Q4 2020 H&E Equipment Services Inc Earnings Call
As president of Investor Relations. Please go ahead.
Thank you Sarah and welcome to <unk> equipment Services Conference call.
Review the company's results for the fourth quarter and year ended December 31, 2020, which were released earlier. This morning. The format for today's call includes a slide presentation, which is posted on our website at Ww Dai Ichi dash equipment Dot com.
Please proceed to slide two.
<unk> the call today will be John Engquist Executive Chairman of the board of directors.
Brad Barber, Chief Executive Officer, and Leslie 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 on 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 that 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.
<unk> anticipate.
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Okay.
And similar.
Expressions constitute forward looking statements forward looking statements involve known and unknown risks and uncertainties.
It could cause actual results to differ materially from those contained in any forward looking statement.
Some of these uncertainties.
Uncertainties is included in the Safe Harbor statement contained on the Companys slide presentation for today's call and is also included in the risks described in the risk factors of the company's 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 force.
The company does not undertake to publicly update or revise any forward looking statements. After the date of this conference call with.
With that stated I will now turn the call over to Brad Barber.
Thank you, Kevin and good morning, everyone.
Welcome to <unk> equipment services fourth quarter 2020 earnings call on the call with me today are John Engquist Executive Chairman Leslie Magee, our Chief Financial Officer, and Kevin Inda, Our Vice President of Investor Relations.
Again my presentation on slide four.
I will briefly discuss our fourth quarter performance provide some color on our end user markets and growth strategy and then Leslie will review our financial results for the quarter and year in more detail. After we will take your questions.
Slide six please.
I'm optimistic that 2021 will be better for <unk> and our industry during the fourth quarter demand on our end user rental markets remained good in physical utilization increased sequentially from the third quarter.
Our distribution business also performed well overall, our fourth quarter performance reaffirmed our belief regarding the ongoing improvement in our business in.
In terms of our financial highlights for the quarter total revenues were down nine 3% or $32 5 million compared to a year ago. Adjusted EBITDA declined 19, 8% or $25 2 million from a year ago and margins were down 420 basis points to 32, 2% primarily due to increased sales volume.
From low margin, new equipment sales and lower rental gross margins, while revenues remain below pre pandemic levels. We were pleased that the year over year declines improved we also generated significant free cash flow again this quarter.
On to slide seven please.
Let me now address our rental business physical utilization for the fourth quarter was 65, 4% a 160 basis point improvement from the third quarter rates remain negative. However, our sequential rate trend has stabilized as we also mentioned last quarter. We continue to focus on adjusting the rental fleet side.
And mix as we prepare for what we believe will be a growth year for our business.
As I stated earlier demand in our nonresidential construction market has continued to improve albeit activity is still below pre pandemic levels. We expect this recovery to continue if we move further into 2021.
Activity on data centers warehouses distribution, and wind and solar farms healthcare and other verticals are strong we expect industrial plants will also remove resume maintenance work, which was significantly postponed last year.
The passing of a major infrastructure or highway Bill would also be very positive for the industry lastly, both visibility and sentiment from our larger contract customers continued to improve.
Slide eight.
Let me conclude by reaffirming our commitment to accelerate our growth strategy. This year as we are pursuing multiple ways to accomplish this goal.
This includes significant increase in the number of warm starts in 2021 last year. We added four new locations. Our plan is to add eight to 10 new locations. This year, we will spread these branches out across our footprint primarily in our existing geographies, where we believe we would like to increase our service density and stable on high growth markets.
Second we will continue to explore additional growth opportunities from tuck in acquisitions of general rental businesses.
Entering the specialty rental business is also part of our focus.
Any specialty acquisition or new location openings would be synergistic with our current lines of business and fleet mix.
This opportunity.
This includes opportunities both inside and outside of our existing geographies.
Our 60 years in business have always been about equipment solutions strategically grow on our product lines and our ability to serve our increasing base of customers. We are ramping up this commitment in 2021.
Lastly, we will elaborate more on her comments, but with our successful upsides notes offered in the fourth quarter, our balance sheet is strong and will support our growth initiatives.
Now I'll turn the call out of Leslie to discuss our fourth quarter and full year 2020 financial results in more detail laterally.
Good morning, everyone and thank you Brad Let's proceed to slide on laughing for our financial results.
During the fourth quarter of 2020, the company completed a successful offering of one 5 billion as Neal eight year, three 875% senior net and you repurchase and redemption of its previously outstanding 565% senior net.
The company's operating results for this quarter include a $44 6 million nonrecurring item associated with the premium paid to repurchase and redeem the old net and the write off of on accretive NAV discount unamortized premium and related deferred transaction costs.
