H&E Equipment Services Inc (HEES) 2007 Q1 法說會逐字稿

Good day and welcome to today's H&E Equipment Services first quarter 2007 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 Stacey, and welcome to H&E Equipment Services conference call to review the company's results for the first quarter ended March 31, 2007, which we released earlier this morning.

During today's call we will refer to certain non-GAAP financial measures, and we have reconciled these measures to GAAP figures in our earnings release, which is available on our website a www.h&eequipment.com Conducting the call today will be John Engquist, the President and Chief Executive Officer; and Leslie Magee, Chief Financial Officer and Secretary. Please proceed to slide two.

Before we start, let me offer the cautionary note that this call contains forward-looking statements within the meaning of the Federal Securities Laws. Statements about our beliefs and expectations, and statements containing the words may, could, would, should, believe, expect, anticipate, plan, estimate, target, project, intend, 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 statements. These risk factors are included in the company's annual report on Form 10K for the year ended December 31, 2006. 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. Except as required by applicable law, including the security laws of the United States, and the rules and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking statements after the date of this conference call. With that stated, I'll now turn the call over to John Engquist.

Thank you Kevin, and good morning everyone. Our format on this call is a little different than in the past in that we are using a slide presentation to highlight our key discussion points. I'm going to start out with an overview of our financial performance and key achievements, discuss our marketplace and key drivers of our business, summarize my remarks, and then I'll turn the call over to Leslie for a review of our financial results. At that point in time we'll be happy to take questions. Please move to slide five.

On our last call I told you that our first quarter results were being negatively impacted by adverse weather conditions. That was certainly the case in January and February, where we saw year-over-year declines in time and dollar utilization. I also stated that once we got beyond the effects of weather we expected utilization to return to normal levels, and that has happened. March, in fact, was the strongest revenue month in our company's history.

We had a very solid first quarter despite the weather impact to our rental business. Revenue increased 15.1%; gross profit increased 17.3%; our income from operations, as adjusted, increased 25.1%. Net income, as adjusted, increased 18.9%; EBITDA, as adjusted, increased 25.7%; and our gross margin remains strong at 31.3%, up from 30.7%.

As discussed in our press release, we have presented certain line items on an as adjusted basis. The same period a year ago is adjusted to exclude the impact of the $8 million non-recurring charge to reflect more realistic year-over-year comparisons. Please move to slide six.

We feel very good about our business in 2007 and beyond. As you can see from the map of our footprint, we operate in many of the fastest growing areas in the United States. We have a lot of major markets in our footprint that are very active today, markets such as Las Vegas, Salt Lake City, Denver, Phoenix, Dallas and Houston. All of these markets continue to see expansion in non-residential construction. Our footprint also affords us tremendous exposure to the petrochemical, mining, oil patch and energy sectors. These are industries that we believe have long term growth potential. We also expect the funding for the hurricane protection and rebuilding efforts to resume in the second half of the year, and continue for some time to come. If you would move to slide seven.

To summarize, we had a very solid first quarter despite significant impact to our business in January and February from adverse weather conditions. Our business environment remains very robust, while we have minimal exposure to the residential markets, our footprint and product mix gives us a great deal of exposure to the petrochemical, mining, oil patch and energy sectors. As I've said before, all are industries we believe have long term growth potential.

We believe our integrated model is the right model and is showing its strength today as every one of our business segments, equipment sales, parts and service, and rentals is showing strong top and bottom line growth. Our business is focused on high growth regions and high growth industries, and we believe we have real opportunities to grow our business through Greenfield start ups, fleet investment, accretive acquisitions, and the continued expansion of our product support operations.

I'm going to now turn the call over to Leslie, and after she concludes, we'll take questions.

Thank you John, and good morning. I'd like to go through these next few slides and provide just a little more detail on our first quarter results. I'll begin on slide nine.

Our total revenue growth was 15.1% year-over-year with strong increases across all of our business segments, with the exception of used equipment sales. As John mentioned earlier, March was a record revenue month for us. For the first quarter of 2007 rentals increased 17% over the prior year, with strong growth across all product lines. Average rental rates were flat year-over-year, primarily as a result of lower time utilization due to weather, and difficult comps.

