H&E Equipment Services Inc (HEES) 2006 Q1 法說會逐字稿

Good day, and welcome to today's H&E Equipment Services First Quarter Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Kevin Inda. Please go ahead, sir.

Thank you, Matt, and welcome to H&E Equipment Services Conference Call to review the Company's results for the first quarter ended March 31, 2006, which were released post-market close yesterday.

During today's call, we will refer to certain non-GAAP financial measures and we've reconciled these measures to GAAP figures in our earnings release, which is available at our website, www.he-equipment.com. Conducting the call today will be John Engquist, President and Chief Executive Officer, and Leslie Magee, Chief Financial Officer and Secretary.

Before we start, let me offer the cautionary note that this call contains forward-looking statements. These statements include, among other things, our 2006 outlook and statements about our beliefs and expectations and statements and similar expressions. Forward-looking statements involve known and unknown risks and uncertainties, which would cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, the risk factors included in the Company's Annual Report on Form 10-K for the year ended December 31, 2005.

Investors and potential investors 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 except as required by applicable law, including the securities laws of the United States, and the rules and the regulations of the SEC. We are under no obligation to publicly update or revise any forward-looking statements after this call.

With that stated, I'll turn the call over to John Engquist.

Thank you, Kevin, and good morning, everyone. I'm going to start off with a review of our financial performance and key achievements for the first quarter, then discuss our outlook for '06, and end with an overview of our near-term strategic priorities. After that, I'll turn the call over to Leslie for a detailed review of the first quarter results. And then, we'll be glad to take questions.

We're very pleased with our first quarter results as every segment of our business performed at a very high level. Our revenues increased by 41.7% to $182.2 million. This is the second highest level of quarterly revenue in our Company's history, and is by far the strongest first quarter we have experienced. Typically, the first quarter is our weakest quarter of the year. Our operating profit increased by 110% to $23.1 million, which is also a record first quarter for our Company. We also increased our overall gross margin to 30.7% from 28.5% in the first quarter a year ago.

During the first quarter, we continued to see strong spending for non-residental construction, the primary driver of our business, and increased activity in the mining and petrochemical sectors, both of which are very important to our business. We believe our integrated model is really showing its strength today as we provide a one-stop solution for all of our customers' equipment needs.

We continue to focus on several core strategies, which we believe will enhance our financial performance. First of all, we are maintaining our focus on continually increasing rental rates. As I discussed on our last conference call, we increased our average rental rates approximately 12% during 2005 and approximately 13% in the fourth quarter of '05 versus the fourth quarter of '04. During the first quarter, we increased our average rental rates approximately 16% compared to a year ago. While this is a very significant rate increase over the first quarter of '05, we would not expect this magnitude of rate increases to continue each quarter as we obtained increasingly strong rate increases throughout '05.

We manage and monitor our rental rates through our proprietary rate management system and we apply a price discipline to our rental business. This system and approach continues to be very successful for us. We continue to leverage our integrated model to capture a greater percentage of our customers' total equipment spending, whether it's for rentals, purchases, or parts and service. The success of this strategy is evident by the fact that our revenues for every segment of our business increased during the first quarter from a year ago.

We apply a very disciplined approach to growing our rental fleet. During the first quarter, we grew the average size of our rental fleet as measured by original equipment cost and adjusted for the Eagle acquisition by approximately $88.4 million, or 19.1% from a year ago. For the same period, we grew our rental revenues by approximately 33%. Our strategy is to add equipment only when we see opportunities to grow revenues without sacrificing rental rates.

We will continue our expansion in the high growth market areas. We completed our acquisition of Eagle High Reach on February 28 and have made substantial progress with integrating Eagle into H&E. We have migrated their fleet management and have begun to implement their pricing models to our systems.

