Q4 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the NESCOE Holdings fourth quarter 2019 results Conference call.

At this time, all participants are in listen only mode.

After the speakers presentations will be a question and answer session to ask a question during the session I need to press star one on your telephone if you require any further assistance. Please press star zero.

I would now like to hand, the conference over to your speaker today.

No Ryan Please go ahead.

Good morning, and welcome to NESCOE Holdings fourth quarter 2019 results conference call.

Leading the call today, our CEO lead Jacobson and CFO Bruce vitamin.

Also joining us is Dyson Dryden a member of Nipscos Board.

I know Brinavess home advisors, the company's Investor Relations Council.

Earlier today, we issued a press release detailing our fourth quarter results.

I like to remind you that managements commentary and responses to questions on todays conference call May include forward looking statements, which by their nature are uncertain and outside of the company's control.

Although these forward looking statements are based on management's current expectations and beliefs actual results may differ materially.

For a discussion of some of the risk factors could cause actual results to differ please refer to the risk factor section of our filings with the FCC.

Additionally, please note that you can find reconciliations of historical non-GAAP financial measures discussed during our call in the press release issued today.

Today's call will begin with remarks, when we Jacobson who'll provide an update on our fourth quarter results general business conditions and outlook, followed by financial review for Bruce Vitamin.

At the conclusion of these prepared remarks, well open the line for questions with that I'll turn the call over to Lee.

Thanks, No as indicated in our press release issued premarket today, we generated broad based growth across each of our key end markets during the fourth quarter, resulting in our 14th consecutive quarter of year over year growth in adjusted EBITDA.

We ended the year above the high end of the range or total revenue guidance and above the midpoint of our adjusted EBITDA guidance provided on our third quarter conference call. Overall, we had another strong year highlighted by sustained revenue growth in both our specialty equipment on parts tools accessories businesses.

November we successfully completed our acquisition of specialty equipment rental company truck utilities, a transaction that expands our operated service footprint in several new markets and brings with it a young specialized sleep.

Over the course of the year, we grew our fleet capture unmet demand in the growing markets. We serve expanded our team and the parts tools and accessories business and opened five new locations to further support that P.T.I. growth.

Specialty equipment rental revenue increased 11% year over year in the fourth quarter supported by record average equipment value on read a 508.7 million.

Excluding the impact of a truck utilities acquisition, which closed in November 2019 rental revenue increased 8% on a year over year basis in the fourth quarter supported by solid underlying demand in each of the markets we serve.

George tools and accessories revenue more than doubled on a year over year basis in the fourth quarter and excluding the impact of truck utilities increased more than 70% on an organic basis in the quarter driven by a combination of new regional locations and market share gains within our equipment rental customer base.

Customer activity with our core electrical transmission and distribution telecom and real markets is expected to accelerate in 2020.

We continue to see multiyear growth in capital spending programs related to hardening and expansion of the aging electrical grid on a national basis.

And accelerating roll out of a nationwide Fiveg network and the expansion of continued maintenance of commercial and commuter rail lines in the U.S. in Canada.

Customer backlogs are currently at record or near record levels positioning us to achieve high fleet utilization and sustained pricing power in the year ahead.

Average open contract length was greater than 13 months on the average through 2019 up from just under 12 months for most of 2018 as a growing them out of contract work is completed under the scope of long term MSC agreements that require uninterrupted availability of key specialty rental units during the.

Couple assignments.

As Bruce will discuss shortly heightened levels of customer activity, let us to pull forward capital spending plan for 2020 into the fourth quarter 2019, a decision that allowed us to add fleet and several underserved markets. We plan to take a measured approach toward capital spending on new fleet in the current year as we seek to reduce love.

Rich full attaining high utilization on our existing fleet investment.

With regard to inorganic growth, we remain opportunistic acquirers of complimentary accretive assets the position us to leverage our scale and expertise in key geographies and industry verticals, specifically, we're focused on rental opportunities that serve the primary infrastructure markets well.

We haven't incumbency advantage electrical transmission and distribution telecommunications and real as well as enterprises that supply parts tools and accessories to these markets.

As with prior acquisitions. This approach enables us to optimize synergies in the servicing of equipment rental and sales execution provide shared services, while leveraging common supply chains.

Now I'd like to review the demand conditions within each of our key end markets.

And the electric transmission and distribution market, we expect the shift toward clean energy and planned investment targeting the replacement and strengthening our nation's agent grid to continue to drive multiyear growth can spend with the utility industry, having just concluded its eighth consecutive year of record capital spending.

According to IAI U.S. investor owned utilities invested more than 135 billion in 2019, an increase of 13% from 2018.

On an absolute basis, he <unk> estimates distribution related capital expenditures by utilities has doubled over the period from 2013 to 2019.

