But you can see with our 1.2% sequential gain that we continue to push forward, that we’re continuing to get rates within the mix of what’s going on at H&E. We will lead on more mega projects going forward, and we will be in the number two and number three position on others. And if there’s a dynamic that does not favor our overall objectives for utilization rate and yield, then we certainly won’t participate on some projects, but we’re very selective and we’re in good position with the projects that are within our footprint.
Seth Weber: Super helpful. Thank you. Thanks, Brad.
Bradley Barber: Thank you.
Operator: Thank you. And the next question comes from Stanley Elliott with Stifel.
Stanley Elliott: Good morning, everybody. Thank you for taking the question. Hey Brad, first off, just for a point of clarification, in addition to the commentary about utilization. I thought I heard you say modest rate improvement as well. Was that for the fourth quarter or were you talking more specifically about ’24?
Bradley Barber: Well, I think it’s — I think ’24 is hard to say. I can tell you there’s no thought of us abandoning and our focus on rate improvement. John, do you want to add some color for what we’ve been looking for?
John Engquist: I will. Stanley, as Brad stated, on these large mega jobs, pricing is more aggressive. These projects are materializing as we speak. I mean, we have fleet on these jobs. We have more fleet that will be deployed in the fourth quarter. And then next year, we have a considerable amount of these projects that are going to break ground. So as we put more fleet on these jobs, obviously at lower more aggressive pricing, there is going to be an impact to our overall rates. What that looks like, it’s difficult to say at this point. What I can tell you is for Q4, we do expect incremental rate improvement. And looking to next year, we do expect demand to remain healthy. So our opportunity for rate improvement is going to be there. I think the question for us and what we need to do some more digging on is how are these large jobs going to impact rates as these projects continue to ramp up.
Bradley Barber: Stanley, let me add, and I fully support everything John just said, that’s spot on for our collective view. We’re moving into more of a normal trajectory with utilization. Hypothetically, in Q1, if we were to suffer an extreme winter situation and smaller projects are delayed or postponed due to weather and we believe these large mega projects will continue to go at a more steady pace, we could see a situation where we see rates flatten out. I want to be clear. That is not our prediction. That’s not our goal internally. That’s not what we’re managing to. It’s — we would simply be talking about a mix issue. But for now we’re planning on incremental rental rate improvement going forward.
Stanley Elliott: And with concerns around ABI numbers and everything else, what are you guys watching to say maybe we should pivot or pause from some of the growth plans that we’ve — you’ve got on the table. I mean so far, the growth plans have turned out quite nicely. But just curious kind of how you’re thinking about that as kind of the — like the longer-term view?
Bradley Barber: Sure. Well, as Leslie stated in her prepared comments, we just concluded our ninth quarter of greater than 20% growth. We did one tuck-in acquisition that’s having an anniversary this month with One Source last year. We’re certainly not abandoning future tuck-in acquisition opportunity. We never overreact to the ABI. And I don’t want to say we don’t pay attention. We certainly do, but we look more at Dodge Construction put in place dollars. We certainly consider the feedback from the field and what we see going on. So I gave Seth some feedback basically saying we are very focused on improving our physical utilization incrementally next year over what we will achieve in ’23. I want to tell you, I’m nothing but very proud of our team’s accomplishment in ’23 to stamp out this number of locations on our small nucleus to start from while we raise rates and expand our margins.
I believe it’s quite impressive and shows what they’re capable of. So we’re not going to abandon that healthy growth levels. But bear in mind, as we open 12 to 15 locations next year, these are premium marketplace. We’re not going to the only place we can find a facility. We’re going where the market is most robust and likely to be for the longest period of time. And so at our current scale, this is absolutely to our advantage, while we’re in this 12 to 15 locations a year. But if you were to see us slow our fleet growth a little bit next year on a same-store basis to ensure that we achieve physical utilization improvement, that wouldn’t be surprising.
Stanley Elliott: And that’s kind of bridging to my last question. You’ve ramped capital spend here pretty meaningfully in the past several years. Some of your peers are generating free cash through the cycle. I feel like you guys have enough scale now with all the growth and the locations that you have in the marketplace. Maybe share some thoughts with investors on kind of at what point do you think you guys can start generating free cash flow through the cycle absent kind of these larger fleet purchases that you’ve been bringing in?
Bradley Barber: Yes. Very good question. Obviously, we could generate some free cash right now today if we so elected. We have decided it’s best for the valuation of the company, fits within our operational capabilities. Clearly, it is not stressing our balance sheet in the least as our leverage continue to go down year-over-year while we’re growing and continuing to pay the dividend. So for the foreseeable future, as we grow, we could continue to be slightly free cash flow negative. But if we want to change that dynamic, it’s easy, we just grow at a little bit slower pace and we generate cash. Maybe to the broader context of your question, I think we’re within two to three years at the type of growth that we have been at, where we will be at a balance where we will more consistently and naturally can produce free cash flow.
So it’s something we look at. It’s something we’ve talked about internally. I don’t want to set an expectation of free cash flow on an annual basis going forward. But I will say this, we could clearly achieve that if that was a primary objective. But for today, we’re going to grow while we lower our leverage and move into these hot markets that are going to pay dividends for decades to come.
