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H&E Equipment Services Inc
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Good morning, and welcome to H&E Equipment Services Second Quarter 2018 Earnings 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, sir.
Thank you, Stephanie, and welcome to H&E Equipment Services conference call to review the Company's results for the second quarter ended June 30, 2018, which were released earlier this morning. The format for today's call includes a slide presentation, which is posted on our website at www.he-equipment.com.
Please proceed to Slide 2. Conducting the call today will be John Engquist, Chief Executive Officer; Brad Barber, President and Chief Operating Officer; and Leslie Magee, Chief Financial Officer and Secretary. Please proceed to slide 3. During today's call, we will refer to certain non-GAAP financial measures and we've reconciled these measures to GAAP figures in our earnings release, which is available on our website.
Before we start, let me offer the cautionary note; that this 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 includes the risks described in the risk factors in the Company's most recent Annual Reports 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 John Engquist.
Thank you, Kevin, and good morning, everyone. Welcome to H&E Equipment Services second quarter 2018 earnings call. As usual I have Leslie Magee, our Chief Finance Officer; Brad Barber, our President and Chief Operating Officer, and Kevin Inda, our Vice President of Investor Relations on the call with me. My comments this morning will focus on our second quarter results, our business and overall market conditions, and then Leslie will review our financial results for the quarter. When Leslie finishes, I'll close with a few brief comments, and then we'll be happy to take your questions.
Proceed to Slide 6, please. Our business delivered solid results across the board during the second quarter, with our rental and distribution business achieving significant growth from a year ago. I am pleased with our results as we successfully capitalized on the demand and growth occurring in the non-residential and other construction markets we serve across the country.
Total revenues increased approximately 24.5% to $310.4 million in the second quarter, while adjusted EBITDA grew 28% to $101.8 million compared to $79.1 million a year ago. For the second quarter, we generated net income of $20.8 million or $0.58 per diluted share, compared to $9.9 million or $0.28 per diluted share a year ago. Our business is performing well compared to a year ago.
Our rental and distribution businesses delivered significant growth during the second quarter, with rental revenues increasing 21.5% and new equipment sales increasing 50.1% compared to a year ago. The large increase in new equipment sales was primarily driven by new crane sales and new earthmoving sales. We are seeing solid demand for small crawlers, all-terrain and truck mounted cranes but the demand for rough terrain cranes remains challenging.
Proceed to Slide 7 please. Demand for rental equipment was strong during the second quarter, resulting in a 21.5% or $25.5 million increase in rental revenue to $143.8 million from $118.4 million a year ago. The trends in our rental metrics are positive, as time utilization remained high at 72%, dollar utilization grew to 35.4% from 34.9% a year ago and we achieved positive rates for the fifth consecutive quarter, up 2.4% year-over-year and 0.7% sequentially. Rental gross margins increased to 49.1% from 47.6% a year ago.
Proceed to Slide 8 please. This slide illustrates our nationwide footprint, various regions, branch locations, 19 Greenfield sites that we've opened since that beginning of 2013 and sites acquired in the CEC and Rental Inc. acquisitions. During the second quarter, we opened our first Greenfield of the year in Aledo, Texas to expand our presence in the Fort Worth Metroplex. We currently have 89 branches located throughout the United States and intend to continue to grow our footprint and business by exploring additional acquisitions, Greenfields and warm-starts.
Proceed to Slide 9 please. Non-residential construction continues to be the biggest driver of our business, accounting for 60% of our total revenue on an LTM basis. As of June 30, 2018, for the month of May, nonresidential construction spending increased 3% from a year ago, and industry data is forecasting continued growth throughout the balance of this year and into 2019. Demand in our other end-user markets is strong as well, especially the energy sector.
During the second quarter, time utilization in our oil and gas focused markets was 75.4% compared to 74.8% a year ago. We believe that fleet mix and age continue to be competitive advantages for our business. We have one of the youngest fleets in the industry at 34.2 months compared to an industry average of 43.6 months.
Proceed to Slide 10 please. Our strong second quarter results, as well as those of our peers and manufacturers, are consistent with the positive industry data on this slide. Many major indicators and forecasts point toward continued growth in the non-residential construction market, and construction industry in general.
At this time, I'm going to turn the call over Leslie for the financial results.
Good morning, everyone. Thank you, John. I'll begin on Slide 12 to cover our financials in greater detail. As John discussed, our second quarter performance was strong in many respects. As a reminder, our second quarter results include CEC's legacy operations, which were acquired on January 1st and Rental Inc.'s operations which were acquired on April 2nd.
