Q4 2019 Earnings Call

Good morning, I'm, one of them today, he couldn't the equipment services fourth quarter 2019 earnings conference call.

Today's call is being recorded.

At this time I would like to turn the call over to Mr. Kevin.

President <unk> Investor Relations. Please go ahead.

Thank you Marguerite and welcome to the huge new equipment services conference call to review the company's results for the fourth quarter. You're ended December 31st 2019, which were released earlier. This morning. The format todays call include a slide presentation.

Which is posted on our website that W.W. dot eightci dash equipment Dot com.

Please proceed to slide two conducting the call today will be Johnny Quizzed Executive Chairman of the board of Directors Red Barber, Chief Executive Officer in President and Leslie Magee, Chief Financial Officer and Secretary.

Please proceed to slide three.

During today's call will refer to certain non-GAAP financial measures.

Can solve these measures to GAAP figures in our earnings release in the appendix to this presentation.

Each of which is available on our website before we start let me offer the cautionary note. This 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.

Some of these uncertainties is included in the Safe Harbor statement contained in the company Slide presentation. Today's call. It also includes the risks described in the risk factors in the company's most recent annual report on form 10-K, and other periodic reports investors potential investors. Another 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 call would that state will now turn the call over to Brad Barbara.

Kevin and good morning, everyone welcome Dave <unk> equipment services fourth quarter 2019 earnings call all the called me today or John.

Decorative chairman Leslie Magee, our Chief Financial Officer, Kevin into our Vice President Investor Relations.

Slide four please.

My comments. This morning, we'll focus on the fourth quarter results, our business and current market conditions in the last the will review our financial results for both quarterly and year well Leslie finishes I will close with a few brief comments after we will take your questions.

Slide six please.

[noise] our business continued to produce solid results in the fourth quarter achieving year over year increases in total revenue gross profit and adjusted EBITDA. Despite a tough comparison from a year ago.

For example, our rental business did not experienced typical seasonality in the fourth quarter of 2018, achieving record physical utilization of 72.9% for the period.

Also new equipment sales were exceptionally high during that period, a strong airberlin crane sales pushed our revenues to approximately 80 million.

Nonetheless fourth quarter 2019, earning revenue improved to 348.1 million our rental business generated good results with higher rental revenues and positive rates from a year ago. Our total gross margin increased 130 basis points, 36.9%.

Adjusted EBITDA increased 10.7% to 126.8 million in margins increased 36.4% from 33.1% a year ago. Overall, we're pleased with the performance of our business in the fourth quarter.

Slide seven please.

As we discussed in our last call, we expect supplied to come in the balance with demand, which would pressure physical utilization in the fourth quarter.

Despite a 390 basis point decline it because we visitation from 72.9% of your go to 69% this quarter, our rental business perform well rental revenues increased 8.2% to 176.3 million and we achieved a 1.7% increase in rental rates from a year ago.

Our fleet size was also considerably larger than a year ago up 10.2% for 179.3 million.

We will continue to be disciplined execution of our rental business with stable end user markets expected this year as well as rational industry behavior. Good returns are achievable for the rental business once again.

Slide eight please.

We currently have 94 branches and 23 stage and believe our footprint as one of our key advantages.

Based on industry data nonresidential construction activity continues to be solid in the regions, we serve to better serve our customers and leverage the demand in our markets. We will continue to grow our rental business through acquisitions and organic expansion.

Slide nine please.

Our end markets and fleet composition continued to be strategic advantages for our business in terms of our revenue mix are significant exposure to the nonresidential markets continues to be a positive based upon industry data forecast, while our exposure to the industrial markets remains low at 10% necessary ongoing maintenance work and.

New projects Dr. always good for our business.

Exposure in the oil and gas markets remains low at 6%.

We composition has a very important element of our business as we monitor mix on a daily basis to ensure the best possible returns on our fleet investment.

