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spk01: Good morning and welcome to the H&E Equipment Services Third Quarter 2020 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Kevin Inda, Vice President of Investor Relations. Please go ahead.
spk02: Thank you, Sarah, and welcome to H&E Equipment Services Conference Call to review the company's results. The third quarter ended September 30, 2020, which were released earlier this morning. The format for today's call includes a slide presentation, which is posted on our website, www.he-equipment.com. Please proceed to slide two. Conducting the call today will be John Inquist, Executive Chairman of the Board of Directors, Brad Barber, Chief Executive Officer and President, and Leslie McGee, Chief Financial Officer and Secretary. Please proceed to slide three. During today's call, we will refer to certain non-GAAP financial measures. And we've reconciled these measures to gap figures in our earnings release and in the appendix to this presentation, each of which is available on our website. Before we start, let me offer the cautionary note that this call contains forward-looking statements within the meanings of 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. With that stated, I'll now turn the call over to Brad Barber.
spk05: Thank you, Kevin, and good morning, everyone. Welcome to H&E Equipment Services' third quarter 2020 earnings call. On the call with me today are John Inquist, Executive Chairman, Leslie McGee, our Chief Financial Officer, and Kevin Enda, our Vice President of Investor Relations. Slide four, please. I will briefly discuss our third quarter performance and current market trends, and then Leslie will review our financial results for the quarter in more detail. After, we will take your question. Slide six, please. I'm pleased to begin today's call by saying the operational environment has progressed from what I would characterize as stable to expansion. I will provide some additional color on the positive trends we're experiencing in our end-user rental markets and physical utilization in a moment, but let me first quickly review our top-line financial highlights. While we continue to see meaningful improvement in the rental business, our financial results remain below year-ago levels. Total revenues were down 18.1%, or 63.7 million compared to a year ago. This was largely the result of an 18.8 or 38.3 million decline in total rental revenues and 42.7 or 27.8 million decline in new equipment sales from a year ago. Adjusted EBITDA declined 22.5% or 28.7 million from a year ago and margins decreased 200 basis points to 34.1%. Let me now address the improvements in our rental business. I stated during our second quarter call that I expect that utilization could be flattish through the balance of this year. Instead, during the third quarter, we experienced a solid increase in equipment on rent while we continued to adjust our fleet by selling our older assets. Even though oil field and industrial rental opportunities remain far below historical levels, demand has improved within our non-residential construction markets. Physical utilization for the quarter was 63.8%, a 430 basis point improvement from the second quarter. As of September 30, 2020, physical utilization was running just over 67%. Keep in mind, demand historically begins to decrease around the holidays, and seasonality becomes a greater headwind, but we are very pleased with the positive cadence in our physical utilization. Rates are still negative. However, our sequential rate trend improved. As Leslie will detail, we remain focused on managing our balance sheet and maintaining the appropriate size rental fleet and inventories. Our ongoing activities to reduce capital expenditures and operating costs resulted in significant free cash flow for the quarter. We have also continued to improve our leverage and liquidity. In conclusion, the momentum in our rental business is encouraging. We believe the current environment could further increase the secular shift towards renting versus owning equipment, creating opportunities greater opportunities for H&E. Based on our improving visibility, we plan to accelerate our growth strategy. This includes significantly increasing the number of warm starts next year. We also remain focused on pursuing acquisition opportunities in both the general rental and the specialty rental businesses. I'll now turn the call of Leslie to discuss our third quarter financial results in more detail. Leslie?