For a high-level overview, total revenues increased 24.5% or $61 million in the second quarter compared to the same period a year ago to $310.4 million, driven primarily by the strength in both our rental and distribution business. Of the $61 million increase in total revenues, approximately $9.8 million and $7.6 million were related to the branches acquired in the CEC and Rental Inc. acquisitions respectively. Gross profit increased $23.8 million – 23.8% or $20.8 million to $108.1 million from $87.3 million a year ago. Margins were 34.8%, compared to 35% a year ago, primarily as a result of revenue mix with significantly higher, but lower margin new equipment sales.
Let's take a look at the underlying details of the 24.5% top-line revenue growth beginning with rental revenues. Rental revenues increased 21.5% to $143.8 million. Rental revenues related to the branches acquired in the CEC and Rental Inc. acquisitions totaled $8.7 million and $3.4 million respectively. As John referenced, physical utilization remained high with average time utilization based on OEC of 72% for the quarter and includes the quarter's results for CEC and Rental Inc. operations. AWP physical utilization was 74% of OEC compared to 75.5% a year ago. Crane utilization increased 820 basis points to 74.3%.
Earthmoving increased 150 basis points to 68.2%. General equipment decreased 380 basis points to 59.9% compared to a year ago and lift truck utilization decreased 400 basis points to 70.5%. Rental rates improved again this quarter 2.4% year-over-year and rates improved in all product lines except for cranes. Rates also increased 0.7% sequentially. With strong utilization in rates, our dollar returns increased to 35.4% versus 34.9% last year. Please note that the rental rate data does not include our most recent acquisition of Rental Inc. We anticipate this information to be available for the quarterly period ended September 30, 2018.
New equipment sales increased 50.1% or $22.9 million to $68.5 million. New equipment sales related to branches acquired in the CEC and Rental Inc. acquisitions totaled $0.1 million and $2.4 million respectively. The improvement in new equipment sales was largely due to higher new crane sales which increased $13.6 million to $35 million. Sales of new earthmoving equipment increased 28.5% or $4.2 million during the quarter.
As a reminder, the product line new equipment sales fluctuations do not include the impact of legacy Rental Inc. operations. New equipment sales by product line data is expected to be available beginning with the quarterly period ending September 30, 2018. Used equipment sales increased 33.3% or $8 million to $32.1 million, largely as a result of higher used crane and AWP sales. Used equipment sales related to the branches acquired in the CEC and Rental Inc. acquisitions were $0.2 million and $0.4 million respectively.
Sales from our fleet comprised 89% of total used equipment sales this quarter compared to 88% a year ago. Also the product line used equipment sales fluctuations included in this presentation did not include the impact of legacy Rental Inc. operations. Our parts and service segments delivered $47.1 million in revenue on a combined basis, up 3.1% from a year ago.
Let me touch on gross profit and margin at this time. Total gross profit for the quarter was $108.1 million, compared to $87.3 million a year ago, an increase of 23.8% on a 24.5% increase in revenue. Consolidated margins were 34.8% compared to 35%. While rental gross margins and other segments growth margins improved from a year ago, the shift in revenue mix to lower margin new equipment sales resulted in slight pressure on consolidated gross margins.
For gross margin detail by segment, rental gross margins for the quarter were 49.1%, compared to 47.6% last year, primarily due to strong utilization and positive rates. Margins on new equipment sales were 10.7% for the second quarter, compared to 11.4% a year ago largely due to lower margins on the crane sales. Used equipment sales gross margins were 32.3% compared to 29.5% last year, and margins on pure rental fleet only sales were 35.7% compared with 31.8% a year ago. Our parts and service gross margins on a combined basis were 41.2% compared to 40.8% a year ago.
Move to Slide 13 please. Our income from operations for the second quarter of 2018 increased 50.3% to $43.1 million or 13.9% of revenues compared to $28.7 million or 11.5% of revenues a year ago. The increase in income from operations is primarily a result of improved rental gross margins, solid margin performance in other business segments, and operating leverage compared to a year ago. SG&A expenses were 22.3% of revenues this quarter compared to 24% a year ago, which I'll discuss further on Slide 16. Also, net gains on sales of property and equipment increased $3 million compared to last year.
Proceed to Slide 14. Net income was $20.8 million or $0.58 per diluted share in the second quarter, compared to $9.9 million or $0.28 per diluted share in the same period a year ago. Our effective tax rate declined to 25.5% compared to 37% a year ago.