Fleet remains one of the youngest in the industry at 36.3 months compared to an industry average of 46.8 months.

Slide 10 please.

Given the current macro industrial day to industry data points customer feedback project pipelines and the Nada nonresidential construction markets. We serve are expected to remain stable and 2020 I'll now turn the call over the last and discuss our financial results in more detail Leslie.

Good morning, everyone and thank you Bob Let's proceed to slide 12 for more details of our financial results.

Slide 12, please before I discuss the financials and non cash goodwill impairment charge off 12.2 million was identified in connection with the company's annual fourth quarter 2019 goodwill impairment tests.

12.2 million goodwill impairment charge consists of a 10.7 million impairment try new equipment that will reporting unit and a 1.5 million impairment charge service revenues did well appointing.

Hi, good well reporting units related to rental revenues easy equipment revenues and parts revenues were not impaired.

Jeremy charge will not result in any cash expenditures and will not affect the company cash position liquidity availability, our covenant test under its senior secured credit facility.

Our business delivered solid results in 2019 were especially pleased with a result in urban okay.

Total revenues increased 8.6% or 2.2 million fourth quarter compared to the same period, a year ago to 348.1 billion, primarily driven by the strength in our rental business and partially offset by declines in new equipment sales.

As Brad mentioned rental revenues as previously reported increased 8.2% to 176.3 million.

Our average time utilization based on how we see.

69 for.

69% for the quarter compared to a tough comp of 79.2% a year ago.

The size of our fleet increased by 10.2%, a 179.3 million versus the year again.

In addition rental rates improved this quarter up 1.7% year every year and rates improved in all product lines.

Rates decreased 8.1% sequentially.

Due primarily to lower physical utilization, our dollar retirees declined 100 basis points to 36% versus last year.

I knew we quite Michelle decreased 23% or 18.3 million, Texas is 61.4 million compared to 79.7 million last year with lower new sales in all product lines with the exception never Navy.

Decrease was primarily driven by lower in Ukraine sales, which were down 28.7% or 12, now knowing and lower new aerial south which decreased 29.8% of 4.9 million.

Used equipment sales increased 12.1% of 4.6 million to 42.4 million increasing in all product lines, except Ariel the increase was largely a result of higher used our living in crane sales sales from our rental fleet comprise 91% of total used equipment sales this quarter.

Compared to 88% a year ago.

Our parts and service segments generated 47.6 million in revenue on a combined basis up 4% from a year ago.

At this time, let's move on to gross profit and margin.

Gross profit increased 4.4% for 128.6 million from a year ago consolidated margins were 36.9% compared to 35.6% a year ago, an increase of 130 basis points, primarily as a result up a positive mix shift to rental higher margins on used equipment sale.

These gains were partially offset by lower gross margins another busy segment.

Gross margin detail by segment rental gross margins as previously reported were 50.3% during the quarter compared to 51.5% a year ago.

Impacted by the nearly 400 basis point declining time utilization.

Margins on new equipment sales decreased 10.8% for the fourth quarter compared to 12.7% a year ago.

Used equipment sales gross margins increased to 33.3% from 29.1% last year largely due to the change in the mix of equipment Paul.

Margins on pure rental fleet, only sales increased 36% from 32.3% a year ago.

Our parts and service gross margins on a combined basis increased to 41.4% compared to 40% a year ago.

Slide 13 please.

As a result was 12.2 million impairment charge income from operations for the fourth quarter of 2019 decreased 18.8% to 41.3 million or 11.9 personnel revenues compared to 50.9 million <unk>, 14.7% of revenues in the year that quarter excluded.

The charge income from operations increased 5.1% to 53.5 million or 15.4% of rapidly.

The change in more margins, excluding the charge was primarily a result to have a shifting revenue next to rental and higher used equipment sales margins, which were partially offset by lower gross margins in other segments and higher ASP DNA call.

Proceed to slide 14.

