One Source. And then, of course, nan lukewarm starts. While we're very happy. Our group of lukewarm starts, each 20 that we've opened successful nan past 2 years are -- we're performing arsenic a group exceptionally well. But they're a drag. I mean it takes them a while to ramp up to nan levels they are dragging respective different categories, but they're generating coagulated EBITDA and of course, adding really greater worth than we had planned for them to. So we're happy, but yes, they are a headwind.

As it pertains to nan incremental margin, Leslie, would you person thing that helps out?

Leslie Magee

Sure, bully morning, Seth. So our rental gross separator flow-through will, arsenic Brad stated, proceed to beryllium impacted by higher depreciation resulting from nan adjacent worth markup of nan fleet of symptom done One Source. A fewer different things to support successful mind. We expect that 2023 will see periods of normal seasonality pursuing nan twelvemonth of really small seasonality from a utilization perspective. And playing into rental gross separator flow-through was besides rates and Brad aliases John whitethorn want to adhd immoderate color. But nan anticipation of rates continuing astatine 2022 levels is astir apt not a adjacent assumption.

Seth Weber

Right, okay. Thank you for that. And past conscionable possibly Leslie, a follow-up connected conscionable CapEx guidance. Is that -- should we presume nan cadence is simply a much accepted cadence, benignant of, second, 3rd 4th weighted. Last mates of years person been benignant of each complete nan map, but do you consciousness for illustration 2023 is simply a much accepted cadence of bringing successful fleet? Or do you deliberation it's going to beryllium dispersed retired crossed nan twelvemonth again?

Leslie Magee

As of now, Seth, I deliberation we are looking astatine much of a normal cadence passim nan year.

Brad Barber

And Seth, I want to spell backmost and additionally respond. Yes, Leslie mentioned -- because I want to beryllium really clear here, our outlook is coagulated for this year, very positive. But arsenic you mentioned, 10% complaint betterment year-over-year, we're not expecting to nutrient 10% again. We acold outpaced nan location benchmark past year. We're exceptionally pleased pinch our group. We deliberation nan execution was fantastic. Our fleet operation has continued to improve. The usage of smart rates is afloat supported by our income force, and that's why we're getting these fantabulous outcomes.

That being said, what we're really comfortable pinch is that we're going to proceed to get incremental sequential capacity successful rates going forward. So we're not giving up connected complaint betterment aliases I deliberation we won't person it. We're going to person complaint betterment but nan little common. It conscionable won't beryllium astatine nan aforesaid grounds mounting levels.

Seth Weber

Yes. Understood guys. I admit it. Thanks again.

Brad Barber

Thank you.

Operator

The adjacent mobility is from Steven Ramsey pinch Thompson Research Group. Please spell ahead.

Steven Ramsey

Hi, bully morning. Wanted to inquire first connected mega projects, clearly, a large communicative successful non-rev and for rental companies. How overmuch of a facet is this successful your caller results? And arsenic you look astatine 2023, moreover this bid of magnitude is this a sizable percent of rental revenue.

Brad Barber

Sure. Good morning, Steven. In our existing results you're looking at, it's truthful nominal, it wouldn't show up. That being said, we've sewage our institution surgery into 3 divisions: East, West and Central. And we person presently progressive mega projects, much specifically, infrastructure, governmental supported infrastructure task successful each area of nan country. So we're starting to spot that work. We've sewage instrumentality connected task arsenic we speak, truthful it's emerging.

I deliberation it's only going to further accelerate arsenic we move passim nan twelvemonth and really worldly it becomes, I don't cognize that we're fresh to springiness guidance connected it, but we're very encouraged and it's going to go a meaningful portion of further marketplace opportunity going forward. So it's affirmative to spot that it's existing today. We're connected these projects, and we will beryllium connected much projects each clip we get connected a telephone for nan remainder of this twelvemonth for sure.

Steven Ramsey

That's helpful. And a speedy adhd connected to this topic. Do you request to displacement strategically aliases operationally successful immoderate measurement to afloat return advantage of this? Or is this conscionable normal operations pinch an added marketplace opportunity?

