Q2 2020 Nesco Holdings Inc Earnings Call
Good morning.
Let's go Holdings second quarter 2020 earnings Conference call. Please note. This conference call is being recorded I would now let me turn call over to Mr. Preston part now I've NESCOE Investor Relations, Sir you may begin.
Thank you operator, and welcome everyone can ask a second quarter 2020 earnings conference call.
Earlier today, we issued a press release announcing our second quarter results and filed an earnings presentation to accompany prepared remark both of which are available and that goes investor relations website at investor NASSCO specialty Dot com.
I would like to remind you that managements commentary and responses to questions about today's conference call.
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 at some of the fact.
That could cause actual results could differ please refer to the risk factor section of our filings with the FCC <unk>.
Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during our call in the press release issued today.
Well now turn the call over to Mexico, Chief Executive Officer Weve Jacobson.
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Thank you press the good morning, everyone. Thank you for joining us I Hope you and your families are safe and healthy nothing is more important than these times.
Decided to share with me that with me today as Josh.
New Chief Financial Officer, as you know Josh joined the NESCOE team in June. He was previously the Chief Financial Officer, Patrick Industries, a public company with over 2 billion an annual revenue. We're thrilled to have Josh joined the team and look forward to achieving key milestones and increasing shareholder value that he got together.
On today's call I'll focus on four key themes and Josh will provide a detailed review of our financial results. Those key themes are as follows one of our top priority remains a health and safety of our employees, while continuing to provide uninterrupted service to our customers.
Two despite the challenging economic environment, our second quarter performance was solid and we achieved ample cash generation.
Three we have significantly enhanced our senior leadership team driving strategic execution and transforming the company into a stronger organization.
For we're well prepared to benefit from near term Tailwinds, while positioning the company for the long term.
I will begin with an update I cobot nineteens impact on the business.
We continue to serve our customers and operate with little to no business disruption. Despite the current economic environment, resulting from cobot 19.
Mandatory shutdowns that social distancing measures put in place to mitigate the pandemics impact have changed the way. We go about doing business. However, as a central service provider, we remain committed to serving our critical electric transmission and distribution telecom and rail customers and all of our service and distribution locations every.
And open for business.
We could not have responded to the pandemic the way we have without our team.
Being a provider of a central services is beneficial from a business perspective, but it can be challenging for employees, it's natural that fuel anxious with the thought of going to work during a pandemic.
That said our team could not have done a better job. They have taken on the responsibility to provide services to our critical infrastructure customers with a sensor pride.
Perhaps by the leadership and Fortitude of our team I want to thank every member of the NESCOE team for your continued resilience and professionalism through the crisis.
On that note that the health and safety of our employees continues to be our highest priority. We have implemented initiatives to ensure the continued safety and welfare of our employees with strict adherence to state and federal protocols. We are fortunate that we do not have a storefront business model. So none of our service locations across the country require in person.
Contact or have a staff sales team.
Service locations, we continue to service our fleet, but adhere to strict social distancing. Many of our office employees are working from home, which has proven to be equally as effective as being in the office. Our sales team has refined the strategy to effectively incorporate the use of virtual meeting as they haven't transition most of their interactions with existing and puts.
Total customers through a combination video and phone calls we appreciate that these changes were unexpected for our team and appreciate how seamlessly and effectively they have transitioned.
The collective years of industry and related operating experience of our leadership team has also been invaluable and helping guide us through the pandemic.
We added three members to our leadership team in the second quarter.
Joining Josh Bloom as key strategic additions to our leadership team, our Mike Turner and Chris holds Mike Turner, joining NESCOE as the new president or parts tools accessories segment, Mike joins us from Anixter up Fortune 500, global distributor of utility power solutions and other products.
Where he had a 25 year career and held leadership positions across multiple divisions and functions, including management finance and sales. We also added Chris holes as Chief Digital officer, a new position at NASSCO.
This is responsible for implementing digital solutions throughout our organization and leads our marketing an IP departments. He was previously a digital transformation advisor for platinum equity and proud of that was Chief Digital officer, and marketing officer for Blue line rentals, we worked with our president Rob Black as our before it was acquired by United Rentals were two point.
