H&E; Equipment Services (HEES) Q4 2021 Earnings Call Transcript

H&E Equipment Services (HEES 0.58%)
Q4 2021 Earnings Call
Feb 24, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the H&E Equipment Services fourth quarter 2021 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 -- Vice President of Investor Relations

Thank you, Keith, and welcome, everyone. We appreciate your participation on today's call and your continued interest in H&E Equipment Services. A copy of the press release covering our fourth quarter and full year 2021 results was issued this morning and can be found, along with all supporting statements and schedules, at the H&E website. That's www.he-equipment.com.

Our discussion this morning is accompanied by a slide presentation which can also be found at the H&E website under the investor relations tab and events and presentations. On Slide 2, you'll see a list of those from the senior management team participating on today's call. They include Brad Barber, chief executive officer; John Engquist, president and chief operating officer; and Leslie Magee, chief financial officer and corporate secretary. Proceeding to Slide 3.

And before I turn the call over to Brad, I'll remind you once again today's call contains forward-looking statements within the meaning of the federal securities laws. Statements about our beliefs and expectations and statements containing words such as may, could, believe, expect, anticipate and similar expressions constitute forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties which could cause actual results to differ materially from those contained in any forward-looking statement. A summary of these uncertainties is included in the safe harbor statement contained in the company's slide presentation for today's call and also include the risks described in the risk factors discussion in the company's 2021 Form 10-K to be filed later today, as well as 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, I'll note this morning that we are referencing non-GAAP financial measures. And you can find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure, and an associated reconciliation as supporting schedules to our press release and in the appendix to today's presentation materials.

And then finally, unless specifically noted, our results and comparisons for the periods reported this morning are presented on a continuing operations basis. That concludes the initial details of the call today. I appreciate your patience. And I'll now turn the call over to Brad Barber, chief executive officer of H&E Equipment Services.

Brad Barber -- Chief Executive Officer

Thank you, Jeff, and good morning, everyone. I also want to welcome you to a review of our financial results for the fourth quarter of 2021, which was another quarter of strong financial performance and excellent operations execution. Thank you for your participation on today's call and for your interest in H&E. I'll begin my comments on Slide 4.

I want to begin this morning with some fourth-quarter financial highlights, including expanded observations on the excellent performance of our equipment rental business. Also, I will address the favorable industry trends that remain in place as we begin '22 and how our execution of key strategic initiatives in '21 has advantageously positioned H&E to benefit from a broadly more vigorous industry recovery. Growing our business remains a guiding principle in 2022, and I want to cover some of the key growth drivers. Once I've completed my comments, Leslie will follow with a thorough review of our fourth quarter financial results, along with an update on our capital structure and liquidity.

Then we'll be happy to take your questions. Slide 6, please. Fourth-quarter financial results were impressive on both a year over year and sequential quarterly basis. Results were supported in part by elevated customer demand for our rental fleet that extended well into the fourth quarter with limited impact from the customary seasonal quarterly slowdown.

Also embedded in our results were early benefit from the divestiture of the distribution activities in '21. The benefits included improved revenue mix and margin appreciation as we shifted operations to greater rental intensity and additional growth through the expansion of our branch network. Time utilization and rental rates continue to rise in the fourth quarter from the pandemic-influenced lows set early in the year. For example, physical utilization in the fourth quarter of 73.1% was the highest level achieved in any quarter over the past three years, representing a 750 basis point improvement from the year-ago quarter and 120 basis points better on a sequential quarterly basis.

The measure was 440 basis points ahead of the fourth quarter of 2019. On a full year basis, physical utilization averaged 69.7% or 680 basis points better than the 2020 and was only 30 basis points below average physical utilization in 2019. As utilization remained elevated, rental rates in the fourth quarter grew by 4.7% on a year-over-year basis. The strength of this important industry benchmark drove impressive quarterly performance across our key performance metrics.