We're very pleased with our start to the year and the underlying trends in our business. We believe non-residential construction spending, a key driver of our business, is in the early stages of a multi-year expansion. All of the markets where we operate - the Southwest, Southeast, Gulf Coast, West Coast, and Intermountain regions of the nation, experienced solid demand and growth during the first quarter and we anticipate continued growth in these regions throughout '06. Therefore, our outlook remains very positive for '06. Based on our first quarter performance and current outlook for the remainder of '06, we are increasing our guidance. We are increasing our annual revenue guidance from the previously announced range of $675 million to $690 million to $710 million and $740 million.

We're increasing our EBITDA guidance from the previously announced $170 million to $180 million range through a revised range of $180 million to $190 million. We are also increasing our earnings guidance from the previously announced $1 to $1.15 per share, which was based upon 38.1 million shares to $1.25 to $1.45 per share based upon 37 million shares. This guidance reflects our estimated income tax rate of approximately 24%, which has been revised from our previous estimate of 29%, primarily as a result of changes during the period and the assumptions related to the valuation allowance.

Overall, we are very pleased with our first quarter results as well as the current trends in our business. Our entire company is very focused on generating solid results for our shareholders in '06. At this time, I'd like to turn the call over to Leslie for a more detailed overview, and then we'd be happy to take questions.

Thank you, John. I would like to go through out first quarter highlights as compared to the first quarter of 2005. And I'd also like to point out that our first quarter results reflect the impact of Eagle High Reach acquisition, which we completed on February 28 of this year.

Our total revenues were 182.2 million for the first quarter, compared to 128.6 million for the same period in 2005, an increase of 53.6 million or 41.7%. Revenues increased for all reportable segments, primarily as a result of increased customer demand for our products and services. Total revenues related to Eagle included in our 2006 operating results were 3 million.

At the end of the first quarter, the original acquisition cost of the rental fleet was 600.5 million, up 140.7 million from 459.8 million at the end of the first quarter of 2005, which includes the fleet acquired through the Eagle acquisition. For the first quarter, dollar utilization increased to 39.2% from 35.1% a year ago.

Our revenues from equipment rentals for the quarter increased 13.4 million, or 33%, to 54 million from 40.6 million. The increase is primarily a result of improved rental rates and increased volume as a result of maintaining a larger average fleet size. Rental revenues increased for all four core product lines - revenues from aerial work platforms increased 8.4 million, cranes increased 1.3 million, earthmoving increased 2.5 million, lift trucks increased 800,000, and other equipment rentals increased 400,000. Total equipment rental revenues related to Eagle included in our 2006 operating results were 2.4 million, of which approximately 85% of these rentals were for aerial work platforms.

Our new equipment sales for the quarter increased 25.4 million, or 83.8%, to 55.7 million from 30.3 million. Sales of new cranes increased 11.8 million, aerial work platforms increased 3 million, new earthmoving sales increased 10 million, and new lift trucks decreased 700,000. Other new equipment sales increased by 1.3 million. Our used equipment sales increased 6.1 million, or 23.8%, to 31.7 million from 25.6 million a year ago. For the quarter, our used equipment sales from the fleet were approximately 139% of net book value, as compared to 132.8% of net book value last year. We continue to experience extended manufacturer late times for new equipment and the demand for well-maintained used equipment has also increased.

Total used equipment sales revenues related to Eagle included in our 2006 operating results were 200,000. Our parts sales increased 2.9 million, or 17.7%, to 19.3 million from 16.4 million. Our service revenues increased 3.1 million, or 33.7%, to 12.3 million from 9.2 million last year. These increases related primarily to increased customer demand for parts and service support.

Our total gross profit was 56 million, compared to 36.7 million a year ago, a 19.3 million or 52.6% increase. A significant portion of the increase in gross profit was the result of increased rental revenues combined with a 7 percentage point improvement in rental gross margins. In addition, due to the increasing customer demand for new and well-maintained used equipment, we were able to sell our equipment at higher gross margin. Our total gross profit margin was 30.7%, an increase of 2.2 percentage points from the 28.5% gross profit margin a year ago.

Total gross profit related to Eagle included in our operating results was 1.2 million, of which the equipment rental operations of Eagle contributed 1--.

Please stand by while we reconnect our speakers.

