H&E Equipment Services Inc (HEES) 2021 Q2 法說會逐字稿

Good morning, and welcome to H&E Equipment Services Second Quarter 2021 Earnings conference call. Today's call is being recorded. At this time, I'd like to turn the call over to Mr. Jeff Chastain, Vice President of Investor Relations. Please go ahead.

Thank you, Jason, and welcome, everyone, to this review of second quarter 2021 results hosted by the management of H&E Equipment Services. Your interest in the company is appreciated. A 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 H&E website, and that's www.HE-equipment.com. 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 H&E that are joining me today, and they are John Engquist, Executive Chairman of the Board of Directors; Brad Barber, Chief Executive Officer; and Leslie 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, 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 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 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.

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 H&E Equipment Services.

Thank you, Jeff, and good morning, everyone. I'd also like to welcome you to our review of H&E Equipment Services results for the second quarter of 2021. I'm going to bring you up to date with some encouraging developments in 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. Leslie 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 and the development of a robust business environment in the rental equipment industry. Our company has skillfully fought 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 influence of these events fading, most of our business segments produced favorable year-over-year and sequential comparisons, and 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.

The 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 of 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 $160.3 million. The result was a 13.9% better than a year ago, while improving 14.5% on a sequential basis -- a 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 and 400 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 2020, second quarter 2021 rental rates were just 0.3 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 late 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. The simultaneous presence of these 3 important industry metrics is 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 H&E to remain confident in the prospects of our company over the remainder of 2021 and into 2022.

Slide 8, please. Our confidence is based in part on an elevated number of customer inquiries that continue to build. In large part, the inquiries are for equipment needs that address nonresidential construction projects, an end market that is well served by H&E and represents 63% of our second quarter 2021 revenues. In addition to new project backlog, the nonresidential construction market is expanding -- experiencing an influx of reactivations, 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 for December 2020. The Dodge Momentum Index, or DMI, has shown comparable improvement with the June 2021 score of 165.8 compared to a score of 151.4 and 136.6 in March of 2021 and 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. H&E's operating profile is 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 earthmoving equipment and our presence in high-growth geographies positions the company's entire complement of assets to leverage the enhanced opportunities 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 20 regarding the pending sale of H&E's crane business. The rationale for exiting this legacy business segment is simple. For years, we have witnessed a trend in our industry where renting 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&E has steadily intensified our exposures to the rental equipment industry through the expansion of facilities and acquisitions. Further reducing our exposure to distribution activities, the sale of our crane business represents a significant step in transitioning to a pure-play rental focus in a growth industry. As I noted on July 20, 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 the 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 equipment 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 H&E. We have previously noted our ambitious plans for expansion, and there remains several methods by which we can execute these plans.

Slide 10, please. One way is through facilities expansion, and I'm extremely pleased with the pace and performance of this growth endeavor during 2021. Nine branches have been opened in 2021, including a July branch in Fresno, California, bringing our total facility count in the state to 10. 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. As of today, we expect to open 10 locations in 2021. It is highly likely that our 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 2 earthmoving distribution branches in Arkansas and plan to start a rental-only branch in the greater Little Rock market. Once the agreements have closed, covering the sale of our crane business and the Arkansas earthmoving distribution locations, H&E Equipment Service will be a pure rental play company in 23 of the 24 states in which we operate with Louisiana being the only state with both rental and distribution activities.

I will now turn the call over to Leslie for a more detailed review of second quarter financial results. Leslie?

Good morning, everyone, and thank you, Brad. I'll begin this morning's 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 by 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% improvement in total revenues to $315.8 million.

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 0.3% over 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 of 2021.

Another excellent indication of industry recovery is fleet growth, as measured by our original equipment cost, or OEC. Although second quarter OEC of $1.8 billion was lower by 2.2% when compared to the same quarter a year ago, the 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 the improvement driven predominantly by an increase in new crane sales.

Used equipment sales increased $7.3 million or 21.6% to $41.4 million. The increase was due in part to higher sales in material handling, AWP and cranes. Sales from our rental fleet comprised 88% of total used equipment sales in the second quarter compared to 90% a year ago. On a combined basis, revenues from our parts and service segments improved $0.5 million or 1.3% to $42.4 million.

Revenues from parts was better by $1.2 million or 4.6% and revenues from service was lower by $0.7 million or 4.3%. Transitioning now to a discussion on gross profit and margin. Gross profit in the second quarter improved to $111.4 million, up $19.3 million or 21% from the same quarter a year ago. 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 improved 220 basis points in the second quarter to 35.3% compared to 33.1% a year ago. Reviewing gross margins by business segment, rental gross margins were 46.1% during the quarter compared to 41.5% a year ago, due primarily to the rise in physical utilization. Gross margin 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 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 earthmoving equipment. 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 40.7% 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. The margin improvement was primarily the result of higher gross margins on rentals and used equipment sales, partially offset by a mix of revenues, 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 $0.43 per diluted share in the second quarter of 2021 compared to $8.8 million or $0.24 per diluted share in the year ago quarter. The effective income tax rate was 27.5% in the second quarter of 2021 and 26.9% in the second quarter of 2020. Proceed to Slide 15. Adjusted EBITDA was $102.3 million 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% in the year ago quarter. The margin decline was the result of lower gain on sales of property and equipment, lower margins on other rentals, an increase in rental expenses and unfavorable revenue mix. These factors were partially offset by higher margins on used equipment sales.