spk00: Good morning, everyone. Thank you, Brad. Let's proceed to slide 11 for more details of our financial results. Total revenues decreased 18.1% or $63.7 million to $289.3 million compared to the same period a year ago. Our rental revenues decreased 19.1% or $35.4 million to $149.4 million from $184.8 million a year ago. The size of our fleet decreased by 7.8% or $154.5 million compared with the prior year comparable period. Rental rates this quarter declined 4% year-over-year, and rates also decreased 0.4% sequentially, but this was a significant improvement from the 2.8% sequential decline in the second quarter. Given lower physical utilization in rates, our dollar returns declined 510 basis points to 32.4% compared to last year, but also reflects meaningful expansion from the second quarter. New equipment sales decreased 42.7% or $27.8 million to $37.2 million compared to $65 million last year. The decline was primarily the result of a 69.5% or 21.6 million decline in new crane sales as well as declines in all other categories with the exception of new other equipment sales. Used equipment sales increased 28.3% or 8.8 million to 40 million and increased in all product lines. Sales from our rental fleet comprised 92.6% of total used equipment sales this quarter compared to 88% a year ago. Our parts and service segments generated $43.5 million in revenue on a combined basis, which is down 12.3% from a year ago. Moving on to discussion of our gross profit and margins. Our gross profit decreased 25% to $99.1 million from a year ago, and our consolidated margins were 34.2% compared to 37.4% a year ago. primarily because of lower rental gross margins. Margins were also lower in all other segments. For gross margin detail by segment, rental gross margins were 44% during the quarter compared to 50.8% a year ago and were impacted by continued pressure on rates and time utilization. Margins on new equipment sales decreased to 11.1% during the third quarter compared to 11.6% a year ago largely due to lower new crane margins. Used equipment sales gross margins decreased to 30.3% from 31.3% last year, primarily due to lower margins in all categories except cranes and earth moving. Margins on pure rental fleet only sales remained solid and were 32.1% compared to 34.8% a year ago. and parts and service gross margins on a combined basis decreased to 39.9% compared to 41.4% a year ago. Slide 12 please. Income from operations for the third quarter of 2020 decreased 44.2% to 31 million or 10.7% of revenues compared to 55.5 million or 15.7% of revenues in the prior year period. These declines in income from operations and margins were primarily a result of an 18.1% decline in revenues, lower rental gross margins, and higher SG&A as a percentage of revenues, despite SG&A costs declining by 9.4%. Partially offsetting these decreases to income from operations were higher gains on sales of property and equipment and a positive shift in revenue mix. Proceed to slide 13. Net income was $10.1 million or $0.28 per diluted share in the third quarter of 2020 compared to net income of $28.4 million or $0.79 per diluted share in the third quarter of 2019. The effective income tax rate was 40.9% in the third quarter of 2020 compared to 26.7% a year ago. The increase in the effective income tax rate was primarily due to unfavorable permanent differences in relation to pre-tax income. Excluding the impact of our 2020 first quarter goodwill impairment charge, our effective tax rate for the nine-month period ending September 30, 2020, would have been 23.5%, resulting in a third quarter effective tax rate of 26.2%. Based on a third quarter effective tax rate of 26.2%, net income and earnings per share for the third quarter would have been 12.6 million and 35 cents per share, respectively. Please move to slide 14. Adjusted EBITDA was 98.8 million in the third quarter compared to 127.5 million a year ago, a decrease of 22.5%. Adjusted EBITDA margins declined 200 basis points to 34.1% this quarter compared to a year ago, also primarily due to lower margins in the rental business and higher SG&A costs as a percentage of revenues. Partially offsetting these results were higher gain on sales of property equipment and revenue mix. Next, slide 15. SD&A expenses for the third quarter of 2020 decreased by $7.3 million or 9.4% to $70 million. SD&A expenses in the third quarter of 2020 as a percentage of total revenues were 24.2% compared to 21.9% a year ago. Employee salaries, wages, payroll taxes, employee benefit costs, and other employee-related expenses decreased to $5.6 million primarily as a result of lower commission and incentive pay combined with headcount reductions. Also, expenses related to Greenfield branch expansion increased $1.3 million compared to a year ago. Next on slide 16, please. On this slide, you'll find our CapEx and cash flow for the nine-month period ending September 30, 2020. Our gross fleet CapEx in the third quarter was $27.8 million, including non-cash transfers from inventory. Gross CapEx was down 72% compared to the third quarter a year ago. Our net rental fleet CapEx for the third quarter was a negative $9.2 million. Gross PP&E CapEx for the third quarter was $3.8 million, and net was $1.5 million. Our average fleet age as of September 30, 2020, was 40 months. Free cash flow for the third quarter of 2020 was 66.2 million compared to a use of 6.4 million a year ago. The increase in free cash flow was largely due to lower net fleet investment this year. Next on slide 17. At the end of the third quarter, the size of our rental fleet based on OEC was 1.8 billion, a 7.8% or 154.5 billion decrease from a year ago. Average dollar utilization was 32.4% compared to 37.5% a year ago, reflecting lower time utilization and rates, yet has improved from the second quarter dollar utilization of 29.6%. Proceed to slide 19, please. Lastly, our balance sheet remains very strong with ample liquidity and no near-term maturities. At the end of the third quarter, the outstanding balance under the amended ABL facility was $18 million and is down $198.9 million since December 31st of last year. We had $724.3 million of cash borrowing availability at quarter end, net of $7.7 million of outstanding letters of credit. Our excess availability was in excess of $1 billion. Our excess availability is the measurement used to determine if our springing fixed charge coverage is applicable. Our senior security credit facility requires $75 million of excess availability before this covenant would even spring. So therefore, with excess availability at September 30th, just over $1 billion, we're in a very strong liquidity position, and we have no covenant concerns. The company paid its 25th consecutive quarterly cash dividend, and while dividends are always subject to approval by the board of directors, it is our intent to continue the dividend policy. With that, we'll move into our Q&A session. Operator, please provide the instructions.
