Q3 2020 H&E Equipment Services Inc Earnings Call
Good morning, and welcome to <unk> equipment services third quarter 2020, <unk> earnings Conference call.
Today's call is being recorded.
This time I would like to turn the call over to Mr. Mike.
Vice President of Investor Relations. Please go ahead.
Thank you Sarah and welcome to actually equipment services Conference call to review the company's results.
Third quarter ended September Thirtyth, 2020, which were released earlier this morning.
The format for todays call includes a slide presentation, which is posted on our website www <unk> HD dash equipment Dot com.
Please proceed to slide to.
Conducting the call today will be Jonny <unk> executive Chairman of the board of Directors, Brad Barber, Chief Executive Officer, President and loves when Magee, Chief Financial Officer and Secretary.
Please proceed to slide three.
During today's call, we will refer to certain non-GAAP financial measures and we've reconciled these measures to GAAP figures in our earnings release and 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 meanings of federal Securities laws State.
It's 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 summer.
A summary of these uncertainties is included in the Safe Harbor statement contained in the Companys slide presentation for todays call and also include the risks described in the risk factors in the company's me. Most recent annual report on form 10-K, and 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 that state It will now turn the call over to Brad Barber.
Thank you Kevin and good morning, everyone welcome to <unk> equipment services third quarter 2020 earnings call on the call with me today are John Nyquist Executive Chairman Leslie Magee, our Chief Financial Officer, and Kevin <unk>, Our Vice President of Investor Relations.
Slide four please.
I'll briefly discuss our third quarter performance and current market trends and then lastly will review our financial results for the quarter in more detail. After we will take your questions.
Slide six please.
I'm pleased to begin todays call by saying the operational environment has progressed from what I would characterize as stable to expansion I'll provide some additional color on the positive trends, we're experiencing in our end user rental markets and physical utilization in a moment, but let me first quickly review our topline financial highlights [noise].
While we continue to see meaningful improvement in the rental business our financial results remain below year ago levels total revenues were down 18.1% or 63.7 million compared to year ago. This was largely the result of an 18.8 or 38.3 million decline in total rental revenues and.
42.7, or 27.8 million decline in new equipment sales from a year ago, adjusted EBITDA declined, 22.5% or 28.7 million from a year ago and margins decreased 200 basis points to 34.1%.
Let me now address the improvements in our rental business I stated during our second quarter call that I expect that utilization could be flattish through the balance of this year.
Instead during the during the third quarter, we experienced a solid increase in equipment on rent, while we continue to adjust our fleet by selling our older assets even.
Even though oil field and industrial rental opportunities remain far below historical levels demand has improved within our non residential construction markets.
Physical utilization for the quarter was 63.8% a 430 basis point improvement from the second quarter as of September Thirtyth 2020, physical utilization was running just over 67%.
Keep in mind demand historically begins to decrease around the holidays and seasonality becomes a greater headwind, but we're very pleased with the positive cadence in our physical utilization rates are still negative however, our sequential rate trend improved.
As Leslie will detail, we remain focused on managing our balance sheet and maintaining the appropriate size rental fleet and inventories.
Our ongoing activities to reduce capital expenditures and operating costs resulted in significant free cash flow for the quarter.
We have also continued to improve our leverage and liquidity.
In conclusion, the momentum in our rental business is encouraging we believe the current environment could further increase the secular shift towards renting versus owning equipment, creating greater opportunities for HD based on our improving visibility we plan to accelerate our growth strategy. This includes significantly increasing the number of warm starts next year.
We also remain focused on pursuing acquisition opportunities in both the general rental and the specialty rental businesses I will now turn the call of Leslie to discuss our third quarter financial results in more detail Leslie.
Good morning, everyone. Thank you Brad Let's proceed to slide 11 for more details about our financial results.
Oh revenues decreased 18.1% or 63.7 million to 289.3 million compared to the same period a year ago.
Our rental revenues decreased 19.1% or 35.4 million to $149.4 million from 184.8 million a year ago. The size of our fleet decreased by 7.8% or 154.5 million compared with the prior year.
Comparable period.
