Custom Truck One Source Inc

NYSE:CTOS

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Nesco Holdings Fourth Quarter 2019 Results Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Noel Ryan. Please go ahead.

[Noel Ryan;Investor Relations;Vallum Advisors LLC]

Good morning, and welcome to Nesco Holdings Fourth Quarter 2019 Results Conference Call. Leading the call today are CEO, Lee Jacobson; and CFO, Bruce Heinemann. Also joining us is Dyson Dryden, a member of Nesco's Board. I'm Noel Ryan of Vallum Advisors, the company's Investor Relations counsel. Earlier today, we issued a press release detailing our fourth quarter results.

I would 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 of 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 risk 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, who will provide an update on our fourth quarter results, general business conditions and outlook, followed by a financial review from 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.

[Lee Jacobson, executive]

Thanks, Noel. As indicated in our press release issued premarket today, we generated broad-based growth across each of our key end markets during the fourth quarter, resulting in our 14th consecutive quarter of year-over-year growth in adjusted EBITDA. We ended the year above the high end of the range of our total revenue guidance and above the midpoint of our adjusted EBITDA guidance provided on our third quarter conference call.

Overall, we had another strong year, highlighted by sustained revenue growth in both our specialty equipment and Parts, Tools and Accessories businesses. In November, we successfully completed our acquisition of specialty equipment rental company, Truck Utilities, a transaction that expands our operated service footprint in several new markets and brings with it a young specialized fleet. Over the course of the year, we grew our fleet to capture unmet demand in the growing markets we serve, expanded our team in the Parts, Tools and Accessories business and opened 5 new locations to further support that PTA growth.

Specialty equipment rental revenue increased to 11% year-over-year in the fourth quarter, supported by record average equipment value on rent of $508.7 million. Excluding the impact of the Truck Utilities acquisition, which closed in November 2019, rental revenue increased 8% on a year-over-year basis in the fourth quarter, supported by solid underlying demand in each of the markets we serve.

Parts, Tools and Accessories revenue more than doubled on a year-over-year basis in the fourth quarter and excluding the impact of Truck Utilities, increased more than 70% on an organic basis in the quarter, driven by a combination of new regional locations and market share gains within our equipment rental customer base.

Customer activity within our core electrical transmission and distribution, telecom and rail markets is expected to accelerate in 2020. We continue to see multiyear growth in capital spending programs related to hardening and expansion of the aging electrical grid on a national basis, an accelerating rollout of a nationwide 5G network and the expansion of continued maintenance of commercial and commuter rail lines in the U.S. and Canada.

Customer backlogs are currently at record or near record levels, positioning us to achieve high fleet utilization and sustained pricing power in the year ahead. Average open contract length was greater than 13 months on the average through 2019, up from just under 12 months for most of 2018, as the growing amount of contract work is completed under the scope of long-term MSA agreements that require uninterrupted availability of key specialty rental units during mission-critical assignments.

As Bruce will discuss shortly, heightened levels of customer activity led us to pull forward capital spending planned for 2020 into the fourth quarter of 2019, a decision that allowed us to add fleet in several underserved markets. We plan to take a measured approach toward capital spending on new fleet in the current year as we seek to reduce leverage while attaining high utilization on our existing fleet investment.

With regard to inorganic growth, we remain opportunistic acquirers of complementary accretive assets that position us to leverage our scale and expertise in key geographies and industry verticals. Specifically, we are focused on rental opportunities that serve the primary infrastructure markets where we have an incumbency advantage, electrical transmission and distribution, telecommunications and rail as well as enterprises that supply parts, tools and accessories to these markets. As with prior acquisitions, this approach enables us to optimize synergies in the servicing of equipment, rental and sales execution, provide shared services, while leveraging common supply chains.

Now I'd like to review the demand conditions within each of our key end markets. In the electric transmission and distribution market, we expect the shift toward clean energy and planned investment, targeting the replacement and strengthening our nation's aging grid to continue to drive multiyear growth in spend with the utility industry having just concluded its eighth consecutive year of record capital spending.

According to EEI, U.S. investor-owned utilities invested more than $135 billion in 2019, an increase of 13% from 2018. On an absolute basis, EEI estimates distribution-related capital expenditures by utilities has doubled over the period from 2013 to 2019. The increase in distribution spending is due to the industry's hardening resilience and expansion initiatives. To that end, Nesco is actively engaged in a number of both large multiyear T&D projects and a myriad of smaller maintenance engagements.