Do you remember where you were?

Yes.

Okay.

Please go ahead.

Okay. Sorry about that. We have a--had a power surge and obviously got cut off from the line. I'll pick up where I believe we left off. Total gross profit related to Eagle included in our operating results was 1.2 million, of which the equipment rental operations of Eagle contributed 1 million.

New equipment sales gross profit increased to 7.2 million from 3.8 million for the first quarter of 2005. Used equipment sales gross profit increased to 7.8 million from 5.8 million for the first quarter of 2005. Our gross profit improved for every product line during the quarter except for gross profit on the sale of used cranes as a result of lower volume of used crane sales.

The improvement in both new and used equipment sales gross profit is the result of increasing customer demand and the mix of equipment sold.

Parts gross profit was 5.8 million compared to 5 million, and service gross profit was 7.8 million compared to 5.9 million from the year ago period. The increase in both parts and service gross profit is primarily a result of higher sales volume and the mix of parts sold.

Income from operations increased 12.1 million or 110% to 23.1 million from 11 million in the first quarter of 2005 from both higher revenues and gross margins. Income from operations as a percentage of total revenues increased to 12.7%, compared to 8.5%.

Net income increased 8.9 million to 9.9 million from 1 million in the first quarter of 2005. Net income as a percentage of total revenues increased to 5.4%, compared to less than 1% a year go.

Our earnings per share for the quarter was $0.29 based on 33.5 million of shares outstanding. SG&A expenses were 33 million, compared to 25.8 million last year, a 7.2 million, or 27.9%, increase. The increase was primarily related to increased headcount, higher sales commission, performance incentives, and benefits.

As a percentage of total revenues, SG&A decreased 18.1% from 20.1% for the first quarter of last year. EBITDA increased 17.2 million, or 70.5%, to 41.6 million from 24.4 million in the first quarter of 2005. EBITDA as a percentage of total revenues increased to 22.8% compared to 19% in the first quarter of 2005.

As John mentioned, we are very pleased with our first quarter results and the current trends we're seeing in our business. And with that, I believe we'd like to move to the Q&A session. So if the operator would please provide the instructions for Q&A.

Hello?

Thank you. (Operator Instructions.) We'll go first to Gary McManus of J.P. Morgan.

Good morning, John and Leslie.

Good morning.

How are you, Gary?

Doing great. Hey, great quarter.

Thank you.

Hey, I'm looking at your revenue guidance and I'm going to take the mid-point, 725 million expected this year, and you did 182 million the first quarter. So that leaves 543 million for the rest of the year. And I think you're getting about 30 million from Eagle, right? So, ex Eagle, it suggests about 513, and 513 is only about 8% growth from a year ago. And so that seems to me to be pretty conservative. And then, if I take the 513 and divide it by the three remaining quarters, it's about 170 million, which is below what you did in the first quarter, which is typically a seasonally weak quarter. So can you elaborate your thoughts on your revenue guidance? It does appear to me to be conservative.

Well, let me say that we don't see our business slowing. The trends in our business are strong and the outlook for non-rev construction. The primary driver of our business is very strong. We in no way are implying that our business is slowing because it's not. I think that Leslie and I are conservative by nature and I think that we're going to be going up against increasingly more difficult comps. But we're certainly not implying that our business is slowing.

Okay. I think before you said you expect in 2006 rental rate growth of 6%, and it was 16% in the first quarter. So can you give me an update on what you expect rental rate growth to be for the rest of the year?

Sure, Gary. Look, it's not going to be 16%. But it's going to exceed 6%. We're comfortable with that. It will be in the upper single-digits, the 10% range.

Okay. And the last question I have is can you talk about your capital spending plans--well, first, what you did in the first quarter roughly speaking in terms of purchases, rental equipment, and what you expect for the full year?

Sure. Our growth CapEx for the first quarter was 72.8 million and that breaks down to growth CapEx of 7.2 million, maintenance CapEx of 35.3 million. And then, I'd like to point out that we purchased equipment that was under operating lease during the quarter of 30.3 million. So while that equipment moved on balance sheet, it should not be reflected as an increase in OEC because that equipment has always been reflected in our prior reporting of OEC.