Rental rates this quarter declined 4% year over year and rape also decreased 8.4% sequentially, but this was a significant improvement from the 2.8% sequential decline in the second quarter, given lower physical utilization rate. Our dollar returns declined 510 basis points to 32 point.
4% compared to last year, but also reflects meaningful expansion from the second quarter.
New equipment sales decreased 42.7% or 27.8 million to 37.2 million compared to 65 million last year. The decline was primarily the result of a 69.5% or 21.6 million decline in new crane sales as well as declines in all other categories.
With the exception of new other equipment sales.
Used equipment sales increased 28.3% or 8.8 million to $40 million and increased in all product lines.
Sales from our rental fleet comprised 92.6% of total used equipment sales this quarter compared to 88% a year ago.
Our parts and service segment generated 43.5 million in revenue on a combined basis, which is down roughly 3% from a year ago.
Moving on to a discussion of our gross profit and margin.
Gross profit decreased 25% to 99.1 million from a year ago, and our consolidated margins were 34.2% compared to 37.4% a year ago, primarily because of lower rental gross margin margins were also lower and all other segment.
For gross margin detail by segment rental gross margins were 44% during the quarter compared to 50.8% a year ago and were impacted by continued pressure on rates.
Beijing margins on new equipment sales decreased to 11.1% during the third quarter compared to 11.6% a year ago, largely due to lower new crane margin.
Used equipment sales gross margins decreased to 30.3% from 31.3% last year, primarily due to lower margins in all categories, except cranes and earthmoving.
Margins on pure rental fleet only sales remain solid and were 32.1% compared to 34.8% a year ago and parts and service gross margins on a combined basis decreased to 39.9% compared to 41.4% a year ago.
Slide 12 please.
Income from operations for the third quarter of 2020 decreased 44.2% to 31 million or 10.7% of revenues compared to 55.5 million or 15.7% of revenues in the prior year period. These declines in income from operations and margins were primarily a result of an eight.
18.1% decline in revenue lower rental gross margins and higher S. DNA as a percentage of revenues, despite seeing a cost declining by 9.4%.
Partially offsetting these GP decreases to income from operations were higher gains on sales of property and equipment and a positive shift in revenue mix.
Proceed to slide 13.
Net income was 10.1 million or 28 cents per diluted share in the third quarter of 2020 compared to net income of $28.4 million or 79 cents per diluted share in the third quarter of 2019. The effective income tax rate was 40.9% in the third quarter of 2020.
Perry to 26.7% a year ago the increase in the effective income tax rate was primarily due to unfavorable permanent differences in relation to pre tax income excluding the impact of our 2021st quarter goodwill impairment charge, our effective tax rate for the nine month period ending September.
Thirtyth 2020 would have been 23.5%, resulting in our third quarter effective tax rate of 26.2%.
Based on a third quarter effective tax rate of 26.2% net income and earnings per share for the third quarter would have been 12.6 million and 35 cents per share respectively.
Please move to slide 14.
Adjusted EBITDA was $98.8 million in the third quarter compared to 127.5 million a year ago, a decrease of 22.5% adjusted EBITDA margins declined 200 basis points to 34.1% this quarter compared to a year ago also primarily due to lower margins in there.
Rental business and higher SDMA cost as a percentage of revenue partially offsetting these results were higher gain on sales of property equipment and revenue mix.
Next slide 15.
SDMA expenses for the third quarter of 2020 decreased by 7.3 million or 9.4% to 70 million. After you net expenses in the third quarter of 2020 as a percentage of total revenues were 24.2% compared to 21.9% a year ago.
Employee salaries wages payroll taxes employee benefit costs and other employee related expenses decreased 5.6 million, primarily as a result of lower commission and incentive pay combined with head count reduction.
Also expenses related to repo branch expansion increased 1.3 million compared to a year ago.
Next on slide 16 please.
On slide you'll find our capex free cash flow for the nine month period, ending September Thirtyth 2020, our gross.
Grossly capex in the third quarter was 27.8 million, including noncash transfers from inventory.
Capex was down 72% compared to the third quarter, a year ago, our net rental fleet capex for the third quarter was a negative 9.2 million grasp any capex for the third quarter was $3.8 million and that was 1.5 million. Our average fleet age as of September Thirtyth point 2021.
