Custom Truck One Source Inc
NYSE:CTOS
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Custom Truck One Source Inc
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Ladies and gentlemen, thank you for standing by and welcome to the Nesco Holdings Third Quarter 2019 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Noel Ryan, Investor Relations. Please go ahead.
Thank you, Sharon. Good morning, and welcome to Nesco Holdings Third Quarter 2019 Results Conference Call. Leading the call today are CEO, Lee Jacobson; and CFO, Bruce Heinemann. Also joining us is Dyson Dryden. I'm Noel Ryan of Vallum Advisors, the company's Investor Relations counsel.
We issued a press release after market closed yesterday detailing our third quarter results. Please note that we recently updated the Investor Relations portion of our corporate website to provide increased accessibility to key resources, while allowing users to sign up for real-time e-mail alerts. We encourage you to sign up for these real-time alerts if you've not done so already. I'd like to remind you that management's commentary and responses to questions on today's conference call may include forward-looking statements, which by their nature are uncertain and outside the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ materially. For a discussion of some of the factors that could cause actual results to differ, please refer to the Risk Factors section of our filings with the SEC. Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during our call in the press release issued today.
Today's call will begin with remarks from Lee Jacobson, provide an update on our third quarter results and general business conditions, followed by a financial review, Bruce Heinemann. At the conclusion of these prepared remarks, we will open the line for questions. With that, I'll turn the call over to Lee.
Thank you, Noel. For those of you on the phone, thanks very much for joining us today. As you saw in our third quarter press release, we generated solid revenue growth in both our Equipment Rental and Parts, Tools and Accessories businesses, resulting in our 13th consecutive quarter of growth in adjusted EBITDA. Demand conditions remain robust in our end markets for our core equipment rental services, as evidenced by our solid 7.3% growth in equipment rental revenue and record level of equipment on rent during the quarter. With over 50% growth in Parts, Tools and Accessories revenue year-over-year, we continue to have strong conviction in the long-term future of this business segment. While the results of this quarter were negatively impacted by a decline in Equipment Sales revenue, used rental equipment and new equipment sales will often vary from quarter-to-quarter, and any timing difference in sales revenue provides the opportunity to continue to rent the equipment and push back associated capital requirements to replace the units on rent. As a reminder, our fleet age remains 3.6 years and as such provides us with significant flexibility on the timing of any used equipment sales to optimize our returns.
There is a high rental demand for equipment that is not sold, evidenced by continued shortages for specialty rental equipment in the markets we serve and record lengths for customer rental contract periods this quarter. We continue to see strong demand in the transmission and distribution end market. Practically speaking, this work involves anything from overhead line maintenance, construction, storm recovery, pole inspections, visitation management and other hot work. As grid hardening activities increase to ensure safety and reliability, we've seen utilities entering into multiyear service agreements with contractors that rely on Nesco to provide specialty equipment as well as related Parts, Tools and Accessories on-demand throughout North America.
To that end, our average contract duration increased by more than 13% year-over-year in the third quarter. We entered the telecom market approximately 3 years ago and since that time, have established a strong position as a specialty rental leader to this industry. We continue to benefit from a growing demand for our equipment to help the telecom operators and their related contractors build and maintain both wireless and wireline networks. Most exciting opportunity in this arena for Nesco is the much-anticipated 5G rollout here in the United States. As a reminder, while, historically, Nesco did not participate in servicing the large wireless 2G, 3G and 4G cell towers, will have a meaningful participation in the installation and maintenance of 4G and 5G small cells, given that they are generally constructed at 20, 40 feet in the air, which is perfectly aligned with our fleet of bucket trucks.
Importantly, small cells 5G nodes will require both connectivity to the existing wireline communications networks and substantially increase backhaul bandwidth over predecessor technologies as well, meaning that wireline fiber installations will be a priority for carriers representing another opportunity for Nesco. Verizon expects to have deployed its 5G ultra-brand -- ultra-wideband technology to 30 markets by the end of this year, while AT&T expects to launch its nationwide 5G network in 2020. A resolution to the anticipated merger of Sprint and T-Mobile will also unlock spending by those carriers that remains on hold currently.
Turning to a discussion of our rail markets. We continued -- we see continued opportunities for share gains within both freight and commuter rail, although commuter rail remains a primary area of focus for us at this time.