Net income was 21.9 million or 61 cents per diluted share in the fourth quarter of 2019 compared to net income of 25.1 million or 70 cents per diluted share in the fourth quarter of 2018. Adjusted net income was 31.99 or 88 cents per diluted share on a lower affected.

Income tax rate of 18.4% in the fourth quarter of 2019 compared to 27.9% a year ago due to discrete items in the current period.

Please move to slide 15.

Adjusted EBITDA was 126.8 million fourth quarter compared to 114.69, a year ago, an increase of 10.7%.

Adjusted EBITDA margins expanded 330 basis points to 36.4% this quarter compared to a year ago, primarily due to the shifting revenues to rental car used equipment sales more margin higher gain on sale property and equipment and an increase in other income.

Partially offsetting these improvements were lower in these cells margins and higher FCX <unk>, Paul versus a year ago.

Next on slide 16.

S. DNA expenses for the fourth quarter 2019 were 77.29, compared with 73 million for their prior year 4.2 million or 5.8% increase.

X gene a expenses in the fourth quarter of 2019 as a percentage of total revenues were 22.2% compared to 21.1% a year ago.

Employee salaries wages payroll taxes employee benefit costs and other employee related expenses increased 1.4 million largely due to our acquisitions since December 31st 2018, a larger workforce and higher incentive compensation related to improve profitability.

Facility related expenses, primarily rent expense increased 1 million.

Cost for outside services increased point 9 million depreciation and amortization increased point 8 million and expenses related to Greenfield branch expansion costs increased point 4 million compared to eight years ago.

Next on slide 17.

This slide you'll find our 2019 fleet capex and cash flow, but in addition, our gross fleet capex in the fourth quarter was 41.7 million, including non cash transfers from inventory net rental fleet capex for the quarter was 3.2 million grasp Piney capex for the quarter was 11.7 million.

In a net was 8.7 million our average fleet age as of December 31st was 36.3 months.

Free cash flow for the quarter of 2000, <unk> fourth quarter of 2019 was 100.9 million compared to free cash flow 69.8 million a year ago. The increase in free cash flow was primarily due to lower net fleet investment.

Next on slide 18.

At the end of the fourth quarter the size of our rental fleet based on a Wifi was 1.9 billion, 10.2% or 179.3 million increase from a year ago average dollar utilization was 36% compared to 37% a year ago.

Proceed to slide 19 please.

At the end of the fourth quarter, the outstanding balance under the amended AB All facility was 216.9 million, we had 525.4 million of cash borrowing availability at quarter end net up 7.7 million of outstanding letters of credit.

Proceed to slide 20 please.

Our business again delivered strong operational and financial results for the year, we were especially pleased with the performance of our rental business, which accomplished good results on solid demand in the nonresidential market. Let me quickly review our full year 2019 resolved.

Our total revenues increased 8.8% or 109.4 million to 1.3 billion in 2019 from 1.2 billion in 2018, mainly due to the growth of our rental business. Our gross profit increased 60.6 million or 13.8% and 499.2 million from 400.

38.59 in 2018 gross profit margin increased 160 basis points to 37% largely due to a shifting revenue mix to rentals and higher used equipment sales margin.

Our adjusted EBITDA for 2019 increased 16.7% of 473.2 million from 405.4 million in 2018, and adjusted EBITDA as a percentage of revenues increased to 35.1% compared with 32.7% in 2018, primarily due to show.

Shifting revenue mix to rentals and higher used equipment sales margins, which were partially offset by higher FCX <unk> compared to your guys.

Our net income was 87.2 million or $2 and 42.

Cents per diluted share compared to net income up 76.6 million or $2 in 13 cents per diluted share in 2018 and on an adjusted basis net income was 96.4 million or $2.67 per diluted share. The effective effective income tax rate was 24.7% in 29.

Teen compared to 26.8% in 20 team.