With that I'll move on to more about our fourth quarter results.
Our total revenues decreased nine 3% on $32 5 million to.
$315 6 million compared to the same period a year ago.
Until revenues decreased 15, 1% or $26 6 million to $149 6 million from $176 3 million a year ago.
<unk> of our fleet decreased by nine 2% on $179 1 million compared with the prior year comparable period Rachel.
Rental rates this quarter declined four 5% year over year, however rates were down only 3% sequentially as Brad mentioned these results were consistent with the third quarter and indicative of continued stabilization.
Our time utilization was 65, 4% compared to 69% a year ago, but increased 160 basis points compared to 63, 8% in the third quarter.
Getting lower physical utilization and rates. Our dollar returns declined 250 basis points to 33, 5% compared to last year, Yes dollar accounts improved sequentially, increasing 110 basis points from 32, 4% in the third quarter.
New equipment sales were better than our expectations. They still below year ago levels down 10, 3% to $55 9 million compared to $61 4 million last year. The decline was primarily the result of a 29, 6% or $8 $8 million decline in new Crane sales.
Partially offsetting.
The decrease was higher sales of new Earth, moving and new other equipment.
Used equipment sales increased 13% or $5 5 million to $47 9 million and was primarily the result of higher material handling Earth, moving and AWP sales.
Sales from our rental fleet comprised 93, five percentage of total used equipment sales this quarter compared to 97% a year ago.
Our parts and service segments generated $42 9 million in revenue on a combined basis, which is down nine 9% from a year ago.
Moving on to a discussion of gross profit and margin.
Gross profit decreased 17, 6% to $106 million from a year ago and consolidated margins were 33, 6% compared to 36, 9% a year ago, primarily because of lower retail gross margins and revenue mix margins were also impacted by lower margin and other prime.
Larry This is segment.
For gross margin detail by segment rental gross margins were 45, 1% during the quarter compared to 53% a year ago and day to continued pressure on rates and time utilization margins on new equipment sales decreased to 10, 5% during the quarter compared to 10, 8% a year ago margins were low.
Over in all major product lines with the exception of new material handling growth margin used equipment sales gross margin decreased to 31, 1% from 33, 3% last year, primarily day to lower margins in all categories, except other used equipment growth margins.
Margins on pure rental fleet only sales were 32, 6% compared to 36% a year ago and parts and service gross margins on a combined basis were 41, 2% compared to 41, 4% a year ago.
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Income from operations for the fourth quarter of 2020 decreased 13, 4% 35, 8% or 11, 3% of revenues compared to 41.
$3 million or 11, 9% of revenues in the prior year period included net income from operations for the fourth quarter of 2019, with a $12 2 million noncash goodwill impairment charge. Excluding this charge income from operations was $53 5 million or 15, 4% of revenues a year ago.
The declines in income from operations and margins were primarily the result of a nine 3% declining revenues lower gross margin revenue mix and slightly higher SG&A as a percentage of revenues. Despite a seven 1% decline in SG&A costs.
Proceed to slide 13 please.
Net loss was $14 6 million or <unk> 40 per diluted share in the fourth quarter of 2020 compared to net income of $21 9 million or <unk> 61 per diluted share in the fourth quarter of 2019, adjusted net income was $16 6 million or <unk> 46 per cent per.
Our diluted share compared to $31 9 million or <unk> 88 per diluted share a year ago.
The effective income tax rate was 37% in the fourth quarter of 2020 compared to 18, 4% a year ago.
On an adjusted basis, the effective tax rate was 22, 3% in the fourth quarter of 2020, and 18, 4% in the fourth quarter of 2019.
Please move to slide 14.
Adjusted EBITDA was $101 6 million in the fourth quarter compared to $126 $8 million a year ago. A decrease of 19, 8% adjusted EBITDA margin declined 420 basis points to 32, 2% this quarter compared to a year ago for the same reasons as I discussed on slide.
On the 12 income from operations.
Next slide 15, SG&A expenses for the fourth quarter of 2020 decreased by $5 5 million or seven 1% to $71 7 million SG&A expenses in the fourth quarter of 2020 as a percentage of total revenues were 22, 7% compared to 22 two percentage.
Year ago.
Employee salaries wages payroll taxes employee benefit costs and other employee related expenses decreased <unk> 5 million, primarily as a result of lower commissions and incentive pay combined with head count reductions.
Bad debt expense decreased $1 2 million and promotional expense decreased <unk> 9 million.
Offsetting this decrease was a $1 8 million increase in liability insurance.
And expenses related to the Greenfield branch expansion increased $1 7 million compared to a year ago.
