Q3 2021 H&E Equipment Services Inc Earnings Call
Good day and welcome to the H M E equipment Services' third quarter 2021 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one.
On your Touchtone phone and to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Mr. Jeff Chastain, Vice President of Investor Relations. Please go ahead Sir.
Thank you Chuck and welcome everyone to this review of third quarter 2021 results hosted by the management of <unk> equipment services. We appreciate your interest in the company a.
A copy of the press release, covering our third 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 <unk> dash equipment Dot com.
Our discussion. This morning is accompanied by a slide presentation, which can also be found at the <unk> website under the Investor Relations tab and events presentations.
Thank you.
Proceed to slide two I'll introduce those who are joining me today, which include Brad Barber, Chief Executive Officer, John Engquist, President and Chief operating Officer, and Leslie Magee, Chief Financial Officer, and corporate Secretary.
Moving to slide three and before I turn the call over to Brad I want to 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 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. A summary of these uncertainties is included in the Safe Harbor statement contained in the company's slide.
<unk> for today's call and.
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 reliance on such.
Forward looking statements the company does not undertake.
Publicly update or revise any forward looking statements. After the date of this conference call.
Also 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 is supporting schedules to our press release and in the appendix to today's presentation materials.
With those details out of the way I'll now turn the call over to Brad Barber, Chief Executive Officer of HMA equipment services. Thank you, Jeff and good morning, everyone. I'd also like to welcome you and to express my appreciation for joining us on today's call as we review the third quarter result of aging equipment services before I begin my comments on the quarter I want to welcome.
Our president and Chief operating Officer, John Engquist, who is joining Leslie and me on the call. John has held many positions within the company over the last 19 years and was promoted to the role of President and CEO earlier. This year, John will be joining the team on all future calls.
I'll begin this morning, stating how pleased I am with our actual third quarter financial performance, which included impressive year over year and sequential improvement improved performance was especially evident in our equipment rental business. It was indicative of outstanding operational execution during a period of strong activity.
Also with the Crane business sale completed we recognize a significant milestone in our transformation to a pure play rental business model.
Closing this transaction strategically strengthens <unk> competitive position for the future.
Proceed to slide four.
I'll provide more detail on both our financial performance and the sale of the Crane business in a moment. In addition, all identify some of the important drivers of business activity that led to our impressive third quarter financial results and what we might expect as 2021 draws to a close.
Finally, I'll following our successful efforts to intensify our focus on equipment rental business I want to explain our strategy for penetrating our existing geography, as well as expanding our geographic footprint and while we expect this strategy to position <unk> to benefit from the strong environment Mark market environment.
Lastly, we will then follow with a more comprehensive review of third quarter financial results. Then we will take your questions.
Six please.
I'll begin my discussion on the third quarter financial results with an explanation of our agreement to sell our frame business required that the operations of this business. We reported in discontinued operations to avoid confusion the financial highlights on slide six our consolidated presented us both continuing and discontinued operations.
For the remainder of our presentation results and information presented as continued operations and exclude the crane business unless otherwise specifically noted as discontinued operations as I mentioned earlier financial metrics for the third quarter of 2021 were decidedly improved compared to the same.
Quarter in 2020, which were in part diminished by the effects of the COVID-19 global pandemic.
However, our industry has demonstrated both disciplined and a sturdy rebound from the pandemic induced declines that dominated 2020.
On a consolidated basis total revenues in the third quarter of 2021 of $319 4 million improved 10, 4% when compared to the same quarter in 2020 and.
In addition, adjusted EBITDA grew to $119 1 million up 26%, while posting a margin of 37, 3% an improvement of 320 basis points over the period of comparison.
Slide seven please.
With regards to continuing operations total revenues improved to $275 4 million or nine 3% when compared to the third quarter of 2020. This favorable outcome was largely due to a 22, 1% increase in total rental revenues to $197 2 million.
Also adjusted EBITDA in the third quarter improved to $112 3 million up 24, 1% over the period of comparison equaling.
Equating to an adjusted EBITDA margin of 48% or 490 basis points better than a year ago quarter.
On to slide eight please.
Our rental business showed outstanding outstanding results for the third quarter.
When compared to the third quarter of 2020 rental revenues increased 21, 6% to $176 7 million with a gross margin of 59% or 660 basis points ahead of year ago quarter.