Total revenues in the fourth quarter improved by 5.1% from the year-ago quarter to $281.3 million. Total rental revenues reached $203.7 million or 25.1% better than the year-ago quarter and 3.3% better on a sequential quarterly basis. Adjusted EBITDA grew by 18.4% on a year-over-year comparison to $110.4 million or a margin of 39.3%, which was 450 basis points better than the same quarter in 2020. I also want to highlight our fleet growth in 2021 as we ended the year with approximately $1.9 billion or 10% larger than 2020, with gross capital expenditures totaling $436.8 million.

We achieved this fleet growth despite manufacturing challenges driven by supply chain issues. On to Slide 7, please. Addressing our rental business. Fourth quarter 2021 revenues totaled $182 million, up 24.7% from the year-ago quarter and were 3% better on a sequential quarterly basis.

Rental gross margin in the fourth quarter grew to 51.7%, 620 basis points better than a year ago while registering an 80-basis-point improvement on a sequential quarterly basis. With physical utilization of 73.1% in the fourth quarter, rental rates experienced further appreciation, climbing 4.7% when compared to the fourth quarter of 2020, with sequential quarterly improvement of 1.5%. Finally, our dollar utilization in the fourth quarter rose to 39.3% or 520 basis points better than the year-ago quarter of 34.1%. The equipment rental industry staged an impressive recovery in '21, considering the lingering presence of COVID-19 and its variants.

Our company managed the challenges well while maintaining a focus on improving the enterprise. I believe our recent financial performance highlights the inherent value of the significant steps taken in 2021 that supported our transition to a pure-play rental business. H&E exits 2021 on a solid foundation for the future, and we're prepared to continue growing our rental business in '22 as the industry continues to remain robust. On to Slide 8, please.

We are confident in the continuation of a strong business environment due to some sensible observations. For example, discussions with customers regarding their project visibility suggests that elevated demand for our rental equipment will likely continue through '22. This customer feedback is consistent in each market we serve. We continue to witness strength in nonresidential construction activity and believe the acceleration of activity in the industrial markets could be propelled further with the recent rise in commodity prices serving as a meaningful catalyst.

Strong performance in 2021 of key industry measures -- of future construction activity support the likelihood for future expansion of nonresidential and industrial activity in '22. Finally, the recently passed infrastructure bill serves as an additional source of future demand for our fleet. We hope to see this additional demand materialize in the second half of '22 or early '23. Elevated utilization, improving rental rates and equipment constraints represent the features of a healthy business environment that is ripe for expansion.

As such, in '22, we plan to grow H&E through significant investment in our rental fleet, further penetration of our existing markets as well as expansion into new markets. Before I turn the call over to Leslie, I want to provide some details on our plan for growth. On to Slide 9, please. Our growth plan underscores H&E's ongoing focus on greater intensity in the equipment rental business following a significant reduction in our exposure to the distribution business.

These measures have allowed us to end the year with a pure focus on equipment rental operations in 23 of the 24 states we operate. On our last call, I commented planned capital expenditure for 2022, noting that the significant -- the likelihood of a significant gross investment in our fleet. Today, I can provide greater clarity on this and report our plans for gross fleet investment in '22 of $550 million to $600 million. The investment represents the largest annual gross capital spend in the company's 60-year history and suggests our confidence in a fundamentally robust cycle.

This investment will also provide the equipment needed to support another growth initiative, the continued expansion of our branch network with additional warm-start and greenfield locations. Slide 10, please. During 2021, H&E added nine warm-start branch locations and one greenfield location in Kansas City, Missouri, ending the year with 102 locations across 24 states. You may recall five branches were subtracted in 2021 following the October sale of our crane business.

In '22, we plan to expand our reach in the U.S. by adding no fewer than 10 locations representing further penetration into existing markets, as well as expansion into new geographies. We have already begun the planned expansion with an opening of a new Fairburn, Georgia location expected early March, our sixth location in the state; and the expected opening of a greenfield location by the end of the first quarter, increasing our coverage to 25 states. Slide 11, please.

