Q2 2021 H&E Equipment Services Inc Earnings Call
Your interest in the company is appreciated.
Copy of the press release, covering our second quarter results was issued this morning and can be found along with all supporting statements and schedules at the <unk> website, and Thats Www Dot H E dash equipment Dot com our.
Our discussion. This morning is accompanied by a slide presentation, which can also be found on the website under the Investor Relations section.
On slide 2 you'll see a list of the executive officers of <unk> that are joining me today and they are John Engquist Executive Chairman of the board of Directors, Brad Barber, Chief Executive Officer, and lastly, Magee Chief Financial Officer, and corporate Secretary.
Please proceed to slide 3 and I'll remind you that today's 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.
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 statements. A summary of these uncertainties is included.
And the Safe Harbor statement contained in the company's slide presentation for today's call.
And also include the risks described in the risk factors in the company's most recent annual report on form 10-K, and other periodic reports investors potential investors and other listeners are urged to consider these factors carefully in evaluating the forward looking statements and are cautioned not to place undue rely.
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.
Finally note we are referencing non-GAAP financial measures during today's call you will find the required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation as supporting schedules to our press release and in the appendix of today's presentation materials.
Well with that that completes the preliminary details today I'll now turn the call over to Brad Barber, Chief Executive Officer of <unk> equipment services. Thank you, Jeff and good morning, everyone. I'd also like to welcome you to our review of each new equipment services results for the second quarter of 2021 are going to bring you up to date with some encouraging development.
And our industry and our progress with strategic initiatives I'll begin on slide 4.
I'll begin this morning with brief comments on some of the headline numbers for the second quarter, along with impressive quarterly performance and favorable trends within the rental business. I'll also provide an update on our strategic growth initiatives and achievements, including comments on the pending sale of our crane business that was disclosed in July.
Lastly, we will follow with a more detailed review of second quarter financial results. After we will take your questions slide 6 please.
Our results for the second quarter show, a continuation of favorable industry trends in the development of a robust business environment and the rental equipment industry.
Our company has skillfully fall through the headwinds caused by the COVID-19, global pandemic, which was painfully evident in our financial performance a year ago as well as the historic Winter storm in the first quarter of 2021, which hindered business activities in several for several weeks across a large portion of our geographic footprint with the unfavorable influences. These.
That's fading most of our business segments produced favorable year over year, it's a quarterly comparisons in our key metrics of performance have turned decisively positive.
For example, second quarter physical utilization at 68, 3% was 880 basis points ahead of the second quarter of 2020 and represent our highest quarterly fleet utilization since late 2019.
When compared to the first quarter of 2021, physical utilization improved by 480 basis points and continue to improve into the third quarter of 2021.
Total revenues for the second quarter improved to $315.8 million and represented a 13, 4% increase on both year over year and sequential basis EBITDA on an adjusted basis was up 7.4% from the second quarter of 2020 to $102.3 million and was 23% better than the first quarter.
There are 2021.
On to slide 7 please.
With regard to our rental business customer needs remain high supporting favorable utilization trends as noted earlier and contributing to better second quarter 2021 rental revenues, which totaled 163 million. The result was a 13.9% better than a year ago, while improving 14, 5% on a sequential.
Basis with sequential quarterly basis.
Our second quarter 2021 rental gross margin improved to 46, 1% exceeding gross margins in the second quarter of 2020, and first quarter of 2021 by 460 in 404 hundred basis points respectively.
With our fleet utilization continuing to prove rental rates have also followed trend of steady improvement when compared to the same quarter in 2022nd quarter 2021 rental rates were just 3 tenths below a year ago level. However, when compared to the first quarter of 2021 rates were better by 1% representing the first sequential quarterly improvement since.
<unk> 2019.
To put a finer point on our excellent second quarter performance, we demonstrated improved fleet utilization and sequential rate gain while growing our fleet by $94 million or more than 5% since the conclusion of our first quarter of 2021.
Simultaneous presence. So these 3 important industry metrics as indicative of a healthy business climate and expanding industry recovery as well as superb execution by our employees and I'd like to thank them for their focus and dedication through this period.
We have numerous reasons at 18, he will remain constant in the prospects of our company over the remainder of 2021 and into 'twenty 2.
