H&E Equipment Services Inc (HEES) 2006 Q2 法說會逐字稿

Good day and welcome to today's H&E Equipment Services second-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.

Welcome to H&E Equipment Services' conference call to review the Company's results for the second quarter ended June 30, 2006, which were released post market close yesterday. During today's call we will refer to certain non-GAAP financial measures. We have reconciled these measures to GAAP figures in our earnings release, which is available on our website at 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 will include forward-looking statements within the meaning of the federal securities laws. These statements include, among others, statements regarding our anticipated financial and operating results, our business strategy, and our likelihood of our success in expanding our business. Forward-looking statements are only predictions and are not guarantees of performance.

All forward-looking statements speak only as of the date of this call. You should not place undue reliance on our forward-looking statements. You should be aware that the occurrence of the events described in the Risk Factors section in our annual report on Form 10-K for the year ended December 31, 2005, and our quarterly report on Form 10-K for the quarterly period ending June 30, 2006, could harm our business prospects, operating results, and financial condition.

With that stated, I will now turn the call over to John Engquist.

Thank you, Kevin, and good morning. I will start off with a review of our financial performance and key achievements for the second quarter, then discuss the trends in our business and our outlook for 2006. I will then turn it over to Leslie for a detailed review of our second-quarter financial results. We will then open the call for questions.

We are extremely pleased with our second-quarter results, as they not only validate our beliefs about the strength of the non-residential construction market, but also validate the leverage we possess in our integrated business model and our associated core strategy. The second quarter resulted in record performance for our Company, with every segment of our business delivering extremely strong results.

Our revenues increased by 47.1% to $202.5 million. This is the highest level of quarterly revenue in our Company's history and is by far the strongest second quarter we have experienced. Every business segment generated record levels of revenue this quarter.

Our operating profit increased by 138.1% or $20.3 million to $35 million, another record. We also increased our overall gross margin to a record 33.7%, from 30.6% in the second quarter a year ago. This level of performance resulted in record levels of net income and EBITDA, which increased 360.5% and 93.8%, respectively.

Our strong performance was and will continue to be driven by several key elements. First, the market we serve remained extremely robust. Spending for non-residential construction, the primary driver of our business, shows continued strength in the geographic regions we serve. We also continue to see increased activity in the mining and petrochemical sectors, both of which are important to our business.

Second, we believe our competitive position remains very strong, as evidenced by our results. We continue to compete with the same players and have seen little change in terms of the competitive landscape. We believe our integrated business model is really showing its strength as we provide a one-stop solution for all of our customers' equipment needs.

Third, our focus on several core strategies is clearly enhancing our financial performance. We continue to focus on and are having great success in raising rental rates. We raised rental rates 12% in 2005; 16% in the first quarter of 2006; and 11% in the second quarter of 2006. While we expect rate increases to moderate somewhat in the second half, we still anticipate double-digit rate increases for the year.

We are also focused on leveraging our integrated model to capture a greater percentage of our customers' total equipment spending, whether it is for rentals, purchases, or parts and service. The success of this model is clear, as we are growing revenue across every operating segment.

Diligently expanding our rental fleet is also key to our success. The average size of our rental fleet in the second quarter as measured by original equipment costs and including the fleet acquired in the Eagle acquisition, increased by approximately $129 million or 27% from the average fleet size in the second quarter of 2005. For the same comparable period, we grew our rental revenue by approximately 40.4%.

We add equipment only when we see opportunities to grow revenues without sacrificing rental rates. Our equipment investment this quarter clearly generated the results we expected.

Expansion into high-growth market areas also remains a key strategy for us. With the acquisition of Eagle now consummated and subsequent integration efforts now mostly completed, we are beginning to fully leverage our West Coast presence. We will continue to evaluate the expansion of our business into desirable markets.

Before I turn the call over to Leslie, let me address our guidance for the remainder of the year. We believe our outlook remains very positive for the remainder of this year, as we continue to see strength in non-residential construction spending; and we remain encouraged by our strong performance this quarter and the current trends in every aspect of our business.

