H&E; Equipment Services (HEES) Q2 2022 Earnings Call Transcript

H&E Equipment Services (HEES 0.47%)
Q2 2022 Earnings Call
Jul 28, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to H&E Equipment Services second quarter 2022 earnings conference call. [Operator instructions] At this time, I would like to turn the call over to Mr. Jeff Chastain, vice president of investor relations. Please go ahead.

Jeff Chastain -- Vice President, Investor Relations

OK. Thank you, Gary, and welcome, everyone. I want to thank you for your participation today as we review our results for the second quarter of 2022. A copy of the press release covering the H&E results was issued this morning and can be found along with all supporting statements and schedules at the H&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&E website under the investor relations tab, and events and presentations. Joining me today on today's call are Brad Barber, chief executive officer; John Engquist, president and chief operating officer; and Leslie Magee, chief financial officer and corporate secretary. Turning 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 risk described in the risk factors in the company's 2021 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.

Also, we are referencing non-GAAP financial measures during today's call. You will find the 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&E Equipment.

Brad Barber -- Chief Executive Officer

Thank you, Jeff. Good morning, and welcome, everyone, to our second quarter 2022 financial review. We appreciate your participation and continued interest in H&E. Our second 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 second quarter at a record level for our company, and I believe is positioned for further growth over the second half of 2022 as we continue our same-store investment and branch expansion strategy. I believe the strategic rationale for our transition during '21 to a pure play rental focus has been validated in '22, as our intensified rental exposure continues to generate significant improvement in margins and other key financial metrics which I will cover in greater detail.

Proceed to Slide 4, please. I will begin today with comments on our improvement across the 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 second 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. Slide 6, please. Given the exceptionally robust second quarter business environment, H&E reported decisive year-over-year improvement across our key financial measures, as well as impressive sequential quarterly growth. For example, total equipment rental revenue of 227.6 million grew almost 30% from the year-ago quarter, while posting sequential growth of 14.2%.

Also, adjusted EBITDA of 121.9 million improved almost 29% on a year-over-year basis and 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 340 basis points, respectively. As I mentioned earlier, high equipment demand, strong rental rate growth, and execution of our fleet expansion strategy were meaningful factors in the quarter and proved especially influential for our rental performance. Slide 7.

Rental revenue in the second quarter reached a record 201.2 million, 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 second quarter utilization measure since 2012 and equated to a 450- and 280-basis-point improvement when compared to the year-ago quarter and previous quarter respectively. As this realization 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 smart rate pricing program.

With these factors in place, our rental gross margin in the quarter at 53.7% was the highest level achieved since 2006 and was 710 basis points ahead of the year-ago quarter and 380 basis points better on a quarterly basis. In addition, dollar 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 grew by more than 228 million when compared to the year-ago quarter and almost 148 million through the first six months of 2022.

As a result of this growth, we set yet another record with a $2 billion investment in our rental fleet. To summarize our quarterly results, I'm very encouraged by our excellent financial performance. I believe the results demonstrate the success of several strategic initiatives employed over the last 12 months. We continue to benefit from these -- we should continue to benefit from these and other initiatives as robust business climate provides additional opportunity for growth.

On to Slide 8, please. We continue to experience strong business activity with the foundational drivers of the equipment. Rental business remain solid. Nonresidential construction opportunities are plentiful 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, address and 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 second quarter. Also, it is encouraging to see leading indicators of 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 '23. 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 continue to hinder the time we deliver of a portion of our equipment orders. Due to the inability of certain manufacturing partners to meet their commitments, we reduced our client capital expenditure range to 465 million to 500 million, or a 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 -- how we see when compared to our initial internal expectations for the year. We're disappointed as this action is necessary. However, we are prepared to increase our revised expenditure level should we see improving condition with regard to the 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 first six months of the year, including our latest operation in Lakeland, Florida, which represents our ninth location in the state and increases our total branch out to 106. We expect to remain very busy over the third and fourth 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&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 9.4% 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 of the year, and we continue to penetrate highly prospective locations where our customers can source one of the industry's youngest fleets. These important factors allow us to capitalize on the opportunities 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.

And I will turn the call over to Leslie for a review of our second quarter financial performance. Leslie?

Leslie Magee -- Chief Financial Officer and Corporate Secretary

Thank you, Brad. Good morning, and welcome, everyone. I'll begin this morning's financial review on Slide 12. Our second quarter revenues of 294.7 million improved 29 million or 10.9% when compared to the second quarter of 2021.