The increase in distribution spending is due to the industry was hardening resilience and expansion initiatives.

To that end NESCOE is actively engaged in a number of both large multiyear TNT projects in a myriad of smaller maintenance engagements.

For example, we're currently the first call for specialty rental equipment with a major contract are serving the western spirit transmission project.

Proposed approximately 150 mile line.

That will collect renewable power <unk> from when rich central New Mexico, and deliver approximately a thousand megawatts of power to the existing grid in northwestern New Mexico.

The <unk> 10, West project, a continuation of the Western Spirit line is expected to require or equipment well into 2022.

More recently, we have grown our market share at a large national contractor with significant T. N D project activity in the Arizona, Kansas and Colorado markets.

In California, we expect a reacceleration of TNT activity in 2020 supported by multiple long term projects related to hardening and system resiliency initiatives.

Overall, we anticipate sustained growth within our TNT and markets. During 2022 effectively support this anticipated growth we have targeted just over 50% or 2019, and now planned 2020 Capex investment in T., Indeed product lines that have outstanding demand as well as superior investment returns.

Within our telecom end markets, we expect customer activity around the ongoing fiveg adoption cycle to accelerate materially during the latter half of 2020.

Between the initial deployment of small cells to support the build out and the growing maintenance requirements of a bigger increasingly dense network our customers expect unprecedented activity levels within the sector and in coming years ahead of the expected consummation of the sprint T mobile merger contractors and carriers, we serve are preparing for increase.

Infrastructure spending paving the way for a decade long deployment of new an upgraded wireline networks capable of supporting high bandwidth low latency fiveg applications.

We are well positioned as a key supplier specialty rental equipment to several large telecom contractors positioning us to capitalize on increased wireless and wireline activity in the Midwest southeast and northeast markets.

Overall, we see accelerating growth and telecom related demand for our equipment as the year progresses.

Preparation for this anticipated growth, we have been and plan to continue to invest in highly specialized in demand product lines that serve both the telecom and electric distribution markets given that much of the same equipment can be used to service both markets, allowing for an increased level of deployment flexibility and optimal fleet utilization.

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Within our rail markets, we continue to participate in a number of large multiyear commuter rail projects. We are currently engaged in commuter rail expansion projects in Washington, DC, California, Texas, and Massachusetts, our investment in this market remains focused on the specialized high real specification prop.

Declines the continued to exhibit a utilization.

As we previously announced NESCOE is just continue where equipment rental business in Mexico.

Earlier, the Mexican government and the national utility to execute National energy reforms prevented the development of a private electrical contractor market. At this time, we have transferred the two to the U.S. or sold 65% or Mexico rental fleet.

We expect to finalize the transfer or disposal the remainder of the fleet and complete the discontinuation of this operation in Q2.

As we look ahead to the remainder of this year.

We expect revenue and EBITDA growth to be driven by a combination of accrete have increased equipment on rent. The addition, and maturation of new PA locations and contributions from the truck utilities acquisition.

With that introduction, let's transition into a review of our results.

We generated 264 million of total revenue in 2019, a 7.2% increase from 2018.

Adjusted EBITDA for the full year was 127.5 billion up 4.7% compared to 2018.

Notably core rental gross profit, excluding depreciation increased 8.6% to 147.2 million year over year.

2019, adjusted EBITDA included a full year of truck, including a full year of trucks utilities was 134.5 million.

In the fourth quarter total revenue increased 12.5% year over year to 77.2 million.

Core rental gross profit increased 12.5% year over year to 40.8 million was sustained reported gross profit margins above 75%, mainly due to higher equipment on rent within the Ers segment and an increase in the number of service locations product lines and market penetration tend to Peter.

Segment.

Total adjusted EBITDA increased slightly on a year over year basis in the fourth quarter to 35.6 million.

Within the our segment in the fourth quarter, which includes contributions from both the rental and sale of new and used equipment revenue declined 1% year over year to 60.8 million.

Importantly revenue from our core equipment rental business increased 11.3% to 50 million.

This represents an 8.1% increase year over year, excluding the impact of the truck utilities acquisition.

Strengthen our core equipment rental business was offset by a 5.8 million year over year decline in new and used equipment sales, we experienced a sequential improvement in both new and used equipment sales versus the third quarter as customer spend what remains of their annual capital spending budgets on fleet acquisitions prior to entering a new.

Full year, consistent with a trend evidenced in past years.

Average always see on rent increased 10% year over year to a record 508.7 million in the fourth quarter driven by record unit deployments in the period and the addition of truck utilities.

Fleet utilization was 81.5% in the fourth quarter compared to 83.5% in the same period of 2018.

After adjusting for new units that have not yet been entered into service and truck utilities utilization was approximately flat year over year.