spk01: Thank you. We will now begin our session. To ask the question, you may press star, then one on your touchtone phone. If you are using a speaker phone, 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. Our first question comes from Stephen Fisher with UBS. Please go ahead.
spk03: Great, thanks. Good morning, guys. Good morning. morning fred i wonder if you could just talk a little bit more about the improved visibility that you cited that's that's driving you to uh accelerate some of your growth plans just what what is that visibility you have what's driving that it seems like in other places we've heard there's sort of um you know i know that your utilization has improved uh sequentially but We're hearing broader about the construction markets. There's still not much visibility. So I'm curious what you're seeing that's improving.
spk05: Sure. Well, good morning. Thank you for the question. The primary driver for that comment is the feedback we're getting from our customers and project activity. In some cases, projects that were postponed for an indefinite period of time have started. In other cases, we're seeing fewer postponements and much fewer cancellations of projects than we were just three to six months ago. Going forward, looking at some of our information, we've got a couple of our product lines that are significantly above prior years' utilization. Right now, our earth-moving products, for example, both our larger construction products and what we categorize as utility earth-moving products, these are many excavators skid steers, are both well above prior year utilization levels. And we always view earth moving as kind of a leading indicator of the health and vitality of the construction markets. You know, so it's, you know, we got kind of anecdotal and quantitative information. We also, you know, continue to look at some of the reports in our selective markets. You know, as we sit here today, oil and industry, the Gulf Coast more broadly, for the first time in a long time, has really been a headwind for H&E. These markets are expected to start recovering at some level, even if it's just the pent-up demand associated with maintenance that's been postponed. I believe most of these facilities have postponed every bit of maintenance they could during 2020, and it's anticipated and reported that we'll start to see that activity level sharply increase. So that's the commentary I can offer you around our improving visibility and our enthusiasm.
spk03: Okay, that's helpful. And then maybe just a question on cranes and how you're thinking about where we are in the cycle. Are we still sort of coming off peak in some of the markets? I know some others are weaker. What do you think it will take to to get the broader crane market going again a little bit better.
spk05: Yeah, I think it's going to take energy recovering at a meaningful level for it to get going. Crane business is very difficult right now, as evidenced in Leslie's prepared comments when we talked about the declines being almost 70% year-over-year in new crane sales. Our physical utilization, although the crane fleet's only 4% or 5% of our total investment in our rental assets, You know, that utilization is well down year over year. So, you know, when we see energy start to come back, I think there could be a tremendous upside within the crane business. But for the foreseeable future, it's going to be difficult.
spk03: And just to clarify, energy meaning more sort of the big process industry plants, or you think more the upstream kind of side of the business?
spk05: It's all of the above. It's all of the above. I mean, obviously, oil is the anchor of energy when I speak of it, but it's really all of the above, Steve.
spk03: Okay, just last quick clarification. I'm not sure if I missed this, but did you guys comment on how much storm-related work there may have been in the quarter?
