Q2 2022 H&E Equipment Services Inc Earnings Call

Good morning, and welcome to H any equipment Services' second quarter 2022 earnings conference call. Today's call is being recorded at this time I would like to turn the call over to Mr. Mr. Jeff testing Vice President of Investor Relations. Please go ahead.

Okay. Thank you Gary and welcome everyone I want to thank you for your participation today as we review our results for the second quarter of 2022.

A copy of the press release covering the H any results was issued this morning and can be found along with all supporting statements and schedules F. D. H any website and that's www dot H E dash equipment dotcom our.

Our discussion. This morning is accompanied by a slide presentation, which can also be found at the a H N. A website under the Investor relations tab and events and presentations.

Joining me today on today's call are Brad Barber, Chief Executive Officer, John Engquist, President and Chief operating Officer, and Leslie Magee, Chief Financial Officer, and corporate Secretary.

Turn to slide three and before I turn the call over to Brad for his opening comments I should 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 other expressions constitute forward looking statements are 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 comps.

The slide presentation for today's call and include the risks described in the risk factors in the company's 2021 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.

Also 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 attendance to today's presentation materials.

And finally.

Unless specifically noted all results in comparisons for the periods reported and discussed this morning are presented on a continuing operations basis.

With the preliminary announcements out of the way I'll now turn the call over to Brad Barber, Chief Executive Officer of H any equipment.

Thank you, Jeff Good morning, and welcome everyone to our second quarter 2022 Financial review, we appreciate your participation and continued interest in H E.

Our second quarter results were outstanding and included several significant achievements, we continue to benefit from excellent fundamental industry conditions throughout our expanded equipment rental business. These highly favorable conditions were led by resilient demand and impressive growth in rental rates.

We want we continue to grow our fleet, which finished the second quarter at a record level for our company.

I believe is positioned for further growth over the second half of 2022 as we continue our same store investment and branch expansion strategy.

I believe the strategic rationale for our transition during 'twenty one to a pure play real focus has been validated in 'twenty two as our intensified real exposure continues to generate significant improvement in margins and other key financial metrics, which I will cover in greater detail.

Proceed to slide four please.

I will begin today with comments on our improvement across the top level financial measures before a bridge the discussion to a review of our rental operations next I will provide a view of current business conditions and the equipment rental industry and close with an update on 2022 growth initiatives Lastly will follow with an in depth discussion on our second quarter financial results.

Including business segment performance measures and update on our capital structure and liquidity then we will be happy to take your questions on slide six please.

Given the exceptionally robust second quarter business environment, H H, a reported decisive year over year improvement across our key financial measures as well as impressive sequential quarterly growth. For example, total equipment rental revenue of $227 6 million grew almost 30% from the year ago quarter.

Hosting sequential growth of 14.2% also adjusted EBITDA of 121, 9 million improved almost 29% on a year over year basis, and 17, 8% sequentially, while posting a record 41, 4% gross margin.

Our adjusted EBITDA margin in the quarter exceeded the year ago, and sequential quarterly margins by 580, and 340 basis points respectively.

As I mentioned earlier high equipment demand strong rental rate growth and execution of our fleet expansion strategy were meaningful factors in the quarter.

Improved, especially influential for our rental performance.

Slide seven.

Rental revenue in the second quarter reached a record 201.2 million improving 28% when compared to the same quarter in 2021, and 13, 6% better on a sequential quarterly basis. The result was driven in part by physical utilization of 73, 2% representing our best second.

Water utilization measure since 2012, and equated to a 450 and 280 basis point improvement when compared to the year ago quarter and previous quarter respectively.

Physical utilization remained strong rental rates improved a remarkable 944% on a year over year basis, and three 5% sequentially.

This exceptional price achievement was reinforced by strong operational execution and the use of our integrated and proprietary smart rate pricing program.

With these factors in place our rental gross margin in the quarter of 53, 7% was the highest level achieved since 2006 and was <unk>.

710 basis points ahead of the year ago quarter, and 380 basis points better on a quarterly basis.

In addition, dollar utilization reached 49% in the quarter compared to 35, 9% in the year ago quarter, and 37, 6% in the previous quarter and the in the <unk>.

Previous quarter finally, our ability to capitalize on the excellent business climate by growing our fleet. Despite ongoing supply chain disruptions contributed to our strong rental performance.

Our rental fleet always see grew by more than 228 million when compared to the year ago quarter, and almost 148 million through the first six months of 2022 as a result of this growth we set yet another record with a $2 billion investment our rental fleet.

To summarize our quarterly results I'm very encouraged by our excellent financial performance.

I believe the results demonstrate the success of several strategic initiatives employed over the last 12 months. We continued to benefit from these as we can we should continue to benefit from these and other initiatives as robust business climate provides additional opportunity for growth.

Slide eight please.