I'll conclude my comments this morning where I began, on strategic advances. I want to emphasize the importance of our initiatives in '21, led by a reduction in distribution activities and a greater rental exposure. Our efforts drove transformative change with regard to our business model. Higher, more stable revenues through the business cycle should arise from this transition, and I believe margin appreciation is already evident.

The implementation of this strategy will dovetail nicely with our growth plans for this new year. As we begin 2022, H&E is well positioned to continue our new strategic growth initiatives. Our young fleet, expanding geographic reach, operational exits and brand recognition are core to our success. In addition, our conservative balance sheet and strong liquidity profile support our ongoing efforts to supplement our growth through acquisition.

On to Slide 12. And I'll now turn the call over to Leslie Magee for our financial performance. Leslie?

Leslie Magee -- Chief Financial Officer and Corporate Secretary

Thank you, Brad, and good morning, everyone. I'll begin this morning's financial review on Slide 13. As Brad noted earlier, revenue in the fourth quarter improved $13.5 million or 5.1% to $281.3 million compared to $267.7 million in the fourth quarter of 2020. The improvement was due largely to excellent rental performance, which experienced strong seasonal trends in utilization and rental rates.

With the strong industry backdrop in place, rental revenues improved to $182 million, a 24.7% increase when compared to the $146 million in the fourth quarter of 2020. Utilization of 73.1% was 750 basis points ahead of the year-ago quarter while rental rates appreciated 4.7% over the same period of comparison. In addition, we closed the quarter with 10% growth in OEC when compared to the fourth quarter of 2020. Used equipment sales totaled $29.5 million in the fourth quarter of 2021, a decline of 34.3% when compared to the year-ago quarter while new equipment sales of $22.5 million declined 33.3% over the same period of comparison.

The decline in used equipment sales, which occurred in all product lines, was largely due to the company's decision to capitalize on high equipment utilization in the quarter. The decline in new equipment sales was partially due to lower sales of earthmoving equipment following the September 2021 sale of two distribution branches in Arkansas and lower sales of other equipment. Gross profit in the fourth quarter totaled $118.2 million, an improvement of 25.6% compared to $94.1 million in the year-ago quarter. High rental gross margins and favorable rental -- revenue mix shift to rental revenues was primarily responsible for the consolidated gross margin appreciation, which finished the quarter at 42% compared to 35.2% in the year-ago quarter.

Within our business segments, total equipment rental margins improved to 46.3% compared to 40.7% in the year-ago quarter with rental margins improving 620 basis points to 51.7% compared to 45.5% over the same period of comparison. Despite the decline in equipment sales, margins for used equipment sales improved 707 -- 770 basis points to 39.3% compared to 31.6% with margins on fleet-only sales up 930 basis points to 41.9% compared to 32.6%. In addition, margin on new equipment sales improved 430 basis points to 14.5% compared to 10.2%. And finally, fourth quarter 2021 margins on parts and service business segments were 25.8% and 63.5%, respectively, compared to 25.9% and 67.6%, respectively, in the year-ago quarter.

Slide 14, please. Income from operations for the fourth quarter of 2021 totaled $41.6 million compared to $30.1 million in the fourth quarter of 2020. Higher rental gross margin and favorable revenue mix in the fourth quarter of '21 largely contributed to margin improvement of 360 basis points to 14.8% compared to 11.2% in the year-ago quarter. The margin improvement was partially offset by higher SG&A expenses.

Let's proceed to Slide 15, please. Net income was $21.7 million or $0.59 per diluted share in the fourth quarter of '21 compared to a loss of $21.3 million or $0.59 per diluted share in the year-ago quarter. Adjusting for a pre-tax $44.6 million nonrecurring charge resulting from the early extinguishment of debt, the company would have reported fourth quarter '20 net income of $12.3 million or $0.34 per diluted share. The effective income tax rate was 25.8% in the fourth quarter of 2021 compared to 21.7% in the fourth quarter of 2020, adjusted for the nonrecurring charge.