For example, we are currently the first call for specialty rental equipment with a major contractor serving the Western Spirit transmission project, a proposed approximately 150-mile line that will collect renewable power from wind-rich, Central New Mexico and deliver approximately 1,000 megawatts of power to the existing grid in Northwestern New Mexico. The I-10 West project, a continuation of the Western Spirit line, is expected to require our equipment well into 2022. More recently, we have grown our market share at a large national contractor with significant T&D project activity in the Arizona, Kansas and Colorado markets.

In California, we expect a reacceleration of T&D activity in 2020, supported by multiple long-term projects related to hardening and system resiliency initiatives. Overall, we anticipate sustained growth within our T&D end markets during 2020. To effectively support this anticipated growth, we have targeted just over 50% of our 2019 and now planned 2020 CapEx investment in T&D product lines that have outstanding demand as well as superior investment returns.

Within our telecom end markets, we expect customer activity around the ongoing 5G adoption cycle to accelerate materially during the latter half of 2020. Between the initial deployment of small cells to support the build-out and the growing maintenance requirements of a bigger, increasingly dense network, our customers expect unprecedented activity levels within the sector in coming years. Ahead of the expected consummation of the Sprint-T-Mobile merger, contractors and carriers we serve are preparing for increased infrastructure spending, paving the way for a decade-long deployment of new and upgraded wireline networks, capable of supporting high-bandwidth, low-latency 5G applications.

We are well positioned as a key supplier of specialty rental equipment to several large telecom contractors, positioning us to capitalize on increased wireless and wireline activity in the Midwest, Southeast and Northeast markets. Overall, we see accelerating growth in telecom-related demand for our equipment as the year progresses. In preparation for this anticipated growth, we have been and plan to continue to invest in highly specialized in-demand product lines that serve both the telecom and electric distribution markets, given that much of the same equipment can be used to service both markets, allowing for an increased level of deployment flexibility and optimal fleet utilization. Within our rail markets, we continue to participate in a number of large multiyear commuter rail projects. We are currently engaged in commuter rail expansion projects in Washington, D.C., California, Texas and Massachusetts. Our investment in this market remains focused on the specialized high rail specification product lines that continue to exhibit high utilization.

As we previously announced, Nesco has discontinued our equipment rental business in Mexico. Failure of the Mexican government and the national utility to execute national energy reforms prevented the development of a private electrical contractor market. At this time, we have transferred to the U.S. or sold 65% of our Mexico rental fleet. We expect to finalize the transfer or disposal of the remainder of the fleet and complete the discontinuation of this operation in Q2.

As we look ahead to the remainder of this year, we expect revenue and EBITDA growth to be driven by a combination of increased equipment on rent, the addition and maturation of new PTA locations and contributions from the Truck Utilities acquisition.

With that introduction, let's transition into a review of our results. We generated $264 million of total revenue in 2019, a 7.2% increase from 2018. Adjusted EBITDA for the full year was $127.5 million, up 4.7% compared to 2018. Notably, core rental gross profit, excluding depreciation, increased 8.6% to $147.2 million year-over-year. 2019 adjusted EBITDA included a full year of truck -- including a full year of Truck Utilities was $134.5 million.

In the fourth quarter, total revenue increased 12.5% year-over-year to $77.2 million. Core rental gross profit increased 12.5% year-over-year to $40.8 million, with sustained reported gross profit margins above 75%, mainly due to higher equipment on rent within the ERS segment and an increase in the number of service locations, product lines and market penetration within the PTA segment. Total adjusted EBITDA increased slightly on a year-over-year basis in the fourth quarter to $35.6 million.

Within the ERS segment, in the fourth quarter, which includes contributions from both the rental and sale of new and used equipment, revenue declined 1% year-over-year to $60.8 million. Importantly, revenue from our core equipment rental business increased 11.3% to $50 million. This represents an 8.1% increase year-over-year, excluding the impact of the Truck Utilities acquisition. Strength in our core equipment rental business was offset by a $5.8 million year-over-year decline in new and used equipment sales. We experienced a sequential improvement in both new and used equipment sales versus the third quarter as customers spent what remained of their annual capital spending budgets on fleet acquisitions prior to entering a new fiscal year, consistent with the trend evidenced in past years.

Average OEC on rent increased 10% year-over-year to a record $508.7 million in the fourth quarter, driven by record unit deployments in the period and the addition of Truck Utilities. Fleet utilization was 81.5% in the fourth quarter compared to 83.5% in the same period of 2018. After adjusting for new units that have not yet been entered into service and truck utilities, utilization was approximately flat year-over-year.

The company's average rental rate per day was $138 and $140 in the fourth quarter of 2019 and 2018, respectively. The company continues to realize gains in pricing by product line, but average reported rate remains relatively constant due to the changing mix as a result of expanding investment in relatively lower cost, telecom and rail equipment.