1 billion in 2018.
Each of these gentlemen have exemplary credentials and already providing valuable insights that are helping NESCOE into its next phase of growth.
Now onto our performance in the second quarter total revenue increased 9% from 62.9 million in the second quarter of 2019 to 68.5 million.
Growth was primarily driven by our PPA segment, where revenue grew 64% year over year to 15.1 million, primarily due to the acquisition of truck utilities.
Within the Ers segment revenue decreased half a percent to 53.4 million.
Equipment sales grew 18% to 10.4 million, while equipment rental revenue declined 4% to 43 million.
Revenue in both segments was impacted by Cobot 19, as electric utilities, and telecoms delayed new projects until social distancing measures are.
Our adjusted EBITDA declined by 14% from 30.5 million in the second quarter of 2019 to 26.2 million due to a combination of lower utilization, which resulted in reduced equipment rental gross profit and increased selling general and administrative expenses primarily related to public company costs.
The Pandemics impact on the company has been mitigated by the fact that we serve critical infrastructure end markets. Most existing projects have continued and there have been some new projects, but not enough to offset projects finished finished up or have been put on hold.
The impact as a pandemic on the company was the greatest from mid March to the end of April while the strictest shelter in place orders were in effect as mentioned on our first quarter conference call. During this period equipment on rent fell 8% to approximately 460 million.
This decline was primarily due to off rents in the distribution and telecom end markets.
Some projects were postponed or activity was put on hold.
Distribution and telecom projects tend to take place in locations with higher population densities that transmission or rail and as a result or more sensitive to shelter in place orders transmission or rail, which typically typically experienced a spring pickup remained relatively flat in this period due to cope with 19 related project delays.
Throughout may equipment on rent fell another 3% to just under $450 million, while muted relative to the mid March to April period, similar factors caused the may decline distribution and telecom experienced slight net equipment off rents and transmission or rail held steady.
In both June July equipment on rent remained in the same range as in May we experienced a rebound and telecom and distribution demand as distancing measures. These offset by the typical summer slowdown in transmission.
The electric grid is nearly entirely responsible for cooling while heating is shared between electric natural gas and heating oil among others given that the transmission grid is particularly strained in the summer and utilities prefer to limit summer repairs to avoid the risk of large scale self inflicted outages and further grid strain.
Escos third and fourth quarters are seasonally the strongest than the typical year in the back half of the year. We expect NESCOE will benefit from this typical seasonality and pent up demand from cobot related project delays.
We have implemented several initiatives to reduce costs and preserve capital to mitigate the impacts of the pandemic.
From a cost management perspective. This includes a hiring freeze a pullback in service cost to coincide with demand reduction in overtime and outsourced equipment servicing and then elimination of non essential spending, including all not a central travel.
In addition, we implemented head count reductions that will provide 2.5 million an annualized cost savings, we focused on variable and growth positions that will not disrupt our business or limit our ability to pivot quickly when demand recovers.
When combined with our other cost reductions total cost reductions to date or approximately 5 million on an annualized basis.
From a cash management perspective, we reduced net capital expenditures in the quarter to 8 million from 29 million in the second quarter 2019, and 27 million in the first quarter of 2020.
We also aggressively reduced working capital most notably a 10 million sequential reduction and accounts receivable in the third and fourth quarter, we plan to push net capital expenditures, even lower and expect working capital will provide a cash benefit which Josh will cover in more detail.
We are laser focused on measures to further improve free cash flow and liquidity as we whether the pan Devon pandemic, but believe cobot nineteens impact on our business will be temporary.
We expect a relatively strong back half of the year, resulting from pent up demand from project delays in the second quarter and our typical increases in demand during the third quarter. The long term fundamental demand drivers at each of our end markets remain unchanged.
In transmission and distribution utilities must make significant investments to harden the grid and reduce fire hazards extend the grid integrate new renewable energy sources and ensure enough power can be delivered to meet future ILEC verification needs, including electric vehicles.
