H&E; Equipment Services (HEES) Q1 2021 Earnings Call Transcript

H&E Equipment Services (HEES -0.15%)
Q1 2021 Earnings Call
Apr 27, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to H&E Equipment Services first-quarter 2021 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Kevin Inda, vice president of investor relations.

Please go ahead.

Kevin Inda -- Vice President of Investor Relations

Thank you, Kate, and welcome to H&E Equipment Services conference call to review the company's results for the first quarter ended March 31, 2021, which were released earlier this morning. The format for today's call includes a slide presentation, which is posted on our website at www.he-equipment.com. Please proceed to Slide 2. Conducting the call today will be John Engquist, executive chairman of the board of directors; Brad Barber, chief executive officer; and Leslie Magee, chief financial officer and secretary.

Please proceed to Slide 3. During today's call, we'll refer to certain non-GAAP financial measures, and we've reconciled these measures to GAAP figures in our earnings release and in the appendix to this presentation, each of which is available on our website. Before we start, let me offer the cautionary note that this call contains forward-looking statements within the meaning of federal securities laws. Statements about our beliefs and expectations and statements containing words, such as may, could, believe, expect, anticipate and similar expressions, constitute forward-looking statements.

Forward-looking statements involve known and unknown risks and uncertainties which could cause actual results to differ materially from those contained in any forward-looking statement. A summary of these uncertainties is included in the safe harbor statement in the company's slide presentation for today's call and also includes the risks described in the risk factors on the company's most recent 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.

With that stated, I will now turn the call over to Brad Barber.

Brad Barber -- Chief Executive Officer

Thanks, Kevin, and good morning, everyone. Welcome to H&E Equipment Services first-quarter 2021 earnings call. On the call with me today are John Engquist, executive chairman; Leslie Magee, our chief financial officer; and Kevin Inda, our vice president of investor relations. I'll begin on Slide 4.

I will briefly discuss our first-quarter highlights, the performance in the trends in our rental business and provide an update on our growth strategy. Leslie will review our financial results for the quarter in more detail. After, we will take your questions. Slide 6, please.

We're becoming increasingly optimistic that the cycle may be nearing a return to pre-pandemic levels. Demand in our end-user markets continued to improve throughout the first quarter, particularly with our rental utilization. The historic winter storm in February was an unexpected headwind for our business during the quarter as approximately 40% of our branches were closed for nearly a week. Even after the weather cleared, the severity of the storm had an extended impact on some of the hardest-hit areas.

Despite the impact from the storm and lower-than-expected financial results from this disruption, we're pleased with our operational performance and continued forward momentum in our rental business. Total revenues in the first quarter were down 2.6% or $7.5 million from a year ago, and we're making significant strides toward further improvement as the year progresses. Slide 7, please. Now, let me provide some additional color on the momentum in our rental business.

To frame the cadence of improving customer demand during the quarter, look at our physical utilization trends during the period. As I said on our fourth-quarter call, we started the year just under 60%, and we expect that utilization to be slightly challenging during the first quarter due to typical seasonality. From the end of December to the end of January, utilization increased 430 basis points. From the end of January to the end of February, utilization rose another 170 basis points despite the impact from the winter storms.

From the end of February to the end of March, we gained another 260 basis points. Also, in early March, physical utilization surpassed our 2020 levels, which was before we realize the full impact of COVID later in the month. Thus, we eventually landed a utilization of 63.5% for the first quarter, which was down just 80 basis points from a year ago. Currently, utilization is running significantly higher than this time a year ago, up nearly 1,000 basis points ahead of the 2020 and within 370 basis points on the same period in 2019, which was a very good year for our rental business.

We are pleased that our rental rates are also stabilizing, down 4% versus year ago and 0.2% sequentially, an improvement from declines of 4.5% and 0.3% in the fourth quarter. As we progress into the stronger seasonal quarters, we expect to see rental rates show sequential positive increases. We are also encouraged by the recent rebound in several key industry indicators. The February Dodge Momentum Index rose 7.1% to 149 from the revised January reading of 139.1, the highest level in nearly three years.

The March ABI increased to 55.6% from 53.3% in February, reaching the highest point since July 2007. The ABC Backlog Indicator and ABC Customer Confidence Index have also shown solid improvement in recent months. This data certainly correlates with the sentiment of our customers which continues to grow increasingly positive as we move into the year. As we know, a federal infrastructure proposal is on the table.

