The Manitowoc Company, Inc. (MTW) Earnings Call Transcript
July 20, 2021
Earnings Call Speaker Segments
Good day, and welcome to the H&E Equipment Services discussion on selling the sale -- on selling the Crane Business Conference Call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Jeff Chastain, Vice President of Investor Relations. Please go ahead, sir.
Thank you, Rocco, and welcome, everyone, to today's call hosted by the management of H&E Equipment Services. We will be discussing the company's decision to sell its crane business to Manitowoc Company, which was announced earlier today. Joining me this morning to discuss the transaction are John Engquist, Executive Chairman; Brad Barber, Chief Executive Officer; and Leslie Magee, Chief Financial Officer. Before I turn the call over to Brad, I need to 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 similar 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 and certain risk factors are included in the safe harbor statement contained in the company's most recent 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 call. Okay. Having completed the preliminary matters for the day. I'll now turn the call over to Brad Barber.
Thank you, Jeff, and good morning, everyone. Welcome to the Special H&E Equipment Services investor call to discuss the divestment of our Crane business. I will talk through the transaction details and expand on the strategic rationale behind the move. Then we will look at the impact on our EBITDA margin and then with the possible uses of proceeds from the transaction and other financial details. We're pleased to announce that we've entered to a definitive agreement for the sale of our crane business to a wholly owned subsidiary of the Manitowoc Company, Inc. for $130 million in cash. The transaction includes 11 full-service crane branches and the staff, which will all join Manitowoc. With this transaction, we will fully exit the crane distribution and service business. We expect the transaction to close during the fourth quarter of 2021, after meeting closing conditions, including regulatory approvals under the Hart-Scott-Rodino Act. I'd like to take this opportunity to thank all of those at H&E who have built the crane business over the years. They are a dedicated team who have served our customers well. We're delighted they will be joining a great company in Manitowoc and with the Crane business in the hands of a more natural owner, I'm confident they will have even better opportunities. This transaction is an important step in the transformation of H&E to a pure-play rental company. The overarching trend in our sector over many years has been the move away from purchasing to run an equipment, and we firmly believe this shift will continue. By focusing on rentals, we believe we can more effectively take advantage of this trend while stabilizing our revenues, increasing our margins and maximizing the potential benefits of near-term tailwinds like the economic recovery and government infrastructure spending. As I just mentioned, with this transaction, we expect H&E will become a higher margin, higher growth business by increasing and stabilizing our EBITDA margin as we focus on the equipment rental business. We have already demonstrated the potential for our rental business to grow faster than other parts of the company with a compounded annual growth rate of 11% in the 5 years leading up to 2020. This growth rate has helped to increase rentals from 32% of H&E's revenue 10 years ago to 51% in 2020. We also expect this transaction will improve our revenue stability. Demand for equipment revenue is more consistent and more resilient to market disruptions than other parts of the business. For example, last year, new equipment sales declined more than twice as much as equipment rentals. The move away from sales of new equipment should allow us to accelerate our already ambitious expansion plans. Possible uses of proceeds from the transaction include, but are not necessarily limited to, further expansion of new facilities, investment in the rental fleet and delivery of a differentiated customer experience through enhanced technology capabilities. In addition, we believe the proceeds will fortify the company's strong cash position while supporting strategic growth initiatives and our ongoing dividends. With that, I will now turn the call over to the operator to please provide instructions.
[Operator Instructions] Today's first question comes from Steven Ramsey of Thompson Research Group.
Maybe kind of start with the large cash balance you'll have once this is done, combined with the already strong preference to grow with greenfields and acquisitions in rental. Does this change or increase your appetite to grow through either of those methods. Just how does it change the growth investment path going forward?
Yes, Steven, thank you for the question. The answer in short is, it does. I mean, we have -- as I stated, we plan to open 8 to 10 warm starts this year, we feel very confident about that. As we continue to push out these warm starts, as we continue to get better clarity in the markets and the metrics in our business have continued to improve. We are likely to further accelerate those warm starts at some level. We're not going to get too far out in front of ourselves, but I think we probably will open more locations in 2022 than we will in '21. And I can tell you, we're actively pursuing acquisition opportunities as they become available. And as you referenced, our balance sheet is in good condition and we've proven over time to be sound and fundamental with our approach. But yes, our optimism is improving.
Got you. And does this take the new equipment division, the new equipment line on the P&L to 0? Or are there -- how much is left post divestiture?
We are always -- the largest rental companies in the world have some level of new equipment sales. So the answer is never 0. This will be a significant decrease in our new equipment sales. More specifically, while we were a Grove in Manitowoc dealer -- are a Grove in Manitowoc dealer covering 17 of our 23 states. We're a Komatsu distributor in 2 of our 23 states, those are Louisiana and Arkansas. And so this greatly reduces our exposure to distribution and very specifically pushes us towards our strategic goal of a pure-play rental business.
Great. And then last from me. Kind of how does this change the SG&A profile of the company, I guess, that some of it's corporate. So just curious if this changes it meaningfully?
Yes. I think there will certainly be some changes with SG&A. I don't know if I would say meaningful changes, but it takes more SG&A dollars to run a rental business than it does the distribution business. The offset to that is while I talked about in my prepared comments, the stability in our revenues, the margin associated with our revenues, the margin associated with our EBITDA will certainly all increase. But we will have some pressures on SG&A as compared to our traditional ratios.