Please move to Slide 15. Adjusted EBITDA was $101.8 million in the second quarter, compared to $79.1 million a year ago. Margins were 32.8% compared to 31.7% a year ago. And despite a shift in revenue mix to lower margin new equipment sales, margins improved slightly as a result of improved gross margins in the rental business and operating leverage.
Next, Slide 16. SG&A was $69 million, a $9.2 million or 15.4% increase over the same period last year. SG&A as a percentage of revenues was 22.3% compared to 24% a year ago. Of the total $9.2 million increase, SG&A expenses related to the branches acquired in the CEC and Rental Inc. acquisitions totaled $1.8 million and $1.5 million, respectively. Other increases in SG&A, not including the newly acquired branches, were largely due to higher labor, wages, incentives, benefits and other employee-related costs of $4.9 million. SG&A expenses also included $0.8 million of amortization of intangibles associated with the purchase price allocations of CEC and Rental Inc. Expenses related to Greenfield branch expansions increased $1 million compared to a year ago.
Next, on slide 17. Our gross fleet capital expenditures during the second quarter were $183.3 million, including non-cash transfers from inventory. Net rental fleet capital expenditures for the quarter were $154.6 million. Gross PP&E CapEx for the quarter was $15.1 million and net was $9.2 million. Our average fleet age as of June 30 was 34.2 months.
Free cash flow for the second quarter was a use of $151.3 million and includes the purchase of Rental Inc. which was acquired on April 2. This compares to a use of $0.7 million a year ago and the net increase in use of cash compared to a year ago was primarily due to an increase in rental fleet CapEx and the Rental Inc. acquisition. We've included GAAP reconciliations to net cash provided by operating activities 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 OEC was $1.7 billion, a 22% or $301.7 million increase from a year ago. Average dollar utilization was 35.4% compared to 34.9% a year ago.
Proceed to Slide 19, please. At the end of the second quarter, the outstanding balance under the amended ABL facility was $132.7 million. Therefore, we had $609.6 million of availability at quarter end, net of $7.7 million of outstanding letters of credit. With a strong balance sheet and ample liquidity, our capital structure supports our growth strategy.
And at this time, I'm going to turn the call back to John.
Thanks, Leslie. Please proceed to Slide 21. To conclude, we believe our business is off to a very strong start for the first half of this year, with significant gains in our rental and distribution business. Our business, including the recently acquired branches through our two acquisitions, is performing very well. Our outlook for the balance of this year remains positive, as demand in our end user markets is strong and industry indicators forecast continued growth in non-residential construction. Increasing the size and scale of our business is a strategic priority, which we expect to achieve through organic growth, acquisitions and Greenfield and warm start branch expansion.
Lastly, we paid our 16th consecutive quarterly cash dividend on June 15. As always, feature dividends are subject to board review and approval each quarter.
At this time, we'd like to take your questions. Operator, please provide instructions.
Absolutely. And we'll take our first question from Neil Frohnapple from Buckingham Research.
Hi, congrats on a great quarter. John...
Good morning.
John, have your plans changed at all versus a few months ago for your Rental fleet expansion in 2018, at least directionally, as I know you don't provide guidance, but just in light of the strong high utilization rental rates you're putting up?
Look yes, look we're not going to change our policy on CapEx guidance, but due to the fact that we have increased our spending pretty significantly, I'm going to give you a little more direction than we have in the past. As you know, the first half of the year we spent about $240 million on a gross basis. Our expectation that in the second half of the year we're going to spend between $160 million and $180 million, it could fluctuate that much in the second half of the year. Approximately half of that spending will be for growth capital and the vast majority of that spend will be in the third quarter. We always pull our capital spending back in the fourth quarter.
Okay.
And all of our growth capital – all of our growth capital will be in the third quarter.
Okay. Got it. And could you talk more about the time utilization performance in the quarter? Obviously, you had a very high level, especially considering the 22% increase in the fleet size on a year-over-year basis? Just curious on how that performed over your expectations. Is there anything that you can say about how it progresses as we move through the quarter?
Look, our physical utilization met our expectations. We expected our utilization to be down somewhat. A year ago I believe we were under-fleeted, we were running at unsustainable utilization levels. I think our aerial utilization a year ago was running 77% at this time. We just – we needed more fleet, and we've grown our fleet. To be able to grow our fleet 22% and keep utilization basically flat while getting positive rates year-over-year and sequentially, I think is a very, very positive result. So we're performing to our expectations.
Okay, great. And then one last one, you highlighted the strength of external indicators to support further revenue growth in the coming quarter, but could you just talk more about customer sentiment for some of your larger customers that have visibility through 2019?
