Q2 2019 Earnings Call
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Yeah, well compared to 72 point.
72% a year ago.
We expanded our rental fleet by approximately 15.6% versus a year ago.
Our rental rates improved again, this quarter up 2.2% year over year and rates improved in all product lines.
Rates also increased 8.6% sequentially, increasing in all product lines as well.
With strong utilization and rate expansion, our dollar returns rose 110 basis points to 36.5% versus last year.
New equipment sales decreased 21.8% or 14.9 million to 53.6 million compared to 68.5 million last year and the decrease was primarily driven by lower crane, and earthmoving sales, which were down 27.7% and 21.3% respectively.
Used equipment sales increased 12.4% or $4 million to 36.1 million largely as a result of higher used aerial and earthmoving sales and sales from our rental fleet comprised 92% of total used equipment sales this quarter compared to 89% a year ago.
Our parts and service segments delivered 48.6 million in revenue on a combined basis at 3.2% from a year ago.
And at this time, let's move on to gross profit and margin.
Our gross profit increased 15.4% to $124.8 million from a year ago, and consolidate consolidated margins were 37.4% compared to 34.8% a year ago, an increase of 260 basis points, primarily as a result of a positive mix shift to higher margin rentals combined with strong performance in new and used equipment sales and our service business.
For gross margin detail by segment, our rental gross margins as previously reported were 49.1% during the quarter the same as the year ago period.
Margins on new equipment sales increased to 12.2% for the second quarter compared to 10.7% a year ago, largely due to the mix of equipment sold.
Used equipment sales gross margins increased 35.4% compared to 32.3% last year and margins on pure rental fleet only sales were 37.8% compared with 35.7% a year ago.
Our parts and service gross margins on a combined basis were 41% compared to 41.2% a year ago.
Slide 13 please.
Income from operations for the second quarter of 2019 increased 10.6% to $47.7 million or 14.3% of revenues compared to $43.1 million or 13.9% of revenues in the year ago quarter. The net change in margins. A 40 basis point increase is primarily the result of a shift in revenue mix to higher margin rentals combined with solid margins in new and used equipment sales and service revenues.
I'd declining gain on sales of property and higher SDMA costs, partially offset these results compare to a year ago.
Proceed to slide 14.
Net income was $22.6 million or 63 cents per diluted share in the second quarter of 2019 compared to net income of $20.8 million or 58 cents per diluted share in the second quarter of 2018, our effective income tax rate was 26.8% in the second quarter, 2018, 19 versus 25.5% a year ago.
Please move to slide 15.
Adjusted EBITDA was 118 million in the second quarter compared to 101.89, a year ago, an increase of 16%.
EBITDA margins expanded 260 basis points to 35.4% this quarter compared to a year ago and margins increase for the same reasons previously mentioned on the income from operations margin discussion on slide 13.
Our next slide 616.
As seen a expenses for the second quarter of 2019 or $77.8 million compared with 69 million in the prior year and $8.8 million or 12.7% increase.
As gene a expenses in the second quarter of 2019 as a percentage of total revenues were 23.3% compared to 22.3% a year ago.
Employee salaries wages payroll taxes and related employee benefit and other employee related expenses increased 4.8 million largely due to our acquisitions since June thirtyth 2018, a larger workforce and higher incentive compensation related to improved profitability.
Facility related expenses, primarily rent expense increased $1.9 million and depreciation and amortization increased $2.5 million.
Expenses related to Greenfield branch expect expansion increased $2.8 million compared to a year ago.
Next on slide 17 please.
Our gross fleet capital expenditures during the second quarter were $138.5 million, including non cash transfers from inventory and our net rental fleet capital expenditures for the quarter were $105.1 million, our gross PPD capex for the quarter was 11.4 million and net was $10.1 million. Our average fleet age as of June Thirtyth was 34.6 months.
Our free cash flow for the second quarter was a use of $6.9 million and this compares to a use of free cash flow of 151.3 million a year ago, which was also impacted by an acquisition completed during that period.
We've included the GAAP reconciliations to net cash provided by operating activities.
To free cash flow for the periods presented on the slide in the appendix at the end of this presentation.
Next on slide 18.
At the end of the second quarter the size of our rental fleet based on how we see it was $1.9 million and 15.6% or 260.3 million increase from a year ago average dollar utilization was 36.5% compared to 35.4% a year ago.
Proceed to slide 19 please.
At the end of the second quarter, the outstanding balance under the amended ABL facility.
With $202.7 million.
And we had 459.5 million of availability at quarter end, which was net of $7.7 million of outstanding letters of credit.