Proceed to Slide 16, please. Adjusted EBITDA in the fourth quarter of 2021 reached $110.4 million or 18.4% better than $93.3 million in the year-ago quarter. The outcome, which was achieved on a total revenue increase of 5.1%, resulted in adjusted EBITDA margin of 39.3% compared to 34.8% in the year-ago quarter. Favorable revenue mix and improvement in rental margins mostly contributed to the 450 basis point increase in margin, partially offset by higher SG&A expenses.

Next, on Slide 17, SG&A expenses totaled $76.9 million in the fourth quarter of 2021 compared to $65.5 million in the year-ago quarter. The $11.4 million increase was largely due to a $9.2 million increase in employee salaries, wages, incentive compensation related to increased profitability, payroll taxes and related employee benefits. Fourth quarter SG&A costs also increased due to a $1.4 million increase in facilities and promotional expenses. SG&A expenses in the fourth quarter of 2021 were 27.3% of revenues compared to 24.4% in the fourth quarter of 2020, with branch expansion costs in the fourth quarter of 2021 $3.7 million greater than the year-ago quarter.

Slide 18, please. Next, I'll cover fourth quarter 2021 fleet capital expenditures and cash flow. Our gross fleet capital expenditures were $79.8 million, including noncash transfers from inventory. And our net rental fleet capital expenditures for the three-month period were $52.4 million.

Gross PP&E capex for the fourth quarter were $9.9 million while net PP&E capital expenditures were $9 million. Our average fleet age as of December 31, 2021, was 40.3 months and compared favorably to the industry average fleet age of 53 months. Our free cash flow in the fourth quarter was $132.2 million and included proceeds of $135.9 million from the closing of the sale of the crane business in October. Slide 19, please.

At the close of 2021, the size of our rental fleet based on OEC was approximately $1.9 billion, $169.7 million or 10% greater than the close for the previous year. And average dollar utilization in the fourth quarter of 2021 improved to 39.3% compared to 34.1% in the year-ago quarter. For the year, average dollar utilization improved to 36.8%, up from 32.6% in 2020. Let's move to Slide 20, please.

Turning to our capital structure. Our net debt at the close of 2021 was $893 million compared to $1 billion at the close of the previous quarter in 2021 with the net sequential improvement due to an increase in cash following the sale of the crane business in October. We closed 2021 with a net leverage measure of 2.3 times, down 40 basis points from 2.7 times on a sequential quarterly basis. We have no maturities before 2028 on our $1.25 billion of senior unsecured notes.

To Slide 21, please. Our liquidity position remains robust with a cash balance at December 31, 2021, of $357.3 million and borrowing availability under our amended ABL facility of $741.3 million, for a total liquidity position of approximately $1.1 billion. Excess availability under the ABL facility was approximately $1.1 billion at the conclusion of 2021 with minimum availability, as defined by the agreement, of $75 million. By definition, our excess availability is the measurement used to determine if our springing fixed charge is applicable.

And with our excess availability of more than $1 billion, we continue to have no covenant concerns. And finally, we paid our regular quarterly dividend of $0.275 per common share of stock in the fourth quarter of 2021. And while dividends are subject to board approval, it is our intent to continue to pay the dividend. Slide 22, please.

In closing, 2021 will be remembered for the completion of transformative steps that position H&E for greater financial performance and increased stability through the business cycle. Our reduced exposure to the distribution business has delivered immediate improvement in our financial performance, including better revenue mix and significant margin appreciation, both of which were evident in our financial results covering the second half of the year. And looking forward, the company has defined a path for growth which, in the interim, calls for a planned fleet investment of up to $600 million in modern and versatile equipment as well as further growth of our branch profile through both existing and new market expansion. And our strong capital structure, together with an excellent liquidity profile which concluded '21 at $1.1 billion, provides the capital and flexibility to execute our '22 growth strategy, as well as future strategic initiatives.