40 months.
Free cash flow for the third quarter 2020, with $66.2 million compared to use of 6.4 million a year ago. The increase in free cash flow was largely due to lower net fleet investment this year.
Next on slide 17.
At the end of the third quarter the size of our rental fleet based on what we see with 1.8 billion, a 7.8% or 154.5 billion decrease from a year ago average dollar utilization was 32.4% compared to 37.5% a year ago, reflecting lower time utilization and rate.
Yes. It is improved from the second quarter dollar utilization of 29.6%.
Proceed to slide 19 please.
Lastly, our balance sheet remains very strong with ample liquidity and no near term maturities at the end of the third quarter. The outstanding balance under the amended ABL facility with 18 million and is down 198.9 million since December 30, Onest of last year, we had 720.
4.3 million of cash borrowing availability at quarter end net of 7.7 million of outstanding letters of credit our excess availability was in in excess of 1 billion our.
Our excess availability is the measurement used to determine if are springing fixed charge coverage is applicable.
Our senior secured credit facility requires $75 million of excess avail availability for this covenant would even spring spring. So therefore with excess availability at September Thirtyth, just over $1 billion were in a very strong liquidity position and we have no covenant concerns.
The company paid its 25th consecutive consecutive quarterly cash dividend and while dividends are always subject to approval by <unk> approval by the board of directors. It is our intent to continue the dividend policy.
With that we'll move into our Q and a session operator, please provide instructions.
Thank you we will.
We'll now begin the question and answer session to.
You asked the question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble roster.
Our first question comes from Steven Fisher with UBS.
Please go ahead.
Great. Thanks, Good morning, guys.
Morning.
Morning, Brett why don't you could just talk a little bit more about the improved visibility that you cited that that's driving you to accelerate some of your growth plans.
What is that visibility you have what's driving that it seems like in other places we've heard there's sort of.
No I know that your utilization has improved.
Sequentially, but.
We're hearing broader about the construction markets that are still not much visibility. So I'm curious what you are saying that that's improving.
Sure well good morning, Thank you for the question.
The primary driver for that comment is the feedback we're getting from our customers in project activity in some cases projects that were postponed for an indefinite period of time have started.
In other cases, it we're seeing fewer postponements and much fewer cancellations of projects than we were just.
Three to six months ago or.
Going forward.
Looking at some of our information we know we've got we've got a couple of our product lines that are significantly above prior year's utilization right now our earthmoving products.
For example, both our larger construction products and what we categorize as utility Earth. Moving these are many excavators skid steers are both well above prior year utilization levels, and we always view Earth moving this kind of a leading indicator of the health and vitality of the construction markets.
So it's you know we got kind of anecdotal and quantitative information. We also continue to look at some of the report in our selective markets and as we sit here today the oil industry. The Gulf coast more broadly for the first time in a long time has really been a headwind for agency.
These markets are expected to start recovering at some level, even if it's just the pent up demand associated with maintenance that's been postponed I believe most of these facilities have postponed every bit of maintenance they could during 2014 and its anticipated and reported that we'll start to see that activity level sharply into.
So those are that's the commentary I can offer you around our our improving visibility and I do the math.
Okay. That's helpful. And then maybe just a question on cranes and how you're thinking about kind of where we are.
Cycle.
Are we still sort of coming off peak and some of the markets I know some others are weaker what and what do you think it will take to get the broader crane market going again, a little bit better.
Yes, I think it's going to take energy recovery data at a at a meaningful level for to get going a crane business is very difficult right now as evidenced in less Li's prepared comments when we talk about the the declines being almost 70% year over year and new Crane sales, our physical utilization, although the crane fleets only.
Four or 5% of our total investment in our crane in our rental assets.
That utilization is well down year over year.
So you know when we see energy start to come back I think there could be a tremendous upside within the crane business, but for the foreseeable future, it's going to be difficult.
And just to clarify energy, meaning more sort of the big process industry plants or you think more of the upstream side of the business.
It's all the above its all the above I mean, obviously oil is the anchor of energy what I speak of it but it's really all the above.
Okay, and just last quick clarification I'm not sure if I missed this did you guys comment on.