Turning to discussion of our PTA segment. Total revenue increased by 130% to $16.4 million in the fourth quarter. This represents a 71% increase year-over-year, excluding the impact of the Truck Utilities acquisition. Segment growth was driven mainly by a combination of increased penetration of our existing customer base together with the opening of 4 new full service locations during the past year in Indiana, Florida, Arizona and Texas, in addition to a warehouse facility in California. After the opening of an additional full service facility in Pennsylvania in 2020, Nesco will be well positioned to serve each major region across the U.S.

As the only pure-play publicly traded specialty equipment rental company serving North America's T&D, telecom and rail markets, we are uniquely positioned to capitalize on a long-term trend that favors equipment rental over equipment purchase, providing our customers cost-effective, on-demand solutions designed specifically for the niche markets in which we operate. We are excited by the opportunities for growth that lay ahead and look forward to executing on the plans we have shared today.

Before I turn the call over to Bruce, I would like to formally welcome Gerry Holthaus to our Board of Directors as an independent director. Gerry brings a proven track record of success in the specialty equipment rental arena. He previously served as Executive Chairman and CEO of Algeco Scotsman and Williams Scotsman prior to its acquisition by Algeco for more than 10 years. He is currently Executive Chairman of WillScot. We believe Gerry is an exceptional addition to our Board and look forward to leveraging his expertise in the years ahead.

With that, I'll turn the call over to Bruce for his prepared remarks.

[Bruce Heinemann, executive]

Thanks, Lee, and welcome, everyone. Today, I'd like to begin with a review of our balance sheet and capital allocation priorities, followed by a preview of our updated financial guidance for the full year 2020. As of December 31, 2019, we had availability on our asset-based lending facility of $96.9 million and total net debt outstanding, including capital leases, of $750.3 million. On March 10, 2020, we amended and expanded our asset-based lending facility from $350 million to $385 million with the addition of MUFG Bank as a new lender under the facility. The increase in facility size expands liquidity, enabling continued flexibility for us to grow our fleet and opportunistically pursue complementary acquisitions.

In 2019, we invested $73 million in growth and $36.7 million of maintenance capital expenditures. We also received $28.5 million from used equipment sales and insurance proceeds from damaged equipment, resulting in net capital expenditures of $81.3 million for the full year. This exceeded the $67.5 million midpoint of our full year net capital expenditures guidance of $65 million to $70 million, as we pulled forward approximately $14 million of capital expenditures from 2020 to the fourth quarter of 2019. While investment in new fleet remains a priority for us to meet the demand we are seeing in the market, we intend to lower our investment in fleet expansions during the second half of 2020 in order to redirect cash generation toward debt reduction.

During the last 12 months, we have grown our fleet by approximately 700 units to 4,584, excluding Mexico and including the acquisition of Truck Utilities. We continue to pass on hundreds of opportunities each quarter due to insufficient fleet availability. This pent-up demand, customer demand, positions us to capture attractive unit economics. We intend to capitalize on what remains a strong market for specialty rentals with a fleet that has grown nearly 20% year-over-year.

Turning to a discussion of financial guidance. For the full year 2020, we anticipate total revenue within a range of $330 million to $360 million, implying year-over-year growth of 25% to 36%, adjusted EBITDA within a range of $142 million to $154 million, implying year-over-year growth of 11% to 21% and net capital expenditures after proceeds from used equipment sales of $45 million to $55 million.

As a reminder, our PTA segment exhibits lower margins than our core equipment rental business. The PTA segment requires minimal capital investment, given the majority of revenue in this segment is sales and service related. The higher relative growth rate of revenues in the PTA segment, in part due to a full year contribution from Truck Utilities acquisition means that it will represent a larger percentage of our overall revenue in 2020, thus, we expect our overall EBITDA margin to decline from 2019 levels, as evidenced by our 2020 guidance.

We expect net leverage to be below 5x by year-end 2020, based on the midpoint of our 2020 adjusted EBITDA guidance and our expected net debt position at the end of the fourth quarter. Disciplined balance sheet management remains a high priority as we continue to target long-term net leverage at or below 3x.

With that, we will turn the call back to the operator and open the lines up for questions.

[Operator]

[Operator Instructions] There are no questions at this time. I'll turn the call back over to the presenters.

[Lee Jacobson, executive]

Thanks very much, everyone, for joining today. That concludes our call. In the interim, should you have any questions, Noel Ryan in Investor Relations can be reached at [e-mail]. Thanks again for joining us today.

[Operator]

This concludes today's conference call. You may now disconnect.