According to the department of energy nearly 50% of the electric grid is at or near the end of its useful life and annual power outages have increased more than six fold since 2000.
The economic cost the power outages, each year exceeds $150 billion greatly outweigh the cost of regular inspection repair and replacement of grid lines Poles and equipment.
Public utilities are well aware the multiple factors driving a need for grid investment, which is why they have announced multiyear capital outlays exceeding 300 billion an aggregate a large percentage of which is allocated the grid hardening and modernization.
Despite the economic backdrop, the need for reliable communications grid has been heightened as a result of the pandemic.
More people are working remotely and in many cases children are attending virtual classes.
In an increasingly digital world, we believe telecom companies will need to increase their focus on fiveg investments filling that were gaps and maintaining existing wireline technology.
Fiveg begins in earnest these installations will be right in our sweet spot the higher frequency millimeter ways Fiveg utilizes cannot travel nearly as far as threeg and Fourg waves, which will force telecommunications companies to install increased number of small cell sites estimated 20 times the number of Threeg.
And Fourg sites. These small cells will be installed on a lower height utility and telephone poles instead of utilizing large towers. These installations will require specialized insulated bucket trucks like nest goes.
Finally, railroads must continue to invest to maintain upgraded repair their existing networks and upkeep existing operations. We believe railroads are increasingly outsourcing repairs to contractors and equipment rental providers to increase operating flexibility.
With that I'll turn the call over to Josh to discuss our financials.
Cash.
Thanks, Lee and good morning, everyone. I hope everyone is remaining safe unhealthy I'm excited to be part of the NESCOE leadership team and look forward to partnering with other members of the team to drive overall shareholder value.
On today's call I will provide a detailed review of our quarterly financial results discuss our balance sheet and liquidity and outline the actions, we're taking to increase free cash flow, while reducing leverage.
As Lee mentioned, our total revenue increased 9% relative to 2019 during the second quarter to 68.5 million.
Ers revenue decreased a half a percent to 53.4 million.
Equipment rental revenue declined 4% to 43 million, primarily due to a less than 1% decline and we see on Reds to 461.1 million.
And fleet utilization decline of 8.9% to 71.3%.
The utilization decline was primarily result of project delays and certain projects being put on hold particularly in a distribution and telecom end markets.
Average rental rate per day was flat on a consolidated basis at 136.7 in both the second quarters of 2020 and 2019.
Ers equipment sales, which can vary quarter to quarter grew 18% to 10.4 million.
And were elevated impart due to new dealer inventory investments in 2019.
Our PPA segment revenue increased 64% to 15.1 million.
PPA rental revenue grew 22% to 4 million, primarily due to investments made in 2019 to establish a national footprint for PA.
PVA sales and service revenue increased 88% to 11.1 million.
Primarily as result of the acquisition of truck utilities.
Pre Cove, and we expected even stronger growth in the PPA segment, most of our PPA revenue stem from new projects start certain new projects were delayed due to cover 19.
Adjusted EBITDA declined 14% to $26.2 million during the second quarter.
The decline and adjusted EBITDA was primarily due to a combination of a lower utilization.
Which resulted in lower equipment rental gross profit and an increase in selling general and administrative expenses as a result of being a newly public company.
The decline was partially offset by higher equipment sales and truck utilities.
Our core rental gross profit, excluding depreciation only declined 7% to 32.7 million.
I'm pleased to report that our free cash flow improved $41.9 million to 14.4 million in the second quarter compared to negative free cash flow of 27.6 million in the second quarter of 2019.
This improvement was due to a combination of strong operating cash flows and lower capex consistent with our cash preservation initiatives in response to cover the 19.
Operating cash flow increased 21.2 million year over year to 22.5 million.
Which was partially driven by our prudent working capital management in the second quarter.
We plan to continue to manage our working capital in the coming quarters and anticipate working capital will be a source of cash in the back half of 2020.
Cash from investing improved 20.8 million year over year to an 8 million net outflow.
One of the primary benefits of our business model is that we're able to significantly reduce capital expenditures in downturns and generates substantial free cash flows.