Brad Barber

No, location is nary shift. I would opportunity what's important is our strategical income efforts good successful beforehand of nan opportunities. When you're dealing pinch projects that are measured starting pinch $1 cardinal and possibly arsenic overmuch arsenic $40 cardinal aliases $50 billion, you don't hold excessively precocious to participate. So we're strategical successful making judge that we attack is astatine nan correct clip pinch nan correct strategy. But operationally, we execute nan aforesaid measurement we ever have. It's conscionable associated pinch fleet guidance and our income unit effort.

Steven Ramsey

Okay, great. And past reasoning astir your regions pinch half of your gross profits coming from nan Gulf Coast and nan Southeast intelligibly a awesome spot to beryllium now and for nan long-term. How overmuch do you want to turn successful that surface science pinch much fleet successful branches? Or would you for illustration expanding successful different geographies, possibly your branch openings bespeak immoderate of this? So conscionable immoderate thoughts there?

Brad Barber

The short reply is, of course, both. We are not deterred by nan density, we for illustration greater density and nan Southeast region, wherever we get astatine astir 50% of our gross margin, I deliberation arguably has been and will apt beryllium nan hottest portion of nan state for sustainability and growth. That being said, we person tremendous opportunity to proceed to grow our scope arsenic evidenced by immoderate of our excitement pinch One Source putting america successful six caller markets successful nan Midwest. And truthful you're going to spot america do both. If we had to flip a coin and prime 1 aliases nan other, we're going to look astatine nan robustness of nan marketplace. We're going to look astatine disposable facilities. And past we're going to look astatine nan squad we tin combine and that's what's going to thrust america to either summation density aliases to dispersed retired a small spot further. But we're happy pinch our footprint. You'll spot america filling it retired arsenic good arsenic expanding it.

Steven Ramsey

Great. And past past speedy 1 for me, and I whitethorn person missed this successful nan prepared comments. On SG&A leverage, bully leverage against full gross successful nan 4th fourth and beardown capacity arsenic a percent of rental revenue. Can you talk astir SG&A leverage successful 2023 aliases nan longer term?

Brad Barber

I'll fto Leslie respond to that.

Leslie Magee

Sure. So conscionable arsenic a reminder, we vanished nan full-year 2022 astatine 27.6% of revenues. And considering our warm-start strategy, I deliberation this is simply a adjacent presumption for now moving into 2023.

Steven Ramsey

Great. Thank you.

Operator

The adjacent mobility is from Steven Fisher pinch UBS. Please spell ahead.

Steven Fisher

Hi, thanks. Good morning. Just wanted to follow-up connected nan rates. Brad, you mentioned nan imaginable for humble sequential quarterly complaint improvement. Can you conscionable possibly springiness america a consciousness of really that translates year-over-year? I cognize you said you wouldn't do different 10%, but I conjecture others person targeted benignant of mid-single-digit range. Does that sound astir correct successful your mind arsenic well? Or really are you reasoning astir that?

Brad Barber

It does sound astir right, mid-­single-digits. What's going to beryllium interesting, Steve, arsenic nan twelvemonth unfolds. We cognize we consciousness very definite we're going to proceed to get these incremental gains quarter-to-quarter-to-quarter. We've sewage momentum coming into nan year. So I deliberation our position is much presently successful nan 3% to 5% range, but yes, mid-single digits.

Steven Fisher

Okay. And are you going to proceed to study that X One Source aliases will that conscionable beryllium benignant of a mixed measure?

Brad Barber

We are going to -- and fto maine show you nan logic we're reporting astatine X One Source is One Source did not person nan data, nan twelvemonth agone information proviso to way would person allowed america to adequately do a measure. We would person had to person a placeholder aliases an assumptive placeholder to measurement against. So for nan first 12 months, we were not going to study pinch One Source. I'd additionally opportunity that there's a batch of opportunity we want root for complaint improvement, and we're seeing that already.

John, do you want to adhd to immoderate of what we're seeing pinch One Source pinch smart rates currently.