The combination of higher physical utilization and strengthening rental rates contribute significantly to the quarter's performance gains which included a 600 basis point increase in dollar utilization to 38, 9% compared to the year ago quarter.
Slide nine please.
Yeah.
Multiple factors produced a strong outcome customer demand for our diverse mix of rental equipment remained vigorous throughout the third quarter as nonresidential construction projects intensified. This elevated demand drove our average physical utilization to 71, 9% or 840 basis points ahead of the year ago period and improved 320.
Basis points on a sequential quarterly basis.
This represented our highest utilization since the fourth quarter of 2018.
At the same time rental rates continued their positive trend and finished the third quarter of 2020, 126% higher on a sequential quarterly basis and two 9% ahead of the same quarter last year.
Such strong financial results would not be possible without our focus on operational excellence, which remains a core component of our success.
Since the close of the third quarter, our physical utilization continued to reflect outstanding operational execution and strong customer demand, reaching a peak of just over 75% in October while we're enjoying the momentum continued coming into the final quarter of this year, we still expect to see utilization levels model.
Great as seasonal factors emerge during the second half of the quarter.
As we enter the final quarter of 2021, I'll remain enthusiastic about the future of the equipment rental industry.
Strong evidence of a broadening construction market remains in place. It's led in part by nonresidential construction activity, which H and he gets primary which is <unk> primary end market and accounted for 68% of revenues over the trailing 12 months from September 32021 customer inquiries remain elevated in <unk>.
All industry indicators continue to hover at near record levels.
As evidence of the company's growing confidence and expansion of our primary markets.
<unk> expects to disclose strong fleet growth plans for 2022 with a growth investment gross investment that is expected to significantly exceed our total expenditures of any of the previous years of our 60 year history, We will disclose our final capital expenditure spending plan for 2022 following the completion.
Our valuation and thereafter begin offering quarterly capital expenditure guidance.
On to slide 10 please.
Before I turn the call over to Leslie for the financial review I want to offer some brief remarks on how we're positioning <unk> for future success as we enjoy strong cyclical recovery in our industry.
First and foremost we've completed significant steps that clearly advanced <unk> transition to a pure rental business. These include the sale of the Crane business, which closed on October one as well as the mid September 2021 sale of two earthmoving distribution branches. These steps and other future initiatives will establish a pathway to higher end.
More sustainable revenue growth as well as margin appreciation throughout the business cycle.
Proceeds from the Crane sale will facilitate continued investment in our rental fleet as we evaluate the expanding needs of our customers, while improving the mix of our fleet, which remains one of the youngest in the industry.
Slide 11 please.
Also proceeds will be used to support further development of our branch network warm starts and Greenfield branch expansion remains an integral part of our expansion plans and we continue to evaluate acquisition opportunities. Thus far in 2021, we have opened 10, new branches, including in October new new location and <unk>.
Hogged in Utah, placing <unk> in 24 states across the U S and we plan to establish no fewer than 10, new branches in 2022.
To conclude next month <unk> will celebrate 60 years in business as we approach. This milestone I'm very confident in the company's ability to capitalize on growth initiatives that should further enhance our competitive position reinforcing my confidence of factors such as our young rental fleet and diverse geographic presence.
So the strength of our balance sheet, our ample liquidity and a robust scalable digital customer platform.
And last but certainly not least the ability and experience of our leadership team as well as our growing group of dedicated employees across our expanding branch network taken each of these factors into account I believe <unk> is ideally positioned to capitalize on our future growth initiatives with that please proceed to slide 12, and I'm going to turn the call over to Leslie Magee.
Good morning, everyone and thank you Brad I'll begin today's financial review.
On slide 13.
As Pat explained earlier, our third quarter and year to date financials reported results of the crane business as discontinued operations.
On slide 13, we present, a summary of key financial metrics for the three and nine months ended September 32021 to convey an understanding of what was given that and more important.
Our financial measures are presented in our continuing and discontinued operations or consolidated results discontinued operations only the crane town and continuing operations, referring to the three months period, the crane business, which represented approximately 3% of our LTC has revenues of just on your.
2014% at consolidated total revenues with an adjusted EBITDA margin at 15, 5% to key point from this table is the accretive nature at the transaction on the continuing operations of <unk>.
The company scaled point margins experienced meaningful appreciation as illustrated on this slide.
The table also known as the September 2021 sale of two earthmoving distribution branches located in Arkansas.