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 201.2 million compared to 157.2 million 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% improved 450 and 280 basis points when compared to the year-ago and sequential quarter respectively.

Our fleet OEC grew 228.2 million compared to the OEC at June 30, 2021 and was up 106.5 million when compared to the first quarter of 2022. Used equipment sales in the second quarter experienced a year-over-year decline of 17 million or 47.4% to 18.8 million. We continue to capitalize on high-equipment utilization in the quarter, resulting in lower sales across all product lines. New equipment sales of 21.5 million declined 6.1 million or 22.2% compared to the year-ago quarter due largely to a decrease in other equipment sales.

Our consolidated gross profit in the second quarter increased 32.5 million on a year-over-year basis, totaling a record 132.3 million. We also set a record for consolidated gross margin in the quarter, which improved to 44.9% or 730 basis points ahead of the same quarter in 2021 and 390 basis points better on a sequential quarterly basis. The net margin expansion was due mainly to higher margins on rental and rental auto in addition to improved mix. Gross profit margins by business segment with a comparison to the same quarter in 2021 included total equipment rental margins of 48.6% compared to 41.7% and rental margins of 53.7% compared to 46.6%, a 710-basis-point increase.

Used equipment margins in the quarter improved to 47.6%, compared to 36.7% 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 second quarter increased over 70% to 50.7 million, compared to 29.7 million in the second quarter of 2021. Second 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, retail other, and improved mix, partially offset by higher SG&A. Let's proceed to Slide 14, please.

Net income more than doubled in the second quarter to 27.9 million or $0.76 per diluted share compared to 12.3 million or $0.34 per diluted share in the year-ago quarter. Our effective income tax rate in the second quarter was 26.8% compared to 28.2% over the same period of comparison. Proceed to Slide 15, please. Adjusted EBITDA in the second quarter increased to 121.9 million compared to 94.6 million 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 a company-best of 41.4% or 580 basis points, better than 35.6% in the second quarter of 2021. The strong result was primarily due to a favorable revenue mix with our growing rental business and higher margins on rental and used equipment, partially offset by higher SG&A. Next, on Slide 16, SG&A expenses totaled 82.7 million in the second quarter, up 12 million or 16.9% compared to the second quarter of 2021. 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&A expenses in the second quarter were 28.1% of revenue compared to 26.6% a year ago. We experienced 2.2 million and higher branch expansion cost in the second quarter of 2022 compared to the year-ago quarter with seven warm starts and greenfield locations added over this period. Slide 17.

Turning to capital expenditures and cash flow, gross fleet capital expenditures in the second quarter totaled 139.6 million, including noncash transfers from inventory. Net rental fleet capital expenditures in the quarter were 123 million. Gross PP&E capex for the second quarter was 13.8 million, while net PP&E capex was 12.7 million. Our average fleet age as of June 30, 2022 improved slightly to 41.2 months and continues to compare favorably to the industry average fleet age of 53.6 months.

Following our increased capital expenditures in the quarter, we experienced negative free cash flow for the second quarter of 63 million. Slide 18. On June 30, 2022, the size of our rental fleet based on original equipment costs was just over 2 billion, an increase of 228.2 million or 12.8% larger than the close on June 30, 2021. Average dollar utilization in the second quarter 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 973 million compared to 898 million at the close of the first quarter of 2022. Our net leverage was 2.2 times compared to 2.1 times over the same period of comparison. And we have no maturities before 2028 and our 1.25 billion of senior unsecured notes.

Slide 20, please. We closed the second quarter of 2022 with a liquidity position, just over 1 billion, including a cash balance on June 30, 2022 of 278.8 million and barring availability under our amended ABL facility of 740.3 million. Excess availability under the ABL facility was approximately 1.2 billion at the conclusion of the second quarter of 2022, with minimum availability as defined by the agreement of 75 million. By definition, excess availability is the measurement used to determine if our springing fixed charge is applicable.

With excess availability of 1.2 billion, 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 second quarter of 2022. And while dividends are subject to board approval, it is our intent to continue to pay the dividend. Slide 21, please.

In Summary, our excellent second quarter results 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 second quarter 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 industry.

And with these modifications in place, I believe H&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 expansion, 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&A period Operator, please provide instructions.