Slide 8 please.
Our confidence is based in part on the elevated number of customer inquiries that continues to build in large part the inquiries for equipment. He used that address nonresident nonresidential construction projects and end market that is well served by tuning and represents 63% of our second quarter 2021 revenues. In addition to new project backlog.
The nonresidential construction market is expanding experience and an influx of reactivation representing previously postponed projects from 2020 to spend it on the onset of COVID-19 pandemic.
I would also note the encouraging scores on key industry indicators, such as the architectural billing index or Abi. This indicator scored 57, 1 in June of 2021 compared to a score of $55.6 from March.
2021, and 42.6 per December 2020.
The Dodge momentum index or DMR has showed comparable improvement with a June 2021 score of 165.8 compared to a score of 151, 4 and $136.6 in March of 2021 in December 2020, respectively.
Both indices remain at near all time highs and collectively imply a pronounced increase in the level of residential building activity over the balance of 2021 and into 2022.
<unk> operating profiles ideal for capturing opportunities evolving in the industry expansion. In addition to our solid position in nonresidential construction markets I believe our fleet mix with an industry, leading exposure to earth moving equipment and our presence in high growth geographies positions the company's entire complement of assets to leverage the enhanced.
He is generated by the economic recovery and potential infrastructure spending.
Slide 9 please.
Before I turn the call over to Leslie I want to close with a few comments about our exemplary achievements and progress in executing our strategic growth initiatives I'll begin with the announcement on July 20th regarding the pending sale of At&t's Crane business. The rationale for exiting this legacy business segment as simple for years, we have witnessed a trend in our industry. We're radiant.
Equipment has become the preferred option of our customers at the expense of purchasing and we see no reason for this trend to reverse over the last 20 years H N against Sterling intensified our exposure to the real equipment industry through the expansion of facilities and acquisitions.
Further reducing our exposure to the distribution activities the sale of our Crane business represents a significant step in transitioning to a pure play real focus and a growth industry.
As I noted on July 20th the potential of our rental business to grow faster than other segments of the company has already been demonstrated for example rental revenues registered a compounded annual growth rate of 11% over the 5 years, leading up to 2020 and for the year of 2020 rental accounted for 51%.
Of our total revenues compared to just 32% 10 years ago.
We believe a pure focus on equipment rental should favorably position the company to benefit from higher revenues and margins, while expanding core strategic growth opportunities, we expect to demonstrate greater resiliency to market disruptions as we manage through the business cycle, which implies a more stable revenue and margin outcome last year the decline in <unk>.
<unk> sales was more than twice that of our rental segment.
The all cash proceeds of approximately $130 million from the sale of our Crane business comes at an opportune time for HLA. We have previously noted our ambition ambitious plans for expansion and there remain several methods by which we can execute these plans.
Slide 10 please.
1 way is through facilities expansion.
Extremely pleased with the pace and performance of this growth endeavor. During 2021 non branches have been opened in 2021, including a July branch in Fresno, California, bringing our total facility count in the state to 10 and.
And yesterday, we opened a new branch in Kansas City, Missouri, representing the first facility in the state, which increases our U S penetration to 24 states and 107 locations.
I added up today, we expect to open 10 locations in 2021. It is highly likely that expansion plans will result in more than 10 locations opened in 2022.
Finally in addition to the sale of our Crane business, we have taken further steps in support of our transition to a pure play equipment rental business recently, we agreed to sell to Earth moving distribution branches in Arkansas and plan to start a rental only branch in the grade a little rock market.
Once the agreements are close covering the sale of our crane business and the Arkansas Earth moving distribution locations HD equipment service will be a pure rental quite company at 23 of the 2014 states in which we operate with Louisiana being the only state where both rental and distribution activities.
I will now turn the call over to Leslie for more detailed review of the second quarter of second quarter financial results Leslie.
Good morning, everyone and thank you Brad I'll begin this morning financial review on Slide 12.
As Brad noted results for the second quarter were impressive compared to the same period in 2020 when business activity was significantly curtailed at the onset of the COVID-19 pandemic.