Our free cash flow was a use of 6.79 in 2019 compared to use of free cash flow of 279 million in 2018, the improvement in our free cash flow was largely the result of lower acquisition investment and lower net capital expenditures in 2019 compared to a year ago.

During 2019, we did complete one acquisition for 106.7 million compared to 196 million for two acquisitions in 2018 net capex in 2019 declined to 221.5 million compared to 328.9 million 2018.

We also continued our dividend payment each quarter with total dividends paid of $1.10 per common share during 2019.

And at this time I'm going to turn call back to Brad. Thank you Leslie. Please proceed to slide 22.

To conclude 2019 was a solid year for our business. So we're focused on generating solid returns for our shareholders. This year as well now let's get into some questions. Operator, please provide instructions for the QNX session.

[noise] operator, please provide instructions for the QNX session.

Thank you Sir if you would like to ask a question on today's call P. signal no by pressing star one on your telephone keypad. That's star one ask a question.

We can now take our first question.

From Stanley Elliott from Stifel. Please go ahead.

Hi, Good morning, everybody. Thank you for taking my question.

[laughter] quick question on the on the time utilization piece is there way to parse out how much of that was oil and gas specific versus.

Anything else that that you could <unk> that would come to mind.

Oh.

Not particularly I would point to oil and gas is traditionally run 6% to 7% of our total revenues.

Mentioned before our heavy exposure is really more of the Eagle Ford shale.

That utilization in general continues to run much higher than the rest of the company.

So it's it's not been a tremendous impact.

Okay, and then how should we think about yesterday cost go anniversary some of the M&A.

Doug.

Well I guess the M&A to actually it's early 2019, you should we expect some sort of leverage within that or or.

Just conceptually how do how to.

I think about that.

Well, we do expect some pressure on S. DNA as a percentage of revenues in 2020, and I would say at similar levels as we saw for the full year of 2019, a there is one significant item in S. DNA that I should mention and specifically we experienced a sick.

Nitpicking increase in our excess insurance renewal program at 12 31 of 2090 during what some would say is undoubtedly the worst excess insurance market that they have ever see and you know all I could say to that as you know we have taken further out.

Action, we've we've replaced our broker and we're currently working on a plan to reduce as much of that cost as possible.

In addition to that you know as we grow our rental business.

We've talked about this before but you will see SGN a increased as a percentage of revenue slightly just purely based on that so and then this insurance identify them on top of that and is that the poor snow help.

Perfect and then lastly from me you mentioned a stable Nonres environment have you should we think about any regions within your portfolio, but doing better than others and Ben Yeah, I'd be curious to get your take on Submarkets. So we've heard very good things about highway spending.

Yeah, just trying to think about that is for parsing out the a the parts of the business.

Sure. Thank you for the question.

Not you know not really our utilization trends continue to be very similar across all of our geographies across most of our product types.

You know like you were seeing some brighter life with certain project types that are likely to come online or that are coming online, but no. There is nothing distinct about a geography that I could point out that's just so much of the rest of our geographies.

Perfect. Thank you very much the time and best of luck.

Thank you.

Next question.

I'm from Stephen Rumsey Thompson Research Group. Please go ahead.

Good morning wanted to start with just a stable commentary on 20 Twond does this mean more honest truth, maybe than what we've seen in the past couple of years.

Does this type of market.

By the backdrop to increase investments in fleet and new branches or would you be more moderate on growth investments and therefore drive greater free cash flow.

Sure. Good morning, Oh, So look our view is that our revenues and twentytwenty will be.

Similar to our 2019 revenues I can tell you as it pertains to a growth capital.

Our current view as the only place we're going to spend growth capital will be with our greenfield locations.

Our existing locations, we're going to continue to monitor utilization and as utilization returned to levels that are appropriate with associate at rate improvement then we'll we'll make those decisions then but right now we're forecasting.

Our view for the years low single digit revenue increases and any where we're going to spend growth capital will be related to a warm start expansion opportunities.

