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