As a result and based upon currently available information, we are increasing our outlook for 2006, while at the same time we are revising our previously announced earnings guidance for the impact of two significant non-recurring charges.

We are increasing our 2006 revenue outlook from our previously announced range of $710 million to $740 million to approximately $750 million to $780 million. We expect our 2006 EBITDA to decrease to a range of approximately $141 million to $151 million, which includes the impact of non-recurring charges.

These non-recurring charges are comprised of an estimated $41 million loss on early extinguishment of debt related to the Company's debt restructuring, which will be recorded in the third quarter, and a onetime charge of $8 million to SG&A expenses associated with the termination of a management services agreement concurrent with our Initial Public Offering recorded in the first quarter of 2006.

We expected adjusted EBITDA in the range of $190 million to $200 million, which is adjusted to exclude the impact of the aforementioned non-recurring items totaling an estimated $49 million. Previously announced EBITDA guidance, which was given prior to the events resulting in these charges and did not take these non-recurring items into account, was a range of $180 million to $190 million.

We are also revising our 2006 earnings guidance from the previously announced range of $1.25 to $1.45 per share to approximately $0.55 to $0.65 per share, based on 37 million shares outstanding. Our revised earnings guidance is reflective of the solid strength in our business; but is also offset by the impact of the significant non-recurring items. The impact of these non-recurring items to our annual earnings guidance is an estimated reduction of $1.05 per share.

Our guidance reflects an estimated effective income tax rate of approximately 21%, which has been revised from its previous estimate due primarily to the expected loss to be recorded on early extinguishment of debt.

We define adjusted EBITDA for our annual guidance as discussed above as EBITDA adjusted for the fees paid in connection with the termination of a management services agreement in the first quarter of '06 and the estimated loss to be recorded in the third quarter on the early extinguishment of debt in connection with our debt restructuring, which was completed on August 4, 2006.

Overall, we are extremely pleased with the second-quarter results and hope our investors are as well. Our entire Company is focused on generating solid results for our shareholders in 2006. I will now turn the call over to Leslie to discuss our second-quarter financials in more detail.

Thank you, John. I will first review our second-quarter highlights as compared to the second quarter of 2005. As a reminder, our second-quarter results do reflect the first full-quarter impact of the Eagle High Reach acquisition, which was completed on February 28 of this year.

Our total revenues were $202.5 million for the quarter compared to $137.7 million for the same period in 2005, an increase of $64.8 million or 47.1%. Revenues increased for all reportable segments primarily as a result increased customer demand for our products and services. Total revenues related to Eagle included in our second quarter operating results were $9.6 million.

Our revenues from equipment rentals for the quarter increased $18.4 million or 40.4% to $64 million from $45.6 million. The increase is primarily a result of improved rental rates and increased volumes as a result of maintaining a larger average fleet size.

Rental revenues increased for all product lines. Revenues from aerial work platforms increased $13.4 million; cranes increased $1.4 million; earthmoving increased $2.2 million; lift trucks increased $800,000; and other equipment rentals increased $600,000. Total equipment rental revenues related to Eagle included in our second quarter results were $7.3 million, of which substantially all of these rentals were for aerial work platforms.

Our same-store growth in our rental business was also strong, at a 24.3% increase in comparison to the second quarter of 2005.

At the end of the second quarter, the original acquisition cost of the rental fleet was $614.3 million, up $128.2 million from $486.1 million at the end of the second quarter of 2005. This does conclude the fleet acquired through the Eagle acquisition.

Our dollar utilization increased to 42.2% from 38.2% a year ago. On average, original acquisition cost of the rental fleet increased only 27.1%, while second-quarter rental revenues increased 40.4%.

For the first half of 2006, our fleet has grown $92 million as measured by original acquisition cost and including the fleet acquired through Eagle. Our fleet grew approximately $71 million in the first quarter as a result of the Eagle acquisition.

Our new equipment sales for the quarter increased $23.5 million or 70.4% to $56.9 million from $33.4 million. Sales of new cranes increased $14.9 million. Aerial work platforms increased $3.1 million. New earthmoving sales increased $3.5 million. New lift trucks increased $700,000. Other new equipment sales increased by $1.3 million.

