H&E Equipment Services - Q2 2022

Transcript

Speaker 0

Good morning, and welcome to H and E Equipment Services Second Quarter 2022 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Jeff Chastain, Vice President of Investor Relations. Please go ahead.

Speaker 1

Okay. Thank you, Gary, and welcome, everyone. I want to thank you for your participation today as we review our results for the Q2 of 2022. A copy of the press release covering the H and E results was issued this morning and can be found along with all supporting statements and schedules at the H and E website, that's www.he equipment.com. Our discussion this morning is accompanied by a slide presentation, which can also be found at the H and E website under the Investor Relations tab in Events and Presentations.

Joining me today on today's call are Brad Barber, Chief Executive Officer John Enquist, President and Chief Operating Officer and Leslie Magee, Chief Financial Officer and Corporate Secretary. Turn to Slide 3 and before I turn the call over to Brad for his opening comments, I should remind you that today's 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 other 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 include the risks described in the Risk Factors in the company's 2021 annual report on Form 10 ks 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 Required supplemental disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation as supporting schedules to our press release and in the appendix to today's presentation materials. And finally, Unless specifically noted, all results and comparisons for the periods reported and discussed this morning are presented on a continuing operations basis. With the preliminary announcements out of the way, I'll now turn the call over to Brad Barber, Chief Executive Officer of H and E Equipment.

Speaker 2

Thank you, Jeff. Good morning, and welcome, everyone, to our Q2 2022 financial review. We appreciate your participation and continued interest in H&E. Our 2nd quarter results were outstanding and included several significant achievements. We continue to benefit from excellent fundamental industry conditions throughout our expanded equipment rental business.

These highly favorable conditions were led by resilient demand and impressive growth in rental rates. Also, we continue to grow our fleet, which finished the 2nd quarter at a record level for our company. Our fleet is positioned for further growth over the second half of twenty As we continue our same store investment and branch expansion strategy. I believe the strategic rationale for our transition During 'twenty one to a pure play rental focus has been validated in 'twenty two as our intensified rental exposure continues to generate I will begin today with comments on our improvement across some top level financial measures before I bridge the discussion to a review of our rental operations. Next, I will provide a view of current business conditions in the equipment rental industry and close with an update on 2022 growth initiatives.

Leslie will follow with an in-depth discussion on 2nd quarter financial results, including business segment performance measures and updates on our capital structure and liquidity. Then we will be happy to take your questions. On Slide 6, please. Given the exceptionally robust quarter business environment, H and E reported decisive year over year improvement across our key financial measures as well as impressive sequentially quarterly growth. For example, total equipment rental revenue of $227,600,000 grew almost 30% from the year ago quarter, while posting Sequential growth of 14.2 percent.

Also, adjusted EBITDA of $121,900,000 improved almost 29% on a year over year 17.8% sequentially, while posting a record 41.4% gross margin. Our adjusted EBITDA margin in the quarter exceeded the year ago and sequential quarterly margins by 580 and 3.40 basis points, respectively. As I mentioned earlier, high equipment demand, strong runaway growth and execution of our fleet expansion strategy were meaningful factors in the quarter Improved especially influential for our rental performance. Slide 7. Rental revenue in the 2nd quarter reached a record $201,200,000 improving 28% when compared to the same quarter in 2021 and 13.6% better on a sequential quarterly basis.

The result was driven in part by physical utilization of 73.2%, Representing our best 2nd quarter utilization measures since 2012 and equated to a 450 basis point 280 basis point improvement We compare it to the year ago quarter and previous quarter, respectively. As physical utilization remained strong, rental rates improved a remarkable 9.4% on a year over year basis and 3.5% sequentially. This exceptional price achievement was reinforced by strong operational execution and the use of our integrated and proprietary SmartRATE pricing program. With these factors in place, our rental gross margin in the quarter 53.7% was the highest level achieved since 2006 and was 7 10 basis points ahead of the year ago quarter 380 basis points better on a sequential quarterly basis. In addition, dial utilization reached 40.9% in the quarter compared to 35 9% in the year ago quarter and 37.6% in the previous quarter.

Finally, our ability to capitalize on the excellent business climate by growing our fleet despite ongoing supply chain disruptions contributed to our strong rental performance. Our rental fleet OEC grew by more than $228,000,000 when compared to the year ago quarter and almost $148,000,000 through the 1st As a result of this growth, we set yet another record with a $2,000,000,000 investment in our rental fleet. To summarize our quarterly results, I am very encouraged by our excellent financial performance. I believe the results demonstrate Several strategic initiatives employed over the last 12 months. We continue to benefit from these and we should continue to benefit from these and other We continue to experience strong business activity with the foundational drivers of the equipment rental business remaining solid.