Next on slide 16.
On this slide you will find capex and cash flow per the 12 month period, ending December 31st 2020.
Both fleet Capex in the fourth quarter was $37 1 million, including non cash transfers from inventory.
Net rental fleet Capex for the fourth quarter was negative $7 7 million.
Gross PP&E capex for the fourth quarter was $1 4 million and net with negative $4 million. Our average fleet age as of December 31, 2020 was $40 nine months free.
Free cash flow for the fourth quarter of 2020 was $79 2 million compared to $100 9 million a year ago.
Next slide 17 please.
At the end of the fourth quarter the size of our rental fleet based on <unk> one.
8 billion, a nine 2% or $179 $1 million decrease from a year ago average dollar utilization was 33, 5% compared to 36 per cent a year ago, reflecting lower time utilization and rate yet improved from the third quarter dollar utilization at $32 four per se.
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Proceed to slide 19 please.
Our recent notes refinancing and upsizing further strengthening our balance sheet and capital structure, we continue to operate with ample liquidity and no near term maturities at the end of the fourth quarter, We had zero outstanding balance under our amended ABL facility and this is a 206 $16 $9 million decrease.
Since December 31 2019.
741, 3 million of cash borrowing availability at quarter end net of $8 7 million of outstanding letters of credit our excess availability was $983 5 million at the end of the fourth quarter, which is a measurement used to determining if are springing fixed charge.
Is applicable with excess availability of almost $1 billion. We have no covenant concerns. We also had more than $300 million of cash on hand at year end. Therefore, we have very a very solid balance sheet to support the growth plan Brad discussed earlier.
Proceed to slide 20 please.
Let me quickly review, our full year 2020 results, which included a noncash goodwill impairment charge of $62 million that was identified during the first quarter of 2020 in connection with an interim goodwill impairment test necessitated by our identification of certain impairment triggering event associated with the impact to our business from COVID-19.
<unk> impact the company's results also include a fourth quarter $44 6 million nonrecurring item associated with the premiums paid to repurchase and redeem the old notes and the write off of unaccredited discounts unamortized premium and related deferred transaction costs.
Beginning with the top line total revenues decreased 13, 3% or $179 2 million to $1 2 billion in 2020 from $1 3 billion in 2019 with declines in all business segments, excluding equipment sales, which increased nine 9% at $13 8 million.
Gross profit decreased $96 6 million or 19, 3% to $402 6 million from $499 2 million in 2019.
Gross profit margin decreased 260 basis points to 34, 4% largely due to lower rental margin than a year ago margins in all business segments were down versus 2019 on.
Offset by a positive shift in revenue mix as lower margin new equipment sales declined 31% in comparison to a year ago.
Adjusted EBITDA for 2020 decreased 16, 6% to $394 8 million from $473 2 million in 2019, adjusted EBITDA as a percentage of revenues was 33, 8% compared with 35, 1% in 2019.
Our net loss was $32 $7 million on 91 per diluted share compared to net income of day, $7 2 million or $2 42 per diluted share in 2019, excluding the impact of the 2000, Twenty's first quarter goodwill impairment charge and the nonrecurring item of $44 six to $9 associated with the <unk>.
He purchased and redemption of the old 565% notes in the fourth quarter net income in 2020 was $50 1 million or $1 39 per.
Per diluted share compared to net income of $96 4 million or $2 67 per diluted share and 29, excluding the fourth quarter 2019 goodwill impairment charge. The effective income tax rate was 21.
And in 2020 <unk>.
7% in 2019, excluding the above mentioned charges, our effective tax rate for the 12 month period, ending December 31, 2020 would have been 23, 1%.
Free cash flow was $307 1 million in 2020 compared to a use of free cash flow of $6 7 million in 2019, the improvement in free cash flow was largely the result of lower net capital expenditures and lower acquisition investment in 2020 compared to a year ago, we completed.
No acquisitions during 2020 compared to the completion of one acquisition for $106 7 million in 2019.
Our net Capex in 2020 declined to negative $2 8 million compared to 221 5 million in 2019.
And lastly, we also continued our dividend payment each quarter with total dividends paid of $1 10 per common share during 2020, and while dividends are always subject to approval by the board of directors. It is our intent to continue the dividend policy.
With that lets now move into questions. Operator, please provide instructions for the Q&A session.
Thank you.
Ask a question you May press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Steven Ramsey with Thompson Research Group. Please go ahead.
Hey, good morning.
What would be curious to hear more on the fleet side coming down and with visibility improving and opening an increased number of branches for 2021 can you share how much capex will be devoted to new fleet. This year and just any thoughts on on Capex for the year.