spk05: We did not. You know, it's interesting. We certainly do benefit when there's destruction. I mean, we have more product on Renton Lake Charles right now, you know, from the first hurricane, not just the second hurricane that has struck there. But in the short run, you know, it causes us some pressure. Weather has... it can be a blessing and a curse. And so, you know, flooding, not so great for our business. Real destruction where structures are knocked down, you bet it helps us. You know, as we sit here today, every location south of Baton Rouge for our business is shut down because there's a hurricane about to make landfall in New Orleans. So, you know, it will be a net positive, but sometimes in the short run, like today, it can be a headwind for us. Got it. Thanks a lot. Thank you.
spk01: Our next question comes from Stephen Ramsey with Thompson Research Group. Please go ahead.
spk07: Good morning, everyone. Good morning. Good morning. I guess to think more on warm starts, can you talk about, you know, some of the decision process on where to place these, kind of the cadence of opening, and, you know, maybe are they –
spk05: building on existing strong geographies adding new ones and then along with that the capex for fleet required to load those new branches sure yeah so you know we kind of have a prioritization uh process uh and we certainly like adding density and expanding existing geographies first and foremost we are not opposed to entering a new geography But in general, we would prefer to enter new geographies through an acquisition. As far as the cadence go, you know, we expect to open somewhere between 8 and 10 locations in 2021 going into next year. And over time, we've always spoke about warm starts as typical rule of thumb year one, about $10 million in OEC. For rental fleet, probably about $1 million PPE. for the operation, and then, you know, they mature at various levels over periods of time. No reason to think they will be loaded in any particular quarter. We would spread these out, you know, across our footprint over a period of time, primarily in the geographies we serve that we're either building density or slightly expanding our geography. But we're not opposed to entering brand-new geographies on a greenfield basis, but it's not our top priority.
spk07: Great. And then kind of to follow on with that on the acquisition pipeline pursuit, maybe can you talk to the level that you can, how that has changed, if it's a bigger pipeline or a pipeline that's maturing and closer to closing transactions, and if the acquisitions fit that strategy of adding new geography or if they're densifying existing.
spk05: Sure. Well, look, I mean, there's a variety. We are always out working. You know, John helps leading on that. John and I, as well as other team members, are consistently working relationships and potential acquisition opportunities. These are both in and out of our existing geographies. They are both in the products that we deal in today, and we are specifically considering new products or specialty rentals. So... You know, what I can comment is that we're continuing to be active and we're looking for the right opportunities.
spk07: Great. And then can you talk to the fleet size coming down? Was that in line with expectations or did Q3, were you able to offload more fleet, maybe at favorable prices? So where does fleet size stand now relative to 2021? better expectations, and maybe how it diverges, if at all, from Q2 thoughts on fleet size?
spk05: Sure. The fleet size is right in line with our expectations. I think I last called reference that we would be in the mid to upper single-digit fleet decrease by the end of the year. We still plan on that being our plan for this year. I would comment that we started the year with a 37-month-old rental fleet. We've only aged the fleet three months as we sit here reporting Q3, and so really proud of the job our team's done. Our pricing on used equipment's been solid, but there's been no upward or downward pressure with pricing that's caused us to act differently. We're just working our plan. So, you know, we're going to take the fleet down a little bit further than it is today, as is our plan. As we get into 2021, Clearly, we are focused on this growth opportunity with warm start, greenfield opportunities. That will be new capital. We've seen our rental rates stabilize. You know, that four-tenths of a percent we were off sequentially is a good indicator that we believe rates have stabilized and should continue to be so moving forward. And we're in the middle of our forecasting process for our existing 97, 98 locations we have today. I can tell you that the early feedback is some amount of fleet growth. We're going to balance that fleet growth, of course, against continued improvement in physical utilization and us achieving rate improvement as well. Great. Thank you. Thank you.
spk01: Our next question comes from Stanley Elliott with Steeples. Please go ahead.
spk04: Good morning, everybody. Thank you for taking the question. Just a point of clarification, Brad, you mentioned projects that were being postponed and definitely started back. Are those larger scale projects? Are they a bunch of smaller scale projects? Just trying to get a sense of the magnitude.
spk05: It's a variety. I want to stay away from talking about specific project names. I will say that we've seen projects that we were told were postponed that they have decided to go forward and do limited scope work. Maybe it's foundation work. Maybe it's the infrastructure work. around the facility with an anticipation that they will restart the full scope of the project. So it's really been a variety, but when I say that, I'm talking about, generally speaking, larger projects, not small projects.