Sure, Nick. Sentiment remains strong across all sectors. There is not an area or region of the country where we are seeing any type of concern from customers. So I'd tell you it's really more of the same, no change throughout the year, remains very positive.
Great. Thanks, I'll pass it on.
Thanks, Neil.
We'll move on to Seth Weber from RBC Capital Markets.
Hey, good morning guys.
Good morning.
Wanted to ask a little bit about dollar utilization. It came in a little bit lower than what we were thinking, and I'm just curious, I don't know if that's a mix function, if it's a function of some of the acquired assets or – I see that earthmoving dollar was down year-over-year. Is there anything to call out there specifically? And maybe just how should we be – is like 50 basis points kind of year-over-year the right way to think about it going forward or just maybe how we should be thinking about as the whole rate versus time combination going forward? Thanks.
Yes. So Seth, I would say similar to the comment, John made about our fleet utilization, we met our own expectations for dollar utilization. We are continuing to invest and grow our earthmoving fleet and we're not always quite as efficient bringing in new product as we are with the existing fleet. That being said, it had – the bleed over effect shows up in time utilization. And clearly there's always some level of economic headwind with new products. So I think the combination of those two may be where you didn't see the expectation you had, but I'll tell you we're performing where we expect, and we'll continue to get pricing on earthmoving and other products and we'll continue to incrementally improve our dollar utilization. But if there's one where I think maybe it didn't hit was on the time that you may have expected. Otherwise we're very satisfied.
Okay. And you think kind of flattish time and increased rates is the right way to think about the rest of the year on a year-over-year basis?
Well, look we expect to see time utilization decrease a little bit, and again I think it's a function of right sizing our fleet, but we definitely will continue to get solid rate increases. We're very comfortable with that, and a more normalized level of utilization from a year ago. We were just running it on sustainable levels a year ago.
Sure. Okay. And then maybe, Brad, just a little bit color on some of the oil and gas markets, the Permian. There's been a lot of discussion on the news about what's going on there versus your exposure to the Eagle Ford. If there's any color you can give us on some of the extra color on some of the energy markets would be appreciated? Thanks.
Yes, our heaviest exposure is in Eagle Ford. Seth, I wouldn't have any additional commentary for this call that we haven't before. It remains very strong. They are our best rental rates. Our utilization is exceptionally high and the opportunity just continues. And I think, I would say that ourselves as well as our competitors have been very measured and we're acting very rationally and so there's growth, but it's just consistently an incremental and that continues. Sentiment in those oil fields remains very strong as well.
Yeah, the activity in the Permian and in the Eagle Ford is as strong as it's ever been right now.
Okay, guys. I appreciate it. Thank you very much.
Thank you.
Kathryn Thompson with Thompson Research Group, please go ahead with your question.
Good morning. This is Steven Ramsey on for Kathryn. I guess, just thinking about the Equipment Rental segment, could you maybe discuss, even qualitatively, how rates trended throughout the quarter? I think, or I feel like at this point in the cycle, investors are looking for cracks in the rental story, and one of those would be the rate side, if that is looking fragile through 2018?
So, the first comment and I know you saw was our sequential rate improvement over quarter-over-quarter of a 0.7%, right. So that was strong. We were very steady. Rates remain very consistent, month to month to month to month. And our view is that our rates will remain similar for the rest of the year. We see an opportunity to continue to get consistent rate gains.
Great. And then, as you continue to be proactively looking for more acquisitions and still remaining disciplined, does the long-term attractiveness of the equipment rental space and the scale benefits of getting bigger, does that justify you guys raising the multiples at which you're willing to transact at?
Look, I think our strategy of increasing our size and scale through acquisition is a strong strategy that makes all kind of sense. We're going to be disciplined in what we pay for assets. And we've got a healthy pipeline of opportunities that we're looking at and we're going to pay market multiples for these businesses.
Got you. That's it for me. Thanks.
Thank you.
Stanley Elliot from Stifel, please go ahead with your question.
Hey, guys. Good morning. Thank you for taking my question. On the M&A piece, possibly could we be looking at some additional transactions later in the year, even though we've already done kind of two at the front-end of the year?
Yes. I think you possibly could see one more.
Okay. And then on the crane sales, was the momentum that you're seeing there, is that newer products that have come out? And then also kind of when do you think that the pricing within that crane piece starts to pick up?
Well, look. I want to point out the fact that our margins were down on new crane sales, that's a mix issue. We're not losing pricing there. We sold some big, big machines that are just lower margin products. They're big dollars, but lower margin. So that was a mix issue. What was the rest of your question, Stanley?