Sure Stephen Good morning to you.
As I said in my prepared comments, we're moving back into a growth mode. We continue to sell out of the fleet last year nice healthy margins maintained again a continuation.
Very young rental fleet age.
As we move forward, we said eight to 10 locations as our expectation feel really comfortable about the eight we've got many of those slated for Q2.
Openings that we'll be announcing.
As it pertains to total Capex guidance.
Maybe the best way to frame that for you would be last year. We said, we would reduce our fleet mid to upper single digits I think.
Reduced about nine 5% this year I think we're probably thinking more in the mid single digit growth, we're going to go a little higher a little lower it probably be on the higher side as our current visibility and as it as far as the breakout of those numbers is concerned we've always talked.
About greenfields being rule.
Rule of thumb $10 million on fleet Capex year $1 million PPE. So.
It'll be dependent on how many of those we punch out we feel very very comfortable about the number of eight <unk>.
I think we will be happy to start announcing those here in short order.
Great and I guess to add on to that thinking about the.
Increased focus on specialty fleet.
I believe a partnership.
He has been discussed maybe you can share more on the partnership and on the Capex that will be devoted to the specialty fleet.
Maybe if you could share more on as you.
Invest in our specialty fleet.
Maybe held that fleet will be disbursed.
Branches or certain geographies certain project types sure.
Look I think the bigger announcement is that we have absolutely broaden our focus to consider and we are actively looking for specialty opportunities as.
As we've said anything we enter will be synergistic.
<unk>.
Groundwork that you're speaking of obviously.
Highly regarded.
<unk> high quality trench product very well complements at 25% Earth moving fleet we have.
Anything we do with specialty would be relatively small.
Compared to our overall investment at this point in time, so we're going to move slowly into those opportunities. We're also considering opportunity for acquisitions and specialty business again.
Certainly be synergistic with our existing product mix and customer base.
It's going to be a slow process as we enter the specialty business, but we've realized that certain segments of specialty can be a little bit more resilient and they also overlap and allow additional revenue opportunities with some existing customers.
Excellent and then one more from me on new sales being very strong this quarter, we had heard this.
From contacts in our channel checks.
What is your view.
Driving new sales.
Equipment do you think it has legs to last into this year.
Maybe just any thoughts philosophically does this tell you anything different about the secular shift to rental this the themes in opposition to that increased secular shift in challenging markets, but maybe would be curious to hear your take on that.
Yes, that's a very good question and I don't believe it's an opposition to penetration increasing.
The majority of those that nice Q4, we had from a relative standpoint, where crane sales in.
It doesn't take many cranes.
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To add a large amount of dollars that being said oil has started maybe whether it's a recovery or just stabilization, but everyone's familiar where crude pricing is currently I think its highest point, it's been in about a year <unk>.
Energy broadly and of course, all very specifically drives crane opportunity. So I would say that if oil and energy continue to stabilize and increase then I think our crane sales are likely to increase if they do not I think we're going to be pretty directly tied to what we see on the energy markets.
Outside of that within our distribution business.
Keep in mind that where commodity distributor in two states, Louisiana and Arkansas. So thats always been Earth moving is a much more consistent marketplace.
And then as the volatility of some of what you see on the Crane markets.
So it's a smaller piece of our revenues more consistent piece and.
And we think it will be steady as it has been now for a couple of years.
Excellent. Thanks.
Our next question comes from Steven Fisher with UBS. Please go ahead.
Thanks, Good morning, guys.
Just wanted to ask about pricing was there any particular region or end market, where the pricing stood out in the quarter or is that minus four 5% and a reflection of the business broadly.
It's a reflection of the business broadly Stephen as you said that year over year number as we moved later into.
The Covid types has not helped us in the year over year measurement that being said as I referred to on our last call. Our view was that rates were stabilizing and not likely to further degradation. So we were we were slightly down sequentially.
I would share with you and we don't like getting into months, but we saw in January our rates were actually flat over December that's a good indicator and further support that we think rates have stabilized and are not likely to continue to decrease and in fact, our view is that as we get out of Q1.
We should move into a position, where we see the opportunity for rates to start to incrementally improve.
Okay. That's that's helpful. You beat me to the next question.
So I guess just in terms of your fleet expectations.
Are you could you talked about.
The overall capex growth, but are you expecting to grow your fleets on a same store sales basis, just kind of trying to figure out.
If it makes sense to add fleet if rates are still declining.
Or do you anticipate.
Like you said after Q1 are you anticipating that rates are actually going to grow and that will support.
Growing the fleet at each branch how are you thinking about that sure.
