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..

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..

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..

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..

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

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?.

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 year one and $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..

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..

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..

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?.

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 it’s at the 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..

Excellent, thanks..

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

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?.

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 , 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..

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, 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?.

Sure. We're absolutely planning for same store growth. It is our 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..

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?.

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..

Perfect. Thanks very much. Thank you..

Our next question comes from Stanley Elliott with Stifel. Please go ahead..

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?.

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..

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?.

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. .

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?.

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.

As far as additional work from power lines or trees that are , 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..

Thank you very much appreciate it..

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

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..

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