H&E Equipment Services Inc

NASDAQ:HEES

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, and welcome to H&E Equipment Services Fourth Quarter 2020 Earnings Conference Call. Today's call is being recorded.

At this time, I would like to turn the conference over to Mr. Kevin Inda, Vice President of Investor Relations. Please go ahead.

[Kevin Inda, Vice President, Investor Relations]

Thank you, Sara, and welcome to H&E Equipment Services conference call to review the company’s results for the fourth quarter and year-ended December 31, 2020, 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, Executive Chairman of the Board of Directors; Brad Barber, Chief Executive Officer and President; 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 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 is also includes 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.

[Brad Barber, Chief Executive Officer]

Thank you, Kevin, and good morning, everyone. Welcome to H&E Equipment Services fourth quarter 2020 earnings call. On the call with me today are John Engquist, Executive Chairman; Leslie Magee, our Chief Financial Officer; and Kevin Inda, our Vice President of Investor Relations.

I’ll begin my presentation on Slide 4. I will briefly discuss our fourth quarter performance, provide some color on our end-user markets and growth strategy and Leslie will review our financial results for the quarter and year in more detail. After, we will take your questions.

Slide 6 please. I'm optimistic that 2021 will be better for H&E and our industry. During the fourth quarter, demand in our end-user rental markets remained good and physical utilization increased sequentially from the third quarter. Our distribution business also performed well. Overall, our fourth quarter performance reaffirmed our belief regarding the ongoing improvement in our business.

In terms of our financial highlights for the quarter, total revenues were down 9.3% or 32.5 million, compared to a year ago. Adjusted EBITDA declined 19.8% or 25.2 million from a year ago, and margins were down 420 basis points to 32.2%, primarily due to increased sales volume from low margin new equipment sales and lower rental gross margins. While revenues remain below pre-pandemic levels, we were pleased that the year-over-year declines improved. We also generated significant free cash flow again this quarter.

On to Slide 7, please. Let me now address our rental business, physical utilization for the fourth quarter with 65.4%, a 160 basis point improvement from the third quarter. Rates remain negative. However, our sequential rate trend has stabilized as we also mentioned last quarter. We continue to focus on adjusting the rental fleet size and mix as we prepare for what we believe will be a growth year for our business.

As I stated earlier, demand in our non-residential construction markets has continued to improve, albeit activity is still below pre-pandemic levels. We expect this recovery to continue to move further into 2021. Activity on data centers, warehouses distribution, and wind and solar farms, healthcare and other verticals are strong. We expect industrial plants will also resume maintenance work, which was significantly postponed last year. The passing of a major infrastructure or highway bill would also be very positive for the industry. Lastly, both visibility and sentiment from our larger contract customers continue to improve.

Slide 8. Let me conclude by reaffirming our commitment to accelerate our growth strategy this year as we're pursuing multiple ways to accomplish this goal. First, this includes significant increase in the number of warm starts in 2021. Last year, we added four new locations. Our plan is to add 8 to 10 new locations this year. We will spread these branches out across our footprint, primarily in our existing geographies where we believe we would like to increase our service density in stable and high growth markets.

Second, we will continue to explore additional growth opportunities from tuck-in acquisitions of general rental businesses. Entering the specialty rental business is also part of our focus. Any specialty acquisition or new location openings would be synergistic with our current lines of business and fleet mix. This includes opportunities in both inside and outside of our existing geographies.

Our 60 years in business have always been about equipment solutions, strategically growing our product lines and our ability to serve our increasing base of customers. We're ramping up this commitment in 2021. Leslie will elaborate more in her comments, but with our successful upsized notes offered in the fourth quarter, our balance sheet is strong and will support our growth initiatives.

I'll now turn the call over to Leslie to discuss our fourth quarter and full-year 2020 financial results in more detail.