We plan to spend less on cash flows from investing in the third and fourth quarters and estimate full year 2020, net capex to be between 35 and 40 million.
For the first six months of the year total net capital expenditures were 35 million.
We expect a combination of strong learning disciplined cost control reduce capital expenditures and working capital management will drive strong free cash flows in the back half of 2020.
Multi and positive free cash flow for the year and further improving our liquidity.
We had ample liquidity of 83.6 million at the end of the second quarter.
This includes 5.3 million of cash and 78.3 million of availability under our asset based lending facility.
At the end of the second quarter, we had net debt outstanding of approximately 766 million and had no significant debt maturities until 2024.
In the coming quarters, our focus will be on cash flow generation.
Debt Paydown and capital preservation to enhance liquidity.
We are committed to achieving a long term leverage profile in the range of three to 3.5 times.
We expect to achieve our long term leverage target through strategic growth and disciplined capital allocation.
As markets recover we will remain thoughtful and disciplined as we look to increase our capital investment.
We will make new fleet investment with a particular focus on asset level returns and positioning the company for long term growth.
As we invest in the new fleet, we will prioritize maintaining positive free cash flows and paying down debt.
This will result in deleveraging through both debt Paydown and adjusted EBITDA growth.
In closing I am excited for what the future hold for NESCOE and look forward to working with the leadership team to execute our strategy.
Profitable growth and maximize shareholder value.
Now I'd like to turn the call back to Lee for closing remarks Lee.
Thanks, Josh.
Customers in each of our core end markets have continued to reiterate spending and investment plans and many of our public company contractor customers maintain record backlogs.
In addition, we expect the decades long shift from owning to running equipment to continue especially in the current environment as companies elevate their focus on capital preservation.
As we exit this period of project delays related to cope with 19, we expect to continue to be a long term beneficiary of strong growth drivers in our end markets.
We believe this will start in the back half of 2020 in the last five years, we have seen always see on rent increase in average of more than 10% from the end of June to the end of September.
Seasonally the third and fourth quarters are typically our strongest we expect these typical seasonal factors to be bolstered by pent up demand, resulting from cobot 19 project delays after making significant investments to grow our fleet and expand the geographic presence of our parts tools and accessories business in 2019, and the first quarter of 2020.
Prepare for growth with limited additional investment required.
In summary, we've assembled a strong team that is focused on executing and delivering on our commitments for 2020 has turned out to be a challenging year for all businesses.
Our critical infrastructure end markets are somewhat insulated, but not immune to what is happening in the general economy.
We're controlling the controllable and are focused on managing costs cash flows and mitigating the downside risks, we're balancing near term uncertainty with positioning the company for accelerated growth as a recovery begins.
The fundamental investment thesis for NESCOE remains intact, we are leading player in critical infrastructure end markets with strong multiyear growth Tailwinds, we are well capitalized and have the right assets and team to manage through this challenging environment and come out stronger on the other side.
With that I'll turn the call back to the operator and open the line for questions.
Ladies and gentlemen via the phone lines you May Presto, one followed by the four on your telephone you will hear us three tome prompt to acknowledge your request.
Your question has been answered and you would like to withdraw your registration. Please press the one followed by this three.
One moment, please frac first question.
And our first question comes from Tim sign of Citigroup. Please go ahead.
Thank you and good morning.
The first question is on.
Just on and again, recognizing you're not not providing guidance but.
For the second half can you just help us maybe with a framework for how we should think about margins as.
Guys as activity levels pick up on them, specifically I'm just looking at at cost of rent in in Ers was up.
$2 million and basically flat revenues.
As we think of the back half of the year and pushing some of the restructuring benefits will flow through there, but maybe just help us again thats kind of a framework on margins for the back half. Thank you.
Sure one of the consequences Tam of the.
Level of off rents over the second quarter.
As we saw a significant number of units that had been on rent prolong duration.
And not unexpectedly at all you'll see a higher level of maintenance cost during that type of cycle.