And so this concludes my financial review this quarter. So operator, we are ready to begin the Q&A period. If you could please provide our instructions.

Questions & Answers:

Operator

Yes, certainly. Thank you.[Operator instructions] And the first question comes from Steven Ramsey with Thompson Research Group.

Steve Ramsey -- Thompson Research Group -- Analyst

Hi, good morning. Maybe to start with the capex topic. Curious if fleet is coming in early enough to benefit from the expected busy season. Or does some of that get pushed? And then as you think about this capex, how much of -- the purchasing already or that you're doing now, how much of that is kind of opportunistic based on what fleet is available in a timely manner? Or how much of that is broad-based increases across the board on fleet types?

Brad Barber -- Chief Executive Officer

Yes, Good morning Steven. The -- our capex timing is going to be very typical. I'll tell you we still believe we're going to get 100% of our capital where we plan to achieve it at. So in any typical year, that means we're heavier in Q2 and Q3, as you refer to the seasonality and getting the product in early enough to be able to utilize it.

We feel like that's going to be the same in '22. So we feel comfortable with that. As it pertains to opportunity or opportunistic situations to acquire more fleet, not so much. I mean while we're happy that we're going to get the fleet when we plan to get the fleet and it's going to be typical, we're not yet seeing much opportunity to source more product from manufacturers.

I mean there have been some isolated cases, but I think it would be a little misleading to present those in a way that makes it seem like it's material. It's not. So we're really comfortable with the cadence it's coming in. It's typical.

We're going to get the benefit. Could opportunity present itself as we move forward? We certainly believe it could. But as we sit here today at the end of February, we're sticking to our current plan.

Steve Ramsey -- Thompson Research Group -- Analyst

OK. Great. And then I guess the -- thinking about rates. The exit rate on rates in Q4 '21, seasonally slow but very strong.

I guess as we think about this slow period, does that give you a higher base to launch from getting into the busy season? And do you expect rates to continue at sort of this 4%-plus level or to moderate but still be positive?

Brad Barber -- Chief Executive Officer

Sure. I'm going to let John provide more detail on that. What I want to say is that 1.5% sequentially and 4.7% was very much in line with what our expectations were. Our rate tool, the information we use, our marketing, it's paying off.

And so we continue to gain confidence on our ability to continue to perform with rates going forward. John, do you want to elaborate in more detail?

John Engquist -- President and Chief Operating Officer

Yes. Look, as Brad mentioned, the 4.7% year over year in the fourth quarter and the strong sequential performance, we were pleased with that as we enter '22 with our utilization tracking ahead of our expectations. With -- fleet levels are still progressing obviously, but we do expect to see quarterly sequential increases in rental rate. For the full year, we would expect to be in the mid- to low single digits on a year-over-year basis, and we're pretty confident in our plan.

Steve Ramsey -- Thompson Research Group -- Analyst

Great. Excellent. And then probably similar driver for this was time utilization being so strong in a slower seasonal period. Can you talk to if that was broad-based strength or certain areas geographically or verticals that were robust? And I guess thinking about how that leads to Q2 and Q3 as fleet comes in during that period, are you planning for utilization to moderate a bit into that mid-60s range or so as it takes time to deploy that new fleet?

John Engquist -- President and Chief Operating Officer

So look, as it pertains to geography, I mean, we are seeing broad-based utilization really across our entire footprint. So it's not particularly -- seasonality is obviously a factor in some of the states that are more prone to experience the winter weather, but what I can tell you is we are seeing utilization is really strong across all of our regions for the most part. By product type, my comments would be the same. We're seeing really strong utilization across all of our product types.