[Leslie Magee, Chief Financial Officer and Secretary]

Good morning, everyone and thank you Brad. Let's proceed to Slide 11 for our financial results. During the fourth quarter of 2020, the company completed its successful offering of 1.25 billion of new eight year 3.875% senior notes and the repurchase and redemption of its previously outstanding 5.625% senior notes. The company's operating results for this quarter include a 44.6 million non-recurring item associated with the premium pay to repurchase and redeem the old notes and the write-off of unaccreted note discount, unamortized premium and related deferred transaction costs.

With that I'll move on to more about our fourth quarter results. Our total revenues decreased 9.3% or 32.5 million to 315.6 million, compared to the same period a year ago. Rental revenues decreased 15.1% or 26.6 million to 149.6 million from 176.3 million a year ago. The size of our fleet decreased by 9.2% or 179.1 million, compared with the prior year comparable period. Rental rates this quarter declined 4.5% year-over-year, however rates were down only 0.3% sequentially.

As Brad mentioned, these results were consistent with the third quarter and indicative of continued stabilization. Our time utilization was 65.4%, compared to 69% a year ago, but increased 160 basis points, compared to 63.8% in the third quarter. Given lower physical utilization in rates, our dollar returns declined by 250 basis points to 33.5% compared to last year, yet dollar returns improved sequentially increasing 110 basis points from 32.4% in the third quarter.

New equipment sales were better than our expectations, though still below year ago levels, down 10.3% to 55.1 million, compared to 61.4 million last year. The decline was primarily the result of a 29.6% or 8.8 million decline in new crane sales, partially offsetting the decrease with higher sales of new earthmoving and new other equipment. Used equipment sales increased 13% or 5.5 million to 47.9 million and was primarily the result of higher material handling, earthmoving, and AWP sales.

Sales from our rental fleet comprised 93.5% of total used equipment sales this quarter compared to 90.7% a year ago. Our parts and service segments generated 42.9 million in revenue on a combined basis, which is down 9.9% from a year ago.

Moving on to a discussion of gross profit and margins, our gross profit decreased 17.6% to 106 million from a year ago, and consolidated margins were 33.6%, compared to 36.9% a year ago, primarily because of lower rental gross margins and revenue mix. Margins were also impacted by lower margins in other primary business segments.

For gross margin detail by segment, rental gross margins were 45.1% during the quarter, compared to 50.3% a year ago, and due to continued pressure on rates and time utilization. Margins on new equipment sales decreased to 10.5% during the quarter, compared to 10.8% a year ago as margins were lower in all major product lines, with the exception of new material handling gross margins.

Used equipment sales gross margins decreased to 31.1% from 33.3% last year, primarily due to lower margins in all categories except other used equipment gross margins. Margins on pure rental play only sales were 32.6%, compared to 36% a year ago, and parts and service gross margins on a combined basis were 41.2%, compared to 41.4% a year ago.

Slide 12 please. Income from operations for the fourth quarter of 2020 decreased 13.4%, 35.8%, or 11.3% of revenues compared to 41.3 million or 11.9% of revenues in the prior year period. Included in income from operations for the fourth quarter of 2019 was a 12.2 million non-cash goodwill impairment charge. Excluding this charge, income from operations was 53.5 million or 15.4% of revenues a year ago.

The declines in income from operations and margins were primarily a result of a 9.3% decline in revenues, lower gross margins, revenue mix, and slightly higher SG&A as a percentage of revenues, despite a 7.1% decline in SG&A cost.

Proceed to Slide 13, please. Net loss was 14.6 million or $0.40 per diluted share in the fourth quarter of 2020, compared to net income of 21.9 million or $0.61 per diluted share in the fourth quarter of 2019. Adjusted net income was 16.6 million or $0.46 per diluted share, compared to 31.9 or $0.88 per diluted share a year ago.

The effective income tax rate was 37% in the fourth quarter of 2020, compared to 18.4% a year ago. On an adjusted basis, the effective tax rate was 22.3% in the fourth quarter of 2020 and 18.4% in the fourth quarter of 2019.