Within commuter, we see multiple opportunities to capitalize on system repair and replacement, while also playing a role in the support of several major new projects underway or getting ready to begin in Los Angeles, Boston, Dallas, Las Vegas, Seattle, Northern California and Florida. In Florida, Virgin Trains is developing a major line that will go from South Florida to the Orlando International Airport, while in New York, a multibillion-dollar transformation of the Long Island railroad is underway.
In Washington, Seattle's L200 high-speed rail project will ramp up construction in early 2020. These projects and others, together with continued policy focus on system safety and reliability, create a strong backlog of activity heading into the next several years and beyond.
Now let's transition into a review of our segment results. Core ERS segment equipment rental revenue grew 7.3% year-over-year to $46.2 million from $43 million in the same period in 2018. This growth is primarily a result of a 7.3% year-over-year increase in average equipment on rent, which grew to $484.3 million as a result of our capital expenditure investments over the last year to capture excess market demand. As a result of the continued contract delays in Mexico, on September 27, 2019, we commenced the closure of our operations there. We established the business with an expectation that in reaction to national energy reforms, a private electrical contractor business would develop in the country and that CFE, the national utility, would also outsource part of its equipment availability requirements creating a demand for utility equipment rental. We've been working at creating the market for over 4 years now, and although we saw signs of progress in 2017 and '18, recent political changes in Mexico have caused us to determine it is time to discontinue these operations.
The current fleet in Mexico is approximately 140 units, of which we expect to repurpose a portion and transfer them to the United States, with the remainder to be sold internationally. All fleet metrics in 2018 and 2019 have thus been adjusted to exclude our Mexico operations. The exit from Mexico is not material to the company's financial results.
ERS fleet utilization was 79.1% in the third quarter compared to 80.5% in the same period of 2018. Our newly purchased units are going on rent quickly but there's naturally some lag between when the units are purchased and when they actually go on rent.
Our utilization calculation includes the new fleet immediately after they are delivered to the company and are available to rent. Adjusted fleet utilization, or utilization excluding fleet that has not entered into service and was purchased as part of our growth plan, was 79.5% in the third quarter. In addition, in the third quarter, 2018 nonrecurring hurricane-related restoration work in Puerto Rico had an approximately 1% positive impact on utilization. Although fleet utilization in the third quarter 2019 -- altogether, fleet utilization in the third quarter 2019 was in line with the third quarter of 2018 after adjusting for these items.
Average rental rate per day was $138.1 in the third quarter compared to $137.7 in the same period of 2018. Rate per day remained relatively constant due to our changing fleet mix, driven by expanding investment in lower-cost telecom and rail equipment. We have realized year-over-year gains in pricing by product line and continue to look for opportunities to increase prices.
Equipment sales revenue in the third quarter declined 65.1% to $4.7 million from $13.4 million during the same period in 2018. Equipment sales can be lumpy in nature, and as I mentioned, any timing differences in used sales provides us with the opportunity to continue to rent this equipment and will allow us to reduce capital spending in the future to replace the units in the fleet. For our Parts, Tools and Accessories segment, revenue grew 51.5% to $11.6 million in the third quarter versus $7.6 million in the same period of 2018. Growth was driven by the opening of new PTA locations and increased penetration of Nesco's Equipment Rental customer base. The segment has grown significantly year-over-year, but we targeted even faster growth in our original forecast. While we have been increasing penetration over our equipment rental customers, conversion of supply chains for some customers has taken longer to achieve than expected. We believe that conversion of these customers is just a matter of time, and then once they are converted, they will be repeat customers for years into the future.
Total revenue in the third quarter was $62.4 million, a decline of $1.6 million or 2.6% from the third quarter of 2018. Excluding equipment sales, revenue grew $7.1 million or 14% for the third quarter -- from the third quarter 2018. Total adjusted EBITDA increased 7.5% to $30.7 million, up from $28.5 million in the same period in 2018, mainly due to higher equipment on rent and an increase in the number of service locations within the PTA segment.
Let's now turn to M&A. We continue to be opportunistic acquirers of complementary assets at accretive multiples that are credit enhancing. Given the fragmented nature of our industry, we see the potential for Nesco to consolidate additional small, privately owned regional businesses positioning us as an acquirer of choice within the niche markets we serve. A good example of this strategy is our recent four point -- $42.2 million acquisition of Minnesota-based Truck Utilities, a specialty rentals, service and truck upfitting company serving the electric transmission, distribution, telecom and other regional end markets, which we closed on November 4th.