And at this time I'm going to turn the call back to Brad. Thank you Leslie.
Please proceed to slide 21.
Thanks conclude we are pleased with our solid results for the year and our outlook remains positive trends in our rental business are encouraging and we continue to achieve positive rates and half is where utilization.
We remain focused on improving all areas of our business with a continued emphasis on growing the rental business.
Lastly.
We continue to pay our forward cash dividend payment of 27, and a half cents on July 14th as always future dividends are subject to board review and approval each quarter.
We'll now take your questions operator, please provide instructions.
Absolutely if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off today your signal to reach our equipment again star one to ask a question and we will pause for just a moment.
And our first question will come from Seth Weber of RBC capital markets.
Hey, good morning, everybody.
Good morning, Seth Good morning wanted to ask about the time utilization.
Just looking into looking at third quarter, I guess Threeq you 18.
It was a softer quarter you took on a lot of fleet last year. So I mean do you think we're at a set up here were you time utilization.
Could actually start to be.
Flat to up here in Threeq, you 19 more in the back half of the year.
Yes, I do think thats possible I think kind of that flat look is a good look to take we've got a much larger fleet, we have some additional fleet still coming in.
We are satisfied with our performance on rates and things that will continue.
But if we were going to be up or down and were likely to be slightly up but I think kind of flattish year over year was a good expectation.
Okay. That's helpful and then anything.
Brad you would highlight for energy markets you know, there's obviously a lot of it kind of a lot of banks out there around.
Around some of the markets in Texas and whatnot is there anything you'd highlight from a from a fleet.
You know fleet on the ground that you are seeing in our time utilization on your fleet in Texas for example.
No. It's more of the same it's very solid best rates, we've got really with that within our entire footprint and utilization continues to be solid and that's our expectation that it will remain so.
Okay, and then just maybe flipping over to distribution business. I think you had previously talked about that business being kind of flattish year year over year is that still the case or is there.
Any.
Immune numbers were a little softer well were looking for in the quarter is there are you.
Feel like that could still be flat or is there some downside to that number do you think on the new equipment sales sorry.
Well I got that.
I think I think we could be flattish.
Is there potential downside there could be I mean, we've talked about large crane sales before that you they can swing us.
Pretty big in a hurry and so they've been a little soft so for year to date I will tell you we still got some backlog.
We had a few machines that we didn't quite make delivery on for the quarter that would have helped our Q2, new retail numbers, particularly in cranes.
And I, just don't think it's impossible that we get back to that flattish number in the wind blows our direction, maybe we do a little better but.
To answer your question, we could have some risk and in flat year over year new sales.
Okay and that Seth one Sean said, one comment I'd make on last call. We mentioned that if you kind of took the first quarter sales and use that as a run rate that you know.
I think thats a pretty good.
Right proxy for where we think there.
Okay. That's helpful. I appreciate it guys.
I'll get back in queue. Thank you.
Thank you.
And our next question will come from Steven Fisher of UBI, Yes.
Hi, Thanks, good morning.
Hi, just to follow up on Seth's question. There can you just give us a little more color within the the cranes on the new sales kind of what were there any particular types of cranes, who you're seeing relative strength or relative weakness.
No. It's really more of the same Steven there's been no real change all terrains have been the more popular product the higher volume sale products that remains crawlers have been spotty that remains in our t. sales have been.
On the lower end of historic levels, but there is no change it's really just been more the same.
That we've seen and expect more of the same going forward.
Okay.
And just curious how you would describe sort of the market supply demand balance out there on the rental fleet and is it getting tighter or looser overall and are there any regions, where you maybe observe something that stands out different than the overall market.
So I'll take the last part of the question No. I mean, you know most of our regions are pretty consistent with relative change or improvement year over year.
As we look at supply demand balance, it's improving in our favor I think thats to be expected based off of the seasonality, we typically get with increased utilization.
As we move forward our utilization is continuing to increase we see an opportunity to consistently good incremental rate gains that fall within the guidance, we've given on our expectation for rate. So it hasn't improved it absolutely has improved will it continue to improve I think incrementally and I think we have a very healthy balance of supply and demand that's going to allow us to perform well.
And so do you have a base case for the direction of rental rate growth over the second half do you think that the market conditions can support.
The steady kind of low two plus percent.
Rate growth or.
Should we assume some deceleration as sort of the cycle progresses.
I would not assume any deceleration I would assume more of the site.
Okay, and just the obviously theres a storm that came through a couple of weeks ago does that have any noticeable impact I assume if it did you would have called it out but just want to make sure.