Our used equipment sales increased $12.2 million or 51% to $36.1 million from $23.9 million a year ago. For the quarter, our used equipment sales from the fleet were approximately 140.1% of net book value as compared to 133.7% of net book value last year.

Pricing has continued to strengthen, as sales from the fleet were approximately 139% of net book value in the first quarter of 2006. Total used equipment sales related to Eagle were $1.3 million.

Our parts sales increased $3.4 million or 19.1% to $21.2 million from $17.8 million. This increase was primarily due to increased customer demand. Our service revenues increased $3.5 million or 35.4% to $13.4 million from $9.9 million last year, also primarily as a result of increased customer demand for our service support. We have grown our technician base approximately 8% on an organic basis through the second quarter to meet the demand in our markets, and we will continue to add technicians.

Our total gross profit was $68.3 million compared to $42.2 million a year ago, a $26.1 million or 61.8% increase. A significant portion of the increase in gross profit was again the result of increased volume of equipment rentals and increased rental rates, which resulted in an increase in excess of 7 percentage points in rental gross margin.

Also, our rental cost of sales as a percentage of total rental revenue has declined by approximately 7 percentage points, which is a result of the operating leverage in our rental business when we're growing our fleet.

Our other operating segments continued to show increasing margins as well. We were able to sell our equipment at a higher gross margin due to the increase in customer demand for new equipment and well-maintained used equipment. Our product support margins have also improved 2 percentage points.

Thus our total gross profit was 33.7%, an increase of 10.1% from the 30.6% gross profit margin a year ago. Total gross profit related to Eagle including our operating results was $4.7 million, of which the equipment rental operations of Eagle contributed $4.2 million.

Equipment rental gross profit increased $13.2 million or 62.3% to $34.4 million from $21.2 million last year. New equipment sales gross profit increased to $7.2 million from $3.9 million for the second quarter of 2005. Use equipment sales gross profit increased to $10.3 million from $6 million.

Our gross profit increased for all product lines during the quarter. The improvement in both new and used equipment sales gross profit is a result of increasing customer demand and the mix of our equipment sold.

Parts gross profit was $6.2 million compared to $5.1 million. Service gross profit was $8.6 million compared to $6.2 million from the same period a year ago. The increase in both parts and service gross profit is primarily a result of higher sales volume and also the mix of parts sold.

Income from operations increased $20.3 million or 138.1% to $35 million from $14.7 million in the second quarter of 2005 on higher revenues and gross margins. Income from operations as a percentage of total revenue increased to 17.3% compared to 10.7% a year ago.

Net income increased $15.5 million to $19.8 million from $4.3 million in the second quarter of 2005. Net income as a percentage of total revenues increased to 9.8% compared to 3.1%.

Earnings per share for the quarter were $0.52 based on 38.1 million diluted shares outstanding.

SG&A expenses were $33.4 million compared to $27.3 million last year, a $6.1 million or a 22.3% increase. This increase was primarily related to increased headcount, higher sales commissions, performance incentives, and benefits. As a percentage of total revenues, SG&A decreased to 16.5% from 19.8% a year ago, again reflecting operating leverage in our business.

EBITDA increased $27.2 million or 93.8% to $56.2 million from $29 million in the second quarter of 2005. EBITDA as a percentage of total revenues increased to 27.8% compared to 21.1% in the second quarter of 2005.

Our rental fleet CapEx spending in the second quarter was $55.5 million of gross CapEx and net CapEx of $24.7 million. Non-rental fleet CapEx in the second quarter was $4.6 million on a gross basis and $4.4 million on a net basis.

At the end of the second quarter, the average age of our fleet was 44 months, which is one month younger than our fleet age at the end of March. We have made very good progress in lowering Eagle's fleet age in a very short period of time. The Eagle fleet age de-aged three months from the end of the last quarter.