And over time, we will see how the potential bill unfolds. Any meaningful bill that passes would likely be a benefit to H&E. With earthmoving comprising 23% or $400 million of our $1.8 billion total rental fleet and consisting of a wide range of dirt products, we're in a good position to benefit from an infrastructure-related project. Let me quickly provide some observations about the Gulf Coast, specifically Texas.

The state fully lifted restrictions associated with COVID-19 much earlier than many others, and our business there is doing well. Energy-related work is coming back, and new projects are abundant. Furthermore, Texas is not waiting on an infrastructure bill. Texas DOT recently announced it would let almost $10 billion in new construction projects in fiscal-year 2021, which is up 27.5% year over year.

Additionally, the winter storms wreaked havoc on Texas, as well as other adjoining states with mass power outages, water system failures and other major problems. Correcting these issues will be a massive effort and could result in significant spending on projects to ensure these infrastructure failures never occur again. We remain very bullish about our opportunities in Texas and along the Gulf Coast. Overall, demand is solid, industry indicators are positive, and business conditions continue to improve.

Our market position is strong, and we have an expansive and growing footprint in high-growth geographies. We like our exposure to a wide range of verticals in the nonresidential construction segment and other healthy end markets. H&E has all the tools to capitalize on these improving conditions. Slide 8, please.

Let me conclude by providing an update on our growth strategy. In terms of our organic growth plans, we believe that our expansion team is on track to accomplish our goal of opening eight to 10 starts this year. We opened two new branches in the first quarter in Lodi, California and; Concord, North Carolina. With Lodi, we have 10 branches in California and further expect to expand our presence in the state.

Our new branch in Concord, North Carolina, will complement our existing branch in Charlotte and brings the number of H&E branches in the state to eight. Thus far, in the second quarter, we have opened another five branches, including Murfreesboro, Tennessee; Longview, Texas; Macon, Georgia; Knoxville, Tennessee; and Marietta, Georgia. Our Murfreesboro location positions us within a second branch just 25 miles from our existing Nashville facility to adequately support our current customer activity and new business from nearby municipalities. With Longview, we'll be able to capture new business and provide greater convenience to our customers in areas between the growing Dallas, Texas and Freeport, Louisiana markets.

We now have 22 branches in Texas. Macon allows us to serve customers between Central Georgia and existing facilities in Atlanta, Savannah and Opelika. Marietta positions a third branch near Atlanta, one of the fastest-growing cities in the past 10 years and increases our total locations in the state to five. Knoxville is the third largest city in the state and gives us our fifth location in Tennessee.

With seven new locations opened year to date, we're clearly executing upon this component of our growth strategy. Lastly, our balance sheet remains strong, and we continue to explore opportunities to deploy capital for acquisitions in the general rental and specialty segments that will complement our existing business and further expand our geographic scale and product offering. With this, I will now turn the call over to Leslie to discuss our first-quarter financial results in more detail. Leslie?

Leslie Magee -- Chief Financial Officer and Secretary

Good morning, everyone, and thank you, Brad. Let's proceed to Slide 11 for more details of our financial results. As a reminder, the prior year's first-quarter results included a noncash goodwill impairment charge of $62 million identified in connection with an interim goodwill impairment test due to certain triggering events related to the impact to our business from the COVID-19 pandemic. Now let me move on to our first-quarter 2021 results.

We were pleased that total revenues were only down 2.6% or $7.5 million to $278.4 million compared to the same period a year ago, especially given the impact to our business from the winter storm. Rental revenues decreased 11.8% or $18.7 million to $139.9 million from $158.6 million a year ago. The size of our fleet decreased by 8.4% or $161 million compared with the prior-year comparable period. Rental rates this quarter declined 4% year over year.

However, rates were down only 0.2% sequentially. Even though the prior-year comparable period was before significant impact to our business from the -- from COVID-19, time utilization in the current quarter decreased only 80 basis points to 63.5% compared to a year ago. Consequently, our dollar returns decreased 110 basis points to 32% compared to last year. New equipment sales increased 22.3% to $37.7 million, compared to $30.9 million last year.

The improvement was primarily the result of a 72.3% or $6.1 million increase in new crane sales. Used equipment sales increased 33.8% or $10.5 million to $41.8 million and was primarily the result of higher sales in all product categories, except cranes. Sales from our rental fleet comprised 93% of total used equipment sales embedded in the comparative period. Our parts and service segments generated $40.1 million in revenue on a combined basis, which is down 13.9% from a year ago.