It is encouraging to see continued evidence of a robust industry recovery as indicated by many of our performance metrics. For example, 4 of our 5 business segments reported better year over year revenues in the quarter, resulting in a $37.4 million or 13, 4% increase in total revenue to 30.
$315.8 9.
Looking at our rental segment revenue in the second quarter of 2021 was $19.5 million or 13, 9% better than the same quarter in 2020 to $160.3 million.
The result was primarily driven by better physical utilization, which grew to 68, 3% compared to 59, 5%. During the same period in 2020 dollar returns in the second quarter were 560 basis points better than a year ago at 35, 2% compared to 29, 6%.
Rental rates were down marginally or <unk> 3 per se as at the same period of comparison. However, it's positive to see the first favorable sequential quarterly comparison in 5 quarters with rental rates in the second quarter, 1% better than the first quarter as from 'twenty 1.
Excellent indication at industry recovery is fleet growth as measured by our original equipment cost or at least Inc.
Although second quarter at least you have $1.8 billion was lower by 2.2% when compared to the same quarter a year ago. Then measure has grown 4.7% since the end of 2020.
New equipment sales increased 6 million or 13, 6% from the second quarter to $49.9 million with eon, praising prudent trading and predominantly by an increase in new crane sales.
Used equipment sales increased $7.3 million or 21, 6% to 41.4 million increase was due in part to higher sales and material handling AWP income.
Sales from our rental fleet comprised 88% of total used equipment sales from the second quarter compared to 90 per cent a year ago.
On a combined basis revenue from our parts and service segments improved 5.9 or 1.3% to $42.4 million.
Revenues from parts was better by $1.2 million or 4.6%. He revenues from service was lower by <unk> 7.
7 million per floor.
3 per seat.
Transitioning now to a discussion on gross profit and margins gross profit in the second quarter improved to $111.4 million at $19.3 million or 21% from the same quarter a year. He does the increase was driven primarily by higher gross margins on rentals and used equipment sales, partially offset by revenue.
Mix and margins on other rentals.
On a consolidated basis margins increased 220 basis points in the second quarter to 35, 3% compared to $33.1 per cent a year ago.
With you and gross margins by business segment rental gross margins were 46, 1% during the quarter compared to $41.5 per cent a year ago due primarily to the rise in physical utilization.
Margins on new equipment sales improved to 11, 5% during the second quarter compared to 10, 7% a year ago, essentially due to higher margins on earthmoving equipment used.
He used equipment gross margins increased to 34, 7% in the second quarter compared to 31, 6% last year due primarily to higher gross margins on sales of material handling AWP and estimating Clinton.
Margins on pure rental fleet, only sales were 38% compared to 34, 7% a year ago and parts and service gross margins on a combined basis were 47% compared to 41, 4% a year ago.
Slide 13, please income from operations for the second quarter of 2021 was $34.4 million or 10, 9% of revenue compared to $27 million or 9.7% of revenues in the prior year period from margin improvement was primarily the result of higher gross margins on rentals and used it.
<unk> sales, partially offset by a mix of revenue lower margins on other rentals and lower gain on sales of property and equipment.
Please proceed to slide 14.
Net income was $15.8 million or 43 cents per diluted share in the second quarter of 2021 compared to $8.8 million or 24 cents per diluted share in the year ago quarter effective income tax rate was 27, 5% in the second quarter of 2021, and 26, 9% in the second quarter.
There are 2020.
Proceed to slide 15.
Adjusted EBITDA was $102.3 9 in the second quarter of 2021 compared to $95.3 million a year ago, an increase of 7 million or 7.4% adjusted EBITDA margins declined to 32, 4% in the second quarter compared to 34, 2% a year ago quarter.
The margin decline was the result of lower gain on sales of property and equipment lower margins on either rentals and increase in rental expenses and unfavorable revenue mix. These factors were partially offset by higher margins on new equipment sales.
Next slide 16 please.
SG&A expenses totaled 77.9 in the second quarter of 2021 compared to $67.9 million in the year ago quarter. The $9.1 million increase was due to a $9 million increase in employee salaries wages payroll taxes and related employee benefit and other employee related expenses as well as a <unk>.
<unk> 9 million increase in facility expenses.
The unfavorable items were partially partially offset by a $1.1 million decrease in liability insurance and a $9 million decline in bad debt expense.