And our next question today comes from Steven Fisher, UBS.
So it sounds like you'll still be in the parts and service business, I assume, to service the rest of your fleet and what you have on the distribution side. How important is the scale to that business now that you'll have less of it? And how should we think about the margin trajectory for that part of the business going forward?
Steven, I've understood -- well, the remaining distribution business we will have after this transaction, there's no relevance between the scale associated with cranes in these 2 states where we are a Komatsu distributor, as I referenced with the last question. So there's 0 significance to answer that question. As far as the trajectory, that's going to be more of a revenue mix issue. And we will certainly have a decline in parts and service associated with the crane divestiture, rentals carry a larger margin than all of the other typical revenue sources we have. And so as we get a little further on, there will be a positive mix shift.
Okay. I got it. And I guess in terms of the -- you mentioned the acceleration of the warm starts. You also mentioned in your release, investment in fleet and technology investment, I imagine you're going to do some of this concurrently. How would you rank those items and priorities? And do you anticipate sort of over allocation to NAVs? And should we assume that since you've led with doing more warm starts, that's really the priority for the proceeds?
Well, I would say that warm starts are the easiest priority to manage the expectations to as we could control the flow. With acquisitions, it's very much an opportunistic situation. So it's difficult to plan for exactly when we will have the capital to allocate. The good news is, we know we have the capital to allocate to an acquisition that we would determine as beneficial for H&E. And as far as same-store growth, I think as we came into 2000 -- as we came into the year, we probably were a little bit more cautious coming out of that heavy COVID year, and we see an opportunity to further grow our same-store or existing locations at a greater level moving forward. And then the differentiation we talk about with IT is really part of an elongated ongoing strategy. We have very sophisticated systems in H&E. I think many times we don't speak about them much publicly. And there may be folks who draw conclusions at our size and scale being the fifth or sixth largest company in the U.S. that may be were a deficiency to our larger competitors when we're in fact are not. And so ours is about being future ready. And that's just our stated commitment to achieving that goal.
Got it. And then just maybe one practical question. curious about the real estate footprint. I know your crane branches were at least in the same cities as your core rental. I don't know how many of these were actually co-located on the same facility, if they were co-located, how does that affect the operations of the business and the separation of the real estate assets, if it does at all?
Sure. The -- most, by a slight number, were not co-located. We had -- Manitowoc disclosed the map and showed where their locations -- their 11 locations will be, most of those were not co-located to the extent and we do have co-located locations. We've just worked out shorter-term arrangements that cover them over the next few years as they move to go to crane-only locations. As far as the allocation, I don't think there's anything to offer there. Listen, this is a typical agreement. We've got a long-standing relationship. It's well documented. And frankly, it's one of the easier things to accomplish within this transaction.
[Operator Instructions] Our next question comes from Ross Gilardi with Bank of America.
Brad, I was interested to get your perspective. I mean, the transaction is going to make you look more like the other publicly traded rental companies with your stock trading at a pretty big discount having lagged the group quite a bit. And the one difference is, obviously, the lack of specialty rental. We all know that specialty rental commands a higher multiple. But can you create or grow and then create a specialty rental business of sufficient scale in a nonearnings dilutive fashion from here, or longer term, are you better off as part of a larger rental company with an existing specialty rental business? As a way of just in the name of maximizing shareholder value kind of over the medium to long term?
Yes. Well, thank you for the question, Ross. I believe -- I firmly believe that we are in a position to close the gap on that valuation you talked about. I mean there's scale, there's geography. There's business mix, you referenced specialty. That's a more current issue. And -- but ultimately, our conclusion was that the distribution piece of our revenue was very underappreciated by the market that maybe its revenue and gross margin profile was misunderstood because when I look at our internal information and measure my EBITDA margins relative to my rental business, we're on par with anybody. I think we performed very well there. Relative to specialty, as we've commented before, we do not have any grand plans of doing -- having exceptional growth in what have become known as more of the specialty products. Conversely, we've kind of quietly continued to grow our earthmoving fleet. Our earthmoving fleet is approaching 25% of our business mix. It's distinctly different from any of our larger competitors, the types of attachments that we offer and the size of our products and the volume of those products are uniquely different. So I would tell you that earthmoving at some level is an inherent specialty that we've continued to grow. And as you know, we are looking around the fringes for other opportunities to acquire with specialty revenue.
Okay. Fair enough. And then from our perspective, it's obviously tricky to model the impact of this transaction because we don't know. It's very hard to model acquisitions that haven't occurred yet. But trying to just isolate this transaction by itself, can you give us some sense as to what the overall EBITDA margin is of the crane business, so we can -- I'd imagine you're going to have some upfront dilution that you're then going to reinvest those proceeds into something that's going to offset it over time. But just trying to understand more from a modeling impact what this would look like next year.
Ross, unfortunately, at this time, we do not. I mean the second part of your statement is certainly the case. We plan to reinvest those dollars in higher returning, more stable business as we move to this pure rental play model and continue to build out earthmoving as a specialty and look for other specialty opportunities.
Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Jeff Chastain for any closing remarks.
Okay. Well, thank you for your participation today and for your continued interest in H&E Equipment Services. We look forward to speaking with you again. And, Rocco, thank you for coordinating the call. Good day, everyone.
Thank you, sir. This concludes today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
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