So I know that there's been a lot of new products that have come through the pipe and been introduced recently from the crane manufacturers. And I was curious if that's really what's driving the outsized growth or the growth or do you think it's just more confirmation that the cycle's finally turning for the cranes?
I'll add a little color to that. It's both. We certainly sold some of the new products. And I've got to tell you the new product, both the quality and engineering is impeccable by the Manitowoc group. So there is no doubt that some of our customers have taken notice of that and that's driven some of the new product – some of that new product replaced older product of similar size. So it's not entirely driven – so I would say it's a balance of both, but it's worth noting that both the quantity of new products Manitowoc is offering as well as the quality is being well-recognized by the customer base, and I think we've benefited from that.
Perfect, and then, then last from me, the results are pretty evidently broad-based. Are there any new specific MSAs or regions that you'd call out as saying, hey, things feel really good right now, just really trying to get a little more color on the results.
It's broad based, while we don't get into quoting rates on region, I will tell you that every geography of the country has consistently had rate improvement, and our time utilization is strong. So our overall results are very reflective of the individual results of the regions of the country. So there's not an area we would call out and say, it's a heck of a lot better, exception of oil field, which I think we all get. Otherwise, it's broad-based and continues to be so.
Perfect, guys. Thank you very much and best of luck.
Thank you.
Thank you.
We'll move on to Erika Jackson with UBS.
Hi, this is Erika Jackson, I'm on for Steve Fisher. I just had a quick question about I think equipment inflation and on what degree you are possibly hearing or seeing at the moment for whatever is maybe like six months out. And then on the back of that, to what extent would you say the market is maybe giving you some latitude to raise rates ahead of equipment inflation or is it still a purely supply demand driven environment?
So it's a supply demand driven environment. Unfortunately, our end users in the rental business, it's of no consequence to them, what we pay for product, unfortunately. To the first part of your question, we've had some manufactures – for 2018 we've had almost no price increases to speak of. For 2019 we've had some folks talk about pricing in the very low-single digits 1%, 2%, maybe 3%. We've yet to enter any meaningful negotiations of pricing agreements for 2019. But that's the tone that most manufacturers are taking in the 1% to 2% range for the conversations we've had.
Great. Very helpful. Thank you.
Seth Weber from RBC Capital Markets. Please go ahead with your question.
Hi. Thanks for taking the follow up. Just sorry if I missed it, but the crane – the new crane sales growth in the quarter – I think you said it was up $13.5 million, but is there a percentage change off of that?
The percentage change is about 64% and just remember that that does not include product line data for CEC and Rental Inc.
Okay.
He's talking about new cranes. They don't have...
Right.
Right. So yeah, they don't have cranes anyway.
Great. Okay. So 64% to $35 million is what you said, Leslie?
Yes.
Okay, perfect.
Correct.
That's all I had. Thank you.
Thanks, Seth.
We'll move on to Bill Mastoris from Baird Company.
Thank you. I'd like to follow up on two earlier questions and the very first one has to do with, John you indicated that you have a very healthy pipeline of acquisitions, and certainly one of your major competitors has aggressively pursued many of the larger acquisitions out there. If you found the right acquisition, how far are you willing to stretch that balance sheet?
I think we would want to probably not go above four turn of leverage. I think we would – in a transformational strategic type acquisition, a large acquisition, we would be comfortable with four turns.
Okay. And within that acquisition pipeline and kind of thinking about how you've grown your business in the past, is it more realistic to expect bolt-on acquisitions or might this be one that moves your needle maybe a little bit more than some of your past acquisitions?
What we're primarily looking at right now is bolt-on type acquisitions. The company is generating EBITDA of $15 million to $25 million. That's the bulk of what we're looking at. We would certainly be interested in a larger opportunity if it came along and we'll see what develops there.
Okay. And then my follow up question, and this also relates to an earlier question, has to do with the sale of cranes. What's driving that? You indicated that the quality of the Manitowoc Cranes has improved, but what are some of the factors that are really driving that sale?
I think it's all attached. It's the industrial sector, it's infrastructure, it's the construction market. It's pretty broad-based increase in demand.
Okay. Thank you very much.
You bet. Thank you.
There are no further questions in the queue. I'd now like to turn the call back over to Mr. John Engquist.
Thanks, everybody. Listen, I appreciate you being on the call. We're really pleased with the quarter and we think we're going to finish the year strong. So I look forward to talking to you on the next call. Thanks for joining us today.