Average time utilization declined nearly four points for the quarter, but we saw continued increases in March, and we're currently experiencing the same positive trend. Time utilization today is just above 70%. We estimate that the year-over-year decline in time utilization resulted in a two percentage point reduction in our dollar returns. Dollar returns were 38.8% for the first quarter of 2007, as compared to 39.2% for the same period in 2006. While the full quarter was down year-over-year, we achieved solid improvement in our dollar returns for the month of March.

New equipment sales continue to reflect strong growth, the growth was 21.7% over the prior period. It is worth noting that we achieved this level of growth even after an extremely challenging comp from the prior year. Our new equipment sales increased approximately 84% in the first quarter of 2006.

New crane sales continue to lead the increases in this segment, with a 51.2% increase over the prior year, and as a result, cranes account for a larger share of our total new equipment sales. For the first quarter new crane sales accounted for a little more than half of the total new equipment sales. Also cranes drive a significant piece of our product support business and we would expect that our product support operations are positively impacted in the future with the level of cranes we're putting in the market today.

All other core products lines increased, with the exception of new aerial equipment sales, which is really attributable to the softness in the [telehandler] product, as we've discussed before in our previous calls. Used equipment sales declined approximately 2.5% which is the trend we've seen as a result of improved new equipment availability from many of our manufacturers. Our parts and service business continues to show strong growth at near 20% on a combined basis, and we continue to grow our technician base.

Gross profit margin has increased to 31.3% as compared to 30.7%, with improvements across all operating segments, with the exception of a slight decline in parts gross margins as a result of mix. The most significant gross margin improvement was in our used equipment business with about 260 basis points, primarily driven by strength in AWPs; and service margins of 140 basis points, driven by the impact of increasing our technician charge out rates in late 2006.

While we have seen growth in our margins, our consolidated gross margins have been impacted by the change in our revenue mix. Our new equipment business has grown at a faster pace than our other segments. For illustrative purposes, our overall gross margin would have been approximately 100 basis points higher with consistent revenue mix in Q1 '07 as in Q1 '06.

Moving on to slide 10, income from operations, as adjusted, increased 25.1%; margins, on an adjusted basis, have increased 110 basis points to 13.8% reflecting higher gross margins and reduced SG&A as a percentage of revenue. On slide 11 you'll see that our net income increased 18.9% on an adjusted basis. Our effective tax rate nearly doubled to a more normalized rate of 40.2% from 21.4% in the prior year. Our pre-tax earnings increased 56% year-over-year with improved EBIT and interest expense savings, primarily as a result of our refinancing in August of 2006.

Obviously this level of improved profitability is not reflected in the EPS graph at the bottom of this slide, due to both the increase in our effective tax rate, and a 13.8% increase in our weighted average shares outstanding for the comparative period.

Turning to slide 12; EBITDA, as adjusted, increased 25.7% as compared to the first quarter of 2006, with margins increasing to 24.9% from 22.8%. We expect EBITDA margins to increase from this level as our rental business improves throughout the stronger months of the year. We estimate that the change in our revenue mix negatively impacted our first quarter 2007 EBITDA margins by approximately 70 basis points in comparison to the prior year.

I'm now on slide 13. SG&A declined as a percentage of revenue to 17.7% on an adjusted basis. SG&A dollars increased $4.2 million due to the acquisition of Eagle on February 28, 2006, and also costs associated with higher revenues such as increased head count, commissions, other employee related expenses, and insurance costs.

Slide 14 provides some detail on our fleet. Our gross fleet Cap Ex for the quarter was $41 million, and net fleet Cap Ex was $13 million. All of our fleet Cap Ex was maintenance Cap Ex for the first quarter of 2007. Gross PP&E Cap Ex for the quarter was $2 million, and net PP&E Cap Ex was $1.6 million. Our fleet age at the end of March was 38.4 months compared to a year ago at 44.8 months.

And lastly slide 16. We are reaffirming our guidance, which is revenue in the range of $900 million to $920 million, an EBITDA range of $232 million to $245 million, and an EPS range of $1.63 to $1.85 based on 38.1 million diluted common shares outstanding, and an effective tax rate of 38.5%.

With that, operator, we would now like to move onto the Q&A session, if you'd please provide the instructions.

(operator instructions) We'll go first to David Bluestein with UBS.

Good morning.

Good morning David.

A couple of questions; one, did you hit what pricing was in the quarter?

On rates?

Pricing rates.