We look forward at an approximate $5 3 million gain on the sale of these Arkansas for instance, which is included in the total $6 2 million continuing operations gain on the sales of property and equipment.
Further the operations of these branches are included in continuing operations due to the date of sale and did not qualify for discontinued operations collectively.
Collectively these transactions support At&t's transition tap here rental business, where we expect to benefit from higher and more stable revenues and margin appreciation.
Slide 14 please.
Moving now to continuing operations our results for the third quarter. Once again included improvement in physical utilization and rental rates along with additional fleet growth revenues in the quarter increased $23 5 million to $275 4 million compared to $251 9 million in the third quarter.
2029.
Nine 3% increase was driven by further growth in our rental revenues, which closed the third quarter at $176 7 million or 21, 6% ahead of the third quarter in 2020 within the rental segment physical utilization on an OCC basis average 71, 9%.
For the quarter at 840 basis points from the year ago measure and was up 1290 basis points from the pandemic led <unk> seen in the second quarter of 2020.
Higher fleet utilization drove further gains in rental rates, which improved two 9% from the year ago quarter, and two 6% on a sequential quarterly basis.
The rate improvement with both meaningful and encouraging when you consider the second quarter 2021 year over year comparison remained unfavorable by 2%.
We continue to grow our fleet in the third quarter, expanding by 5% when compared to the same quarter in 2020, and eight 4% fleet growth since the end of 2020.
Looking at our other business segments used equipment sales declined 14, 2% in the third quarter to $31 1 million with the decrease due primarily to lower sales of earthmoving equipment caused largely by the strong rental to name.
Also year over year sales at new equipment were down 34% to $19 4 million due principally to supply constraint, which led to fewer sales at Newark meeting.
<unk> leather and Clinton.
Our parts and service business segments reported aggregate revenues at $26 1 million or five 4% better than the year ago quarter, when compared to the same quarter in 2020 total gross profit improved 29%.
4% to $113 9 million increase which resulted in gross profit margin of 41, 4% or 650 basis points ahead of the prior year third quarter.
Similarly data higher margins from rentals and used equipment sales in addition to favorable revenue mix.
Reviewing our business segments gross margins on rentals improved to 59% or at 660 basis points compared to 44, 3% in the year ago quarter with the improvement due primarily to higher utilization and rental rates.
Used equipment margins were 37, 6% compared to 34% led by higher margins on material handling and earthmoving equipment.
Margins on new equipment sales were 12, 4% compared to 11%, resulting from better margins on earthmoving and crane.
Peer rental fleet margins improved to 39, 7% up.
31, 5% and finally margins on parts finished the quarter at 24, 5% compared to 26% in a year ago quarter, while our service margins were 65, 2% in the third quarter compared to 67, 5% a year ago.
Slide 15 please.
Income from operations for the third quarter of 2021, titled $45 7 million or 16, 6% of revenues.
Now compared to income of operations of $25 4 million in the third quarter of 2020 or 10, 1% of revenues.
Third quarter 2020, when margins were supported by the improvement in rental gross margins of favorable favorable mix of revenues and higher gain on sales of property and equipment and partially offset by higher SG&A expenses.
On the sales of property and equipment were $6 two in the third quarter of 2021 and $2 million in the third quarter 2020, with the third quarter 2021, and increased ticket of $5 3 million gain on the sale up Arkansas distribution right.
Proceed to slide 16 please.
Net income was $24 7 million or 68 per diluted share in the third quarter of 2021 compared to $8 million or <unk> <unk> per diluted share in the third and.
In the year ago quarter.
The effective income tax rate was 24, 7% in the third quarter of 2021 and 34% in the third quarter of 2020.
Slide 17 please.
Adjusted EBITDA improved to $112 3 million in the third quarter of 2021 compared to $90 5 million in the year ago quarter, an increase of 21 8 million or 24, 1%.
Adjusted EBITDA margins increased to 48% in the third quarter compared to 35, 9% in the year ago quarter.
The combination of favorable revenue mix, better rental margins and higher margins on used equipment sales and higher gain on sales of property and equipment trends and margin improvement, partially offset by higher SG&A expenses.
Next slide 18 please.
SG&A expenses totaled $74 4 million in the third quarter of 2021 compared to $64 five nine in the year ago quarter, the $9 9 million or 15, 3% increase was due largely to a $9 1 million increase in employee salaries wages incentive comp.
