H&E Equipment Services Inc (HEES) 2007 Q3 法說會逐字稿

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

Welcome to H&E Equipment Services conference call to review the Company's results for the third quarter ended September 30, 2007, which we released earlier this morning. The format for today's call includes a PowerPoint presentation, which is posted on our website at www.heequipment.com.

Please proceed to slide one. Conducting the call today will be John Engquist, President and Chief Executive Officer, and Leslie Magee, Chief Financial Officer and Secretary. Please proceed to slide 2.

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. 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 are statements that involve known and unknown risks and uncertainties, which could cause actual results to different materially from those contained in any forward-looking statement. These risk factors are included in the Company's annual report on Form 10-K for the year-end 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 securities laws of the United States, and the rules and regulations of the SEC, we're under no obligation to publicly update or revise any forward-looking statements after the date of this conference call.

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

Good morning everyone. Would you please proceed to slide 3. I will start out with an overview of our financial performance and key achievements, discuss our marketplace and the key drivers of our business, and then turn the call over to Leslie for a detailed review of our financial results. We will then open the call up to questions.

Turn to slide 5 please. The third quarter was an outstanding quarter for our Company in almost every respect. In the third quarter we achieved record levels of revenue, gross profit, operating income and EBITDA. We were also able to generate the same level of earnings as the prior year, despite a much higher effective tax rate. Revenues increased 32.6% to $270.6 million. Income from operations increased 21.5% to $42.4 million. Net income as adjusted was $20.4 million for both periods, with a much higher effective tax rate in the current quarter.

EBITDA increased 21% to $69.6 million, and our gross margin decreased to 31% from 33.7% due largely to the strengthen in our new equipment sales, which is a lower margin business.

Please proceed to slide 6. Our footprint continues to be an asset for our Company. In the markets we serve non-residential construction activity remain strong and our markets give us tremendous exposure to the petrochemical, mining, oil patch and energy sectors. These are all key drivers of our business, and are industries we feel still have growth potential. We're also seeing increased spending in coastal Louisiana for hurricane protection, coastal restoration, and demolition projects. We expect this spending to accelerate and continue for some time.

We're also excited about the growth opportunities we see from our recent appointment as an authorized distributor for Komatsu Utility equipment in Utah, Nevada and Southern California, and Link-Belt in most of the mid-Atlantic region.

Would you please proceed to slide 7. To summarize we had a very strong quarter of record results with solid growth across all of our business segments. Our business environment continues to show strength. While we have minimal exposure to the residential markets, our footprint and product mix gives us a great deal of exposure to several industries we believe have long-term growth potential. We also believe we will benefit from the increased infrastructure spending across our footprint.

Our business is focused on high-growth regions and high-growth industries. We see significant opportunities to grow our business through Greenfield startups, fleet investments, and the continued expansion of our product support business. As you know, we recently completed the acquisition of J.W. Burress, Inc. which expands our footprint continuously throughout the mid-Atlantic region. We have completed the systems conversion of Burress on to our IT platform, which will facilitate the integration process and allow us to take advantage of the significant upside to this acquisition, particularly on the rental side of their business.

At this point I would like to turn the call over to Leslie to discuss our third quarter financials.

Good morning everyone. I would like to go through these next few slides and provide a little more detail on our third quarter results. I will begin on slide 9. Our total revenue increased to $270.6 million, up 32.6% year-over-year, with $10.1 million of revenue from Burress. Even without the one month contribution from Burress, all business segments reflected double-digit growth, with the strongest increases in new and used equipment sales at 51% and 40%, respectively.

I will spend some time discussing the key highlights and drivers of our results by segment. Burress' contribution to our performance is included in my discussion unless otherwise noted. Also just to point out, we have provided Burress' one month results from September 1 to the close of the quarter by line item in his mornings press release.