No no in fact, we were very fortunate that.
The timing of the storm and really the magnitude was much lighter. So it was raining in may of pauses for half a day, but no impact to the business.
Good to hear thanks, a lot.
Thank you for questions.
And we'll take a question from Steven Ramsey of Thomas Research Group.
Good morning.
I guess I wanted to speak about kind of your areas of bids to be looking at your map locations. There are certain areas, where it seems like you have a real concentration of branches like the Denver area Gulf coast areas in Louisiana that certain regions of Texas can you discuss if the areas density.
Outperforming.
Areas that you only have one branch and maybe kind of discuss.
The rates and utilization factors.
Of that.
Though in some cases generally yeah I mean, we're we're denser in larger markets, we're continuing to focus on adding density.
That's a really good part of our growth strategy that being said we have some individual markets are performing at very high levels. So it's difficult to kind of call out and segregate them in the way. The question was asked because the truth is we have both but generally the larger market you can look at.
Market data and see that they are the hotter more robust markets faster growth rate, but we're in some markets, where we have singular locations that have tremendous growth as well and we're benefiting the same way.
Great and kind of thinking about that that theme I mean as you.
Add locations and add sleep.
Incrementally going forward.
Is there an intention to open more branches in those bids aside areas or is the investment case better to like you did in Oregon launch new branches and add fleet into areas, where you only have one branch.
Right. Good question its both in the in the case of Oregon, We've got a handful of good customers long term relationships and some project activity that spurred our interest of moving into that market. It certainly helps our geographic presence we find in many cases as we add locations.
We exponentially grow our revenue not only with new customers, but existing customers, who were running in and out of existing of our existing footprint. So the answer is both.
I will tell you that we like in improving the density if we were to think about a magnitude of priorities. The density play is outstanding that being said, we're also going to be smart and opportunistic and look at the new markets, where it makes sense.
Excellent and then.
You know I guess.
How do you balance then or you know the quicker payback of putting fleet.
In adding branches into those inside areas, and then establishing new new regions, maybe for kind of the longer term.
Growth I mean it is.
It is and as you kind of weigh that decision to implement the growth strategy are you having are you transferring much fleet in into these branches or is it pretty much new new fresh fleet going into.
Let me touch on that one number you know, it's typically new fleet going into those locations are in some cases, we were always moving assets, but I think as a general rule when we enter new markets, New Geraud geographies, where we don't have a presence.
That will more likely than not be done through an acquisition.
From a warm start standpoint in these big markets, where we can increase density that will be done through new store openings. That's a that's a general rule, there's exceptions to that like like friend Bill where we were on some big projects. There we had a customer base. There. So we went in there where they.
A greenfield, but as a general rule when when we enter new markets. It will be done through an acquisition.
Great. Thank you.
[noise].
Our next question will come from Ross skill Rd of Bank of America.
Hey, good morning, guys.
Hi, good morning.
I was just curious you know relative to the beginning of the year. How do you feel on you know capital spending and what you're intending to spend this year are you lowering are you adding to it or is it more or less the same.
It's the same Ross.
If we were to do anything maybe we would incrementally add currently but our view is it's going to be more of the same we've talked about that high single digit growth plan.
Got it do you think.
United Rentals, and Capex adjustment will further tighten the market and are you seeing any other larger national or.
More regional players taking a similar tax here.
Look I prefer not to comment on any particular competitor, but what I can say that I see our largest competitors acting very responsibly, whether it be adjusting their capital.
Being focused on rates and.
Again, Thats really what fuels my commentary about how we're going to continue to get the incremental gains in physical utilization in my confidence that we continue to incrementally improve our rental rate sequentially.
So.
I hope that's helpful to you, but I think the dynamics exist for a variety of reasons and certainly people's buying habits.
Or part of that equation.
But we feel everyone's being pretty disciplined in the view of what we see in market.
Your gross margins on your used equipment were up like 300 basis points year on year is that a reflection of strength in used equipment prices or is that just differences in mix or a depreciation schedule or just general calling a fleet tied to some recent acquisitions or anything like that.
It's both but I will tell you that the used equipment.
Market and our ability to push pricing is a is a large piece of that improvement, but there is some mix as well.
And just across the different types of fleet.
Are you seeing relative strength or weakness and used equipment prices.
So it's no change really it's been good for quite sometime and remains the same.
So what do you think.
You guys sound, obviously very bullish on non residential construction and the outlook.