Branch expansion costs accounting for $3.2 million of total SG&A expenses in the second quarter compared to $2.2 million sequentially quarter quarterly basis, and $1 million in the year that quarter.
Slide 17, please next I'll cover fleet capital expenditures and cash flow for the 3 months period, ending June 32021, and our gross fleet Capex was 170.459, including our non cash transfers from inventory net rental fleet capex for the 3 months.
Period was $108 million gross PP&E capex for the second quarter was $8.9 million and net PP&E Capex was $8 million. Our average fleet age as of June 30, It was $39.7 months, which compares favorably to the industry average fleet age at $52.1.
Following the increase in growth Capex in the second quarter free cash used for the 3 months ended June 32021 was $110.1 million compared to free cash flow of 121.
$1 million over the same 3 months period in 2020.
Slide 18 please.
At the end of the second quarter the size of our rental fleet based on <unk> was $1.8 billion, a $41 million or 2.2% decrease from a year ago. However, as I noted previously at least he was at 4.7% since the close of 2020.
Average dollar utilization was 35, 2% compared to 29, 6% a year ago, driven predominantly by higher physical utilization and essentially flat rental rate, which reflect the period of gradual improvement from their lives.
Slide 19 please.
Addressing our capital structure, we concluded the second quarter of 2021 with net debt of $1 billion in net leverage of 2.7 times we.
We have no maturities before 2000.22028 and on our $1.2 5 billion of senior unsecured notes.
Slide 20 please.
With regard to our liquidity position, we had no need to the first 6 months of 2021 to access borrowings under our amended ABL facility. We continue to operate with ample total liquidity of 944 million, which represents the sum of cash on the balance sheet at $282.5 million and <unk>.
Borrowing availability under the ABL facility at $741.3 million.
Our excess availability under the ABL facility was approximately $1.1 billion at the end of the second quarter with minimum excess availability as defined by the agreement at $75 million recall excess availability is the measurement. He said he is timing of our springing covenant applicable with excess availability of more.
$1 billion, we have no covenant concerns.
Finally, we paid our regular dividend at <unk> 27, and a half cents per common share of stock again in the second quarter of 2021, and while dividends are always subject to board approval. It is our intent to continue to pay the dividend.
In summary, second quarter financial results exhibited measurable improvement across our operations with favorable key performance comparisons on a year over year and sequential quarterly basis, the rental equipment industry remains in a recovery phase and indicators of future activity are firming he remain highly supportive.
A further improvement since closing the second quarter of 2021 at 68, 3% physical utilization of our fleet climbed to 71, 9% as of August <unk> 2021.
Our strategic transition to a pure play rental equipment company is expected to position <unk> for further revenue growth and margin appreciation through the business cycle, and we have the capital structure and spin he profiles ex.
Our strategic growth initiatives.
And slide 21. Please this concludes my financial review on this quarter and operator, we are ready to begin our Q&A. Please provide instructions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then 1 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 2.
The first question comes from Steven Ramsey from Thompson Research Group. Please go ahead.
Hi, good morning.
Maybe to maybe just start with the rate improvement sequentially I guess.
The second half to be positive as utilization keeps improving and maybe can you talk to you on rates are they.
Getting better broadly or specific markets driving it in certain markets still lagging.
Yes, good morning, Stephen.
So we do expect sequential rate improvement to continue going forward for the remainder of the year and into 2022.
It's broad base its across really our entire geographic footprint the opportunities. There I mean, there are puts and takes within the physical utilization or that demand piece thats. So important to be able to raise rental rates, but we believe we're going to be positive sequentially going forward. I also believe we are likely to have positive year over year rates start to.
So up during this quarter and we'll be talking about those in greater detail force on our next call.
Excellent.
And then maybe can you talk to you on the fleet size up 5% from year end.
Maybe can you talk to how much of that is filling in.
<unk> branches, how much of that is going to the new brand.
Branch openings that you have.
Gross.
Thus far.
And just.
Just the take up rate as you get those into the market. If it's maybe faster than usual given the fleet dynamic in the industry. Yes. So so more of that capital if I just look at the total amount of the capital you referenced more of it in the quarter went to the warm start locations. We have some growth at same store location.