Moving on to a discussion of gross profit and margins. Gross profit decreased 11.8% to $93 million from a year ago. Consolidated margins were 33.4%, compared to 36.9% a year ago, primarily because of lower gross margins on rentals and used equipment sales, combined with revenue mix. For gross margin detail by segment, rental gross margins were 42.1% during the quarter, compared to 46.1% a year ago due to pressure on rates and time utilization.

Also, the prior-year comparable period included an additional billing day as a result of leap year on February 29, 2020, which we estimate accounted for approximately 60 basis points of the decline in the first quarter of 2021 rental gross margin. Margins on new equity sales increased to 11.4% during the first quarter, compared to 11.2% a year ago as margins were higher in all product lines with the exceptions of new crane and new other sales. Used equipment sales gross margins decreased to 32.1% from 34.5% last year, primarily due to lower margins in all categories, except other used equipment gross margins. Margins on pure rental fleet-only sales were 34%, compared to 36.4% a year ago.

And our parts and service gross margins on a combined basis were 41.6%, compared to 41.1% a year ago. Slide 12, please. Income from operations for the first quarter of 2020 was $18.5 million or 6.6% of revenues, which is compared to a loss from operations of $31.9 million in the prior-year period. Included in loss from operations for the first quarter of 2020 was a $62 million noncash goodwill impairment charge.

Excluding the impairment charge, income from operations was $30.1 million or 10.5% of revenues a year ago. The declines in income from operations and margins compared to prior year on an adjusted basis was primarily a result of a 2.6% decline in revenue, revenue mix, lower gross margin and lower gain on sales of property and equipment of $4.1 million. Partially offsetting these declines in income from operations were lower SG&A costs of 7.1% or $5.7 million. Proceed to Slide 13.

Net income was $4.2 million or $0.11 per diluted share in the first quarter of 2021, compared to a net loss of $37 million or a loss of $1.03 per share in the first quarter of 2020. The effective income tax rate was 27.1% in the first quarter of 2021 and 21.9% in the first quarter of 2020. Excluding the prior year's impairment charge, net income was $2.8 million or $0.30 per diluted share in the first quarter of 2020. On an adjusted basis, the effective income tax rate was 26.2% in the first quarter of 2020.

Please move to Slide 14. Adjusted EBITDA was $83.2 million in the first quarter, compared to $99.2 million a year ago, a decrease of 16.2%. Adjusted EBITDA margins were down 480 basis points to 29.9% this quarter compared to a year ago, largely as a result of revenue mix. In addition, adjusted EBITDA margins were negatively impacted by lower gross margins, combined with lower gain on sales of property and equipment.

As mentioned, SG&A expenses declined $5.7 million or 7.1%, partially offsetting the aforementioned declines to adjusted EBITDA margin. Next, Slide 15. SG&A expenses for the first quarter of 2021 were $74 million, compared with $79.6 million in the prior year, a $5.7 million or 7.1% decrease. SG&A expenses in the first quarter of 2021 as a percentage of total revenues were 26.6%, compared to 27.8% a year ago.

Employee salaries, wages, payroll taxes and related employee benefits and other employee-related expenses decreased $3.4 million, primarily as a result of lower commissions and incentive pay, combined with headcount reductions, decreases in health insurance costs and worker compensation costs and other employee cost reductions implemented subsequent to the first quarter of 2020 in response to COVID-19 impact to our business. Bad debt expense decreased $1.3 million, and liability insurance expense decreased $0.9 million. Legal and professional fees decreased $0.6 million. Partially offsetting these decreases was a $1 million increase in accrued litigation loss contingencies.

Approximately $2.2 million of the total increase in SG&A expenses was attributable to our warm start openings compared to a year ago. Next, on Slide 16. On this slide, you will find capex, fleet capex and cash flow for the 12-month period ending March 31, 2021. And our gross fleet capex in the first quarter was $71.7 million, including noncash transfers from inventory.

Our net rental fleet capex for the first quarter was $32.9 million. Gross PP&E capex for the first quarter was $7.3 million, and net was $7.1 million. Our average fleet age as of March 31, 2021, was 41.5 months. Free cash flow for the first quarter of 2021 was $22.2 million, compared to a free cash flow of $40.5 million a year ago.