With more than 50 years in the industry, Truck Utilities is a well-positioned regional brand serving customers at St. Paul Fargo and Kansas City. At an asset level, Truck Utilities adds 132 specialty units to our fleet with an average age of 2.3 years and original equipment cost of $44 million. At a strategic level, this transaction provides our combined customer base with access to young growing fleet of specialty equipment, parts and accessories in addition to enhanced upfit capabilities and very significantly an expanded service infrastructure and service radius. For the last 12 months, ended September 30, 2019, Truck Utilities generated adjusted EBITDA of $8.2 million, and we believe that transaction has the potential to create approximately $4 million of annual synergies. We expect this transaction to be immediately accretive on both the pre- and post-synergy basis. We financed the transaction by drawing on our asset-based credit facility. Nesco's leverage metric declined on a pro forma basis, including anticipated synergies.
Prior to Truck Utilities, in each of our 6 acquisitions since 2012, we've acquired targets at attractive synergy adjusted multiples averaging 4.0x, and have achieved at least 100% of our target synergies in each of these transactions. We are targeting similar success for Truck Utilities and future acquisitions. In summary, we're very optimistic about the long-term outlook for Nesco. We anticipate continued stable growth in capital spending by the infrastructure sponsors within our end markets. Fleet shortages have resulted in us continuing to pass on hundreds of customer contracts each quarter and contract lengths with our customers have extended to record levels. We're excited by the opportunities for growth that lie ahead.
I'll now pass the call over to Bruce for an update on our capital structure and liquidity as well as financial guidance.
Thanks, Lee, and good morning to you all. I'll begin with a review of our balance sheet and cash flow items and finish with updated financial guidance for 2019. As of September 30, 2019, Nesco had $0.2 million of cash on our balance sheet and $82 million of availability on our asset-based credit facility. We ended the quarter with $701.1 million of total debt outstanding, including our capital leases. During the quarter, we spent $29.5 million on total capital expenditures, of which $6.5 million were maintenance expenditures and $23 million were growth expenditures. Total proceeds from used equipment sales were $4.4 million. Net capital expenditures, which represents total gross capital expenditures, less proceeds from used equipment sales were $25.1 million. The resulting change in our fleet was an increase to 4,221 average units during the quarter compared to 3,889 average units during the same period in 2018. Year-to-date, Nesco has spent $60.4 million on growth capital expenditures and $24.5 million on maintenance capital expenditures. We plan to continue to grow our fleet in order to increase adjusted EBITDA and reduce leverage while balancing fleet expenditures and cash generation. Our leverage target remains approximately 3.0x, and we plan to appropriately balance fleet expansion and adjusted EBITDA growth with free cash flow generation over the next couple of years to achieve this objective. As a reminder, Nesco's large NOL balance is beneficial from a cash generation perspective, and we don't expect Nesco will be a cash taxpayer in the United States for at least the next few years.
Turning to the full year 2019, we are updating our guidance for several factors. First, to include the anticipated results for Truck Utilities from the date of closing on November 4, 2019. Total revenue is expected to be between $255 million and $262 million, representing a 4% to 6% growth versus 2018. We expect adjusted EBITDA to be between $125 million and $129 million or 3% to 6% growth over 2018. We expect net capital expenditures, which is capital expenditures after any proceeds from used equipment sales to be between $65 million and $70 million, consistent with our original plan for the year. Pro forma to include a full year of Truck Utilities, we expect 2019 adjusted EBITDA to be between $132 million and $136 million or a 9% to 12% growth over 2018. We will provide financial guidance for 2020 on our year-end call in March of next year, which will be our standard approach going forward as a public company.
Thanks for your time this morning, and now Lee and I would be happy to answer any questions that you may have.
[Operator Instructions] Your first question comes from Chad Dillard with Deutsche Bank.
This is Kevin on behalf of Chad. Could you help us quantify the unmet demand you're seeing for specialty rental equipment in the markets you serve? And as a follow up, what is baked in your guidance in terms of rate and utilization for 4Q?
We're continuing to see a level of unmet demand, just simply equipment availability, very consistent with last year. We've continued to see that really across each of the 3 end markets, with actually more centered in transmission distribution, not surprisingly, given the balance of our revenue in that direction. Within the guidance and the utilization on rate-per-day, Bruce, you want to address those?
Yes. We assumed in the fourth quarter a little over 80% utilization of our equipment in Q4 of 2019.