Sensation payroll taxes and related employee benefits.
Also <unk> 9 million and higher facilities expenses and a six.
$6 million increase in professional fees.
Branch expansion costs accounted for $3 3 million of total SG&A expenses in the third quarter largely representing the addition of 10 branches to our network at the conclusion of the third quarter of 2020 and includes initial expenses associated with our new location in Ogden, Utah.
Slide 19, please next I'll cover fleet capital expenditures and cash flow for the three months period, ending September 32021, and our credits fleet capital expenditures were $110 9 million, including noncash transfers from inventory.
Net rental fleet capital expenditures for the three months period were $79 7 million gross PP&E capital expenditures for the third quarter were $8 5 million, while prestige when sales of PP&E exceeded our credits expenditures by $1 4 million.
Our average fleet age as of September 30 of 2021 with 39, six months, which compares to the industry average fleet age 50 to 70.
Free cash flow for the three months ended September 32021, with $44 2 million compared to free cash flow of $66 2 million over the same three months period in 2020.
Slide 20 please.
At the end of the third quarter the size of our rental fleet based on <unk> was approximately $1 $8.088 billion increase or 5% greater than a year ago.
<unk> was up 141 million or eight 4% <unk> 15020.
Our average dollar utilization was 38, 9% compared to 32, 9% a year ago, and driven predominantly by higher physical utilization and rising rental rates.
Slide 21.
Addressing our capital structure, we ended the third quarter of 2021 with net debt of $1 billion and net leverage on a trailing 12 month basis at two seven times, which was a modest improvement from the previous quarter, we have no maturities before 2028 on our one to five.
And a senior unsecured name.
522 please.
With regards to our liquidity position, we have no borrowings through the first nine months under our amended ABL facility. Our total liquidity position remains healthy at $976 3 million, representing the sum of cash on the balance sheet of 235 million and borrowing base.
<unk> ability under the ABL facility of $741 3 million, our excess availability under the ABL facility was approximately $1 1 billion at the end of the third quarter with minimum excess availability as defined by the agreement at 75 million by definition excess availability.
<unk> is the measurement used to determine if our springing fixed charge is applicable with excess availability of more than $1 billion. We continue to have no covenant concerns and finally, we paid our regular quarterly dividend of <unk> 27, and a half cents per common share of stock in the third quarter of 2021, while that dividends are.
Always subject to board approval.
We continue to pay the dividend.
<unk> hundred 23 please.
In summary, our third quarter financial performance reflects <unk> strong operational execution across an expanding branch network and our success with capturing with capturing the growth opportunities increasingly evident throughout our end market.
Our rental operations delivered strong performance in the quarter capitalizing on improving fleet utilization and rising rental rates, while growing two 9% in acquiring more than 8% for the year.
I have a rental Chris Marr.
Margin improved 660 basis points to 59% with one of our excellent quarterly metrics.
The sale of the Crane business completed we are now better positioned to execute our growth initiatives, while benefiting from higher and more stable revenue growth and margin differentiation as we intensify our focus on the round.
And this concludes my review on our quarter.
Operator, if you would please to high injections to our call today.
Yes, ma'am, we will now begin the question and answer session.
To 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 and to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
And the first question will come from Stanley Elliott with Stifel. Please go ahead.
Hey, good morning, everybody. Thank you for taking the question.
Quick question for you all nice to see the margin lift ex distribution business. You are structurally have you thought about or could communicate kind of where do you think the margins can go 48 very good a lot of good tailwind to <unk> 36 for nine months, it's still very good too.
Any sort of color or direction that you guys could share on that front.
Sure Stan and good morning.
We believe that 40% Mark is kind of a good indicator with our business mix and profile, obviously that could be a little impact it with season out more seasonal quarters Q4 Q1.
But generally it's probably in the range of where we're going to be performing at currently that stated our view is that we're going to continue to improve our rental performance primarily.
<unk>.
Maybe some utilization certainly our view is that we will continue to increase rates. We believe we're improving the mix of our assets that deliver better returns. So given time, we believe that that number will continue to incrementally improve as we go forward.
And you mentioned utilization 75% in October.
Probably not sustainable over the long term how are you all thinking about kind of a more ideal sort of level operating into into next year.
I'm curious your thoughts there.
Sure, Yes, we're proud of that 75% in the company's history. There was a time, we actually hit 77% of several years ago.
We talk a lot about.