And look, as we get into the heat of the season and when we have our capex coming in, in the second and third quarter, we would expect to see our utilization level out. Does that mean that we're going to achieve the same levels in the fourth quarter that we saw in '21? Probably not, but we are very comfortable with our plan. The record capex speaks to our comfort with our ability to maintain utilization.

Brad Barber -- Chief Executive Officer

Yes. Steve, let me add. I agree with everything John just characterized. Last year was a year where we had accelerating utilization throughout the year.

Very uncommon for Q4 to exceed Q3 in physical utilization. I've been in the business closer to 30 years than 25 at this point, and that's just not -- that does not happen often. So we had a lot of momentum. As you asked the question, we're going to have this product coming in, there is always a headwind associated with bringing in product, particularly that much product.

Now as we continue to grow out our number of locations, we're not uncomfortable at all. We don't think we're leaning too far forward with that $550 million to $600 million but it will moderate. We had those 10 locations we opened last year. Some of those are operating at exceptionally high utilization while others are operating more typical to a new location.

They're all operating very well. And then as we've said, we're going to open no fewer than 10 this year, so those take a little while to ramp up. I guess what I'm saying to you is, last year, we started low and we finished exceptionally high. This year, we're starting off better.

We're probably going to level off a little sooner, albeit at a very healthy level. And my best guess right now would be, on a year-over-year basis, we may achieve similar physical annual utilization but we're going to do so on a much larger fleet. We're going to do so with consistent incremental improvement in rental rates, and it's going to make for a nice year at H&E.

Steve Ramsey -- Thompson Research Group -- Analyst

For sure, for sure. And then thinking about rental -- or just margins overall being strong and favorable mix being a driver. Can you clarify if that was rental revenue versus selling fleet? Or was it mix within rental revenue?

Brad Barber -- Chief Executive Officer

Well, obviously, the rental margin in and of itself in Q4, landing north of 51% is going to be a big piece of that, if I understand your question. The other thing I'll take a stab at, and let's make sure I'm clearly responding to you, is we have had a downward shift in used sales -- fleet sales or the majority of our used sales, right? And that's by design. I mean we're not going to stop selling fleet. But with the age of our rental fleet -- the young age of our rental fleet and our opportunity to maintain it on rent and improving returns, we're just slowing the pace that we're selling out of the fleet, and that will continue through the year.

Steve Ramsey -- Thompson Research Group -- Analyst

Excellent. And then last question for me. Peers had talked about incremental margins 55% and upwards for this year. How do you think about H&E now that you're more pure play? Do you feel like this is an attainable incremental margin level for you guys this year or in the coming years?

Brad Barber -- Chief Executive Officer

Leslie may have some additional comments. Obviously, I think some of that incremental margin is heavily influenced by the big categories, utilization being one of them. And I fully believe that H&E runs the highest utilization of any of our peer group. I'll tell you, I think, while we're going to grow the fleet, we'll probably run similar utilization.

I don't know that we have a lot of leverage left in utilization. Leslie, would you add anything else to that?

Leslie Magee -- Chief Financial Officer and Corporate Secretary

Sure. Good morning. I would just point out that our flow-through margins, as we -- as I'm speaking of the rental business, were exceptionally high this year, and that was really driven primarily by much higher time utilization and better rates. So looking forward into 2022, we also expect strong incremental rates.

But I would say that they're expected to come down from that 2021 high yet remain strong. And that's because the drivers are shifting to different buckets to positive flow-through from a larger fleet and rate. So that's just going to drive different metrics but still strong.

Steve Ramsey -- Thompson Research Group -- Analyst

Excellent. Thanks for the color.

Leslie Magee -- Chief Financial Officer and Corporate Secretary

Sure.

Operator

Thank you. And the next question comes from Steven Fisher with UBS.

Steven Fisher -- UBS -- Analyst

Thanks. Good morning. You mentioned that you're comfortable with the timing of getting the fleet in the typical fashion. I guess I'm just curious kind of what underlies that confidence.