We continued to experience strong business activity.

With the foundational drivers of the equipment rental business remaining solid nonresidential construction opportunities are plentiful across our regions of operation with no visible trends that suggest construction project delays or cancellations. We continued to experience strong demand for our rental fleet, while the industry supply of industry supply of construction.

<unk> constrained in fact current customer feedback addressing equipment needs suggest favorable conditions should persist as we continue through the seasonal strength of our business cycle.

As of today fleet utilization remains at levels consistent with the second quarter also it is encouraging to see leading indicators of construction activity remaining at levels that support expansion as reflected in the June Abi.

And the and the Dodge momentum index with the latter measure, reaching a 14 year high in.

In addition, the commencement of infrastructure project serves as an additional source of demand toward late 2022, and then 'twenty three.

I want to reiterate we see no evidence of disruption to the favorable industry trends at present under the prevailing business conditions healthy utilization level should continue for the balance of the year with additional improvement in rental rates expected.

Before I turn the call over to Leslie I want to provide an update on our 2022 growth initiatives.

Slide nine please.

In a business environment characterized by exceptional equipment demand supply chain disruptions remain an inconvenient, but temporary reality of our industry and continue to hinder the timely deliver of a portion of our equipment orders due to the inability of certain manufacturing partners to meet their commitments, we reduced our planned capital.

For range to 465 million to 500 billion or reduction of approximately 16% at the midpoint.

A reduction in our planned fleet sales will mitigate the business impact of this reduction therefore, we expect no change in our year end, how do we see when compared to our initial internal expectations for the year.

We are disappointed this action is necessary. However, we are prepared to increase our revised expenditure level should we see improving condition with regard to the sourcing of equipment.

Regarding our branch expansion initiatives, we remain confident in achieving our goal of no fewer than 10 additions in 2022.

Slide 10 please.

Four new branches were added through the first six months of the year, including our latest operation in Lakeland, Florida, which represents our ninth location in the state and increases our total branch count to 106, we expect to remain very busy over the third and fourth quarters of 2022 as we execute this important component of our growth strategy and <unk>.

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Growing our operations through acquisition remains a priority for <unk> as we continue the evaluation of attractive bolt on opportunities.

As Leslie can attest, our strong debt capacity and liquidity position represent excellent resources in support of this growth.

In closing strong utilization of 73, 2% an exceptional rental rate growth of nine four.

4% were central to our outstanding results in the quarter and I believe both measures continued to be among the best in our industry.

Exactly one outcomes combined with rising rental concentration, which grew to 77% of total consolidated revenues for the quarter and successful growth initiatives are strengthening our competitive position Adil.

Additional branch openings are planned over the second half of the year and we continue to penetrate highly prospective locations, where our customers can source one of the industry's youngest fleets. These important factors allow us to capitalize on the opportunities created in a robust business cycle and we're confident they will serve us well through the remainder of 2022.

I ask everyone to move on to slide 11 place I'm going to turn the call over to Leslie for a review of our second quarter financial performance Lastly, thank.

Thank you Brad good morning, and welcome everyone I'll begin this morning financial review on Slide 12.

Our second quarter revenues of $294 7 million improved 29 million or 10, 9% Lincoln paired to the second quarter of 2021. The increase was driven by strong appreciation in real rates and higher utilization on a larger fleet.

Same combination of factors should have a 28% increase in rental revenue, which totaled a record $201 2 million compared to $157 2 million in the year ago quarter.

Rental rates were nine 4% better than a year ago and increased three 5% sequentially utilization at 73, 2% increased 450, and 280 basis points, when compared to the year ago and sequential quarter respectively.

Fleet at least <unk> $228 2 million compared to the Elysee at June 30 of 2021 and was up $106 5 million when compared to the first quarter of 202018.

Used equipment sales in the second quarter experienced a year over year decline of $17 million or 47, 4% to $18 8 million, we continue to capitalize on high equipment utilization in the quarter, resulting in lower sales across all product lines.

New equipment sales of $21 5 million declined $6 1 million or 22, 2% compared to the year ago quarter due largely to a decrease in other equipment Sal.

Our consolidated gross profit in the second quarter increased $32 5 million on a year over year basis totaling a record $132 3 million. We also set a record for consolidated gross margin in the quarter, which improved to 44, 9% or 730 basis points ahead of the same quarter in 2000.

21, and 390 basis points better on a sequentially sequential quarterly basis.

The net margin expansion was due mainly to higher margins on rental and rental model. In addition to improved mix.

Profit margins by business segment with a comparison to the same quarter. In 2021 included total equipment rental margins of 48, 6% compared to 41, 7% and rental margins at 53, 7% compared to 46, 6%, a 70 710 basis point increase.

Used equipment margins in the quarter improved to 47, 6% compared to 36, 7% with fleet only margins, which exclude used equipment obtains a trade in improving to 59% compared to 37, 8%.

