Executive Summary

Q3 2024 revenue was $384.9M, down 4.0% YoY; diluted EPS was $0.85 vs $1.35 YoY as lower physical utilization, slight rate pressure, and branch ramp costs weighed on margins .
Equipment rental revenues rose 3.3% YoY to $326.2M and rental revenues rose 2.8% to $288.1M, reflecting network expansion despite softer local demand; sales of rental equipment fell 47.3% by design to preserve fleet age and value .
Adjusted EBITDA was $175.3M (45.6% margin) vs $191.4M (47.8%) YoY; gross margin declined to 44.5% on lower rental margins and unfavorable mix as fleet sales were reduced .
Physical utilization averaged 67.6% (−240bps YoY, +120bps QoQ); average rental rates were −0.1% YoY and −0.6% QoQ, largely due to a mix shift toward mega projects with longer duration and pricing flexibility .
Record expansion: eight new branches in Q3 (nine including October), bringing total to 157 locations across 32 states; management reiterated confidence in mega projects and intends to open 12–18 locations in 2025 .

What Went Well and What Went Wrong

What Went Well

Equipment rental revenues grew despite industry headwinds, aided by 27 new locations added since Q3 2023; rental revenues rose 2.8% YoY to $288.1M .
Used equipment margins remained strong at 60.2%, reflecting disciplined fleet sales and favorable age of dispositions (~75 months) .
Branch expansion accelerated: eight branches added in Q3 and a ninth in October; footprint reached 157 branches in 32 states, positioning HEES for mega projects and future growth .

Management quote: “A record number of eight branches were added in the third quarter… Our branch count is up more than 14% in 2024 and approximately 54% since the close of 2021.”

What Went Wrong

Total revenue declined 4.0% YoY and gross margin fell to 44.5%; rental margins decreased (51.2% vs 53.3% YoY) on lower utilization and modest rate pressure .
Net income fell to $31.1M (EPS $0.85) from $48.9M (EPS $1.35) YoY; adjusted comps are also lower given last year’s goodwill impairment adjustment .
SG&A rose 7.9% to $112.4M (29.2% of revenue) due to branch openings (≈$11M related to 27 new locations), creating near‑term margin headwinds before new branches mature .

Financial Results

Metric	Q1 2024	Q2 2024	Q3 2024
Revenue ($USD Millions)	$371.4	$376.3	$384.9
Net Income ($USD Millions)	$25.9	$33.3	$31.1
Diluted EPS ($USD)	$0.71	$0.91	$0.85
Gross Margin %	44.4%	45.5%	44.5%
Adjusted EBITDA ($USD Millions)	$161.7	$173.2	$175.3
Adjusted EBITDA Margin %	43.6%	46.0%	45.6%

Segment revenue breakdown (YoY comparison):

Segment	Q3 2023 ($M)	Q3 2024 ($M)
Equipment rentals	$315.8	$326.2
Sales of rental equipment	$52.7	$27.8
Sales of new equipment	$12.6	$14.1
Parts, service & other	$19.5	$16.8
Total revenue	$400.7	$384.9

KPIs and operating metrics:

KPI	Q1 2024	Q2 2024	Q3 2024
Physical (time) utilization %	63.6%	66.4%	67.6%
Dollar utilization %	37.0%	38.6%	39.4%
Rental rates YoY %	+2.9%	+1.9%	−0.1%
Rental rates QoQ %	−0.2%	−0.1%	−0.6%
Rental gross margin %	48.5%	51.0%	51.2%
Total equipment rental gross margin %	43.3%	45.5%	45.3%
Average fleet age (months)	39.9	40.0	40.8
SG&A as % of revenue	30.8%	29.7%	29.2%

Non-GAAP notes:

Q3 2023 had a $5.7M goodwill impairment; adjusted net income and EPS were $53.0M and $1.46, respectively, affecting YoY comparisons .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Gross fleet expenditures (CapEx)	FY 2024	$350–$400M (reduced from $450–$500M in Q1)	$350–$400M (maintained)	Maintained
Q4 2024 fleet CapEx mix	Q4 2024	N/A	Primarily replacement; growth CapEx for 2024 largely spent	Introduced
Branch openings plan	FY 2025	N/A	12–18 new locations	Introduced
Physical utilization & rental rates outlook	Q4 2024	N/A	Below year-ago measures expected to persist through year-end	Introduced
EBITDA flow-through margin	H2 2024	N/A	Pressure expected in back half on moderating rates, lower utilization, reduced fleet sales, higher new store costs	Introduced
Sales of rental equipment	H2 2024	N/A	Lower YoY expected in back half	Introduced
Quarterly dividend	Ongoing	$0.275/share paid; intent to continue	$0.275/share declared Nov. 15 for Dec. 13 payment	Maintained