Yes, we were flat year-over-year. And David that's not surprising to us at all when you look at the declines in time utilization we had in January and February because of the weather issues we had. That's kind of where we expected to be. Our -- we still believe we'll get what we told you on rate increases, which will be low to mid single digit rate increases. But again, with our time utilization what it was in January and February, it's difficult to drive rates.

Maybe it's splitting hairs, but what did your pricing look like in the month of March?

Still basically flat.

Okay, fair enough. You mentioned your Cap Ex in the quarter, do you, Leslie, have a Cap Ex target for the year?

We don't give Cap Ex guidance. We have just said that we intend to grow our fleet, however our growth would moderate from 2006 somewhat.

All right. If I dial our own assumptions in there, and we're still roughly running with an expectation of about $100 million in free cash flow, have you given any further thought to what you intend to do with that cash flow?

You know David, as I've said in the past, this is a fragmented sector. Acquisitions are certainly part of our plan going forward, that's an area that we're working on. We don't have anything to announce right now, but we are working on that. We have been very pleased with the returns we're getting on our Greenfield, that's an area that we're looking at. We have opened an operation in Austin, we have opened a new operation in Corpus Christi, and we're looking at several other markets. On the last call I said we'd open probably four Greenfield's this year. We may do a little better than that, but we've been very pleased with those returns.

Beyond that David, we're just weighing our alternatives there. But we'll make some good decisions there with that cash flow.

Okay. Usually in that conversation you mention that you're not looking for big deals, you're not an elephant hunter is the phrase I've heard you use. There are a lot of elephants out there, I mean are you still committed to staying with making acquisitions of entities smaller than yourself?

Absolutely. You won't see us out there trying to buy one of the big rental companies. I think that would change our business model and you now we believe passionately in our model and we're going to maintain that. So, our position there has not changed. We'd certainly do a larger acquisition than Eagle but we're not elephant hunting by any stretch of the imagination.

Appreciate the comments; thank you.

Thank you. We'll go next to Seth Weber with Banc of America.

Thanks, good morning, guys. Good; appreciate the slide show this time. It's a good presentation. On the crane business, John, last quarter you talked about troubles with your supplier, how you were kind of constrained there. Can you comment? Has that improved at all? And do you think that that will continue to improve through the back half of the year?

And then a separate question; I appreciate the color on how much cranes now represent to the equipment sales. Can you give us a similar number to what they represent to the rental?

Sure. One; I kind of view our supply constraints on the crane side as a high-classed problem. The demand is just absolutely phenomenal. When you look at the crane products we sell, we sell the Manitowoc product and the Grove product.

We have seen some improvement on the lattice boom side, the Manitowoc product in slippage. That seems to have stabilized a little bit. We're still seeing some slippage in deliveries on the Grove product line, the hydraulic cranes. And particularly, on the GMK product line, which is the German made AT cranes that Grove has. So overall, there's been some improvement but they've got a ways to go.

We're not losing business there. It's potentially slipping by a month, two months, you know. We get that eventually but again, that's kind of a high-class problem. The demand is just phenomenal and I don't see that letting up. I think cranes will be on allocation for Manitowoc's distribution group through '08 certainly.

As far as the - Leslie?

Sure. On the cranes, Seth, cranes make up about 12% to 13% of our rental fleet and the revenues are pretty consistent with that same level.

One of the problems we've had, Seth, is that there's such phenomenal demand on the crane product line, we have not grown our crane fleet to the level that we would like to, simply because there's such demand with our end users to purchase this equipment such that it's made it difficult for us to grow our fleet.

Okay. Thanks and just a follow up, I appreciate the color on how the mix has changed, how it affected your margin. Given these comments, I mean, would you expect new sales to continue to be growing faster than the rental business? I mean, would you expect to see this kind of impact on the margin going forward?

I think you will see our rental business, as we get into the year, improve. We are going to grow our fleet some. Obviously, we weren't growing our fleet in January and February because of our utilization issues. Our utilization has returned to normal so, as we move forward, we're going to be adding fleet. And you'll see some fleet growth there.

And Seth, look, we view this new equipment demand very positively. You know, I think that speaks very well for the strength of the market that we're in.

Okay. If I could, just one follow up; is there any change to the Gulf coast funding situation? Do you have any - have a view on how that's going to shake out?