New equipment margins rose to 15% compared to 12, 3% and finally margins on parts sales were unchanged at 26, 8% while service margins were 64, 6% compared to 68%.

Slide 13 please.

Income from operations in the second quarter increased over 70% to $50 7 million compared to $29 7 million in the second quarter of 2021 second.

Second quarter margins improved to 17, 2% compared to 11, 2% in the year ago quarter.

The improvement was driven by higher gross margin on rentals retail either and improved mix, partially offset by higher SG&A.

Let's proceed to slide 14 please.

Net income more than doubled in the second quarter to 27, 9 million or <unk> 76 per diluted share compared to $12 3 million or <unk> 34 per diluted share in the year ago quarter.

Our effective income tax rate in the second quarter was 26, 8% compared to 28, 2% over the same period of comparison.

Proceed to slide 15 please.

Adjusted EBITDA in the second quarter increased to $121 9 million compared to $94 6 million in the prior year quarter, representing a 28, 8% improvement against the 10, 9% improvement in total revenue <unk>.

The adjusted EBITDA margin in the stack in the second quarter improved to accompany best of 41, 4% or 580 basis points better than 35, 6% in the second quarter of 2021. The strong result was primarily due to favorable revenue mix with our growing rental business and higher margins on rental.

Unused equipment, partially offset by higher SG&A.

Yeah.

Next on slide 16.

SG&A expenses totaled $82 7 million in the second quarter at $12 million or 16, 9% compared to the second quarter of 2021. The increase was primarily due to employee salaries wages and incentive compensation related to increased profitability and head count and payroll taxes.

Also higher facilities expenses and professional fees contributed to the increase.

G&A expenses in the second quarter were 28, 1% of revenues compared to 26, 6% a year ago we.

We experienced $2 2 million and higher branch expansion costs in the second quarter of 2022 compared to the year ago quarter with seven warm starts and greenfield locations added over this period.

Slide 17.

Turning to capital expenditures and cash flow gross fleet capital expenditures in the second quarter totaled $139 6 million, including noncash transfers from inventory net rental fleet capital expenditures in the quarter were $123 million gross PP&E capex for the second quarter.

<unk> was $13 8 million, while net P. P. Any capex was $12 7 million.

Okay.

Our average fleet age as of June 32022 increased slightly to $41 two months and continues to compare favorably to the industry average fleet age of $53 six months.

Following our increased capital expenditures in the quarter, we experienced negative free cash flow for the second quarter at 63 now.

Yes.

Slide 18.

On June 32022, the size of our rental fleet based on original equipment cost was just over $2 billion, an increase of $228 2 million or 12, 8% larger than the close on June 32021.

Average dollar utilization in the second quarter of 2022 improved to 49% compared to 35, 9% in the prior year quarter.

Now to slide 19 please.

Net debt at the close of the second quarter was approximately $973 million compared to $898 million at the close of the first quarter of 2020 team. Our net leverage was two two times compared to two one times over the same period of comparison and we have no maturities before 2020, a on our one.

Two 5 billion of senior unsecured notes.

Slide 20 please.

We closed the second quarter of 2022 with a liquidity position just over $1 billion, including a cash balance on June 30 of 2022 of $278 8 million and borrowing availability under our amended ABL facility of $723 million.

Excess availability under the ABL facility was approximately $1 2 billion at the conclusion of the second quarter of 2022 with minimum availability as defined by the agreement of $75 million.

By definition excess of Delta.

Volatility is the measurement is to determine if our springing fixed charge is applicable with excess availability of $1 2 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 second quarter of 2022.

And while dividends are subject to board approval. It is our intent to continue to pay that dividend.

Slide 21 please.

Summary, our excellent second quarter results continue to demonstrate a consistent pattern of improvement across many of our key financial metrics. This favorable performance trained is especially evident over the last 12 months, which follows our decision to reduce exposure to the distribution business, while intensifying our rental concentration.

Revenue growth and margin appreciation have been meaningful over this timeframe with the second quarter, representing our highest result for rental revenue rental gross profit consolidated gross profit and margin and adjusted EBITDA margin. These impressive measures demonstrate what we can achieve in a fundamentally robust industry.

And with these modifications in place I believe <unk> is now better positioned to maximize its financial performance through the equipment rental business cycle.

Our strategic growth initiatives, which are highlighted by record investment in our rental fleet further branch expansion and continued interest in bolt on acquisitions will play a substantial role in our future as we work to build a long term industry presence.

With that we are now ready to begin the Q&A period period, operator, please provide instructions.

We will now begin the question and answer session.

To ask a question you May press Star then one on your telephone keypad.

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.

Oh.

Yeah.

The first question is from Steven Ramsey with Thompson Research Group. Please go ahead.