And how about some full year guidance roughly or a range?

We're not giving CapEx guidance.

Okay. All right. Thank you.

Sure.

Gary, one other thing I'd like to comment on is one of the reasons for that 16% is because we have--in rate increases--we have a significant crane component to our fleet, as you know. And there's just a tremendous supply and demand imbalance there. Cranes are difficult to get and we're really seeing tremendous rate increases in that segment of our business.

Sounds like a great position to be in right now. Thanks.

Thank you.

We'll take our next question from Jamie Cook with Credit Suisse.

Hi. Good morning.

Good morning, Jamie.

Good morning.

Nice quarter. My first question in terms of--could you just speak a little bit about what you're seeing by region in the areas that you participate? Whether there were some regions that were stronger? And can you also talk about rental rates by region?

Sure. I'll be glad to. I would point out that we're very, very fortunate with our footprint. We're in the Southeast, Gulf Coast, Southwest, Intermountain region, and in Southern California. We have no weak areas in our footprint. Our business is extremely strong across our footprint. If I had to pick our strongest two regions it would be the Intermountain region led by Vegas, Phoenix, Salt Lake. Those are extremely strong markets for us. And then, the Gulf Coast is really coming on strong for several reasons. One, we've seen a significant pickup in the petrochemical sector, which is a big driver of our business in the Gulf Coast. And then, obviously, what's going on from a clean-up and rebuilding standpoint from the Hurricanes.

So we're very, very fortunate with our footprint. I don't think we could be better positioned than we are.

Okay. And then, can you--I mean, your rental rates. I understand that it's probably not sustainable given the comps you have coming up. But they still were well above I think most people's expectations. What are you seeing from the competition in the areas that you participate? Are you seeing similar rate increases or are--I'm assuming given your sales growth there is no market share loss or anything like that. But I guess if you could expand on that a little.

No. I think that we are outpacing the sector in rate increases. I think there's several reasons for that. I think we are maniacally focused on rate increases. It's something that we talk about every day and that we preach and we preach and we preach. We're very focused on it. I think we have a very strong rate management system in place that is allowing us to really measure rate performance.

And then, as I stated earlier, we've got a significant crane component to our fleet. And the supply and demand imbalance there is very, very significant and it's allowed us to get some tremendous rate increases on the crane side of our business. But a lot of it has to do with focus and the systems that we have in place.

Great. And then, last, can you just sort of give us an update on what you're seeing out there in terms of acquisition opportunities and whether we should expect any in 2006?

Jamie, acquisitions are a part of our plan. We've always said that. We're--what we're interested in is small accretive acquisitions that we can really integrate into our business model and our culture. This is a very fragmented sector. There's a lot of small players out there, and I think we're going to certainly have opportunities going forward to look at some really interesting acquisitions. We don’t' have anything in place right now, but that is definitely part of our business plan.

Great. Thanks and great quarter.

Thank you.

(Operator Instructions.) We'll go next to David Bluestein with UBS.

Good morning.

Hey, David.

Good morning.

A couple of questions. First, Leslie, the tax rate came in a little lower than I expected. What are you looking for for 2007?

Yes. We had a one-time adjustment to our [indiscernible] taxes with regards to the valuation allowance.

Leslie, are you still there?

Please stand by while we connect our speakers.

Hello?

John?

Yes.

Sorry, David. Don't take it personally.

David, I'm sorry. We've got a phone problem here. We will--if it happens again, we'll dial right back.

Got you.

Okay. So anyway, we have the one-time adjustment related to the valuation allowance. So I would think looking forward you could use something more like a 36 to 38% effective tax rate.

Okay, terrific. Second question. One of your competitors early in the week mentioned some softness in the Southwest. They focused on record levels of rainfall in California. Did you see any of that? Did some of the machines come back to the lot?