Please move to Slide 14. Adjusted EBITDA was 101.6 million in the fourth quarter, compared to 126.8 million a year ago, a decrease of 19.8%. Adjusted EBITDA margins declined 420 basis points to 32.2% this quarter, compared to a year ago for the same reasons as I discussed on Slide 12 income from operations.

Next Slide 15. SG&A expenses for the fourth quarter of 2020 decreased by 5.5 million or 7.1% to 71.7 million. SG&A expenses in the fourth quarter of 2020 as a percentage of total revenues were 22.7%, compared to 22.2% a year ago. Employee salaries, wages, payroll taxes, employee benefit cost and other employee related expenses decreased 5 million, primarily as a result of lower commissions and incentive pay combined with headcount reductions.

Bad debt expense decreased 1.2 million and promotional expense decreased 0.9 million. Offsetting this decrease was a 1.8 million increase in liability insurance, and expenses related to the Greenfield branch expansion increased 1.7 million, compared to a year ago.

Next on Slide 16. On this slide, you'll find CapEx and cash flow for the 12-month period ending December 31, 2020 and our [gross rental] CapEx in the fourth quarter was 37.1 million, including non-cash transfers from inventory. Net rental fleet CapEx for the fourth quarter was negative 7.7 million. Growth PP&E CapEx for the fourth quarter was 1.4 million and net was negative 0.4 million. Our average fleet age as of December 31, 2020 was 40.9 months. Free cash flow for the fourth quarter of 2020 was 79.2 million, compared to 100.9 million a year ago.

Next Slide 17 please. At the end of the fourth quarter, the size of our rental fleet [based on OEC] was 1.8 billion and 9.2% or 179.1 million decrease from a year ago. Average dollar utilization was 33.5%, compared to 36% a year ago, reflecting lower time utilization and rates, yet improved from the third quarter dollar utilization of 32.4%.

Proceed to Slide 19, please. Our recent notes refinancing and upsizing further strengthened our balance sheet and capital structure. We continue to operate with ample liquidity and no near-term maturities. At the end of the fourth quarter, we had zero outstanding balance under our amended ABL facility. And this is a 216.9 million decrease since December 31, 2019. We had 741.3 million of cash borrowing availability at quarter end, net of 8.79 of outstanding letters of credit.

Our excess availability was 983.5 million at the end of the fourth quarter, which is a measurement used to determine if our springing fixed charge is applicable with excess availability of almost $1 billion we have no covenant concerns. We also had more than 300 million of cash on hand at year-end. Therefore we have a very solid balance sheet to support the growth plan Brad discussed earlier.

Proceed to Slide 20 please. Let me quickly review our full-year 2020 results, which include a non-cash goodwill impairment charge of 62 million that was identified during the first quarter of 2020 in connection with an interim goodwill impairment test, necessitated by our identification of certain impairment triggering events associated with the impact to our business from COVID-19 impact.

The company's results also include a fourth quarter 44.6 million non-recurring item associated with the premiums paid to repurchase and redeem the [oldness] and the write-off of unaccredited discount, unamortized premium and related deferred transaction costs. Beginning with the top line, total revenues decreased 13.3% or 179.2 million to 1.2 billion in 2020 from 1.3 billion in 2019 with declines in all business segments, excluding used equipment sales, which increased 9.9% or 13.8 million.

Gross profit decreased 96.6 million or 19.3% to 402.6 million from 499.2 million in 2019. Our gross profit margin decreased 260 basis points to 34.4%, largely due to lower rental margins than a year ago. Margins in all business segments were down versus 2019 and was fully offset by a positive shift in revenue mix, as lower margin new equipment sales declined 30.1% in comparison to a year ago.

Adjusted EBITDA for 2020 decreased 16.6% to 394.8 million from 473.2 million in 2019. Adjusted EBITDA as a percentage of revenues was 33.8%, compared with 35.1% in 2019. Our net loss was 32.7 million or $0.91 per diluted share, compared to net income of 87.2 million or $2.42 per diluted share in 2019, excluding the impact of the 2020 first quarter goodwill impairment charge and a non-recurring item of [44.6 million] associated with the repurchase and redemption of the old 5.625% notes in the fourth quarter.