We're absolutely planning for same store growth.
It is our anticipation that utilization is going to continue to improve and allow us to achieve improved pricing. It's never our plan to have capital spending when we think we're facing a continued decline in rates <unk> soft utilization. So our outlook is pretty positive.
Now that being said I think we're going to be a little challenge to you in Q1.
We started the year.
Just under 60% utilization utilized as you know.
On the seasonality of Q4, particularly the holidays around Christmas and new year always the seasonal low point.
Every week of January utilization improved the first two weeks of February improved over January.
<unk>.
Anyone watching the National news can see today, we have been more severely impacted by winter storms than we have been for the last few months or last few years for that matter actually the last few days, we've had approximately 40 about 40% of our locations closed due to weather.
So notwithstanding this recent last week week and a half of harsh severe weather. Our view is that utilization is going to continue to trend like it was in January which is consistently up that combined with rates that are basically flattish right now should turn into rates that are incrementally positive going forward.
Sure.
That's helpful and would you hope your folks are staying safe and warm just maybe one last question do you have a sense of what the backlogs at your construction customers are doing on.
Are they growing at the moment are they holding flat or declining because I think there's at least some.
Around this amongst investors because it seems like there is a lot of positive sentiment out there.
You mentioned it yourself.
Other rental companies, but just kind of curious how much of that is that optimism is a function of what's actually happening in backlogs today or is it in anticipation that those backlogs will eventually turn later this year with just general economic optimism on.
Eventual reopening of the economy.
Sure well.
I think there is some geographical challenges are right, California is a little bit more suppressed per day little a little bit further lockdown due to COVID-19 than maybe most of our other geographies. That's a timing issue. It's certainly not an issue of demand in the marketplace or opportunity going forward.
Broadly on non res commercial construction across the majority of our footprint.
I think the sentiment is high because people have jobs in hand, Theres work being performed and that they believe there is more work going to be performed and then the last comment I would add is around the industrial sector.
Particularly shutdown turnaround type maintenance work in 2020.
Most facilities postponed every bit of maintenance, they possibly could to preserve cash not knowing where we were going to basic.
Basically 910 months ago.
So as we sit here today I believe that work's going to come back I think there is some level of pent up maintenance demand. So I think the industrial sector will be better and should oil continue to head on the trajectory it's been on.
That's going to be a really nice opportunity for us on all of our competitors in the sector, particularly on the rental side of the business.
Terrific. Thanks, very much thank you.
So again, if you'd like to ask a question. Please press Star then one.
Our next question comes from Stanley Elliott with Stifel. Please go ahead.
Hey, good morning, everyone. Thank you all for taking the question.
Can you comment on that.
SG&A levels kind of in the coming year, because he had such an unusual.
Year last year, and then with growth kind of looking to really accelerate pretty meaningfully here in the second quarter on is there any guidance any day.
Like debt that you could share with us.
Sure. Good morning. This is lastly, so we ended the full year of 2020 at 24, 7% of revenues.
And I would say for 2021, we would expect some slight pressure on SG&A as a percentage of revenue and.
Some of that is going to be driven by the warm start growth plan that Brad has talked about.
Perfect that makes sense and then.
What do you think about.
We've heard from some other companies about larger projects resuming that had been postponed are you all seeing debt in your book and I was curious kind of how that relates to the comments around improved visibility on sentiment.
Yes, we certainly are seeing that in our book of business.
In addition to seeing jobs that have been postponed.
Or pause restart or start as on.
As expected we've also seen opportunities.
Get reignited and conversation around additional projects, particularly in.
In the Gulf Coast. So, it's really been all of the above but its a general improvement.
In that area.
And then lastly in terms of the weather that's plaguing much of the U S right now.
Looking back historically I would assume debt debt during the recovery phase or when things are starting to stall out that's actually could be a boost to the overall business just wanted to see if that was the case or not.
Sure.
It could be it could be some level of a boost that listen I think it's going to be viewed as more pent up demand.
I spoke about our utilization trends improving every week of January the first two weeks of February improving over our <unk>.
My points in January and now we've been pause just a bit.
That work is going to come back immediately as soon as this call is as far as additional work from power lines or trees that are ice fallen down.
Going to be very incremental.
But notwithstanding that we see our utilization continuing to prove improve as we roll through the first quarter.
Great guys. Thank you very much I appreciate it.
This concludes our question and answer session.
I would like to turn the conference back over to Brad Barber for any closing remarks.
We'd like to thank everyone for taking the time to get on our fourth quarter and full year 2020 call today, and we look forward to speaking to you on our next regularly scheduled quarterly call. Thank you.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.