There's no question that it was exceptionally wet first quarter in Southern California, abnormally so. And I think that we felt that a little bit. But I can tell you, David, the market's there and it's going to be very strong. But it certainly impacted the first quarter.

Okay. And then, last question. Can you talk about where you are seeing capacity constraints? And I guess, you mentioned getting deliveries of cranes. Are you seeing--are you having some issues with lead times from [Kamatzu]--I guess that's one. Let me start that question.

Yes. We--Kamatzu is actually allocating equipment. So--now we've ordered heavily there and I think we've done a pretty good job. We have enough equipment coming to support our business plan, but there are supply constraints on the--with Kamatzu. Significant supply constraints with Manitowoc Grove, and the aerial manufacturers probably are doing--in a little better shape there, but depending on models, there can be some significant lead times there too.

Okay. And then, the last question - capacity constraints. Where are you on parts and how are you doing with service technicians?

Very well. As we've reported in the past, we added something over 70 technicians in '05. That trend is continuing. We added a significant number of technicians in the first quarter and will continue to do so because our work force is operating at capacity. And when we bring technicians on, we're certainly able to put them to work.

Terrific. Thanks a lot.

(Operator Instructions.) And we have a follow-up from Gary McManus with J.P. Morgan.

Yes. In the equipment rental segment, you had like 33% revenue growth, but if I looked at the cost of equipment ex depreciation, that was down 8%. So this is like the fifth quarter in a row where you had pretty strong revenue growth in that segment and the cost of equipment ex depreciation is down. So can you kind of explain to me, just elaborate, what's going on that you're able to get the costs down there? And do you expect that continuing here near term?

I think there's a couple of factors there, Gary. One of those would be our maintenance and repair expenses. We have continued to manage those over the course of the last year or so. In addition to that, in the first quarter of '06, we purchased that equipment that was on operating lease, so the lease payment will reduce. So if you're excluding depreciation, you would see the impact of that.

And so, again, would you expect that kind of trend to continue? That you continue to decline--have this expense level decline for the rest of the year?

To some level. I think we still have some room for improvement there, but that will probably moderate.

Okay. That's it for me. Thanks.

Thank you, Gary.

We'll take our next question from Phil Wilpacelli with CIBC World Markets.

Yes. Hi. This is actually [Tara Shay] in for Phil. I was just wondering if you can go over your dollar utilization rates again, and could you actually also tell us about the average age of your fleet?

Sure, I'd be glad to. I believe our dollar utilization for the quarter was 39--what--?

.2%.

39.2%. That's up about 400 basis points from the prior year's quarter. Our average age on the Head and Engquist standalone fleet was pretty much flat in a little over 41 months. When you factor Eagle's fleet into that it raised us to something over 44 months because they had a significantly older fleet than we do.

Great. Thank you very much.

We'll take our next question from [Michael Sweeney] with [Trilogy].

Yes. Can you update us on any plans that the financial sponsors might have to conduct a secondary offering here?

I really don't have anything to say in that regard and nothing has been decided in that area.

Do you know--do you know what the lockout provisions are for the financial sponsors?

Six months.

Michael Sweeney. Okay. Thanks.

(Operator Instructions.) We'll go next to [John Fulton] with [Gilder].

Yes. Good morning. Regarding Eagle, how long do you think it will take to reprice their book? And what do you think the order of magnitude of price increases will be?

John, when we get them fully integrated into our systems, which will be early June I believe, we're going to start seeing significant rate increases there very quickly. Again, it's the age old issue - you can't manage it if you can't measure it. And when we have them on our systems, I think we'll see rate increases in the range of 10% very quickly.

Okay. Thank you.

You bet.

And there are no further questions at this time. I would like to turn the call back over to Mr. Engquist for any additional or closing remarks.

Well, I appreciate everybody being on the call. We had a great quarter. We're excited about our business. And I said earlier, we're very focused on generating solid results for our shareholders. So we look forward to speaking with everybody on our second quarter call. Thank you.

Thank you for your participation. You may disconnect at this time.