As part of that recovery year over year.
As far as rates go look we're experiencing the same types of rates in our new locations as we do our existing locations. It's maybe state. It differently. It is not part of our strategy to enter a market with low rates to make penetration, we make our rate decisions based on supply demand customer profile and a variety a variety of other customers.
Centered.
Type data points. So those rates are very similar and as evidenced in our utilization I would point out that yesterday and Leslie just covered in our prepared comments at 71, 9%.
That point in time, we measure utilization as you can suspect on a daily basis weekly monthly and a variety of waste, but every week every Monday I look at where our utilization was compared to the prior year as well by product type.
By region.
Various geographies.
Yesterday was the first time that we eclipsed our utilization in the same time in 2019 so.
As I stated in my prepared comments being able to grow our fleet, 5% improve our rental rates 1% sequentially.
Putting ourselves in position to have year over year rate increases moving forward, which I think is likely.
Really bodes well and now we have actually intersected 2019 as utilization levels fleets still down 2.2% we quote it but the fleet we will continue to grow for the remainder of the year, but as we've stated previously we expect our overall fleet growth issue to be in that mid to upper mid single digit growth.
We are really positioned ourselves well to come into 2022 and and perform at an exceptional level.
Excellent and last quick 1 for me oil and gas contribution to Q2 and in the near to medium term here as activity seems to pick up there or is that a driver of rate is that still a rate premium.
Market free, but its still a rate premium market, we're opportunistic but.
But yes, those those markets have certainly improved they are not a meaningful driver of our overall revenue.
But they certainly are positive force.
Great. Thank you guys.
Thank you.
The next question comes from Stanley Elliott from Stifel. Please go ahead.
Hey, good morning, everyone. Thank you all for taking the question.
I'm proud to early in the presentation, you mentioned elevated inquiries I'm curious if that's kind of board near term work or if your contractors and in some of your customers or are starting to think about we're kind of into 2022 and through the year.
It's both.
Our near term inquiries are going up as evidenced in our performance right. So I think that speaks most clearly to what's going on every day in our locations.
As we talk about leaning forward I referenced the Abi the DMR. These indices that collectively were very helpful. I will tell you that's triangulated against the feedback we're getting from our customers and.
I can tell you people have our customers have a very bright view of 2022 more often than not the conversations with these customers really center around them being able to get the work force to perform the work. That's there you know everyone's always got our largest concern in there and there and theyre opportunity, but their concern is not an amount of work that's.
Going to be driven their way in everyone's aware at 63% of our revenue we derive from that nonresidential commercial construction market. So we're well positioned and so my comments are both certainly right now today and for the remainder of this year as well as into 2022 people are feeling good.
Great and then.
You're thinking about the growth profile I mean, you've done a nice job with the warm starts here.
Does the selling of the crane business in.
Exiting out of some of the other Earth moving distribution business that does that change your view on wanting to get a little more aggressive in terms of M&A.
It it does I mean listen.
I wouldn't want to give you the sense that we've not had an aggressive attitude towards.
Acquisition opportunities 2020 for the obvious reasons did not present much opportunity for buyers or sellers.
I can tell you we are seeing the pipelines of opportunity heating up here later in the year and we are very actively pursuing those and hopefully we will find something that aligns well with our interest that is a good investment for HMA.
And then lastly, with a lot of the warm start it looks like they've kind of you've got 10 planned this year and youre kind of at that number.
77 ish sort of amount of SGA run rates looks pretty good and should start to see some leverage kind of off of that number on a go forward basis.
No I said at the beginning of the year that compare to the full year of 2020, we expected some slight leverage so that's.
Still remains and I would really look more at that percentage of SG&A.
What percentage of revenues than the flat dollar amount.
I think that should be more of your guidance.
No Thats fair, just kind of tricky with the <unk>.
Last year being so so crazy. Thanks, so much for the time and best of luck.
Thank you Stanley.
Again, if you have a question. Please press Star then 1.
Okay.
There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Jeff <unk> for any closing remarks.
Okay, well before we conclude today's call I'd like to thank everyone for your participation and continued interest in <unk> and we look forward to speaking with you again soon Jason we appreciate you coordinating today's call good day everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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