Net income in 2020 was 50.1 million, or $1.39 per diluted share compared to net income of 96.4 million or $2.67 per diluted share in [2019], excluding the fourth quarter 2019 goodwill impairment charge. The effective income tax rate was [Technical Difficulty] in 2019, excluding the above mentioned charges, our effective tax rate for the 12-month period ending December 31, 2020 would have been 23.1%.

Free cash flow was 307.1 million in 2020 compared to a use of free cash flow of 6.7 million in 2019. The improvement in free cash flow was largely the result of lower net capital expenditures and lower acquisition investment in 2020 compared to a year ago. We completed no acquisitions during 2020, compared to the completion of one acquisition for 106.7 million in 2019. Our net CapEx in 2020 declined to negative 2.8 million, compared to 221.5 million in 2019.

And lastly, we also continued our dividend payment each quarter with total dividends paid of a $1.10 per common share during 2020. And while dividends are always subject to approval by the board of directors, it is our intent to continue the dividend policy.

With that, let's now move into questions. Operator, please provide our instructions for the Q&A session.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Steven Ramsey with Thompson Research Group. Please go ahead.

[Steven Ramsey, Thompson Research Group]

Good morning. We'll be curious to hear more on the fleet size coming down, and with visibility improving and opening an increased number of branches for 2021, can you share how much CapEx will be devoted to new fleet this year, and just any thoughts on CapEx for the year?

[Brad Barber, Chief Executive Officer]

Sure Steven. Good morning to you. As I said my prepared comments, you know, we're moving back into a growth mode. We continue to sell out of the fleet last year. Nice healthy margins maintained in a continued very young rental fleet age. You know, as we move forward, we said 8 to 10 locations is our expectation. So really comfortable about the 8, we've got many of those slated for Q2 openings that we'll be announcing. As it pertains to total CapEx guidance, you know, maybe the best way to frame that for you would be – last year we said, we would reduce our fleet mid-to-upper single-digits, I think we reduced about 9.5%. This year, I think we're probably thinking more in the mid-single-digit growth.

We’re going to go a little higher, a little lower. It would probably be on the higher side is our current visibility. And as far as the breakout of those numbers is concerned, you know, we've always talked about Greenfields being, you know, rule of thumb $10 million in fleet CapEx [indiscernible] $1 million PPE. So, it'll be dependent on how many of those we punch out, we feel very, very comfortable about the number of eight and, you know, I think we'll be happy to start announcing those here in short order.

[Steven Ramsey, Thompson Research Group]

Great. And I guess to add on to that thinking about the increased focus on specialty fleet, I believe a partnership has been discussed, maybe you can share more on the partnership and on the CapEx that will be devoted to the specialty fleet and maybe if you could share more on as you invest in specialty fleet, maybe how that fleet will be dispersed to branches or certain geographies, certain project types.

[Brad Barber, Chief Executive Officer]

Sure. Look, I think the bigger announcement is that, you know we have absolutely broadened our focus to consider and we're actively looking for specialty opportunities. As we've said, anything we enter will be synergistic, you know that ground works that you're speaking of, obviously, highly regarded, high quality trench product, very well complements at 25% earthmoving fleet we have. Anything we do with specialty would be relatively small, compared to our overall investment at this point in time. So, we're going to move slowly into those opportunities.

We're also considering opportunity for acquisitions and specialty business. Again, it would certainly be synergistic with our existing product mix and customer base. So, you know, it's going to be a slow process as we enter the specialty business. But we've realized that certain segments of specialty can be a little bit more resilient, and they also overlap and allow additional revenue opportunities with some existing customers.