[Operator Instructions] We have a question from Citigroup with Tim Thein.
Maybe just going back -- taking a step back and thinking about the updated guidance today, what has changed you going back to, call it, late June, there was the release, you had some disclosure about pulling forward some CapEx and potential upside to that full year guidance that you laid out. Just again, high level, what has kind of changed in terms of -- you mentioned the timing of used sales. Is there anything else that you would point to in terms of squaring that difference between where we are today versus where we were potentially looking just a couple of months ago?
Sure. The updated guidance is a product really of several factors. First, our decision to discontinue business in Mexico effectively, that's an adjustment of our prior guidance from $137 million to $135 million. Within our equipment rental business, we're performing better than planned in and rental revenue. But as a result of slightly higher-than-expected level of short-term projects concentrated in the telecommunications market, we're experiencing elevated servicing costs, and those are resulting in expected gross profit being slightly less than planned. But again, the top line from a rental revenue standpoint is slightly better than the plan that we put forth.
In the equipment sales side, we've seen really a characteristic that is common to our industry, it's kind of lumpy. It'll spike, it'll decline. We've seen a decline in sales that we expect to result in $2 million less than planned EBITDA. There's a good side of that, the lesser-used sales will allow us to reduce our CapEx needs in the future and retain a level of fleet that we need to support our rental revenue targets.
In our PTA business, we expected -- we expect to finish the year up 50-plus percent year-over-year. Top line growth, but it'll still be behind our plan and that will result in an EBITDA shortfall of roughly $5 million. We had a plan that assumed a high level of ramp up in the second half and we've seen that customer conversion, as I commented earlier, occur at a slower rate than anticipated in the forecast. The last factor in the change in guidance is the closing of Truck Utilities. The acquisition, we expect to contribute $1.3 million of EBITDA from closing to end of year, to hit the midpoint of our guidance of $127 million. And again on a pro forma full year basis, Truck Utilities would increase our EBITDA performance to $134 million, and that's a pre-synergies figure. So I think that's the bridge, can certainly fill in anymore on any of those points.
Okay. No, that's good. I appreciate that. And then just going back to your comments about the kind of the demands environment and the ongoing, basically, passing up on the contracts that you can't fulfill. And then that I think you said 13% increase year-over-year in terms of contract duration, all certainly supportive. Are you -- or do you expect to be able to leverage that, especially in just the longer contract terms, is there kind of a prioritization of -- or -- yes, kind of a prioritization in terms from a contract or mix perspective? What I'm getting at is, basically, do you expect to be able to leverage that into a more favorable rate structure as you layer those contracts in?
We do basically look at our pool of fleet assets from a demand standpoint, and in a high-demand environment, particularly in T&D, is a situation where we're seeking to strongly allocate that equipment to long-term deals with quality customers and certainly targeting optimum pricing as well. And optimum pricing is important. If you've got a 2 or 3-year commitment from a customer, that price point that really is going to drive the best business performance, might not be the highest individual price. If you're going to flip contracts on a 3-month basis and really bring your utilization down fundamentally to something like 75%, that higher rate of that scenario is not advantageous compared to a lower rate negotiated around a 3-year contract term commitment. So we're in a -- we on a, frankly, a contract-by-contract bases, our my senior management team, our inside personnel, inside management, sales management are looking that on a ongoing basis to try to allocate equipment to the optimum deal, starting with term, quality of customer, rate is the third factor and really trying to achieve the right balance of allocation.
Okay. And then maybe last one for Bruce. Is there any update to the expected deleveraging and the net leverage targets? Obviously, you've just closed on Truck Utilities but maybe update us in terms of what the plan calls for from a net leverage standpoint?
Yes. So this plan and guidance for 2019 gets us to around 5.4x leverage at the end of 2019, excluding the synergies from Truck Utilities. And with those synergies, we'd be a little bit lower than that at the end of the year. And again, our goal, as we talk -- as we continue our investment in the fleet and the Parts, Tools and Accessories business is to -- with increased EBITDA and pay down of debt to get towards the 3.0 as our goal moving forward.
At this time, I will turn the call over to the presenters.
Thank you very much for your time and participation this morning. We look forward to talking to you again with respect to our fourth quarter, and I'd remind you that with -- in conjunction with our fourth quarter, we'll be providing 2020 guidance. Again, thanks very much, everyone, for your time. Look forward to speaking to you in the near future. Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.