Excellent and are you seeing more areas.

Where fleet is getting too high we have heard from some that certain regions, there's too much fleet in those regions.

Do you feel like your fleet is in good shape, a key driver rates as is or do you need to shift fleet to drive.

Better reach overall for the company.

Sure.

Last quarterly cost spoke it and really repeatedly said that our view is that supply was catching up with demand and as evidenced by our fourth quarter utilization, we had a really nice quarter and let me say again I think we're going to have a nice year 2020.

But supplied caught up with demand. It is our view that there is little bit more capacity in certain markets. It's not heavily weighted to any individual market as we sit here you know towards the middle end of February this is probably our seasonal low point, it's raining today.

Across most of the country. Its IC, it's really hard to make those predictions I can say to you we do not plan on moving out or transferring a lot of equipment I don't see that need I think that as a seasonality passes were going to continue to see disciplined, particularly from our larger competitors I hope to continue to see discipline from our manufacturers and our utilization.

I'll return to more typical levels.

But until that point, you know, we're going to focus on what we haven't as I stated in most of the last question.

Our any additional growth investment will be around warm start opportunities.

Excellent and last for me on the on kind of your well you're rolling 12 month future outlook has this shifted much in the past few months it just the tool.

Is the next 12 months.

Not as positive maybe as is the tone, we heard on the Q3 call. So just wondering if that has evolved in the last few months.

Yeah, I believe it had slightly I will also say that I think the opportunity for it it's really around utilization correct. Our current view of utilization I believe the opportunity for that to to improve absolutely exists. We believe the markets are very stable as we've talked to our branch locations our salespeople.

Numbers, they have a very robust outlook for the year and so we share their optimism, but until I see our utilization pick back up to where it was in our ability to achieve solid positive incremental rates going forward, we're going to be a little more muted what our capital spend.

Great. Thanks for the color.

We can now take our next question from Seth Weber from RBC capital markets.

Please go ahead.

Hi. Thanks. This is brendan on for so I guess I'd like to start with the goodwill impairment charge was that on any particular kind of equipment or is it more broad based.

No it's not on a type of equipment. It's on reporting units, which is the new equipment sales reporting unit and service revenues reporting units. So it's not specific to any type of it's not an impairment charge on our equipment, it's more that accounting.

Standard and.

Discounted cash flow modeling that you have to do.

Not that entire equipment at all.

Okay, Alright, and then.

Yeah, I guess, what does your [laughter]. The M&A pipeline look like right now are you favoring any industry verticals over others as you look or just kind of.

Taking a look at what's available and keeping me open mine there.

Yes, so it's all the above.

Obviously with 94 locations in 23 States has a lot of geography for us to fill in we like the general rental construction markets that represent you know typical fleet mix that you see with us and our most of our larger competitors.

We're not adverse to considering specialty rental businesses.

I'll tell you that we.

We're kicking a lot of tires and I'm looking forward to fight in another water to possibly this year that at a land. These are primarily small tuck in type acquisitions, but it's all the above.

Okay, and then last from me into the extent you're willing to comment I'm. It you know it sounded like you're continuing to expect to be able to push rental rates.

Little bit higher in the coming year with maybe some small improvement and time utilization, but just any any comments you're willing to share there.

Sure.

I will tell you are my view of rental rates would be flattish to slightly up at this point in time, we've talked about we ended the year, 1.7% up last year.

We thought we would be somewhere in the water and a half to 2%. So we were right within our own range right now I would tell you that flat to slightly up is our expectation.

And as I think about physical utilization on a year over year 2020, compared to 29 thing I think we're going to have a little headwind to achieve the same annual physical utilization, but.

Sitting here in February weather conditions as they are currently basically across the country, it's very difficult to a call. It but you know similar utilizations, maybe we're going to have a little pressure to push is down slightly rates are going to be a little.