[Steven Ramsey, Thompson Research Group]

Excellent. And then one more for me on new sales being very strong this quarter, we had heard this from contacts in our channel checks, I guess, what is your view driving new sales of equipment? Do you think it has legs to last into this year, and maybe just any thoughts philosophically, does this tell you anything different about the secular shift to rental this – this seems in opposition to that increased secular shift in challenging markets? But maybe would be curious to hear your take on that?

[Brad Barber, Chief Executive Officer]

Yeah, that's a very good question. And I don't believe it's in opposition to penetration increasing. You know, the majority of those that nice Q4 we had from a relative standpoint, were crane sales, and, you know, it doesn't take many cranes to add up a large amount of dollars. That being said, oil has started, you know, maybe whether it's a recovery or just stabilization, but everyone's familiar where crude pricing is currently. I think highest point; it's been in about a year. Energy broadly, and of course, all very specifically drives crane opportunity.

So, I would say that if oil and energy continue to stabilize and increase, then I think our crane sales are likely to increase. If they do not, I think we're going to be pretty directly tied to what we see in the energy markets. Outside of that, within our distribution business, keep in mind that we're a Komatsu distributor in two states, Louisiana and Arkansas. So that's always been – earth moving is a much more consistent marketplace than is the volatility of some of what you see in the crane markets. So, it's a smaller piece of our revenue is more consistent piece. And we think it'll be steady as it has been now for a couple years.

[Steven Ramsey, Thompson Research Group]

Excellent, thanks.

[Operator]

Our next question comes from Steven Fisher with UBS. Please go ahead.

[Steven Fisher, UBS]

Thanks. Good morning, guys. I just wanted to ask about pricing, was there any particular region or end-market where the pricing stood out in the quarters at minus 4.5% and a reflection of the business broadly?

[Brad Barber, Chief Executive Officer]

It's a reflection of the business broadly, Steven. As you said, that year-over-year number as we moved later into the COVID times, you know, has not helped us in the year-over-year measurement. That being said, and as I referred to on our last call, our views that rates were stabilizing, and not likely to further degradation so, you know, we were, we were slightly down sequentially. I would share with you, and we don't like getting into [months], but we saw in January, our rates were actually flat over December.

That's a good indicator, in further support that we think rates have stabilized and are not likely to continue to decrease. And in fact, our view is that as we get out of Q1, we should move into a position where we see the opportunity for rates to start to incrementally improve.

[Steven Fisher, UBS]

Okay, that's helpful. You beat me to the next question. So, I guess then, just in terms of your fleet expectations, are you because you talked about the overall CapEx growth, are you expecting to grow your fleets on a same store sales basis, just kind of trying to figure out if it makes sense to add fleet if rates are still declining or do you anticipate, you know, like it said, like you said, after Q1, are you anticipating that rates are actually going to grow and how it will support growing the fleet at each branch? How are you thinking about that?

[Brad Barber, Chief Executive Officer]

Sure. We're absolutely planning for same store growth. It is anticipation that utilization is going to continue to improve and allow us to achieve improved pricing. It's never our plan to have capital spending when we think we're facing a continued decline in rates and or soft utilization. So, our outlook is pretty positive. Now, that being said, I think we're going to be a little challenged here in Q1. We started the year just under 60% utilized, as you know, you know, the seasonality of Q4, particularly the holidays, around Christmas and New Year are always the seasonal low point.

Every week of January utilization improved. The first two weeks of February improved over January. And you know, if anyone watching the national news can see today, we've been more severely impacted by winter stones than we have been for the last few months or last few years for that matter. Actually, the last few days, we've had approximately about 40% of our locations closed due to weather.

So, notwithstanding this recent, you know, last week, week-and-a-half of harsh severe weather, our view is that utilization is going to continue to trend like it was in January, which is consistently up that combined with rates that are basically flattish right now should turn into rates that are incrementally positive going forward.