Nonresidential construction opportunities are clinical across our regions of operation with no visible trends that suggest construction project delays or cancellations. We continue to experience strong demand for our rental fleet, while the industry supply of construction remains constrained. In fact, Current customer feedback addressing equipment needs suggest favorable conditions should persist as we continue through the seasonal strength of our business cycle. As of today, fleet utilization remains at levels consistent with the Q2. Also, it is encouraging to see leading indicators The construction activity remaining at levels that support expansion as reflected in the June ABI and the Dodge Momentum Index with the latter measure reaching a 14 year high.

In addition, the commencement of infrastructure projects serves as an additional source of demand toward Late 2022 and into 'twenty three. I want to reiterate, we see no evidence of disruption to the favorable industry trends at present. Under the prevailing business conditions, healthy utilization levels should continue for the balance of the year with additional improvement in rental rates expected. Before I turn the call over to Leslie, I want to provide an update on our 2022 growth initiatives. Slide 9, please.

In a business environment characterized by exceptional equipment demand, supply chain disruptions remain an inconvenient but temporary reality of our industry and to hinder the timely deliver of a portion of our equipment orders. Due to the inability of certain manufacturing partners To meet their commitments, we reduced our planned capital expenditure range to $465,000,000 to 500,000,000 or reduction of approximately 16% at the midpoint. A reduction in our planned fleet sales will mitigate the business impact of this reduction. Therefore, we expect no change in our year end OEC when compared to our initial internal expectations for the year. We're disappointed this action is necessary.

However, we are prepared to increase our revised expenditure level should we see improving condition with regard to Sourcing of equipment. Regarding our branch expansion initiative, we remain confident in achieving our goal of no fewer than 10 additions in 2022. Slide 10, please. Four new branches were added through the 1st 6 months of the year, including our latest operation in Lakeland, Florida, which represents our 9th location in the state and increases our total branch count to 106. We expect to remain very busy over the 3rd and 4th quarters of 2022 as we execute this important component of our growth strategy.

In addition, growing our operations through acquisition remains a priority for H and E as we continue the evaluation of attractive bolt on opportunities. As Leslie can attest, our strong debt capacity and liquidity position represent excellent resources in support of this growth. In closing, strong utilization of 73.2% and exceptional rental rate growth of 9 0.4% were central to our outstanding results in the quarter, and I believe both measures continue to be among the best in our industry. These excellent outcomes combined with rising rental concentration, which grew to 77% of total consolidated revenues for the quarter and successful growth initiatives are strengthening our competitive position. Additional branch openings are planned over the second half And we continue to penetrate highly perspective locations where our customers can source 1 of the industry's youngest fleets.

These important factors allow us to capitalize on created in a robust business cycle, and we're confident they will serve us well through the remainder of 2022. I'd ask everyone to move on to Slide 11, please. I'm going to turn the call over to Leslie for a review of our Q2 financial performance. Leslie?

Speaker 3

Thank you, Brad. Good morning, and welcome, everyone. I'll begin this morning's financial review on Slide 12. Our 2nd quarter revenues of 294 The increase was driven by strong appreciation in rental rates and higher utilization on a larger fleet. The same combination of factors drove a 28% increase in rental revenue, which totaled a record $201,200,000 compared to 157 point $2,000,000 in the year ago quarter.

Our rental rates were 9.4% better than a year ago and increased 3.5% sequentially. Utilization of 73.2 percent improved 450 and 280 basis points when compared to the year ago and sequential quarter, respectively. Our fleet OEC grew $228,200,000 compared to the OEC at June 30, 2021, and was up $106,500,000 when compared to the Q1 of 2022. Used equipment sales in the 2nd quarter experienced a year over year decline of $17,000,000 or 47.4 percent to $18,800,000 We continue to capitalize on high equipment utilization in the quarter, resulting in lower sales across all product lines. New equipment sales of $21,500,000 declined $6,100,000 or 22.2% compared to the year ago quarter due largely to a decrease in other equipment sales.

Our consolidated gross profit in the 2nd quarter increased 32 point and 3.90 basis points better on a sequentially sequential quarterly basis. By business segment with a comparison to the same quarter in 2021 included total equipment rental margins of 48.6% compared to 41 point 7% and rental margins of 53.7% compared to 46.6%, a 7 Used equipment margins in the quarter improved to 47.6% compared to 36.7 percent with fleet only margins, which exclude used equipment obtained through trade in, improving to 50.9% compared to 37.8%. New equipment margins rose to 15% compared to 12.3%. And finally, margins on parts sales were unchanged at 26.8%, while service margins were 64.6% compared to 68%. Slide 13, please.