The Companys average rental rate per day was 138 and a $140 in the fourth quarter of 2019 and 2018, respectively.

The company continues to realize gains and pricing by product line, but average reported rate remains relatively constant due to the changing mix as a result of expanding investment in relatively lower cost telecom and rail equipment.

Turning to discussion of our PPA segment total revenue increased by 130% to 16.4 million in the fourth quarter.

This represents a 71% increase year over year, excluding the impact of the truck utilities acquisition.

Segment growth was driven mainly by a combination of increased penetration of our existing customer base together with the opening of four new full service locations during the past year in Indiana.

Florida, Arizona and Texas in addition to a warehouse facility in California.

After the opening of an additional full service facility in Pennsylvania in 2020, NESCOE will be well positioned to serve each major region across the us.

As the only pure play publicly traded specialty equipment rental company.

Serving north Americas, TNT Telecom and rail markets, we are uniquely positioned to capitalize on a long term trend that favors equipment rental over equipment purchase providing our customers cost effective on demand solutions designed specifically for the niche markets in which we we operate.

We are excited by the opportunities for growth that lay ahead and look forward to executing on the plans we've shared today.

Before I turn the call over to Bruce I would like to formally welcome jury Holthouse to our board of directors as an independent director.

Jerry brings a proven track record of success in the specialty equipment rental arena. He previously served as executive chairman and CEO of algae coal Scotsman and Williams Scotsman prior to its AG acquisition biological for more than 10 years is currently executive Chairman of will Scott, We believe juries an exceptional.

In addition to our board and look forward to leveraging his expertise in the years ahead.

With that I'll turn the call over to Bruce for his prepared remarks.

Thanks, Lee and welcome everyone.

Today I'd like to begin with a review of our balance sheet and capital allocation priorities, followed by a preview of our updated financial guidance for the full year 2020.

As of December 30, Onest 2019, we had availability on our asset based lending facility of 96.9 million and total net debt outstanding including capital leases of 750.3 million.

On March 10, 2020, we amended and expanded our asset based lending facility from 350 million to 385 million with the addition of EMG bank as a new lender under the facility.

The increase in facility size expands it liquidity, enabling continued flexibility for us to grow our fleet and opportunistically pursue complimentary acquisitions.

In 2019, we invested 73 million in growth and 36.7 billion of maintenance capital expenditures.

We also received 28.5 million from used equipment sales and insurance proceeds from damaged equipment.

Resulting in net capital expenditures of 81.3 million for the full year.

This exceeded the 67.5 million midpoint of our full year net capital expenditures guidance of 65 million to 70 million as we pulled forward approximately 14 million capital expenditures from 2020 to the fourth quarter of 2019.

While investment in new fleet remains a priority for us to meet demand, we're seeing in the market, we intend to lower our investment in expansions during the second half of 2020 in order to redirect cash generation towards debt reduction.

During the last 12 months, we've grown our fleet by approximately 700 units to 4584, excluding Mexico and including the acquisition of truck utilities.

We continue pass on hundreds of opportunities each quarter due to is insufficient fleet availability.

This pent up demand customer demand positions us to capture attractive unit economics, we intend to capitalize on what remains a strong market for specialty rentals with a fleet that has grown nearly 20% year over year.

Turning to a discussion of financial guidance.

For the full year 2020, we anticipate total revenue within a range of 330 million to 360 million, implying year over year growth of 25% the 36%.

Adjusted EBITDA within a range of 142 million to 154 million, implying year over year growth of 11% the 21%.

Net capital expenditures after proceeds from used equipment sales of 45 to 55 million.

As a reminder, RPG segment exhibits lower margins than our core equipment rental business. The PPA segment requires minimal capital investment given the majority of revenue in this segment is sales and service related.

The higher relative growth rate of revenues in the PPA segment in part due to a full year contribution from truck utilities acquisition.

Means that it will represent a larger percentage of our overall revenue in 2020, thus we expect our overall EBITDA margin to decline from 2019 levels as evidenced by our 2020 guidance.

We expect net leverage to be below five times by year end 2020 based on the midpoint of our 2020, adjusted EBITDA guidance and our expected net debt position at the end of the fourth quarter.

Disciplined balance sheet management remains a high priority as we continue to target long term net leverage at or below three times.

With that will return the call back to the operator and open the lines up for questions.

At this time I'd like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad, we'll pause for just a moment to compel documentary roster.

Again, if you'd like to ask a question. Please press star and the number one on your telephone keypad.

Okay.

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There are no questions at this time I'll turn the call back over to the presenters.

Thanks, very much everyone for joining today that concludes our call in the interim should you have any questions no Ryan in Investor Relations can be reached at investors at NESCOE specialty dotcom. Thanks again for joining us today.

This concludes today's conference call you may now disconnect.

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