How much storm related work there may have been in the quarter.
We did not you know it's interesting we certainly do benefit when there's destruction of a we have more product on written Lake Charles right now.
From the first hurricane not just the second hurricane that has struck there but in the short run you know it causes us some pressure whether he is.
It can be a blessing and a curse and so you know flooding not so great for our business real destruction were structure to knock down you bet. It helps us as we sit here today every location south of Baton Rouge for our businesses shut down.
Because there's a hurricane about to make landfall in New Orleans so.
No it will be a net positive, but sometimes in the short run like today it can be a headwind for us.
Got it thanks a lot.
Thank you.
Our next question comes from Steven Ramsey with Thompson Research Group. Please go ahead.
Good morning, everyone.
And I guess to mourn and I guess.
To think more on warm start can you talk about.
You know some of the decision process on where to place these kind of the cadence of opening.
Okay, and maybe are they are they building on existing strong geographies, adding new ones.
And then along with that the Capex required to a low dose do branches.
Sure yes so.
You know, we kind of have a prioritization process and we certainly like adding density and expanding existing geography is first and foremost we're not opposed to entering a new geography, what book in general we would prefer to enter new geographies do an acquisition.
As far as the cadence go out we expect to open somewhere between eight and 10 locations in 2021.
Now going into next year and over time, we've always spoke about a warm starts as typical rule of thumb year, one about $10 million and though we see.
For rental fleet, probably about a million dollars pp.
For the operation and then you know they mature at various levels over periods of time.
No reason to think they will be loaded in any particular quarter, we would spread things out.
Across our footprint over a period of time, primarily in the geographies. We serve that were either building density or or slightly expanding the geography, but we're not opposed to entering brand new geographies on a greenfield basis, but it's not our top priority.
Great and then kind of the follow on with that on the acquisition pipeline pursuit, maybe can you talk to.
The level that you can how that has changed is that.
Bigger pipeline or pipeline, that's maturing and closer to closing transactions.
If the acquisitions did that.
That strategy of adding new geography or there.
Densifying existing.
Sure well look I mean, there is a variety we are always out working you know John helps leading on that John and I as well as other team members or consistently working relationships and potential acquisition opportunities. These are both in and out of our existing geography. They are both.
In the products that we deal in today, and we are specifically considering new products or specialty rentals. So.
What I can comment is that we're continuing to be active and.
We're looking for the right opportunities.
Great and then can you talk to the fleet size coming down.
Was that in line with expectations or did Q3 did you were you able to offload more fleet, maybe at favorable prices, So where suite size stand now relative to.
2021, better.
Better expectations.
Maybe how it diverges at all if at all from Q2 thoughts on fleet size.
Sure.
The fleet size is right in line with our expectations. We I think last call reference that we would be in the mid to upper single digit fleet decreased by the end of the year, we still plan on that being at our plans for this year I would comment that we started the year with 37 month old rental fleet, we've only age the fleet three months.
As we sit here reporting Q3, and so really proud of the job our teams done our pricing on used equipments been solid, but there's been no upward or downward pressure with pricing. That's caused us to act differently. We're just working our plan. So you know we're going to take the fleet down a little bit further than it is today as is our plan.
As we get into 2021.
Clearly we are focused on this growth opportunity with warm start greenfield opportunities that will be new capital.
We've seen our rental rates stabilize.
That four tenths of a percent we crossed sequentially is a good indicator that we believe rate to stabilize and should continue to be so moving forward.
And we're in the middle of our forecasting process for our existing 90 798 locations we have today.
And I can tell you that.
The the early feedback is some amount of fleet growth and we're going to balance that fleet growth of course, again continued improvement in physical utilization and us achieving rate improvement as well.
Great. Thank you.
Thank you.
Our next question comes from Stanley Elliott with Stifel. Please go ahead.
Good morning, everybody. Thank you for taking the question.
Just a point of clarification, Fred you mentioned projects were being postponed indefinitely started back or those larger scale projects and they see a bunch of smaller scale projects, just trying to get a sense of the magnitude.
It's a variety we've won a lot of.
Want to stay away from talking about specific project named I will say that weve seen projects that we were told were postponed that they have decided to go forward into limited scope work right. Maybe its foundation work, maybe it's the infrastructure around the facility with an anticipation that they will.