Are you -- kind of what conversations are you having with your suppliers in that regard?

Brad Barber -- Chief Executive Officer

Yes. We have daily conversation. I mean obviously, we don't speak to every manufacturer every day, but we speak to every manufacturer on a weekly basis on a variety of topics and maybe more specific to the question, just affirmation of their commitment to us. And I can tell you to a manufacturer -- not one manufacturer has backed up an inch on their commitment to delivery.

So the further we get into the year, the higher our confidence grows. But with the relationships we have, the consistency these manufacturers have shown us through other cycles and different times continues to lead us to believe we should be very confident in getting the fleet at the timing that they have proposed. And we've got fleet flowing through every day at this point. So it will certainly ramp up in Q2 and three, but we have a high degree of confidence as we sit here today.

Steven Fisher -- UBS -- Analyst

Great. And then it sounds like, if you're able to, you might want to upsize the fleet spending. And if you do, probably a similar message or sentiment across the industry given how strong the demand is. Do you think that would necessarily mean a loosening of supply/demand balance overall in the industry? Or do you think maybe that just will enable more projects to happen, keeping the market pretty tight for equipment?

Brad Barber -- Chief Executive Officer

I suspect the market stays pretty tight for equipment. My best speculative guess, right, would be that if products weren't to become available, they would be coming available from small regional or even smaller than regional rental players who may have placed orders but decided to do something different at a point in time. I don't think that availability will come from H&E or any of our larger peer group. I think we're pretty confident in what we're seeing.

We've shown discipline. We have the systems. So I don't anticipate there's going to be much product becoming available. Now what happens in Q4, I guess we'll make those decisions on a shorter horizon.

But as we sit here for the next quarter or two, I feel comfortable with where we are and there's not likely to be excess product available.

Steven Fisher -- UBS -- Analyst

Great. And just one last market-based question. I guess I'm wondering what you're seeing in the pipeline for bigger types of construction projects and what kind of things you're bidding on. I don't think that's typically been a very large part of your business, but I'm wondering if anything is different this time around and how that could be part of a mix of your business as the cycle unfolds.

Brad Barber -- Chief Executive Officer

Sure. So I think the biggest worth noting is the bipartisan infrastructure bill. And we are not seeing any of that product yet -- or any of those opportunities materialize yet. We are hoping that we see those, based on feedback from our customers, late in this year, maybe early next year before they start.

As we've continued to grow out our earthmoving product, we're -- 27% of our fleet is in earthmoving, and that certainly ranges from many excavators to larger earthmoving products, we do participate a fair amount. I will tell you any geography we're in, if there is a stadium, a hospital, a school, a levy, a data center, H&E is going to be participating at some level. So we certainly have exposure. We're selective on how much of that exposure we want to take on, but we are participating on those large projects on a daily basis.

Operator

[Operator instructions] And the next question comes from Stanley Elliott with Stifel.

Brian Brophy -- Stifel Financial Corp. -- Analyst

This is Brian Brophy on for Stanley. Just wanted to ask what are your plans on the specialty side of the business in terms of your fleet purchases for this year.

Brad Barber -- Chief Executive Officer

Slow, slow. We initiated organically growing a trench safety business. And I think about the same time we initiated growing that business, steel started to take an upward swing and continued to do so for some period of time. At this point, it's leveled off.

But with that being -- that product being almost entirely commodity steel related, the pricing is just at a level where we're not going to continue to advance growing it. Now we are dedicated to the specialty business. We're dedicated to that organic specialty business. And as we've spoken before, to significantly grow our exposure in specialty, it would more -- quickly, it would more likely come through an acquisition opportunity.

So we continue to make those types of considerations. But at this point, our entry into specialty is pretty narrow, and due to current commodity pricing, it's pretty slow. But that's a short-term issue and we're just going to remain disciplined until it's time to advance ourselves forward.