Next, on Slide 17. At the end of the first quarter, the size of our rental fleet based on OEC was $1.8 billion, an 8.4% or $161 million decrease from a year ago. Average dollar utilization was 32%, compared to 33.1% a year ago, reflecting lower time utilization and rates. Proceed to Slide 19, please.

We continue to operate with ample liquidity and no near-term maturity. At the end of the first quarter, we had no borrowings under our amended ABL facility and more than $300 million of cash on hand at quarter end. We had $741.3 million of cash availability at quarter end, net of $8.7 million of outstanding letters of credit. Our excess availability was $968.5 million at the end of the first quarter, which is the measurement used to determine if our springing fixed charge covenant is applicable.

With excess availability of nearly $1 billion, we have no covenant concerns. Also, our net leverage remains low at 2.4 times. We paid our regular dividend of $0.275 per common stock share again in the first quarter. And while dividends are always subject to board approval, it is our intent to continue to pay the dividend.

Let's now get into questions. Operator, please provide instructions for the Q&A session.

Questions & Answers:

Operator

[Operator instructions] The first question comes from Steven Ramsey of Thompson Research Group. Please go ahead.

Steven Ramsey -- Thompson Research Group -- Analyst

Hey, good morning. Maybe to start with. Fleet size, down 8%, improving outlook and obviously seasonality coming in. I mean how do you think about capex for the rest of the year? Would you prefer your capex to be even higher but the constraints at the manufacturer's level maybe slowing you down from maybe what you would prefer to do on the capex front?

Brad Barber -- Chief Executive Officer

Yeah. Good morning, Steven. The answer is I think we're very pleased with our capex that we have in the Q. There are some products we've really had an opportunity to pull forward, as Leslie mentioned.

We had a little headwind in SG&A costs related to pulling forward. We've opened now seven of these greenfield/warm starts for the year. That's been a little bit of a challenge. But generally speaking, we've been able to meet the expectations.

If there would be anything different, they're isolated products we would pull forward a little faster. But for the full year, we have no concerns. We got our orders in early, price protected very, very minimal, and in most cases, zero price increase. So we're satisfied that we've got the plan to fill our expectations.

Steven Ramsey -- Thompson Research Group -- Analyst

OK. Great. And then thinking about the winter weather impact, maybe how that hits Q2, are you seeing any kind of catch-up work there? Is it already caught up? Or do you expect higher fleet on rent in Q2, partly from the winter weather catch-up?

Brad Barber -- Chief Executive Officer

That disruption we had, had two specific impacts on our business. The one you're referring to is the pause it placed in our utilization. Having 40% of our locations shut down the better part of a weekend and some of that extended impact certainly paused it. So to that part -- to that -- to your question, we've resumed.

We've recently run back up close to 68% utilization. So our trend on rent continuing to improve has resumed, and we're satisfied with that. The area it had an impact to us, not in Q2, but in Q1 that we can't really replace or resume on, was in our parts and service business. When you lose those man hours, they're just lost.

It's not pent-up demand. We've got adequate demand on the parts and service side of our business, but it had more of a specific impact to parts and service side. But on the rental side, we're in good shape. Our utilization is trending back to our expectations, approaching 68%, and we expect that trend to continue.

Steven Ramsey -- Thompson Research Group -- Analyst

OK. Great. And one last quick one from me. Your outlook you had discussed, clearly the macros improving, and you talked some about what you're hearing from the sales force and customer feedback in the field.

Can you maybe share or clarify that? And if what you're hearing from customers and from your sales force is more or less optimistic than what you're seeing in some of the macro data?

Brad Barber -- Chief Executive Officer

It's more optimistic, clearly. If you were talking to a group of my salespeople,and ask them, did we have adequate fleet coming, to the extent they had a real view of the total plan, they would say no. We need to buy much more. And so as we're going to continue to grow the fleet where we see opportunities, that optimism is much higher in the field.

But we're also trying to balance against these rate improvements that we expect to make for the remainder of the year.

Steven Ramsey -- Thompson Research Group -- Analyst

Excellent. Thank you.

Brad Barber -- Chief Executive Officer

Thank you.

Operator

The next question is from Stanley Elliott of Stifel. Please go ahead.

Stanley Elliott -- Stifel Financial Corp. -- Analyst

Good morning, everyone. Thank you all for taking the question. Starting off, thinking about the weather impact, do those items come off rent? Just curious kind of how that will flow through. If you look at kind of that 40%, it seems like maybe a 3% sort of a headwind but just trying to make sure we're thinking about that correctly.