We expect the funding to resume in the second half of the year, starting in the third quarter. And I think that'll be very beneficial to us. There's a lot, a lot of work to do there but I do believe it'll be the second half of the year before the funding resumes. Some of it has started but it's minimal right now. The big part's coming in the second half.

Great; thanks very much, guys.

Thank you. We'll move next to Jamie Cook with Credit Suisse.

Hi, good morning. My first question; there's been a lot of activity in your space. United Rentals is up for sale; RSC is going public. I guess with all these different dynamics going on, are you seeing any change in the competitive environment for better or for worse?

I'm really not, Jamie. You know, obviously there's a lot of interesting stuff going on. This URI situation, that's a huge deal. I really don't see that having an impact on our business, good or bad.

They buy at a level now that there's no pricing advantage if a strategic buyer was to come in. I mean, they're not going to get better pricing than they're getting today. I think all of the top 10 rental companies in the U.S. are getting the manufacturer's best price. I mean, there's just not that much margin to play with in that equipment. So, I really see that, from our perspective, there's not an issue, good or bad.

But nothing on the rental rate side either?

I don't think so. I mean, you know, I think URI has done a good job of focusing on rates and so has RSC. Both of them are good rental businesses and I think they're continuing to focus on rate issues.

Rates are stable right now. You may see some markets in some regions where there's some softness compared to other areas, but overall, I think rental rates are very stable.

And then, you know, can you talk a little bit - can you talk a little bit about, you know, on the Hurricane Katrina impact - or the funding issue, I guess, and you're saying that you expect it to pick up in the beginning of the third quarter of this year. Is there any way you can sort of handicap, for us, how much that is impacting results in the first half of the year?

Well, I think we went up against some real difficult comps in January, February and March. A year ago, every piece of dirt equipment we had was on rental. I mean, our utilization was unrealistically high. So, the big thing it did, it created some pretty difficult comps for us.

Okay. And then, I just guess my last question, if you take the mid-point of your revenue guidance and you back out what you did in the first quarter, it implies lower growth, I think, the lower revenue growth in the remaining nine months in the year.

So I guess I just am having a hard time reconciling that if you take into account that your January and your February was so weak in the first quarter. I understand you had Eagle, but is there anything else besides that that's impacting sort of your top line forecast?

No. I don't think so, Jamie. I mean clearly, as we move farther into the year, we're going to be going up against tougher comps. Our growth rates in '06 were very strong, as you know. And as we move into the year, the comps get a little more challenging. But we're maintaining our guidance. And as we get a little farther into the year, we'll take another look.

Okay great. Thanks; congratulations.

Thank you. (OPERATOR INSTRUCTIONS). And we'll go next to Philip Volpicelli with Goldman Sachs.

Hi, it's actually Jason [Mulleffic] for Phil. Just one follow up on that; I guess, you know, obviously January and February were softer months than March; obviously kind of a record month. Going forward, is that kind of a level we should expect? Or, is that some of that built in kind of catch up activity from, you know, the softer start?

We anticipate our business remaining very strong. I'm not sure I understand your question. I'm not telling you we're going to have a record month every month, but the drivers of our business are very solid. We're very excited about '07. I mean, it's going to be a really strong year for us.

As I said, I think we're to the point now we can start growing our fleet. Our utilization has returned to normal. We anticipate demand for equipment to stay very strong. So, we're very bullish on the year.

Okay, thank you. And just one follow up on kind of the pricing. Obviously, you know, overall as you'd mentioned it, it's kind of flat, year-over-year. Are there any, you know, like, the cranes, for example, obviously very, you know, you mentioned hard to get equipment. Everyone's kind of looking for that. Are there areas within, you know, the overall demand that's allowing you to get price in some areas of equipment?

Yes. That's a fair question. I mean, clearly I think that when you have a supply and demand imbalance that exists, like we had on the crane side of our business, it's easier to push rates.

With that said, in the past year or so, we have pushed rates very hard there. So, we're not going to continue to get the kind of rate increases on cranes that we did a year ago, but probably have a little more opportunity there than we do on other product lines.

We think that in southern California, when we acquired Eagle, their rate structure was lower than we had in other areas of our company. So, we think we still have some opportunity there to improve rates. But overall, our forecast, or our outlook on rates, has not changed from our last call. You know, low to mid single digit range.