Brian Brophy -- Stifel Financial Corp. -- Analyst

And that kind of plays into my next question. A lot of the OEMs are talking about getting pricing this year. What are you guys seeing on the inflationary side in terms of your fleet purchases for 2022?

Brad Barber -- Chief Executive Officer

Yes. So we've before said that we had low single digit on average, and that is the case. We placed our orders early on. There's always puts and takes within that, but at 2%, 3%, maybe 4% on the high side but certainly not as an average is what we've seen.

As it pertains to ordering and making considerations for 2023, those conversations could be a little different. But today, our products, that $550 million to $600 million, we're planning on low single-digit inflation year over year.

Brian Brophy -- Stifel Financial Corp. -- Analyst

Thanks. That's really helpful. I'll pass it on.

Brad Barber -- Chief Executive Officer

Thank you.

Operator

Thank you. And the next question comes from Jeffrey Campbell with Alliance Global Partners.

Jeff Campbell -- Alliance Global Partners -- Analyst

Good morning. You mentioned that you're going to aim for 10 additional locations in 2022. I think you touched on this on Slide 10. But I just wondered if you could add some color on the drivers of these expansions.

Brad Barber -- Chief Executive Officer

With 102 locations currently, in 24 states, in my prepared comments, I shared that we're fixing -- within weeks, we'll have a 25th state exposure with a new greenfield that we're opening. There are a lot of markets where H&E either does not participate or can certainly participate with greater density. So we take a very quantitative analytical approach to the markets. If we open 10 locations a year, we're probably going to have -- eight or nine of those will be what we define as warm starts, just adjacent or we're filling in a geography where we have name recognition; customer base; very important, just an employee base.

And then one or two of those will end up being a greenfield where we enter a new market relatively unknown and we come with a new team. And so we like doing both. But when you look across, we have an outstanding geography, we've got ample opportunity to continue to fill in and just tremendous opportunity to grow outside of our existing geography. And I'll tell you that that's heavily driven by analysis, and that's, in general, our approach to expansion.

And as you said, we're saying we're going to open no fewer than 10 or maybe 11 or 12 this year. We'll see what happens as the year materializes.

Jeff Campbell -- Alliance Global Partners -- Analyst

OK. Thanks. And although I imagine it must be a nascent concern at this point, can you discuss any current or future ESG efforts that are being undertaken at H&E?

Brad Barber -- Chief Executive Officer

It's actually a very relevant and hot topic currently. We have formed actually a committee of our board to address ESG. We are working currently to select a partner to work with us on our initial steps for ESG. And we'll be talking more about that plan, our expectations as we go forward.

I think maybe the only other thing I would add in addition to our -- the board-level involvement oversight is that we have an internal task force that's also been selected and assigned. So you'll be hearing more about ESG as we go forward in subsequent quarters.

Jeff Campbell -- Alliance Global Partners -- Analyst

OK. I am looking forward to that. Thanks very much.

Brad Barber -- Chief Executive Officer

Thank you, Jeff.

Operator

Thank you. [Operator instructions] And as there is nothing at the present time, this concludes our question-and-answer session. I would like to turn the conference back over to Jeff Chastain for any closing remarks.

Jeff Chastain -- Vice President of Investor Relations

OK. Well then, we'll conclude today's call. We appreciate you taking the time to join us today and for your continued interest in H&E equipment. We look forward to speaking with you again.

Keith, I want to thank you for your assistance with today's call. Good day, everyone.

Operator

[Operator signoff]

Duration: 43 minutes

Call participants:

Jeff Chastain -- Vice President of Investor Relations

Brad Barber -- Chief Executive Officer

Leslie Magee -- Chief Financial Officer and Corporate Secretary

Steve Ramsey -- Thompson Research Group -- Analyst

John Engquist -- President and Chief Operating Officer

Steven Fisher -- UBS -- Analyst

Brian Brophy -- Stifel Financial Corp. -- Analyst

Jeff Campbell -- Alliance Global Partners -- Analyst

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