John Engquist

Yes. So obviously, we've sewage them onto our level now. We did -- that was 1 of nan large synergies erstwhile we looked astatine One Source was nan pricing synergies. And now that we person them progressive connected our system, we're already seeing coagulated sequential month-over-month increases. And we expect that to continue, and we expect a batch for 2023. So each affirmative there.

Steven Fisher

That's great. And what astir nan effect of One Source connected utilization? Do you spot opportunities location to amended utilization arsenic well? And really will that [Multiple Speakers]

John Engquist

Yes, we do, we do. They're not moving astatine nan aforesaid levels that we are currently. But again, we spot that arsenic an opportunity, not only pinch nan utilization, but pinch nan fleet mix, and that's thing that we're focused on. And we're going to proceed to make those improvements passim nan year. So we look guardant to reporting connected that advancement later successful nan year.

Brad Barber

Yes, Steven. And obviously, their beingness utilization is conscionable bespeak successful our wide institution capacity because we measurement that astatine a constituent successful time. So we cognize wherever we are there. And arsenic John conscionable stated, that's different opportunity, and we're very pleased pinch our advancement pinch that squad truthful far.

Steven Fisher

Great. And conscionable lastly, there's been a batch of chat connected nan telephone astir nan spot of request and nan mega projects and crossed nan regions. So I guess, I'm funny if you tin springiness america a consciousness of what variations you spot successful request astatine this point. We do consciousness location is immoderate mixed messages coming from various parts of nan non-residential building marketplace arsenic liking rates benignant of select through. How do you spot that variation? Or do you not spot it benignant of filtering into your business astatine all?

Brad Barber

We conscionable don't spot it arsenic much. And I've seen immoderate of nan aforesaid reporting I deliberation you whitethorn beryllium referring to aliases akin reporting. And I deliberation we're a small much isolated pinch nan surface science we cover. I mean these high-growth, 29 states we hap to beryllium successful are holding up amended than immoderate of nan areas wherever I've seen immoderate pauses. We consciousness arsenic beardown coming arsenic we did a 4th aliases 2 quarters agone astir nan opportunities successful beforehand of america successful mega projects, whether they beryllium stimulus related aliases not are conscionable going to beryllium further substance for our fire.

Steven Fisher

Terrific. Thanks very much.

Brad Barber

Thank you.

Operator

The adjacent mobility is from Stanley Elliott pinch Stifel. Please spell ahead.

Brian Brophy

Hi, bully morning. This is Brian Brophy connected for Stanley. Congrats connected nan quarter. I was hoping you could talk a small spot much astir smart rates. Give america a small spot much colour connected immoderate of nan actions you're taking there? And what's your consciousness for really overmuch that contributed to nan complaint maturation successful nan 4th quarter?

Brad Barber

Well, we -- Smart Rate is simply a move programme that's proprietary to our company. We've developed it astir apt 5 aliases six years astatine this point, and we proceed to cleanable it arsenic we move forward. And it uses a assortment of information points, some real-time, existing pinch what's going connected wrong our branch, wrong our section region aliases districts of course, arsenic good arsenic market-related data. We usage customer floor plan size of customers and galore different information points again, since it's proprietary, we don't talk successful immoderate greater item astir really we weight these variables.

But what I tin show you is nan operation of our master income force, knowing nan powerfulness of this accusation and being motivated to usage it astatine nan constituent of request is what has transpired to springiness america a amended than 10% summation Q4 complete Q4. So also, arsenic I mentioned, I judge earlier possibly successful nan first question, we acold outpaced -- I judge we acold outpace each of our competitors, larger competitors past twelvemonth pinch complaint improvement. And past we person entree to nan Rouse benchmark information that lets america truthful we outpace nan benchmark by a bully separator arsenic well.

So our position of that moderating should not beryllium interpreted that there's thing going connected successful nan marketplace aliases that we are little focused successful immoderate measurement of achieving greater rates. It's conscionable location is simply a marketplace retired there, and we person to beryllium competitive. And truthful we're going to -- you'll spot much incremental gains going forward.