Operational excellence excellence and the initiatives, we have internally and so I would not want to lead anyone to believe that we're going to average 75% in a quarter. That's that's not realistic.
You saw what the quarterly average was I will tell you that as we go forward.
We believe we have room to improve our annual utilization incrementally.
So.
Is there something more specific John or myself, we'd be happy to respond to it but we're proud of what we achieved in Q3, but what we achieved in Q3 on average is not necessarily the best we can do in other peak periods.
That's great and then lastly in terms of the Capex need for the business you have a young fleet obviously.
A lot of Oems are facing supply chain issues do you all feel conversations you've had with them thus far that you'll be able to get the fleet that you would want given the demand book that you see building into next year.
We feel very confident.
We stay in contact we have excellent relationships with our manufacturers, we have been what I would call more intense planning for the last six months.
And we have got verification with.
We're wrapping up our 2022 planning.
With our operations right now based upon what our expectations are we believe we're going to receive 100% of the products that we need.
Maybe more importantly, we're going to be able to do so without any large inflationary headwinds, we're expecting low single digit increases on average.
The answer is yes, we can get the product should be further supply chain disruptions and we all hear from the manufacturers will then my comments would change, but we're hearing direct from them. Our orders are placed and we feel very good about our ability to grow.
Brad Thats, great, Thanks, everybody and best of luck.
Thank you.
Again, if you have a question. Please press Star then one our next question will come from Steven Ramsey with Thompson Research Group. Please go ahead.
Hey, good morning wanted to follow up on the fleet commentary there.
Make sure I understand it the first clarify getting 100% of the fleet you would like to have for next year will the timing of that coming in.
To you and your branches be ideal or will it come in later in 2022. Then then you would get it in a normal year.
Steven we're working on fine tuning that right now, but the vast majority of our planned purchases for next year are already slotted for not only quarters, but specific months, we're asking the manufacturer to verify their ability to make deliveries to our requirements and they are telling us theyre going.
Get us the equipment when we want it.
We'll certainly be able to talk in more detail as I just mentioned, we're going to move to give quarterly guidance on capex starting next quarter.
Because we're going to have significant fleet growth next year.
We think it's important that we communicate that we will try to make sure when we give that guidance, we tried to context the cadence.
Today as we sit here our manufacturers have supplied us delivery dates.
Absolutely fit into what our planning calls for.
Excellent Okay, and then thinking about your long term ambitions in specialty equipment I guess, if there are any updates on this front and do you think you can grow this at the desired level or do the manufacturer's production challenges slow down the ability to execute their silver.
Maybe just a little slower than what you originally hoped for.
I think there are two things on the specialty front number one yes, theres always acquisition opportunity and we continue to be active in pursuing and reviewing.
Opportunities that are better that are out there.
Number two we organically started.
Now state of trench safety business.
Obviously, the steel pricing currently is a headwind to us and it has stifled our desire to purchase product at current steel pricing. So that's not detracting from our.
Our desire to enter that business or grow it we can grow it fairly significantly.
That being said outside of a larger acquisition, especially is going to remain a very small piece of our overall revenue for the foreseeable future, but we plan to get back to growing that organic startup that we that we've that we've spoken about just as soon as the pricing makes better sense for us.
Okay, Okay and then.
On the rate front, certainly flipped positive in a major way.
Much of that is easier comps how much of that is pricing initiatives and then thinking about rates going forward.
Given the tight fleet in the industry do you expect it.
To be positive to this magnitude.
Going forward and then our rates strong broadly or some geographies are lagging or leading in a major way.
Yeah, Steve Let me, let Johnny <unk> respond to that yeah sure. So look I can say.
Stephen our rates are consistent across all geographies, we've seen consistent gains across all geographies with respect to 2022, we do feel that 2022 is going to be a positive environment for us to continue to raise pricing. So we're optimistic about that and think next year is going to serve.
Support additional pricing increases.
Okay.
Excellent that does it for me thanks.
Thank you.
Again, if you have a question. Please press Star then one.
And this will conclude our question and answer session I would like to turn the conference back over to Mr. Jeff <unk> for any closing remarks. Please go ahead, okay. Thank you Chuck.
Go ahead, then and conclude today's call. We appreciate you taking the time to join US today and for your continued interest in <unk> equipment services. We look forward to speaking with you again and Chuck. Thank you for your assistance with today's call today everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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