Brad Barber -- Chief Executive Officer

Yes. Some of them do come off rent. What you certainly don't get is you lose all your momentum going forward. As we pointed out, our utilization had continued to step up.

Every week in January, I think I covered on our fourth-quarter call, every week in January was sequentially improving in physical utilization. When we had that call the second week in February, it was improved over the end of January. And we talked about that cadence just continuing as well in my prepared comments. But to answer your question, you do get some off rents.

You certainly don't -- you certainly lose all your momentum, and you just kind of stand in place or tread water for a couple of weeks in that broader geography. And so that hurt us. Good news is that since resumed and we're back off and running and as optimistic as we were before that storm hits.

Stanley Elliott -- Stifel Financial Corp. -- Analyst

With the backlogs a lot of the OEMs are facing and some supply chain disruptions, things like that, do you guys have a view whether the rental channel could actually increase penetration this cycle or even over the next 12 months relative to new equipment purchases?

Brad Barber -- Chief Executive Officer

I believe the rental -- I think that is likely to occur. My view is that rental penetration in the short term and likely the longer term is going to continue to trend in the direction it's frankly been trending in for quite some time.

Stanley Elliott -- Stifel Financial Corp. -- Analyst

And then lastly, in terms of SG&A, lots of moving parts with kind of the slowdown and then some of the new adds. Is there any way we should think about that through the cadence for the balance of the year, especially with, what, like two more locations look to be opening?

Brad Barber -- Chief Executive Officer

Yeah. I'll let Leslie give a little more detail, but you nailed it, right? I mean we had this -- we had the slowdown. We've got these seven locations that we've opened in a pretty short period of time. Leslie, do you want to give some color on the cadence?

Leslie Magee -- Chief Financial Officer and Secretary

Sure. So on our last call, I stated that we ended the full-year 2020 at 24.7% as a percent of revenues, and we expect to see slight pressure as a percent of revenues compared to that for 2021. And that view is really unchanged, and that's really largely due to the warm start strategy that we have. And related to the cadence of that, Q1 is always the highest percent of revenue, just because of the seasonality.

So that should begin to settle down as the year progresses, down to that overall guidance that I gave.

Stanley Elliott -- Stifel Financial Corp. -- Analyst

Perfect. Thank you, guys. Best of luck.

Kevin Inda -- Vice President of Investor Relations

Thank you.

Brad Barber -- Chief Executive Officer

Thank you.

Operator

The next question is from Ross Gilardi of Bank of America. Please go ahead.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Hey, good morning, guys. Hey, Brad, can you talk a little bit more about that Texas infrastructure spend and the timing of that as to when it should get spent and where and kind of the types of projects? Any color there would be helpful.

Brad Barber -- Chief Executive Officer

What I was referring to specifically in the prepared comments was DOT spending, so roads and bridges primarily. Those projects will let throughout this year, and I do not have the schedule in front of me. But generally, they're largely let earlier in the year as opposed to later in the year. So I would need to research a little bit more to give you a firm assurance on that, but I would tell you that's the typical trend.

And I think what's nice to see is their projected letting is going to be up about 30% year over year.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

OK, OK. Interesting. And then are you seeing any signs that the smaller independent rental chains that maybe didn't order as early as you did are really struggling to obtain fleet and losing market share to yourselves and the national rental companies?

Brad Barber -- Chief Executive Officer

What I can tell you is, certainly, if they did not have their orders in, they're not going to get product is what I believe. So I don't have a lot of insight to most small rental competitors, but generally, they order in a very short view in a short horizon. So that would imply to me that they probably did not order early. And if they have not ordered at this point in time, I think they're going to get blocked out on the view.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Got it. OK. And then just lastly, how are you thinking about specialty going forward? I mean is this -- is it just kind of something you wish you had more of and will gradually build up? Or are you feeling more urgency to address it, either by M&A or organic investment? And what areas of specialty are most compelling to an H&E?

Brad Barber -- Chief Executive Officer

Yeah. Good question. I think it's going to be a slow process for us here. What could move that needle faster would be an acquisition opportunity, and we are certainly open to investigating those as they come along.

Anything we would consider, as you know and others know, we've talked about the trench safety space. That plays well with our existing 23%, 24% of our earthmoving products. So we would look for things that are synergistic to our existing customer base, bring us some more customers, but more importantly, allows us to penetrate them deeper. Over a period of time, specialty will still be a relatively small piece of the business here at H&E.