Next, Slide 16, please. SG&A expenses totaled $77 million 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 benefits and other employee-related expenses as well as a $0.9 million increase in facility expenses. The unfavorable items were partially offset by a $1.1 million decrease in liability insurance and a $0.9 million decline in bad debt expense. Branch expansion costs accounted for $3.2 million of total SG&A expenses in the second quarter compared to $2.2 million on a sequentially quarterly basis and $1 million in the year ago quarter.

Slide 17, please. Next, I'll cover fleet capital expenditures and cash flow for the 3-month period ending June 30, 2021, and our gross fleet CapEx was $174.5 million, including our noncash transfers from inventory. Net rental fleet CapEx for the 3-month period was $138 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 was 39.7 months, which compares favorably to the industry average fleet age of 52.1 months. Following the increase in gross CapEx in the second quarter, free cash used for the 3 months ended June 30, 2021, was $110.1 million compared to free cash flow of $121.1 million over the same 3-month period in 2020.

Slide 18, please. At the end of the second quarter, the size of our rental fleet based on OEC was $1.8 billion, a $41 million or a 2.2% decrease from a year ago. However, as I noted previously, OEC was up 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 a period of gradual improvement from their lows.

Slide 19, please. Addressing our capital structure. We concluded the second quarter of 2021 with net debt of $1 billion and net leverage of 2.7x. We have no maturities before 2028 and -- on our $1.25 billion of senior unsecured notes.

Slide 20, please. With regards to our liquidity position, we had no need through 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 of $202.5 million and borrowing availability 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 second quarter, with minimum excess availability as defined by the agreement of $75 million.

Recall, excess availability is the measurement used to determine if our springing covenant is applicable. With excess availability of more than $1 billion, we have no covenant concerns. And finally, we paid our regular dividend of [$0.275] 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, the second quarter financial results exhibited measurable improvement across our operation 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 and remain highly supportive of further improvement.

Since closing the second quarter of 2021 at 68.3% physical utilization of our fleet, climbed to 71.9% as of August 1, 2021. Our strategic transition to a pure-play rental equipment company is expected to position H&E for further revenue growth and margin appreciation through the business cycle, and we have the capital structure and liquidity profile to execute our strategic growth initiatives.

And Slide 21, please. This concludes my financial review on the quarter. And operator, we're ready to begin the Q&A period. Please provide our instructions.

(Operator Instructions) The first question comes from Steven Ramsey from Thompson Research Group.

Maybe to start with the rate improvement sequentially. I guess, do you expect the second half to be positive as utilization keeps improving? And maybe can you talk too on rate? Are they getting better broadly or are specific markets driving it in certain markets still lagging?

Yes, Steven. So we do expect sequential rate improvement to continue going forward for the remainder of the year and into 2022. It's broad-based. It's across really our entire geographic footprint, the opportunities there. I mean, there are puts and takes within the physical utilization or that demand piece that's 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 show up during this quarter, and we'll be talking about those in greater detail, of course, on our next call.

Excellent. And then maybe can you talk too on the fleet side, up 5% from year-end. Maybe can you talk to how much of that is filling in existing branches? How much of that is going to the new branch openings that you have going thus far? And 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 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 locations 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 stated 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 of other customer-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 that 71.9%. That point in time, we measure utilization, as you can suspect, on a daily basis, weekly, monthly in a variety of ways. But every week, every Monday, I look at where our utilization was compared to the prior year as well by product type, by region, the various geographies, yesterday was the first time that we eclipsed our utilization at 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's utilization levels. Fleet is still down, I think, 2.2%. We quote it, but the fleet will continue to grow for the remainder of the year. And as we've stated previously, we expect our overall fleet growth this year to be in that mid- to upper mid-single-digit growth. We are really positioning ourselves well to come into 2022 and perform at an exceptional level.

Excellent. And last quick one for me. Oil and gas contribution to Q2 and in the near to medium term here as activity seems to pick up there. Is that a driver of rate that's still a rate premium market for you guys?

It's still a rate premium market. We're opportunistic. But yes, those markets are certainly improved. They're not a meaningful driver of our overall revenue, but they certainly are positive for us.

The next question comes from Stanley Elliott from Stifel.

Brad, early in the presentation, you mentioned elevated inquiries. I'm curious if that's kind of more near-term work or if your contractors and some of your customers are starting to think about work, kind of, into 2022 and through the year?

Well, 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 DMI, these indices that collectively are 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 workforce to perform the work. That's there. Everyone's always got a largest concern in their opportunity. But their concern is not an amount of work that's going to be driven their way. And everyone is aware that 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 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 and exiting out of some of the other earthmoving distribution business, does that change your view on wanting to get a little more aggressive in terms of M&A?

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 H&E.

And then lastly, with a lot of the warm starts, it looks like the kind of -- you got 10 planned this year and you're kind of at that number. So 77-ish sort of on an SG&A run rate looks pretty good and we should start to see some leverage kind of off of that number on a go-forward basis?

I said at the beginning of the year that compared to the full year of 2020, we expected some slight leverage. So that still remains. And I would really look more at that percentage of SG&A as a percentage of revenues than the flat dollar amount. I think that should be more of your guidance.

Yes. No, that's fair. Just kind of tricky with the last year being so crazy.

(Operator Instructions) There are no more questions in the queue. This concludes our question-and-answer session. I'd like to turn the conference back over to Jeff Chastain 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 H&E, 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.