Good morning, maybe to start with this tight supply of fleet against very strong demand a couple of questions on that topic number. One is this the case in all geographies or regions and then secondly, do you think that this dynamic last into 2023.

Hi.

Yes, good morning, Steven.

It is the case in all geographies and regions. We're witnessing the same physical utilization levels, meaning we're just consistently up year over year and stayed very steady across all the geographies we serve.

As it pertains to the availability of equipment, if you're speaking from the manufacturers, it's going to continue to be tough for the remainder of this year and we're looking forward to seeing some level of improvement into 'twenty, three but its certainly allowing us to.

Feel confident about maintaining our utilization at 73% level.

And also continued to sequentially achieve rate gains going forward.

Okay helpful and then maybe to <unk>.

With that line of thought.

Lower gross Capex for this year is that fleet delivery being slower year to date or is that expected slowing in the second half and then maybe a follow on to that are you, placing orders now for 2023.

So it's a little of both.

We did not achieve the level, we hope to in Q2 that was heavily loaded to the back side of the quarter.

But weeks quickly turned into months in a handful of manufacturers in fact, three specific manufacturers contributed to about 80% of our.

Our decrease in our Capex guidance for the year. So a piece of that was in Q2, and then the remainder will be feathered out across Q3 and into Q4.

Okay.

Okay.

Okay helpful. And then are you, placing orders now for 2023.

We are we're slotting in orders right now for 'twenty three and.

We've got.

The visibility looks good based off of the current feedback from the manufacturers and we have well more than 50% of our expected order slotted for 2023 already.

Excellent. Thank you.

Thank you.

Again, if you have a question. Please press Star then one.

The next question is from Stanley Elliott with Stifel. Please go ahead.

Hey, good morning, everyone and thank you guys for taking the question.

Right along those lines on the slotting. These are just slots are not confirmed orders right. So I mean do you have some flexibility.

To pull those back or you revise expectations should the economy, you know seemingly change from the trajectory that we're on right here.

That's correct family, we do I'll take it further.

In many cases, we do not have confirmed pricing.

We have more orders slot. It then with certain manufacturers then we may potentially need.

And we're going to use that to negotiate and understand where our pricing is going to actually land and then we'll confirm those orders. So that's always the case I think as you are aware and others.

If we have product on order, we decided not to take it we are under no obligation to do so it is always our intent to work with.

Good partners with our manufacturers and that's how we operate but should we see a shift in business and we know how to react to it.

And the rental rate environments exceptionally strong right now.

What sort of and I think we will see improvement in the back half of the year, but let's just say hypothetically, we do what sort of carryover would you get or or kind of tailwind into 'twenty three just kind of use that as a starting base.

Yes, I'll, let John respond to the runaway piece, yes sure.

Stanley. So you know when we started the year out this year, we had an expectation for rental rates in the mid to lower to mid single digits.

And then in early Q2.

With the strength of our sequential rate performance, we got it to that 5% range is really where we were thinking.

With our three 5% sequential rate improvement in the second quarter.

Gave us the confidence to think that we can potentially do a little better than that 5% range. So when we're thinking about an exit rate for 2022 coming out at the end of the year I think we'll be in that upper 5% range potentially 6% and really that's based on the current momentum and Thats, what we think we're going to see.

We do expect sequential rate improvements in Q3 and Q4 keep in mind Stanley. Let me add Q3 is a pretty tough comp I think we were up sequentially, 2% last year and Q3 of 21. So we're going to start to come up when we gain that momentum last year, but we're going to continue to get rates as John stated.

And then last from me the utilization commented best since 2012.

You know what are you all doing kind of structurally maybe how the business has evolved to allow you to get.

The improved utilization trends that youre seeing now I get it that certainly demand is very good and a nice tailwind, but would love to hear some color on how you guys have done so thanks for the business to help that be a possible.

Yeah listen, we've we've developed obviously systems and processes over decades, and historically when when all of our competitors previously reported physical utilization levels, we've always set the bar the highest.

A robust market great demand, but it's no small accomplishment to rod consistently north of 73%.

Utilization and I will tell you that is heavily bode well, we got a lot of people working very hard we're proud of our team I want to be clear on that we were providing them. Good information good visibility in our systems allow us to operate at that level consistently without taxing our ability to continue to serve our customers well.

Perfect. Thanks, everybody, congratulations and best of luck.

Thank you Stanley.

Once again, if you have a question. Please press Star then one please standby as we poll for questions.

Showing no further questions. This concludes our question and answer session I would like to turn the conference back over to Jeff <unk> for any closing remarks.

Okay. Gary. Thank you. We'll go ahead and close today's call them. We appreciate you taking the time to join US today and for your continued interest in HD equipment. We look forward to speaking with you again and Gary. Thank you very much for your assistance on today's call.

Hey, everyone.

Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Yeah.

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Yes.

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