For the third quarter of 2007 rentals increased 12.3% over the prior year with growth across all product lines. Our average time utilization for the quarter was 70.7% as compared to 70.3% a year ago, a 40 basis point increase. This compares to 69.1% time utilization in the second quarter of 2007.

We grew our fleet by $28 million in the third quarter, while at the same time increasing physical utilization over the prior year.

Rates on average declined 1.2%, excluding any impact from Burress over the prior year. This was driven primarily by a 1.7% average decline in AWP rates largely due to weakness in the Florida market. We also had a 3% average decline in earthmoving equipment, increased time utilization of our earthmoving fleet offset the declines in rates, which resulted in higher dollar returns over the prior year.

We believe we have achieved the right balance between pricing and physical utilization to improve our dollar returns. Also, as expected, our crane rental rates increased 8.1% over the prior period, and lift truck pricing was also strong at an increase of 3.2%. Overall dollar returns were 41.9% for the third quarter of 2007 as compared to 42.4% for the same period in 2006.

Dollar returns, excluding Burress' rental performance, is really a more comparable measurement. Dollar returns excluding Burress' results were 42.7% versus 42.4% in the prior year. New equipment sales continue to reflect tremendous strength with an increases of 56% over the prior period. Our revenue mix continues to trend more heavily towards new equipment sales.

For the quarter new equipment sales represented 35% of total revenues as compared to 29.7% of total revenues a year ago.

While demand for new equipment remained strong across all product lines, new crane sales continued to grow significantly. Cranes increased 114.5% over the prior year. All other core product lines increased, with the exception of a $1.2 million declined in new lift truck sales for the quarter.

Used equipment sales increased approximately $14.8 million or 49.7%, which is much stronger than the trend from the last several quarters. Growth in this segment of our business is due in part to one customers' conversion of a large crane package previously on rental purchase.

Also, Burress contributed approximately 20% of the increase in used equipment sales. All product lines reflected very solid growth over the prior year.

Our parts and service business continues to show strong growth at 24.2% on a combined basis due to increased demand and revenues from Burress.

Our total gross profit margin has decreased to 31% as compared to 33.7%. I will explain gross margin fluctuations by addressing each contributing segment.

The most significant factor decreasing gross margins is the change in our revenue mix. We estimate that the change in revenue mix negatively impacted our gross margins by 210 basis points. Margins on new equipment sales increased 13.9% from 12.2% a year ago. Margins on new equipment improved due to the strength in claim pricing, along with the mix of cranes sold in the quarter.

To a much lesser degree, total gross margin was impacted by a decline in used equipment margins to 24.2% from 26.9%. Used equipment margins declined due to the crane rental purchase conversion mentioned earlier. Rental sale business is generally lower margin business and margins would have remained relatively flat without this large transaction.

In addition, the sale of younger cranes on average have narrowed our used crane margins. Also our rental gross margin was 52.8% as compared to 53.9%. As discussed in the second quarter our cost of sales has increased due to higher depreciation expense as a result of de-aging and also growing our fleet. Our maintenance and repair costs and other rental expenses improved as a percentage of rental revenues during the third quarter of 2007 as compared to a year ago.

Gross margins on other revenue, which is primarily related to equipment support activities such as hauling, freight and damage waiver, declined to 11.9% from 16.8%. The decline relates primarily to increased fuel cost and increased hauling costs associated with our fleet rotation process.

Slide 10 please. Income from operations increased 21.5% to $42.4 million from $34.9 million. Margins decreased 140 basis point to 15.7% from 17.1% as a result of the shift in revenue mix. Operating leverage in our business partially offset the negative impact of revenue mix to EBIT margins.

Proceed to slide 11. Net income as adjusted was $20.4 million in both periods. Earnings remained flat due to the increase in our effective tax rate to 39.4% from 21.6% in the prior year. Assuming our current effective tax rate in the prior year's period, net income as adjusted would have increased approximately 29%. Burress was neutral to earnings for the one month from acquisition to the close of the quarter.