Okay, great. Well, good luck.

Thank you. We'll go next to Andrew Bauer, with Stonebrooke Fund Management.

Thank you very much. Good morning. Can you address if there's anything else that's affecting either current pricing or your pricing outlook as far as mix of business or size of business that you're getting?

Ask that question again, Andrew. I'm not sure I understood you.

Sure. I just didn't know if, as more equipment becomes available, if you are now able to participate in jobs or, you know, work for customers that previously you hadn't been able to and if that's a factor at all in your pricing outlook for the year.

I think I understand your question, David. On our last call, I indicated that we would probably take a little more aggressive approach to major projects than we had in the last year or so. You can, on a major project, you can put a lot of equipment on that site. You can maintain 100% time utilization over the course of a year.

Your maintenance cost, typically, goes down because you handle that equipment less. So, even though your rates go down a little bit on a major project, your dollar returns can improve. So we think, by being a little more aggressive on those projects, we can improve our dollar returns, our return on assets, our earnings. And - even though it may have a little bit of a negative impact on our overall blended rental rates' increases. But, it's clearly the right thing to do.

I can tell you that our company is not and will not be sacrificing rental rates for revenue growth. That's not happening.

And you're starting to see some of the bidding that you've been doing on these major projects come to fruition?

We are, yes.

Okay. Baked into the guidance for the year, should we expect that some of the trends that we've seen in each of the segments to hold? In other words, would it be wrong to think that used equipment revenue may be down on a full year basis?

Yes. What we've seen there, Andrew, is we've seen a shift. A year ago, manufacturers were having a difficult time, all of our manufacturers, delivering product. So what we were seeing is people were buying late model, high quality equipment out of our rental fleet because they couldn't get new equipment.

The availability from most manufacturers has improved, so we're seeing a shift from people buying that rental fleet equipment to buying new equipment. And, you know, with availability improved, I think that'll continue.

But is it wrong to assume that used equipment pricing has held particularly strong as, even though your revenue went down year-over-year, the margins were up over 200 basis points?

We have seen - I have seen no softening in used equipment residual values. They've held up very well.

Can you provide, as a percentage of book value, what the used equipment pricing is, year-over-year?

I can't. Leslie can. Give her just a second here.

Sure. 140%, I believe, for the quarter, as compared to kind of a rough ballpark here, 139%. Yes, that's right. 140.8% to 139%.

And that's compared to the first quarter of '06?

Right.

Okay. All right, great. Thank you very much.

Thank you and we'll go back to David Bluestein, with UBS.

Hi, good morning again. I don't want to push too hard, but the first quarter was up despite the higher share counts and the higher tax rate. The guidance doesn't really indicate that you're going to have an up year on an EPS basis. Where's the - which is the down quarter?

David again, I mean, moving forward, we continue to go up against tougher comps here.

So more likely, Q3 or Q4 and Q2 is probably at least flat?

David, we'll take a look at that. Leslie can give you a call. I mean, we're going to look at guidance as we get a little farther into the year here.

Okay, fair enough. Congrats on the quarter.

Thank you very much. (OPERATOR INSTRUCTIONS). And, we'll go next to Steven Volkmann, with J.P. Morgan.

Hi guys. Hey, is the tax rate going to be higher going forward? Is that the missing link here?

No. We've not changed our estimate of 38.5% for the year. The first quarter was a little bit higher due to some discrete items but we're still maintaining our estimate.

Okay, so we're still scratching our heads then. I'll take a call too, if you figure out the answer to David's question.

What about - can you just give us the Eagle impact for the first quarter, in dollar terms?

Sure. Eagle, for the quarter, was $9.4 million in revenues.

What would you like beyond that, Steve? You're looking at gross profit, or...?

EBIT, if you've got it.

EBIT was right at $1 million.

Great. Thank you very much.

Thank you. With no further questions, I'll turn the conference back over for any additional or closing remarks.

Thanks everyone for being on our call. Again, we feel really good about our business. We're in the right markets. I think we've got the right model and the drivers of our business are very solid. And we have strong exposure to some industries that we think still have legs. We've got long-term growth potential.

So, thank you for being on the call and we look forward to talking to you in the near future on our second quarter call. Thank you.

Thank you and once again, ladies and gentlemen, that will conclude today's call. We thank you for your participation and you may disconnect at this time.