And given enough years and the right acquisitions and organic growth, it will become a larger piece. So we're serious. We're looking. Our sense of urgency in getting something done, I would just tell you, is going to be the same as every other part of our business.

We're disciplined, and we're focused, and we're not going to do anything crazy. But we're -- at the same time, we're optimistic.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Well, just on that, just a quick follow-up in terms of like how you define anything crazy. It just seems like it's hard to -- there's a lot of competition for these assets, as we all know. I mean most of these businesses seem to go for high single-digit, low double-digit EBITDA margins. I mean are you -- when I ask you about urgency, would you guys be willing to tolerate some upfront dilution to actually start to build a footprint or not? Just curious if you could respond to that.

Brad Barber -- Chief Executive Officer

It's possible, and I don't mean to be evasive. It's possible to the extent we would have to evaluate the opportunity in and of itself. What we pay on day one as opposed to what it may bring to us over a period of time, being able to grow that or bring that experience into our business and spread it across our footprint could allow us to pay maybe a price tag that otherwise we would not have considered in the general rental business. That being said, we're not going to lean too far forward, unless we have a high degree of certainty we can leverage that type of growth opportunity in that hypothetical example I just gave you.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

OK. Fair enough. Thank you.

Brad Barber -- Chief Executive Officer

Yeah. Thank you, Ross.

Operator

The next question is from Steven Fisher of UBS. Please go ahead.

Steven Fisher -- UBS -- Analyst

Thanks. Good morning, guys. I just wanted to start off on the rates. I know you talked about stabilization but just trying to frame the 4% decline.

What was the exit rate on that as you have left the quarter? Is that -- was it still down year over year? Or were you actually flat or maybe up?

Brad Barber -- Chief Executive Officer

Well, sequentially, we were down two-tenths over last quarter in our measurement. So that's probably the only information I have that I could give you that kind of guides directionally to what you're looking for.

Steven Fisher -- UBS -- Analyst

OK. I guess I'm just kind of curious if you're anticipating that we'll start to see those rates up on a year-over-year basis in the second quarter at some point time.

Brad Barber -- Chief Executive Officer

Yeah. Let me speak about sequential. And if you have other questions, I'd be happy to try to answer those as well. It is my anticipation -- it is our anticipation that our rates will start to show sequential rate improvement on a quarterly cadence going forward in the near future.

We had stepped down for a number of quarters. I think we were down 0.4% in Q4 over Q3. We're down 0.2% -- or excuse me, 20 basis points in Q1 over Q4, seasonally tough times. And we believe that that cadence will start to move in a positive direction.

How long it takes us to intersect that year over year is a different question that I don't think I'm prepared to answer to, but we certainly will get back to previous rates and eclipse premium rates. The question is how long does it take us to do that. With the current supply/demand environment, again, I'm making a comment, just coming out of Q1 and now starting to get the real momentum within our rental business. With the current supply/demand environment and the discipline that I've seen from our competitors in the marketplace and the discipline that exists in H&E, we're going to be optimistic that we can push those a little quicker, but rates are very much supply/demand driven.

And the good news is we're moving back in a position where we're going to see sequential rate Improvement. Give me a quarter or so, and I'll be able to guide you better on year over year.

Steven Fisher -- UBS -- Analyst

Got it. That's helpful. And you talked a little bit before about some of the optimism out in the field. I guess I'm just curious how you would characterize the visibility you have for the second half at this point and how it compares to the visibility that you would typically have at this time of year.

Brad Barber -- Chief Executive Officer

Well, there are a few things. John Engquist, our president and chief operating officer, has been conducting regional meetings, sales meetings and otherwise, where we're really talking more specifically within the customer size, small, medium, large, the diversification of customers by SIC Code. We use a lot of data to support this. And then there's the anecdotal conversations that go along with our sales force.

And of course, our -- what we call iConnect, our CRM tool. So that's all positive. It's probably more anecdotal. Something I can point out that's a -- just a -- it's a number, it's a statistic, is that our physical utilization on earthmoving, Steven, you're familiar, we've talked about earthmoving as an early cycle indicator many times.

Our earthmoving utilization is exactly the same it was at this point in time in 2019. Our fleet is not much larger. I think it's maybe $25 million larger than it was in 2019. The point is, is we did not decline that fleet to catch it.