Slide 12 please. EBITDA increased 21% as compared to the third quarter of 2006, with margins decreasing to 25.7% from 28.2%. We estimate that the change in our revenue mix negatively impacted our EBITDA margin by approximately 200 basis points in comparison to the prior year.

Next, slide 13. Our SG&A ratio improved to 15.4% of revenue as compared to 16.7%, a 130 basis point improvement. SG&A dollars increased $7.5 million. Approximately $4 million of the increase was due to cost associated with higher revenues such as increased employee salaries and wages and related employee expenses. Burress resulted in a $1.2 million increase in SG&A expenses, in addition to a $300,000 increase in amortization of intangibles in connection with the acquisition.

Slide 14. Our gross fleet capital expenditures for the quarter were $74.5 million, and net fleet capital expenditures were $38 million. We grew our fleet by $20 million in the third quarter.

Gross PP&E capital expenditures for the quarter were $6.3 million, and net PP&E capital expenditures were $6.1 million. Our fleet age at the end of September was 33.4 months as compared to a year ago at 41 months. Today we are maintaining a younger fleet as a result of fleet growth, the rotation of our aerial fleet, and the young fleet acquired through Burress.

With that overview of the financial results, I would like to turn the call back to John so that he can discuss our outlook for the remainder of the year.

We expect demand for our products and services to remain strong for the remainder of the year. We are increasing our guidance to reflect our current expectations for the remainder of the year and the Burress acquisition. At this time we do not expect Burress to be accretive or dilutive to EPS for the remainder of 2007. We are revising our annual guidance as follows.

We expect revenues to increase from a previous range of $935 million to $953 million to a range of $995 million to $1.007 billion. We are increasing our 2007 EBITDA guidance from $233 million to $240 million to a revised range of $246 million to $252 million. We are also increasing our EPS outlook from $1.59 to $1.67 to a range of $1.70 to $1.75.

With that, operator, we would now like to move to the Q&A session. Please provide instructions.

(OPERATOR INSTRUCTIONS). Jamie Cook, Credit Suisse.

This it is Chase Becker in for Jamie. I just had a quick question regarding your new equipment margins. They are a little bit better than what we thought. And I think if you look back over last few years, your margins in that segment in the fourth quarter have actually been better than the third quarter. And I understand that is probably a function of how the market has been, but how should we think about that going into fourth quarter? And obviously you're not going to give guidance on 2008, but is there any reason to believe that this 13.9% margin is not sustainable?

Yes, what I would think of there is mix. Going into the fourth quarter if we were to have some large Manitowoc sales, latticed boom sales, that could impact that margin. Those sell at a much lower margin than our hydraulic crane product does. So mix can impact that significantly.

Then with regards to J.W. Burress, I don't want to really get into guidance for 2008, but can you kind of just walk us through how the integration is going. And your expectations on the margin front, how should we see that next year and beyond? Any color you could give would be much appreciated.

We are in the middle of our budget process right now. We're getting close to the end of it, so I'm really been no position to give '08 guidance yet. Burress is very much a distribution business today without a lot of focus on the rental side of their business. That is where we see a huge upside to the acquisition, and we're going to be very focused there.

A typical distribution company has gross margins in the 19 to 20% range. You know what our gross margins are, so we certainly see upside there. The integration process is proceeding. We have them on our information systems today, which is really going to help us in the integration process. We're going to be able to start giving them the appropriate information that they need. We're going to start putting in the appropriate infrastructure, really focused on that rental business, and we expect to see -- make great strides in '08 in that area.

Last question. In terms of the SG&A, I think we really saw some leverage in the line this quarter. How sustainable is that? How should we think about that going forward? And that is it and I will get back in queue.

It is an area that we're focused on, we're paying a ot attention to, and we're going to continue to focus on it. I would hope to continue to see SG&A decline a little bit as a percentage of our revenue. We're very focused in that area.

Perfect. Congratulations on a nice quarter.

David Bluestein, UBS.