So as we look to a second half with increasing on rents and an increasing decreasing level of off rents proportionately, we should see reduced overall costs as a percent of the increasing revenue and a widening of the GP spray.
Read as we go through the quarter and see a more normal deployment of equipment.
With less of a wave or rush of the off rents connected with the utilization decline and just the overall environment.
Yes, not as this is Josh I'll, just add to that so as we think about our EBITDA margin in Q2.
Pretty significant decline compared to year over year, but really only down 100 basis points compared to Q wine and so we had planned for margins to be down year over year for 2020 with the growth of our PA business.
And also the sales of our new fleet, which have a.
Overall lower margin profile compared to net goes legacy margin profile. In addition to that the addition of truck utilities, which came on in Q4 last year that also will impact our overall margin profile and so as we think about the outlook at the remainder of the year and as we get a greater mix rental revenue, which had a higher over.
All margin profile, you combine that with the yesterday SJ cut overall cost reductions that we've done today to $5 million, we would expect sequential margin improvement as we progressed through the back half the year.
Got it alright. Thank you that's helpful and and Lee on just on on rates.
The.
Holding those flat year over year.
In a quarter, where we had such ill pronounced decline in fleet on rent.
I guess stood out to me at least and Im just curious.
As those projects.
Were delayed and put on hold this as they restart.
Did that impact or does that impact the calculation at all and in do you have to.
Presumed those don't get put out for bid again, but maybe just.
Highlight just speak to ramps again I think.
And again in a quarter, where you have that significant declines so them to hold flat.
Yes again.
Maybe it's not as noteworthy is I.
Selling it but maybe just some color on that.
Sure. We we believe with great conviction, we we deliver the highest level responsiveness highest level of service to our customer base and we have really the best value proposition.
Where your cost of equipment or a few percentage points against the whole project.
And a few percentage points against like let's say 70, or 75% of project costs being labor that responsiveness that service quality puts you in a position if you're delivering uptime, you're really avoiding for that customer.
The cost of downtime for that 75% of the project costs. So we have remained extremely focused on that as we commented we operated across our system throughout the entirety of the quarter with essentially no disruption and we think thats been recognized by our ability to hold pricing consistent.
With.
Prior year consistent with prior quarter.
Anytime you've got a downturn cycle, you certainly see increasing price pressure weve for the most part help we've had instances where we've made logical concessions we've had instances where weve logically not made a concession and if need be passed just because of that nature of that project short term.
Bad application et cetera.
It is hard to.
Predict where literally pricing will go we expect it continued environment of.
Where our service will support sustaining solid pricing, but we do expect competition at a meaningful level over the the ramp up period, we expect.
Got it Okay and last one for me is just on on Ptca and.
You highlighted earlier that growing that national footprint, where are you on the journey on.
In terms of growing wallet share with your customers as Youve added more of these locations and just curious if you if you're able to quantify any any increase in terms of overall penetration rates.
Of that.
Customers rental spend.
With the disruption of.
The pandemic in the second quarter.
It's really hard to.
Look at that measure and draw any conclusions frankly.
We ended 2019 at a 24% penetration of our rental revenue through PJ rental and PA sales.
In the second quarter will first quarter as well first and second quarters of the year, we were up year over year end, the rental and of PA and we see that growing significantly from this position in the back half like our our results and equipment rental.
We also see sales bouncing back from what was a.
Challenging quarter as it related to new project deployment and the the Liberal sale of Ptca again rental held very solid and we obviously overall reported a gain which was a combination of the rental the.
Truck utilities impact and so on I wish I could quantify for you really that share of wallet.
We think we're making the kind of progress we should in terms of recognition as a a provider of parts across the broad spectrum rental as well as sales that's a unique part of our value proposition.
Services as well as the sales and rental again, a pretty unique element of our value proposition and I think we're positioned extremely well to gain the share we expect in the second half.
Q2 was just as we all know very unique and uncommon environment.
Right Okay.
Very good thanks for that well so thats all.
Thank you thank you Tim.
Thank you as a reminder, via the phone lines you May press. The one followed by the four on your telephone keypad to register a question or comment once again that is the one for.