Income from operations in the 2nd quarter increased over 70% to $50,700,000 compared to $29,700,000 in the Q2 of 2021. 2nd quarter margins improved to 17.2% compared to 11.2% in the year ago quarter. The improvement was driven by higher gross margin on rentals, rental other and improved mix, partially offset by higher SG and A. Let's proceed to Slide 14, please. Net income more than doubled in the 2nd quarter to $27,900,000 or $0.76 per diluted share compared to $12,300,000 or $0.34 per diluted share in the year ago quarter.

Our effective income tax rate in the Proceed to Slide 15, please. Adjusted EBITDA in the 2nd quarter increased to $121,900,000 compared to $94,600,000 in the prior year quarter, representing a 28.8% improvement against the 10.9% improvement in total revenue. The adjusted EBITDA margin in the second quarter improved to Company best of 41.4 percent or 580 basis points better than 35.6% in the Q2 of 2021. The strong result was primarily due to favorable revenue mix with our growing rental business and higher margins on rental and used equipment, partially offset by higher SG and A expense. Next on Slide 16.

SG and A expenses totaled $82,700,000 in the 2nd quarter, up $12,000,000 or 16.9 percent compared to the Q2 of 20 The increase was primarily due to employee salaries, wages, incentive compensation related to increased profitability and headcount and payroll taxes. Also, higher facilities expenses and professional fees contributed to the increase. SG and A expenses in the 2nd quarter were $2,200,000 in higher branch expansion costs in the Q2 of 2022 compared to the year ago quarter with 7 warm starts And greenfield locations added over this period. Slide 17. Turning to capital expenditures and cash flow.

Gross fleet capital expenditures in the 2nd quarter totaled $139,600,000 including non Cash transfers from inventory. Net rental fleet capital expenditures in the quarter were 123,000,000 Gross PP and E CapEx for the 2nd quarter was $13,800,000 while net PP and E CapEx was 12,700,000 Our average fleet age as of June 30, 2022, improved slightly to 41.2 months and continues to compare favorably to the industry average Following our increased capital expenditures in the quarter, we experienced negative Free cash flow for the Q2 of $63,000,000 Slide 18. On June 30, 2022, the size of our rental fleet based on original equipment cost was just over 2,000,000,000 an increase of $228,200,000 or 12.8 percent larger than the close on June 30, 2021. Average dollar utilization in the Q2 of 2022 improved to 40.9% compared to 35.9% in the prior year Quarter. Move to Slide 19, please.

Net debt at the close of the second quarter was approximately 9 $73,000,000 compared to $898,000,000 at the close of the Q1 of 2022. Our net leverage was 2.2x compared to 2.1x over the same period of comparison, and we have no maturities before 20 28 on our $1,250,000,000 of Senior unsecured notes. Slide 20, please. We closed the Q2 of 2022 with A liquidity position just over $1,000,000,000 including a cash balance on June 30, 2022 of 278 $800,000 and borrowing availability under our amended ABL facility of $740,300,000 Excess availability under the ABL facility was approximately $1,200,000,000 at the conclusion of the Q2 of 2022, With minimum availability as defined by the agreement of $75,000,000 by definition, excess Volatility is the measurement used to determine if our spring fixed charge is applicable. With excess availability of 1 point $2,000,000,000 We continue to have no covenant concerns.

And finally, we paid our regular quarterly dividend of 0.275 per common share of stock in the Q2 of 2022. And while dividends are subject to board approval, it is our intent to continue continue to demonstrate a consistent pattern of improvement across many of our key financial metrics. This favorable performance trend is Especially evident over the last 12 months, which follows our decision to reduce exposure to the distribution business while intensifying our rental concentration. Revenue growth and margin appreciation have been meaningful over this time frame with the Q2 representing our highest results for rental revenue, rental gross profit, Consolidated gross profit and margin and adjusted EBITDA margin. These impressive measures demonstrate what we can achieve in a fundamentally robust And with these modifications in place, I believe H and E is now better positioned to maximize its financial performance through the equipment rental business cycle.

Our strategic growth initiatives, which are highlighted by our record investment in our rental fleet, further branch And continued interest in bolt on acquisitions will play a substantial role in the future as we work to build a larger industry presence. With that, we are now ready to begin the Q and A period. Operator, please provide instructions.

Speaker 0

We will now begin the question and answer The first question is from Steven Ramsey with Thompson Research Group. Please go ahead.

Speaker 4

Good morning. Maybe to start with this tight supply of fleet Against very strong demand, a couple of questions on that topic. Number 1, is this the case in all geographies or regions? And then secondly, Do you think that this dynamic lasts into 2023?

Speaker 2

Yes. Good morning, Stephen. It is the case in all geographies and regions. We're witnessing the same physical utilization levels, meaning we're just consistently up year over year and staying very steady across all of the geographies we serve. As it pertains to the availability of equipment, if you're speaking from the manufacturers, it's going to continue to be tough for the remainder of this year.