Restart the full scope of the project. So it's really been a a variety, but what I'd say that I'm talking about generally speaking larger projects.
Not small projects.
That's great and then can you talk a little bit more about the decision or the discussion around specialty.
Is this something your customers are requesting is this is kind of the way you see the market.
Migrating longer term, we'd love to get a little more color there if you wouldn't mind it.
Sure happy to provide color it's both.
We've got a significant amount of Earth moving we have continued to grow our earth moving fleet, a little faster than the other product types within our equipment profile that in of itself kind of lends itself to certain products that we may want to enter to better serve existing customers.
And we see customers continuing to look for sources that can provide a wider array of exists of products for their needs and so you know the punch line is we're on these projects. We know these customers we have good working relationships and we're looking to facilitate more of what their request are so you know I think there are couple.
Two or three specialty business types of products that are well aligned for our existing business, our existing footprint, our existing customer base and we're well focused on achieving that becoming part of our rental offering.
Perfect and then lastly for me at 10% sort of kind of new store growth is.
Nice to see you are you seeing anything with some of your smaller competitors out there that the pandemic is really.
Impaired their business and so this is more of a share gain opportunity or.
Or is this more to that you what you're seeing in the tea leaves that encouraging to push forth on the expansion side.
I think it's three things number one I think the smaller operators are really struggling right now and I don't think its going to get a lot easier for them. So I think that is some level of an advantage for agency.
I believe that we see opportunity within the markets themselves just as they are right for us to continue to expand and the third thing that I will add that we've been doing these warm starts now for about 10 years.
And you know we've been I think the last few years punch it out.
Really I think 18, we did only one location, but other than they think we do about for the year I think Doug.
Five year.
We've got four that we've announced in 2020, we have done and I think that will complete 2020 this year, but as we look and do analysis of these locations looking at return on capital just the performance and we compare them to other locations or acquisitions or acquisition opportunities I got to tell you we have performed.
Really well with these organically grown warm starts and so there's just a lot of reasons. It adds up we've got the balance sheet we.
We're not going to hurt our leverage we're going to stick with this.
Our capital structure is good for we're going to stick with our dividend and we can just do you know eight or 10 of these a year and we feel like they're very safe growth opportunity for HD and history tells us that they are going to provide us good returns and so we've also gotten better at doing one starts along the way.
Perfect. Thanks, so much appreciate it.
Thank you.
Again, if youd like to ask a question. Please press Star then one.
Our next question comes from Seth Weber with RBC capital markets. Please go ahead.
Hi, Good morning. This is Brendan on for Seth. Thank you for the color on what drove the increase in SG <unk> as a percent of revenue in the quarter.
I'm curious as to how you're thinking about that going forward, particularly given your increased greenfield Karl focus and I guess, what's the typical timeline.
When you do put in a new location to kind of get that up to operating at company averages.
Yes, so the timeline associated with getting these a company averages can be as as short as six to 12 months and probably more like 18 months on average.
So I mean, there is a range within that as far as them looking more like a mature location and having typical metrics throughout the personnel.
As far as the impact to ask DNA, obviously, you know they have a negative impact to SGT early on you front load you hire the staff you need to run a business that's not yet ramped up and I think general there have been times before we've called out the cost associated with those and we will likely do the same thing going forward says we're going to start to.
Duties and multiple numbers.
So it's a negative impact in the short run certainly not in our longer view and we will be giving some helpful information as we ramp these warm starts up in 2021.
Okay. Thanks, and then your parts and service was roughly flat sequentially.
Any more color you can give on sort of what you're seeing there and then thoughts on sort of maybe when we might see an uptick in rebuild activity.
Yeah, when cranes take off were going to see a.
An uptick in that service activity until they do I think we're probably going to be fixed at very similar levels for the foreseeable future.
Okay, great. That's it from me thanks.
Thank you.
This concludes our question and answer session I.
I would like to turn the conference back over to Mr. Barber for any closing remarks.
Sure. We thank everyone for taking the time to join our call today and look forward to updating everyone.
On our year end results as we move forward. Thank you.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.