Lastly, I would like to make a few remarks regarding our balance sheet. As you know, we recently priced and closed our $250 million aggregate principal amount of our senior unsecured notes due 2016. The annual interest rate on these notes will be 8 3/8%. We used the $245.3 million in net proceeds of the offering, together with cash on hand and borrowings under our existing senior secured credit facility, to consummate our cash tender offer and consent solicitation. We tendered for our 11 1/8% senior secured notes due 2012 and our 12.5% senior subordinated notes due 2013.

The total principal amount accrued in unpaid interest, consent fee amounts, and premiums paid for the senior secured notes was $217.6 million. This amount represents the tender of $195.5 million or 97.8% in principal of our senior secured notes.

The total principal amount accrued in unpaid interest, consent fee amounts, and premiums paid for the senior subordinated notes was approximately $60.1 million. 100% of our senior subordinated notes were tendered.

In connection with the transactions I just mentioned, we expect to record a onetime loss on early retirement of debt in the third quarter this year of an estimated $41 million, or approximately $32 million after-tax. This charge reflects payment of the $26 million of tender premiums and fees and expenses in connection with the tender offering consent solicitation, combined with the write-off of approximately $5 million of unamortized deferred financing cost and $10 million of remaining unamortized original issue discount on the old notes. Just a reminder, this is a preliminary estimation of the loss on early retirement.

We believe our improved capital structure provides us much greater financial flexibility going forward. The refinancing will reduce our annual interest expense and improve our future cash flows, excluding the onetime cost of extinguishing the debt.

We're extremely pleased with our second-quarter results and the current trends we see in our business. With that, operator, we would like to now move to the Q&A session, if you will please provide the instructions.

(OPERATOR INSTRUCTIONS) Jamie Cook with Credit Suisse.

Congratulations on a nice quarter. I guess my first question, Leslie, can you just remind us, what are you assuming for interest savings in the second half of the year as a result of the refinancing?

We are assuming it is, on a pre-tax basis, 5 to $6 million. On an annual pre-tax basis.

Okay, 5 to $6 million. I guess my question just relates to your guidance. If you back out all the onetime charges, given the interest savings, the fact that you're anticipating rental rates to increase, I think, John, you said in the double-digit range in the second half of the year versus your previous expectation of about 6%, I am having a hard time reconciling your guidance.

So I'm just wondering, one, whether it's conservatism; or two, whether there's any concerns out there given we are hearing things of a slowing economy, or just how you look at the markets.

Jamie, we are seeing absolutely no slowing. We have gone through financial review meetings recently with our various regional managers, and we are seeing no slowdown whatsoever in the markets we serve. So that should not be a concern [to anyone].

Okay, so it looks like it is just your usual conservatism there.

That might be fair.

Okay. Then can you just talk about -- I mean, last quarter you talked about supply constraints especially on the crane side; whether that has eased at all. Or if you could just talk about that by your different pieces of business.

The crane side has not eased. They are very, very supply constrained and have very extended lead times. Most manufacturers, the lead times have eased somewhat. Certainly on the aerial side it has, I think most specifically as it relates to reach forklifts. The manufacturers have caught up somewhat. So we are seeing somewhat improved availability from most manufacturers, but certainly not from the crane manufacturers.

Then, John, just my last question as it relates to the industry. You know, it seems like we are seeing some more consolidation again I guess in the rental industry. I guess just sort of your view on how that affects the market and how H&E Equipment will participate.

Obviously, there's some big deals going on out there. I don't really see that having much of an impact on us. I mean, the acquisition in Nations, I think Sunbelt or Ashtead already was at a size where they were getting preferred pricing. I don't see that giving them any kind of competitive advantage from a price standpoint. So I don't see any negative to that.

I can tell you part of our business plan is to look for accretive acquisitions. I have said many times we are not elephant hunters; we are not out trying to do big acquisitions, trying to buy big a rental company. But this is a very fragmented sector, and I think we are going to have opportunities to look at small accretive acquisitions that will make a lot of sense for us.

Okay, thank you. I will get back in queue, and congratulations on a great quarter.

David Bluestein with UBS.

John, the used equipment sales came in a little higher than we expected. I guess the question is, are you finding it that easy to bring machines back into the fleet that you can support that level of used equipment sales? Or does it look more like a spike to you?