Why does Tim why don't metrics and our numbers like the architectural billings index and some of the other non res data points that are out there concern you right now I mean, obviously, you're seeing a lot something much different than what a lot of these numbers are saying.
Sure listen, we certainly watch all of those reports and they do weigh on how we view the markets and shape, our thoughts about how we grow the business.
You take the Avi. It's one report that has shown some volatility from time to time and not proven to be accurate in a shorter window of time. So if we were to continue to see more negative type numbers out of the ABS over a period of time it would weigh on us.
We've got a really good handle.
With with our customers with reporting with discussing opportunities.
And of course, we can look at our current environment I think another thing we have in our favor is the geographies we serve.
Regionally, we can have a location in a region that may show, a little more softness in one of the types of reporting you're talking about.
But generally we are such a small piece of those overall markets that we can perform well within them and I think we've proven that over multiple cycles now.
Just just on that last lastly, Brad I mean, if you kind of answered this with elements of your other answers but.
Clearly right now markets are worried that we're going into this real soft patch if not industrial recession like we did in 2015 and 2016 and if you look out the window from where you sit do you see any similarities to the way that market conditions are evolving to what you saw a few years ago in 15 and 16 win for you guys rates just kind of flattened out maybe you had a couple of down quarters. It wasn't that big of a deal, but you did have a maybe a little bit in many of the mini correction in the rental market are you able to compare and contrast, what you're seeing now to like a few years ago at all in that context.
Not really listen I mean, obviously, we try to pay attention we want to be critical with our thoughts.
When we stack everything that's available to us up it looks like more of the same is going to continue to be positive.
We will continue to watch, but what we're seeing in the marketplace. The feedback we're getting from our customers and quite frankly, the job starts in the bidding activity do not support with a few of these more recent term reports have had to say.
But we're going to continue to watch them.
Okay. Thanks very much.
Thank you.
And ladies and gentlemen, as a reminder that is star one for phone questions. We will now hear from Stanley Elliott with Stifel.
Good morning, Mike. Thank you for taking the question I apologize if you touched on this earlier.
Is there a way to talk about utilization kind of as it has helped track through the quarter I'd be curious to see if the weather that we saw at the central parts of the U.S. had much of an impact on the on the quarters results.
General generally the utilization as expected and what's typical incrementally improve throughout the quarter you can have events.
Like how holiday or particular, when the holiday fall that you can get a kind of an anomaly within a trend line, but in general it's improved incrementally throughout the quarter and that continues to improve as we sit here today.
And Brad you talked about.
That data.
There seems to be more discipline in the marketplace in terms of fleet in terms of rate do you have any ideas or thoughts kind of overarching what me what may be driving that I'd just be curious because it does feel like that there is a lot more.
Your data and things of that nature that maybe we're looking at maybe marginally structurally improve marketplace.
Yes, so look I believe I'm not going to talk about the marketplace I think I've made clear that what we see is good positive in future opportunity in the market.
I would say that ourselves our larger competitors and other regional players we have.
Subs into fleets.
Ill use information to drive their business decisions much more today than they have in previous cycles and the discipline that I have confidence in is because there's a lot of smart people out there using good information and making good decisions and isn't there is not a void of that type of information.
Within the management decisions in our company or other companies that we compete with and so that's what gives me the highest degree of confidence I'd also add that I don't see manufacture building inventory in previous cycles. There have been select manufacturers within certain product types, specifically, who may have been more aggressive and built inventory and speculation and then kind of stuff the channel through creative financing or extra discount that entice bad behavior I, just don't see any of that happening with any of our manufacturers in any of the product type so lot of discipline within the the fundamentals of the folks who are making the equipment as well as the folks who are written this equipment.
Perfect and last for me.
EMEA leverage kind of attacking or should be towards the bottom end of your kind of quote targeted range.
You should we expect that to change if you want to run the business at lower leverage how are you thinking about that.
And.
As a caveat kind of.
How that relates to the thoughts around acquisitions.
Well as you say that our leverage is coming down we expect that it will continue to as far as this change in our leverage targets that we've traditionally gassy, there's no change at this point in time.
So that would mean that youre M&A, certainly would be a strong opportunity or or possibility for you all in the back half the year, depending upon kind of market conditions.
Absolutely.
Great. Thanks, guys appreciate it that's what.
Thank you.
And there are no further questions I would like to turn the call back over to Mr., Brad Barber for closing remarks.
Sure I'd like to thank everyone for their time and attending the call today and we look forward to speaking to you on our next quarterly call. Thank you operator.
And ladies and gentlemen, this does conclude today's conference. We thank you for your participation you may now disconnect.