Questions & Answers:

Operator

[Operator instructions] The first question is from Steven Ramsey with Thompson Research Group. Please go ahead.

Steve Ramsey -- Thompson Research Group -- Analyst

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

Brad Barber -- Chief Executive Officer

Good morning, Steven. 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 '23.

But it's certainly allowing us to, you know, feel confident about maintaining our utilization at that 73% level and also continuing to sequentially achieve rate gains going forward.

Steve Ramsey -- Thompson Research Group -- Analyst

OK. Helpful. And then maybe to continue with that line of thought. Lower growth 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?

Brad Barber -- Chief Executive Officer

So it's a little of both. We did not achieve the level we hoped to in Q2 that was heavily loaded to the back side of the quarter. But weeks quickly turned into months and a handful of manufacturers, in fact, three specific manufacturers, contributed to about 80% of our decrease in our our capex guidance for the year. So, a piece of that was in Q2 and then the remainder will be filtered out across Q3 and Q4.

Steve Ramsey -- Thompson Research Group -- Analyst

OK. Helpful. And then are you placing orders now for 2023?

Brad Barber -- Chief Executive Officer

We are. We're slotting orders right now for '23. And you know, we've got -- the visibility looks good based on the current feedback from the manufacturers. And we have well more than 50% of our expected orders slotted for 2023 already.

Steve Ramsey -- Thompson Research Group -- Analyst

Excellent. Thank you.

Brad Barber -- Chief Executive Officer

Thank you.

Operator

[Operator instructions] The next question is from Stanley Elliott with Stifel. Please go ahead.

Stanley Elliott -- Stifel Financial Corp. -- Analyst

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

Brad Barber -- Chief Executive Officer

That's correct, Stanley. We do. I'll take it further. You know, in many cases, we do not have confirmed pricing.

We have more orders slotted with certain manufacturers that we may potentially need. And we're going to use, you know, that to negotiate and understand where our pricing is going to actually land. And then we'll confirm those orders. So, you know, that's always the case.

And I think as you are aware and others, you know, 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, you know, as 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.

Stanley Elliott -- Stifel Financial Corp. -- Analyst

And the rental rate environment is, you know, exceptionally strong right now. What sort of -- and I think we'll see improvement in the back half a year. But let's just say hypothetically, we don't, what sort of, you know, carryover would you get or kind of tailwind into '23? Just kind of use that as a starting base.

Brad Barber -- Chief Executive Officer

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

John Engquist -- President and Chief Operating Officer

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

You know, with our 3.5% sequential rate improvement in the second quarter, you know, it gave us the confidence to think that we can potentially do a little better than that 5% range. So, when we're thinking about an exit rate for 2022 coming out at the end of the year, you know, I think we'll be in that, you know, upper 5% range, potentially 6%. And really that's based on the current momentum. That's what we think we're going to see.

You know, we do expect sequential rate improvements in Q3 and Q4.

Brad Barber -- Chief Executive Officer

Yeah. Keep in mind, Stanley, let me add, Q3 is a pretty tough comp. I think we were up sequentially 2% last year in Q3 of '21. So, yeah, we're going to start to come up when we gained that momentum last year, but we're going to continue to get rates, as John stated.

Stanley Elliott -- Stifel Financial Corp. -- Analyst

And then last for me, you know, 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 we'd love to hear some color on how you guys have done some things to the business to help that be possible.

Brad Barber -- Chief Executive Officer

Yeah, 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 at the highest. You know, it's certainly a robust market, great demand, but it's no small accomplishment to ride consistently north of 73% utilization. And I will tell you, that is heavily both -- but we got a lot of people working very hard, and 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.

Stanley Elliott -- Stifel Financial Corp. -- Analyst

Perfect. Thanks, everybody. Congratulations. Best of luck.

Brad Barber -- Chief Executive Officer

Thank you, Stanley.

Operator

[Operator instructions] 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.

Jeff Chastain -- Vice President, Investor Relations

OK. 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&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.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Jeff Chastain -- Vice President, Investor Relations

Brad Barber -- Chief Executive Officer

Leslie Magee -- Chief Financial Officer and Corporate Secretary

Steve Ramsey -- Thompson Research Group -- Analyst

Stanley Elliott -- Stifel Financial Corp. -- Analyst

John Engquist -- President and Chief Operating Officer

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