There is tremendous demand for really high-quality used equipment. There is no question about it, and we are seeing a lot of demand. David, as you know, we take a little different approach to our fleet management than some rental companies do. Everything we have in our fleet is for sale at all times, and we control that through pricing.

I think you can see our pricing continues to increase significantly. We're going to keep driving that up. We have an adequate supply of equipment coming to maintain the appropriate fleet size, even in view of these strong equipment sales.

Got you. Leslie, you mentioned that the tax rate is going from 24% to 21%. But it sounds like that is largely the result of the nonrecurring items.

That is exactly correct.

So it is fair to say that your tax rate for your recurring operations in the back half of the looks like 24%, still?

Well, if you were to take -- we have got several things going on this year. We have the valuation allowance adjustment we made in the first quarter, and then these two significant nonrecurring items.

So if you were to take all of those out and just look at pure business, I would say our effective tax rate would be more of an ongoing rate of close to 40%, 36%, 38%.

Okay, and that is what it should look like next year as well?

Right, at least that, yes.

At least 36% to 38%?

Right. I mean, it could be approaching 40%.

Okay. The components of that would be both federal -- you are talking -- okay; terrific, I got it. Thank you.

Nigel Coe with Deutsche Bank.

Congratulations on good results. [Lensom] prices pretty good. Was there any material difference between the different products on pricing?

Could you repeat that, Nigel?

Yes, John, could you break out the pricing by product? Was there any material difference between, say, cranes and aerial lift platforms?

On rental rates. I mean, obviously, we have gotten significant rate increases as it relates to cranes given the demand for cranes. That is an average 11% calculation.

Yes, no question, Leslie is correct, Nigel. We're getting much stronger rate increases on the cranes side.

Okay, great.

Just because of the supply constraint.

Great, so cranes led pricing. Just on the tax rate, you are looking at the GAAP tax rate to pick up next year. Can you just remind us on cash taxes what you expect for cash taxes for next year and year after?

We have been a very minimal cash taxpayer. That will be true for 2006, given these nonrecurring items. Those will start gradually increasing as some of our state NOLs expire, and with earnings and that sort of thing. So we will expect that to increase a little bit.

Okay, so a slight pick up in cash taxes?

Right.

Right, okay. Great. Your utilization is getting quite -- it is getting up there. What do you see in terms of fleet investment and CapEx for this year and perhaps next year as well, based on your current assumptions?

As you know, we have not given CapEx guidance. But I can tell you we're growing our rental fleet, Nigel. We're in a wonderful environment. We have just tremendous incremental margins in fleet growth right now; and we think this environment is going to be here for a while. So whereas we have not given CapEx guidance, I can tell you we are growing our fleet.

Okay, so given that maybe the environment is a bit stronger than what you expected back in January, February, you think that CapEx might be a little bit higher than what you initially expected perhaps? Would that be a fair assumption?

I think that our fleet growth will be similar to what we had a year ago.

Okay, great. Just a final question. You talked about -- can you give any color on performance by geographies? Any parts of your footprint where (indiscernible) maybe a little bit stronger or softer than the average?

Sure, I will be glad to. I think the strength varies by business segment. If you look at from a rental standpoint, our strongest market is the intermountain region. That is certainly led by markets like Las Vegas, which is just phenomenal. Pheonix is very good. Salt Lake City is very good. So the intermountain region is certainly our strongest market from a rental standpoint.

The Gulf Coast has been exceptionally strong from the standpoint of equipment sales, and we think that is going to continue for a long time.

I can tell you we are seeing strength all across our footprint. I mean from the Southeast, Florida through the Gulf Coast, the Southwest, the intermountain region, Southern California, we just see a lot of strength in our markets.

That sounds good. Great, thanks a lot guys.

Seth Weber with Banc of America.

John, just following up on that previous comment, the strength in the intermountain, Las Vegas, Phoenix, as well as here in the Southeast and Florida, do you have a sense? Is that being driven by -- is there any residential exposure that has been unusually strong there, that you feel like could be starting to soften? Or you think that is largely non-res?