Our next question comes from Richard cost of Jefferies. Please go ahead.
Hey, guys. Thanks for taking my question.
So you don't you talked a little bit are quite a bit actually about some of these product or project delays that you experienced in Q2, which makes total sense. How much revenue do you think you ended up losing in Q2 as as a result of some of these delays and things that got pushed out and.
What time period do you expect to catch up with all of that over or is it something that ends up all coming through in Q3 or is it over a few quarters or how do you see that plan out.
Yes, I'll take it first stab at that this is Josh.
Difficult to quantify the actual revenue Miss in the quarter I think you can pinpoint to utilization.
That really impacted the off rents that Lee alluded to earlier, so we had a fairly significant decline almost 9% utilization year over year had we been operating more normal levels. At this time of year, our expectations. We would have been at that high seventys per cent for utilization, which would have drove pretty significant revenues more.
In line with where we saw Q1.
So as we think about the back half of the year, which is seasonally stronger for us and when you.
Add the project delays and postponement that should start to pick up in the back half of the year, we should start to really see things pick up from utilization standpoint, as we progress through the year not only from a seasonal perspective, but also from the delays have the projects that really drove down utilization in Q2 and so.
So.
Yeah, I think we will see certainly capture of some of that deferred activity.
In Q3 in Q4.
But it's also going to spill into 2021 or or the logical success succession projects that will get bumped down the road and that's going to be a function of continued challenges around.
The dealing with the pandemic and what work can be executed in in more.
Urban areas.
Manpower.
Theres certainly a challenge continuing challenge with respect to manpower not so much with NESCOE, but with respect to our customer base. So we don't expect the kind of an instant returned to full on and we pick all up picked that all of that deferral up in Q3 year Q4, it will in some fashion direct or indirect bump into the future and.
Into the backlogs of our customers and and basically backlog from or around standpoint that we have.
Gotcha and do you think you can improve your utilization rates into that high seventys range by the end of Q3.
I would say from where we're at somewhere mid to high Seventys by the end of Q3 and continuing that into Q4, our typical trend will be mid to high Seventys Q3, as it recorded outage and ticker so over 80 in the fourth quarter we.
Anticipate will be a little bit short of that this year.
We do see nice solid growth if history repeats itself.
My reference point as 20 out of 20 years I've been in this exact industry you've seen Q3 in Q4 improve.
We certainly expect for me it will be 21 out of 21 years.
But it's a long ways from a little bit over 70, so that what we've seen in most years, we will gain considerably them.
Gotcha and appreciate that and then lastly from me you guys did pretty well on working capital you've talked about more improvements coming through in the back half of the year how much more do you think you can get out of working capital. After the performance so far and where are you targeting those improvements to come from.
Yes, Josh.
Yeah, we focused on working capital management consistent with our whole.
Cash flow cash preservation and free cash flow generation in the quarter you saw a lot come from receivables here in Q2, as we think about ptca in our expansion, which was fairly rapidly.
We have a lot of inventory in the field year over year.
As we kind of mature those sites, we're going to lift to opt to optimize those inventory levels and so we will look to be bringing down inventory levels.
In addition to flexing, our overall working capital and receivables in particular, consistent with our revenues and so I would say as we progressed through the back half of the year, we may not see the magnitude that we saw in Q2 of bringing working capital down, but we're definitely going to continue to flex working capital and we're going to continue to optimize our.
Inventory levels at our PPA sites, which is a pretty significant source of working capital and drive that down as we progressed through the back half the year.
Okay, great. Thanks very much.
Thank you. Thank you.
Thank you for the questions at this time I'd like to turn the call back over to Mr. Jacobson for closing remarks.
Thank you.
That concludes our call today.
Thanks, everyone for your interest in NESCOE.
We look forward to speaking with you on our meeting our next me earnings call for the third quarter in the meantime, if you have any questions. Josh can be reached at investors at NESCOE specialty dotcom have a good day.
That does conclude the conference call for today, we thank you for your participation and asset you. Please disconnect. Your lines. Thank you have a good day.
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Okay.
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