Brian Brophy

Got it. Yes, that's helpful. Thank you. And past connected utilized gross margins, obviously, rather beardown this past year. How sustainable do you deliberation that inclination is going into 2023? Or astatine immoderate constituent do you deliberation we commencement to normalize backmost to mid-30-ish type of utilized instrumentality margins that you guys person historically put up? Thanks.

John Engquist

Yes, Brian, I'll return that one. So we don't spot ourselves going backmost to nan mid-30 gross separator connected utilized income nan utilized markets today, pricing is strong. We cognize that pricing peaked retired precocious past year. But from what we're seeing, we spot continued strength. I mean, I would not beryllium amazed for america to proceed connected pinch utilized margins successful nan 50% range. So again, we expect a patient utilized instrumentality marketplace for nan equilibrium of nan twelvemonth and assured we tin execute that level.

Brian Brophy

Got it. Thanks, that's really helpful. And past tin you thief america pinch nan modeling effect from nan Komatsu distribution sale? How should we deliberation astir that flowing done 2023?

Leslie Magee

The biggest point to constituent retired is I would opportunity that nan Komatsu business that we sold was accounted for a small much than half -- a small much than 50% of our caller instrumentality sales. So decidedly support that into nan account. And past arsenic good arsenic we would expect our parts and work business to diminution related to nan Komatsu sale, not astatine that aforesaid complaint because nan bulk of nan gross sold were new.

Brian Brophy

That’s very helpful. I’ll walk it on. Thank you.

Operator

[Operator Instructions] The adjacent mobility is from Alex Rygiel pinch B. Riley. Please spell ahead.

Alex Rygiel

Thank you. In nan past, I deliberation you've stated that you would walk much connected your rental fleet if nan instrumentality was available. So I conjecture my mobility present is, has nan world proviso concatenation for non-improved astatine all? And if so, really should we deliberation astir benignant of nan outlook for nan proviso concatenation done 2023?

Brad Barber

Yes. Good morning, Alex, I don't judge that nan proviso concatenation has improved capable to talk astir an improvement. I deliberation what has improved is our manufacturers understand nan situation they're successful and their readying is overmuch much crisp this twelvemonth than it was nan aforesaid clip a twelvemonth ago. But no, there's still a existent disruption retired there. There's still a deficiency of availability, and we are still successful a position wherever we could return much instrumentality than we are presently readying for successful our existing forecast.

So it will fto up. I mean, look, nan agleam broadside of this is it conscionable continues to stress nan proviso and request imbalance that gives america nan assurance connected coagulated utilization going guardant and this incremental betterment successful rental rates connected a sequential basis.

Alex Rygiel

And secondly, arsenic it relates to One Source, I deliberation it was expected that utilization would beryllium beneath benignant of institution averages for immoderate time? Do you person immoderate amended visibility connected that and erstwhile it mightiness benignant of scope institution averages?

John Engquist

Yes. I would opportunity successful nan backmost half of nan year, you look astatine nan -- wherever nan One Source locations are, astir of which are successful nan Midwest, seasonality is simply a bigger facet location than what we would typically spot successful immoderate different markets. So I would opportunity arsenic we get later into nan twelvemonth -- into nan 3rd quarter, we should commencement to spot that level retired and get person to those institution averages. But look, this could beryllium a 12-month task aliases it could hap a small spot sooner, but we are focused connected it, and we cognize there's an opportunity to improve.

Brad Barber

Yes. And we're getting affirmative gains already. So I 2nd John's comments there, I deliberation that group will beryllium performing astatine institution utilization levels by year-end, if not sooner.

Alex Rygiel

Very helpful. Thank you very much.

Brad Barber

Thank you.

Operator

This concludes our question-and-answer session. I would for illustration to move nan convention backmost complete to Jeff Chastain for immoderate closing remarks.

Jeff Chastain

Okay. Thanks, Gary, and spell up and reason today's call. We admit everyone taking nan clip to subordinate america coming and for your continued liking successful nan company. We look guardant to speaking pinch you again soon. Gary, acknowledgment again for nan assistance, and bully day, everyone.

Operator

The convention has now concluded. Thank you for attending today's presentation. You whitethorn now disconnect.