Earnings Call Themes & Trends

Topic	Q1 2024 (Prior)	Q2 2024 (Prior)	Q3 2024 (Current)	Trend
Mega projects exposure	Highlighted multi‑year demand drivers (data centers, LNG, solar/wind) supporting long-term fundamentals	342 projects ≥$400M across 31 states; strong presence in Gulf/Southeast/Mid-Atlantic	$537B of projects in HEES regions; deployed on nearly half of those started; continued selective pursuit	Strengthening, expanding footprint
Rental rates trajectory	Flattish to slightly up; 2.9% YoY increase; modest sequential decline	Expect slight sequential rate pressure due to mega project mix; discipline in local markets	−0.1% YoY; −0.6% QoQ; pressure mainly mix-driven from mega projects, local rates stable	Mild sequential pressure from mix
Utilization	Lower YoY on weather/branch ramp; dollar util 37%	66.4% time util; sequential improvement; disappointment vs aspirations	67.6% time util; +120bps QoQ; −240bps YoY; dollar util 39.4%	Improving sequentially, still below YoY
CapEx	Reduced FY24 gross fleet to $350–$400M; quick flex if demand accelerates	Maintained $350–$400M; disciplined; seasonal peak Q3	Q4 focused on replacement; FY25 CapEx TBD amid budgeting, seeing better OEM pricing	Disciplined, replacement skew near-term
Free cash flow	Aim for meaningful FCF generation adjusted for transactions	Stronger FCF through cycle as scale builds; tuck-in M&A pursued	Liquidity strong; dividend continued; leverage ~2.2x, ample ABL availability	Improving profile, balance sheet solid
Competition/pricing discipline	Discipline across industry cited	Continued discipline; some aggressive mega project pricing; selective participation	Competitive backdrop unchanged; selective pursuit; rate aggression not increasing	Stable, disciplined
Product performance	—	Earthmoving showing improvement YoY; highest dollar util category	Earthmoving improved YoY; supportive into 2025	Improving

Management Commentary

“Despite weakness in these key metrics, rental revenues grew 2.8% compared to the year-ago quarter due largely to the steady expansion of our branch count…” .
“A record number of eight branches were added in the third quarter… Our branch count is up more than 14% in 2024 and approximately 54% since the close of 2021.” .
“Average rental rates declined 0.1% compared to the prior-year quarter and were down 0.6% from the second quarter… reflective of our transition of more OEC to mega projects.” .
“Our target range for 2024 gross fleet expenditures remains $350 million to $400 million…” .
“We anticipate zero price decreases with our small and medium customers… mega projects still give a very positive yield.” .

Q&A Highlights

Rental rates mix: Rate pressure is largely from mega project mix; small/medium local customer rates are stable to modestly up; potential stabilization in back half of 2025 if local projects improve with easing rates .
Mega projects competition: Competitive backdrop unchanged; HEES is selective, prioritizing proximity, project nature, and customer variables; no signs of increasing rate aggression .
2025 CapEx: FY25 CapEx still in budgeting; Q4 2024 CapEx primarily replacement; some better pricing from OEMs expected .
Earthmoving category: Utilization improving YoY; remains a high dollar utilization category; supportive outlook into 2025 .
Oversupply and used equipment: Slight oversupply persists industry-wide; auction values softening but retail/wholesale steady; strategy is disciplined fleet sales with strong margins .
Branch ramp: New store misalignment compressing to 12–18 months from 18–24 months previously, but expansion weighs on near-term SG&A/utilization .

Estimates Context

We attempted to retrieve Wall Street consensus (S&P Global) for Q3 2024 EPS, revenue, and EBITDA for HEES, but data was unavailable due to a mapping issue in the SPGI CIQ system. As a result, estimate comparisons are not included.
Implication: Without consensus, the post‑print market reaction likely hinged on the narrative (mega projects mix, sequential utilization improvement, branch expansion cadence) rather than a headline beat/miss.

Key Takeaways for Investors

The core rental engine remains resilient: equipment rental revenues grew YoY despite lower utilization and modest rate headwinds, driven by footprint expansion and young fleet age .
Near‑term margin pressure is primarily branch ramp and mix-related; SG&A leverage should improve as new stores mature over 12–18 months .
Mega projects are the strategic fulcrum: longer-duration deployments with attractive yields, albeit with rate optics that can modestly pressure averages; exposure is increasing into 2025 .
Disciplined CapEx and fleet sales strategy protects ROIC: FY24 gross fleet spend maintained at $350–$400M; Q4 replacement focus and reduced fleet sales stabilize fleet age and margins .
Watch catalysts: Dodge Momentum Index and easing rates could re-accelerate local project activity in H2 2025, helping rate stabilization and utilization lift .
Balance sheet/liquidity strong with net leverage ~2.2x and ample ABL capacity, supporting continued 12–18 branch openings in 2025 and dividend continuity .
Trading lens: Absent consensus comps, narrative focus is on sequential utilization improvement, durability of rental margins, and pace/returns of expansion; any signs of rate stabilization or stronger local demand would be stock‑supportive .

H&E Equipment Services, Inc. (HEES)·Q3 2024 Earnings Summary