[Steven Fisher, UBS]

That's helpful. And we do hope your folks are staying safe and warm. Just maybe one last question, do you have a sense of what the backlogs that your construction customers are doing? Are they growing at the moment? Are they holding flat or declining? Because I think there's at least some debate around this amongst investors because it seems like there is a lot of positive sentiment out there? You mentioned it yourself and other rental companies, but just kind of curious how much of that optimism is a function of what's actually happening in backlogs today or is it an anticipation that those backlogs will eventually turn later this year with just general economic optimism and eventual reopening in the economy?

[Brad Barber, Chief Executive Officer]

Sure. Well, you know, I think it's – there's some geographical challenges there, right, California is a little bit more suppressed today. A little bit further lockdown, due to COVID than maybe most of our other geographies. That's a timing issue. It's certainly not an issue of demand in the marketplace or opportunity going forward. Broadly, or non-res commercial construction across the majority of our footprint, I think the sentiment is high because people have jobs in hand.

There's work being performed and they believe there's more work going to be performed. And then the last comment I would add is around industrial sector, you know, particularly shut down turnaround type maintenance work in 2020. You know, most facilities, postponed every bit of maintenance they possibly could to preserve cash, not knowing where we were going, you know, basically 9months, 10 months ago.

So, as we sit here today, I believe that work is going to come back. I think there's some level of pent-up maintenance demand. So, I think the industrial sector will be better. And should oil continue to head on the trajectory it’s been on that's going to be a really nice opportunity for us and all of our competitors in the sector, particularly on the rental side of the business.

[Steven Fisher, UBS]

Perfect. Thanks very much. Thank you.

[Operator]

[Operator Instructions] Our next question comes from Stanley Elliott with Stifel. Please go ahead.

[Stanley Elliott, Stifel]

Hey, good morning, everyone. Thank you all for taking the question. Can you comment on SG&A levels kind of in the coming year because you had such an unusual year last year, and then with growth, kind of looking to really reaccelerate pretty meaningfully here in the second quarter on? Is there any guidance or anything like that that you could share with us?

[Leslie Magee, Chief Financial Officer and Secretary]

Sure, good morning. This is Leslie. So, we ended the full-year of 2020 at 24 7% of revenues. And I would say for 2021, we would expect some slight pressure on SG&A as a percentage of revenue and some of that is going to be driven by the warm start growth plan that Brad has talked about.

[Stanley Elliott, Stifel]

Perfect, that makes sense. And then, when you think about – we've heard from some other companies about larger projects resuming that had been postponed, are you all seeing that in your book, and I was curious, kind of how that relates to the comments around improved visibility and sentiment?

[Brad Barber, Chief Executive Officer]

Yeah, we certainly are seeing that in our book of business. You know, in addition to seeing jobs that have been postponed or pause, restart or start as early as expected, we've also seen opportunities, kind of get reignited in conversation around additional project, particularly in the Gulf Coast. So, it's really been all the above, but it's a general improvement in that area.

[Stanley Elliott, Stifel]

And then lastly, in terms of the weather that's plaguing much of the U.S. right now, looking back historically, I would assume that, that during the recovery phase or when things are starting to fall-out, that's actually could be a boost to the overall business just wanted to see if that was a case or not?

[Brad Barber, Chief Executive Officer]

Sure. It could be some level of a boost. Listen, I think it's going to be viewed as more pent-up demand. I spoke about our utilization trends improving every week of January. The first two weeks of February improving over our high points in January, and now we've been paused just a bit. So, that work is going to come back immediately as soon as [this fall]. As far as additional work from power lines or trees that are [ice falling down], you know, it's going to be very incremental, but notwithstanding that, we see our utilization continuing to improve as we roll through the first quarter.

[Stanley Elliott, Stifel]

Thank you very much appreciate it.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Brad Barber for any closing remarks.

[Brad Barber, Chief Executive Officer]

Sure. We’d like to thank everyone for taking the time to get on our fourth quarter and full-year 2020 call today, and we look forward to speaking to you on our next regularly scheduled quarterly call. Thank you.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.