- Net income was $21.3 million in the third quarter, compared to net income of $8.5 million a year ago.
- Rental revenues increased 24.2 percent to $156 million, up from $125.6 million a year ago.
- New equipment sales increased 39.4 percent to $68.2 million in 3Q18.
- Used equipment sales increased 36.2 percent to $30.3 million in 3Q18.
With surging rentals and soaring equipment sales, H&E Equipment Services posted a hefty 24-percent increase in sales and revenue for the third quarter of 2018.
“Demand in the non-residential construction markets we serve remained strong during the third quarter, resulting in another good quarter for our business,” according to CEO John Engquist in an earnings call.
“Our total revenues increased 24.3 percent – or $63 million – in the third quarter compared, to the same period a year ago to $322.1 million,” explains chief financial officer Leslie Magee, pointing primarily to H&E’s rental and distribution businesses.
Strong results in the distribution business, for example, continued with a whopping increase in new equipment sales of 39.4 percent, – $19.3 million – to $68.2 million.
New sales up for crawler, all-terrain cranes
“The improvement in new equipment sales was largely due to higher new crane sales, which increased $12.4 million or $36.7 million and was comprised mostly of small crawlers, all-terrain and truck mounted cranes,” Engquist explains.
“Sales of new earthmoving equipment increased 39.3 percent or $5.3 million during the quarter.”
Used equipment sales increased 36.2 percent, or $8 million, to $30.3 million, largely as a result of higher used AWP sales.
Total gross profit for the quarter was $114.7 million compared to $94 million a year ago, an increase of 22 percent, on a 24.3 percent increase in revenues.
Adjusted EBITDA grew 22.2 percent to $108.2 million compared to $88.5 million a year ago, Engquist notes of the third quarter.
“Strong results from our rental business continued as we capitalized on the healthy, non-residential construction markets,” he says.
Rental revenue jumped 24.2 percent, or $30.4 million, to $156 million. That’s up from $125.6 million a year ago.
Physical utilization remained high at 71 percent – despite the fleet growing by $236.6 million organically year-to-date, the company says.
In recent weeks, utilization has returned to industry-leading levels and H&E says it does not expect to reach 2017’s unprecedented utilization levels.
Dollar utilization was 35.9 percent compared to 36 percent a year ago, Magee says.
Improving the margins
“We achieved positive rates for the sixth consecutive quarter of 2.2 percent year-over-year and 0.8 percent sequentially,” Engquist says. “Rental gross margin has improved to 50 percent.”
The gross margin reached 35.6 percent, compared to 36.3 percent a year ago.
“The decrease in gross margin was primarily a result of a shift in revenue mix to lower margin new equipment sales revenue,” the company says.
Engquist says a shift in revenue mix to lower margin, new equipment sales resulted in pressure on consolidated gross margins.
For gross margin detail by segment, rental gross margins for the quarter were 50 percent higher during the quarter, compared to 49.7 percent in the year-ago quarter, primarily due to higher rental revenues and lower rental expense as a percentage of rental revenues.
Margins on new equipment sales increased to 11.5 percent for the third quarter, compared to 10.9 percent a year ago. And used equipment sales gross margins were 32.3 percent compared to 32.1 percent last year.
Margins on pure rental fleet-only sales were 36 percent compared with 33.7 percent a year ago. And parts and service gross margins on a combined basis were 40 percent, compared to 40.5 percent a year ago.
A steady expansion
H&E’s national footprint has been growing steadily. It has opened 89 branch locations, and 19 greenfield sites since the beginning of 2013, with eight sites acquired in the Contractors Equipment Center (CEC) and Rental Inc. acquisitions earlier this year.
The 3Q results include CEC’s legacy operations, acquired on January 1, and Rental Inc.’s legacy operations, acquired on April 2.
The strategy is to pursue acquisitions and improve density in H&E’s existing growth markets where it’s underexposed, Magee says.
“We’re also pursuing acquisitions that provide us with an entry in completely new markets that possess strong non-residential construction trends and opportunities.”
Engquist, in the October 25 earning call, insisted that fleet mix and age continue to be competitive advantages for the company.
“We have one of the youngest fleets in the industry at 33.8 months compared to an industry average of 44.5 months.”
Demand trends positive in major end-user markets
Non-residential construction represents 60 percent of the company’s total revenue.
“The industrial market remains a solid market for our business in terms of both rentals and new equipment sales,” Magee says. “It is important to note that while new project activity is a positive for us, the majority of our exposure is on existing plants for ongoing maintenance work.”
Industry data shows non-residential construction spending is up 4.4 percent through August. Continued growth is forecast for 2019, according to H&E.
While oil patch revenue accounts for only seven percent of total revenues, demand on energy-related projects remains strong, he says.
“During the third quarter, time utilization in our oil and gas-focused markets remained strong at 73.4 percent, with our most highly-exposed Midland market running more than 80 percent.”
As a result of massive energy-related activity in the Permian and Eagle Ford Basin, Magee says, “our branches that serve these markets are also benefiting from an increase in general nonresidential construction projects to support the oil patch, including housing, retail, infrastructure, schools, hospitals and more.”
The electrical grids in these areas are at capacity and require significant expansion to keep up with the extraordinary growth in power demand, notes Magee.