spk04: That's great. And talk a little bit more about the decision or the discussion around specialty. Is this something your customers are requesting? Is this kind of the way you see the market
spk05: migrating longer term would love to get a little more color there if you wouldn't mind it's sure happy to provide color it's both you know we've got a significant amount of earth moving we have continued to grow our earth moving fleet a little faster than the other product types within our equipment profile that in of itself kind of lends itself to certain products that we may want to enter to better serve existing customers And we see customers continuing to look for sources that can provide a wider array of products for their needs. And so the punchline is we're on these projects, we know these customers, we have good working relationships, and we're looking to facilitate more of what their requests are. So I think there are a couple, two or three specialty types of products that are well aligned for our existing business, our existing footprint, our existing customer base. And we're well focused on achieving that becoming part of our rental offering.
spk04: Perfect. And then lastly for me, 10% sort of kind of new store growth is nice to see. Are you seeing anything with some of your smaller competitors out there that the pandemic has really impaired their business and so this is more of a share gain opportunity? Or is this more that what you're seeing in the tea leaves, is that encouraging to push forth on the expansion side?
spk05: I think it's three things. Number one, I think the smaller operators are really struggling right now, and I don't think it's going to get a lot easier for them. So I think that is some level of an advantage for H&E. I believe that we see opportunity within the markets themselves just as they are, right, for us to continue to expand. And the third thing that I will add, that we've been doing these warm starts now for about 10 years. And, you know, we've been, I think the last few years, punching out – Really, I think 18, we did only one location. But other than 18, we do about four of these a year. I think we've done as many as five a year. We've got four that we've announced in 2020 we've done, and I think that will complete 2020 this year. But as we look and do analysis of these locations, looking at return on capital, just the performance, and we compare them to other locations or acquisitions or acquisition opportunities, I've got to tell you, we have performed really well with these organically grown warm starts. And so there's just a lot of reasons it adds up. We've got the balance sheet. We're not going to hurt our leverage. We're going to stick with this. Our capital structure is good for it. We're going to stick with our dividend. And we can just do eight or ten of these a year, and we feel like they're a very safe growth opportunity for H&E. And history tells us that they're going to provide us good returns. And so we've also gotten better at doing warm starts along the way.
spk04: Perfect. Thanks so much. Appreciate it.
spk05: Thank you.
spk01: Again, if you'd like to ask a question, please press star, then 1. Our next question comes from Seth Weber with RBC Capital Markets. Please go ahead.
spk06: Hi. Good morning. This is Brendan on for Seth. Thank you for the color on what drove the increase in SG&A as a percent of revenue in the quarter. I'm curious as to how you're thinking about that going forward, particularly given your increased greenfield growth focus. And I guess what's the typical timeline when you do put in a new location to kind of get that up to operating at company averages?
spk05: Yeah, so the timeline associated with getting these at company averages can be as short as 6 to 12 months and probably more like 18 months on average. So, I mean, there's a range within that as far as them looking more like a mature location and having typical metrics throughout the P&L. As far as the impact to SG&A, obviously, you know, they have a negative impact to SG&A early on. You front load, you hire the staff you need to run a business that's not yet ramped up. And I think generally there have been times before where we've called out the cost associated with those, and we will likely do the same thing going forward since we're going to start to do these in multiple numbers. So it's a negative impact in the short run, certainly not in our longer view, and we will be giving some helpful information as we ramp these warm starts up in 2021.
spk06: Okay, thanks. And then your pots and service was roughly flat sequentially. Any more call you can give on sort of what you're seeing there and then thoughts on sort of maybe when we might see an uptick in rebuild activity?
spk05: Yeah, when cranes take off, we're going to see an uptick in that service activity. Until they do, I think we're probably going to be fixed at very similar levels for the foreseeable future.
spk06: Okay, great. That's it for me. Thanks. Thank you.
spk01: This concludes our question and answer session. I would like to turn the conference back over to Mr. Barber for any closing remarks.
spk05: Sure. We thank everyone for taking the time to join our call today and look forward to updating everyone on our year-end results as we move forward. Thank you.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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