And we're looking forward to seeing some level of improvement into 2023, but it's certainly allowing us to Feel confident about maintaining our utilization at that 73% level and also continuing to sequentially achieve rate gains going forward.

Speaker 4

Okay, helpful. And then maybe to continue with that line of thought, Lower gross CapEx for this year, is that fleet delivery being slower year to date or is that Expected slowing in the second half and then maybe a follow on to that, are you placing orders now for 2023?

Speaker 2

So it's a little of both. We did not achieve the level we hoped to in Q2. That was heavily loaded to the backside of the quarter. But weeks quickly turned into months and a handful of manufacturers. In fact, 3 specific manufacturers Contributed to about 80% of our decrease in our CapEx guidance for the year.

So a piece of that was in Q2 and then the remainder will be feathered out across Q3 and into Q4.

Speaker 4

Okay, helpful. And then are you placing orders now for 2023?

Speaker 2

We are. We're sliding orders right now for 2023 and we've got The visibility looks good based off of the current feedback from the manufacturers and we have well more than 50% Of our expected orders slotted for 2023 already.

Speaker 4

Excellent. Thank you.

Speaker 2

Thank you.

Speaker 0

The next question is from Stanley Elliott with Stifel. Please go ahead.

Speaker 5

Hey, good morning, everyone. Thank you guys for taking the question. Brad, along those lines on the slotting, these are just slots and not confirmed orders, right? So I mean, you have some flexibility to pull those back or Your revised expectations should the economy seemingly change from the trajectory that we're on right here?

Speaker 2

That's correct, Stanley. We do. I'll take it further. In many cases, we do not have confirmed pricing. We have more orders Slotted then with certain manufacturers that we may potentially need, and we're going to use that Negotiate and understand where our pricing is going to actually land and then we'll confirm those orders.

So that's always the case and I think as you are aware and others, If we have product on order and we decide not to take it, we are under no obligation to do so. It's always our intent to work as We're good partners with our manufacturers and that's how we operate. But should we see a shift in business, then we know how to react to it.

Speaker 5

The rental rate environment is exceptionally strong right now. What sort of and I think we'll see Prove in the back half of the year, but let's just say hypothetically, we don't. What sort of carryover would you get or kind of tailwind into 2023? Just kind of use that as a starting base.

Speaker 2

Yes. I'm going to let John respond to the rental rate piece.

Speaker 6

Yes. Sure. Good morning, Stanley. So when we started the year out this year, we had an expectation for rental rates in the mid to lower to mid single digits. Then in early Q2, with the strength of our sequential rate performance, we guided to that 5% range is really where we were thinking.

With our 3.5% sequential rate improvement in the second quarter, it gave us the confidence to think that we can So we're thinking about an exit rate for 2022 coming out at the end of the year. I think we'll Being that upper 5% range, potentially 6% and really that's based on the current momentum, that's what we think we're going to see. We do expect sequential rate improvements in Q3 and Q4. Yes. Keep in mind, Stanley, let me add, Q3 is

Speaker 2

a pretty tough comp. I think we were up sequentially 2% last year in Q3 of 2021. So yes, we're going to start to come up when we gain that momentum last year, but we're going to continue to get rates, As John stated.

Speaker 5

And then last for me, the utilization you commented best since 2012. What are you all doing kind of structurally, maybe how the business has evolved to allow you to get the improved utilization trends that you're seeing now? I get it that certainly demand is very good and a nice tailwind, but would love to hear some color on how you guys have done some things for the business to help that be possible?

Speaker 2

Yes. Listen, we've developed, obviously, systems and processes over decades. And historically, when all of our competitors Previously reported physical utilization levels, we've always set the bar the highest. It's certainly a robust market, great demand, but it's No small accomplishment to run consistently north of 73% utilization. And I will tell you that is Heavily both, but we got a lot of people working very hard.

We're proud of our team. I want to be clear on that. We were providing them good information, good visibility And our systems allow us to operate at that level consistently without taxing our ability to continue to serve our customers well.

Speaker 5

Perfect. Thanks everybody. Congratulations. Best of luck.

Speaker 2

Thank you, Stanley.

Speaker 0

Please stand by as we poll for questions. Showing no further questions, this concludes our question and answer session. I would like to turn the conference back over to Jeff Chastain for any closing remarks.

Speaker 1

Okay, Gary. Thank you. We'll go ahead and close today's call then. We appreciate you taking the time to join us today and for your continued interest in H and E Equipment. We look forward to speaking with you again.

And Gary, thank you very much for your assistance on today's call. Good day, everyone.

Speaker 0

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