It is almost all non-res that is driving our business. We have very, very minimal exposure to residential. So I mean the driver, the significant driver of our business is non-residential construction.

As I stated earlier, we do see a lot of recovery in the mining sectors, and the petrochemical sector, and the oil patch is very strong right now. I think that is going to continue for the foreseeable future, with what you see going on with oil prices and all of the problems the world is dealing with in the Middle East.

Okay, can you remind us where your mining exposure comes in? Roughly, is it a kind of 10%-ish number or is it bigger than that, do you think?

I don't have a number, Seth. That can be extremely important to our business in the intermountain region. At one time, that accounted for about 35% of ICM's revenue prior to our merger with them to create H&E Equipment Services. As mining declined that went down to almost nothing.

That is coming back, so it can be important to us in the intermountain region; and obviously we see benefits from it in our Arkansas market because of our [commot to] the distribution there. And even in Northern Louisiana where there is some significant lignite activity.

Okay, thanks very much, guys.

[Dave Gart] with Trilogy Capital.

I have two quick questions. One is, what percentage of your fleet you would say is -- can be used for residential construction and non-residential construction both? So obviously, a big large aerial crane would not be used for residential construction. Can you help me with that a little bit, please?

Well, I think probably, reach forklifts, rough terrain reach forklifts is the primary product that we have that would be used in residential construction. It would bleed over into, I guess, some other things like small dozers and whatnot. But again, residential construction is not a significant driver of our business.

No, I understand, but just in terms of the fleet that you have, sort of what percentage of the fleet has applicability on the residential side? I understand it is not a big part of your business.

Aerials, which includes reach forklifts, accounts for about two-thirds of our fleet. Okay? Now of that, reach forklifts is the smallest piece of that. So I think, by far reach forklifts would be used more in residential construction than any other product we have. But again, that is a small piece of that two-thirds of our fleet.

And what is the rest of the fleet?

It is a mix of cranes, it is -- Leslie, do you have a breakdown there by percentages?

Cranes and earthmoving both represent about 12% of our fleet. Lift trucks comprise about 6%; and then the two-thirds of aerials.

Okay, okay. Thank you. The other quick question is, in terms of the lock-up of the sponsors, do you have any comments on that? I think the six-month lock-up is up. Do you have anything to share, sort of what might happen?

Have nothing to share there. At the point in time we have something to announce, we will certainly make the appropriate public announcements.

Thank you.

Trey Snow with Priority Capital.

You were giving some color earlier on non-res construction mining, petrochem, as sort of a percent of the overall business. Is there much difference in the segments? For example, is mining stronger in new equipment sales? Is there any kind of differentiating there?

Yes, there is. I think that varies by region, too. If you look at our mining exposure in the intermountain region, we get increased activity from support activities for the mines. It kind of impacts all aspects of our business, from aerials, to lift trucks, to cranes, across the board. We are not in there with big equipment doing -- moving overburden or anything like that. We are just a support group for the mine.

If you look at Arkansas, it is heavily weighted to equipment sales. We are not going to be renting these big off-road haul trucks. That is sales activity. So it kind of varies by region.

Okay, but outside of non-res it is mostly sales, it sounds like?

Well, in the petrochemical sector, now, we do a tremendous amount of rental business. That is a big driver of our crane rental business.

Okay. That makes sense. Have these buying patterns changed? For example, are mining companies buying more new versus used, used versus new? Any kind of shifts there over the last --?

I think there has been a lot of activity in new equipment sales in the mining sectors. They were down for so long I think there was a pretty good pent-up demand for product there.

Okay, great. Thank you for that.

(OPERATOR INSTRUCTIONS) It appears there are no further questions. I will turn it back over to John Engquist for any additional or closing remarks.

Thanks, everybody, for being on the call. We have got tremendous momentum in our business today. I think we are performing at a very high level and we will continue to do so. We look forward to generating really solid results for our shareholders going forward. Thanks for being on the call, and we will see you on our next call.

This does conclude today's conference call. You may disconnect at this time. Thank you for participating.