It's just been somewhat of a stable, slightly larger fleet. And that physical utilization matches 2019, which was a nice year. That is an outstanding indicator to us internally about what's going to come behind the earthmoving being done on these projects. So I don't want to oversell 2021 with the stability we see.

I believe it's very real. And I think our opportunity for utilization to improve and rates to incrementally start to move in the right direction, it's painted on everything we look at.

Steven Fisher -- UBS -- Analyst

Makes sense. And then just lastly, you talked a little bit about infrastructure stimulus and how you're just kind of watching to see how that plays out. What would you have to see to really start putting the orders in or just trying to start fleeting up in advance of that, so you're prepared for those dollars to -- when they start flowing?

Brad Barber -- Chief Executive Officer

Yeah. We would want to see the bill and understand where the dollars are going to be spent. We may have to do some estimates on how many of those dollars are within our 23-state geography. Since we're in most of the high-growth markets, we would expect that a large percentile of those would be.

So there are a variety of things we would have to consider. For this year, we still have an opportunity to bring on more fleet if we want to. I would tell you that we're very focused on discipline, improving our returns in every sense. And it would likely be more of a 2022 scenario for us on the infrastructure bill, just with the timing.

I don't know that there are many shovel-ready projects as we sit here today.

Steven Fisher -- UBS -- Analyst

Got it. Thanks a lot.

Brad Barber -- Chief Executive Officer

Thank you.

Operator

[Operator instructions] The next question is from Barry Haimes of Sage Asset Management. Please go ahead.

Barry Haimes -- Sage Asset Management -- Analyst

Thanks very much. I had a couple of questions. So first one is with the price of steel up a fair amount, you mentioned on your capex, orders you've put in, you're price protected. But if you weren't, how much have prices gone up for equipment versus what you've got in your order book? And then how much would lease rates or rental rates have to go up to justify you guys increasing fleet at those higher price levels? That was the first question.

Brad Barber -- Chief Executive Officer

Sure. So the price points really vary by the percent of steel in a particular product. I would generalize and say that we've probably seen 2.5% to 5% steel surcharges or had conversations around those levels with most of our manufacturers. That being said, some of them have maintained their position that there's still today there's no steel surcharge.

So it -- there's a range. To the second part of your question, all -- if you just go down to the base level, for every 1% you pay more, you need to achieve 1% more rental revenue to obtain the return you were getting previously. And so obviously, that has to flow through historically in the rental business. The good news for us, there's a blend of older products, as well as the newer products -- the newest product and everything in between.

And so that's a target that moves over time. But you want to obtain the same rental revenue increase that you have in cost to protect your returns basically.

Barry Haimes -- Sage Asset Management -- Analyst

Great. Thanks. And then I had a question related to alternative energy. If you were to look at solar versus wind versus, let's say, a traditional gas-fired power plant, what would be the equipment intensity for the types of equipment you guys sell or rent in each of those three? Is it similar? Are there big differences? Just some sort of a feel for that.

Thanks.

Brad Barber -- Chief Executive Officer

There are some differences. I'll tell you, we're agnostic as far as what type of power project goes on. They all consume large quantities of products. There is a product mix issue related between solar -- solar is closer to the ground, while wind turbines are way up in the air.

So there are some obvious differences in those types of products. I will tell you the products that we deliver to the energy field are the same products that we deliver to our commercial construction sites. We've talked about the fungibility of our products across all product segments many, many times. So we're not a specialist in any regard.

And each of the three classifications you mentioned give us outstanding opportunity, and we're participating on all of those today.

Barry Haimes -- Sage Asset Management -- Analyst

Great. Thanks so much. Appreciate the help.

Brad Barber -- Chief Executive Officer

Thank you for the question.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Brad Barber for closing remarks.

Brad Barber -- Chief Executive Officer

Sure. We just want to thank everyone for taking the time to attend our first-quarter 2021 earnings call, and we look forward to revising this group next quarter. Thank you.

Operator

[Operator signoff]

Duration: 41 minutes

Call participants:

Kevin Inda -- Vice President of Investor Relations

Brad Barber -- Chief Executive Officer

Leslie Magee -- Chief Financial Officer and Secretary

Steven Ramsey -- Thompson Research Group -- Analyst

Stanley Elliott -- Stifel Financial Corp. -- Analyst

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Steven Fisher -- UBS -- Analyst

Barry Haimes -- Sage Asset Management -- Analyst

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