Last opportunistic than last year, and that's primarily driven by this utilization situation.

Okay, great. Thank you.

Thank you.

Again, if you would like to ask a question on today's call is the.

Press Star one.

You know take our next question from Ross Gilardi from.

Bank of America. Please go ahead.

Morning, guys.

Hi, good morning rules.

Brad just on your rate comment right. There I mean do you the.

The quarterly progression over the course of the year reduce.

Did you see rate slightly down year on year and the first time.

Kind of improving to positive in the second half or.

Thank you will sustain flat to slightly up rates throughout the year.

I think it's going to be somewhere in between both of your questions or the comments within your questions I I, Let me say I believe we can achieve positive rates for the year.

But it's going to be more loaded into Q2, three and four and that's going to be heavily reliant on utilization levels. So you know the stated we think the markets that we're serving a very stable the job too. They are the work flow is there.

And if everyone remains disciplined and I think there's an opportunity, but it's going to be a little bit more difficult 2020 than it was in 2019, if we could achieve positive rates.

Okay, and your free cash flow like I think I was going to the numbers. You said was slightly negative for the overall year, which is less negative than the prior year, but I expect you guys to generate some cash this year overall I mean were you surprised by that.

Not at all in.

No as you're thinking about further M&A I mean, you want to make sure your free cash flow positive before you.

Never up the business further in this.

This environment them at one point.

Got you and John I'm supposed to talked about you know comfort of taking leverage up to the three and a half the four times.

Range for this you know right right acquisition, I mean, do you still feel comfortable enough to.

Do that.

Sort of reality with.

I wanted to be through this cycle.

Raw says this is John we're not going to lever up our leverage is going to come down. This year, we're going to generate significant free cash flow, we generated $100 million free cash in the fourth quarter that was in line with our expectations.

But I can tell you our leverage will come down this year, we're not levering up.

Ill, let me add Ross I think what you've heard us say before about where we would consider taking leverage was more with a a large.

A much larger acquisition opportunity than has been represented in these tuck in opportunities opportunities that we've taken advantage of so far in are likely to continue to look to take advantage of so you know don't confuse the too that tie into the range. You gave we spoke about was for soap and much more significant than a tuck in.

Yeah. These tuck in acquisitions were done will not change our leverage and I would point out relative to leverage we ended the year at 2.4 terms.

It's really low leverage in our sector. So we're not levering up over by what we're going to remain conservative.

Okay got it and then.

We used equipment market I was just curious to get your thoughts on what you're seeing in the auction channel versus the retail channel I mean, it seems broadly speaking the retail channel has been more.

A lot more stable than the auction channel or you expect which would would you agree with that.

As the industry tries to sort of re rebalance and absorb some of that excess supply do you expect that to continue.

Sure so.

We utilize the auction very little I read the same reports talk to the same folks I suspect you had you know towards into last year, and we saw a little bit of acceleration in price deterioration very very small but noticeable.

Anecdotally there is a large auction going on right now and I've been talking to folks who are on site and watching that the auction progress. This week down in Florida, and the general consensus has been pricing seems to be returning it's more favorable it better.

You don't Leslie prepared remarks, you talked about we disclose our U.S revenues in total and then we talk about how much of our used revenues come from rental fleet sales that margin was 36% right into our sweet spot of good healthy margin. So let me say our margins on new sales are absolutely expected to be good.

Relative to how we normally before I do believe we're going to see some firming of pricing, but no doubt in Q3 I saw the same reporting there were more units a more dollars auction I think as people tried to rationalize their fleet or the tail end of last year.

Thanks, guys.

Thank you.

I would now like turn call back the bride currently Additionally, our closing remarks.

We'd like to thank everyone for taking time to join the HDD equipment serves call today and look forward to speaking to you and our next quarterly call.

Thank you operator.

Thank you that concludes today's conference. Thank you for your participation ladies and gentlemen, you may now disconnect.

[music].