A couple of quick questions. One, what was the age of the Burress fleet when you bought it?

About twenty months.

20 months. Okay. Next question, I see the share repurchase and I see the phraseology, the program is expected to continue until December 31, 2008 unless extended or shortened. Does that mean that the end of next year is a rough target for completion?

We had to put a timeframe on that and we put a year. As you know, we have a restricted payment calculation in our indentures that we have to abide by. I think it allows us at the end of the third quarter to purchase about $60 million worth of stock. And then from there it is a percentage of net income each quarter, so I think that is the reason for that.

But it is your rough intent to complete it by the end of next year? Is that a fair statement or is that too aggressive or not aggressive enough?

No, that would be our intent, and we will be -- it depends on opportunity. But that that would be our intent.

Are there any CapEx reasons that would get in the way? Have you started to think about whether or not you will be building fleet, reducing fleets, and maybe some commentary on how you think your fleet is positioned by product type?

I think our fleet is in wonderful shape. Leslie pointed out that our fleet age is 33.4 months right now. It is in really good shape. As you know, most of the manufacturers we represent today, their leadtimes have improved a lot, so we can take a pretty short term approach to fleet investment. And that is what we're going to do. We're going to be opportunistic. And if the opportunities are there, we will grow our fleet some.

Can you talk a little bit about the process of selling used, the ability of your Company to access some of the non-U.S. markets for used equipment, and what your activities have looked like there?

Sure, I will be glad to. We have done a really good job of accessing the Asian markets. Dale Roesener, who is heavily involved in our aerial fleet products, has spent a lot of time in Asian markets. The lower end of our fleet, the older aerial equipment that we have is very attractive to those Asian markets. That is not equipment -- and I'm speaking 7, 8, 9 year old aerial equipment -- that product is not real attractive in the U.S. market, but there is a tremendous demand for it over there.

And that is why we have taken advantage of those opportunities to rotate our aerial fleet, get rid of our older products. We have done it at much better margins than we could have obtained in the U.S. market. That has been a good opportunity that we have taken full advantage of.

Is that one of the reasons the fleet age came down so much is because you sold older machinery relative to normal?

No question. I think the average age of the aerial equipment we have been selling is probably 74, 75 months. We have really sold off the bottom end of our fleet and improved the quality of our overall aerial fleet dramatically.

Brandt Sakakeeny, Deutsche Bank.

Congratulations on the quarter. Could you give us just a little color, I think on two areas, one on geography. We have heard from others that Florida and California has been softish. Have you seen that in your experience at all? If you could just comment on your utilization of the earthmoving equipment, which was actually quite good. And also again we have heard that it has been a soft space.

Florida is a soft marketplace right now. Leslie discussed some rental rate declines that we realized. Our aerial rates overall are down about 1.7%, and that is largely due to the Florida marketplace, which is soft today. All of our operations there are focused on the aerial business. And so that is really what has driven a decline in our overall aerial rates. It is Florida.

Our earthmoving rates are down about 3%, and that is really a function of us just pushing rates too hard. As you know, the last three years we have been getting extremely strong rate increases. And a lot of those were focused on the dirt side of our business, and I think we push that a little too far and got ahead of ourselves. We believe we have found the right balance between pricing and time utilization to improve those dollar returns. And I can tell you our time utilization and dollar returns are up significantly on our earthmoving business.

That's great. Thanks. Is Florida stabilizing here? Does it feel like the worst is over?

I think it is. I think the market is stabilizing. We have actually opened some new facilities in the greater Miami area that are performing very well for us. They are startups and we just got them open, but I can tell you they are performing ahead of plan for us. I do think that market has bottomed out and stabilized, and I think we'll see some improvements there in '08.

Seth Weber, Bank of America.

John, can you give us your view on the reconstruction funding issue down in the Gulf Coast? Did that help the quarter at all at this point or do you think that is still on the to come? Then I have a couple of other questions.

There is no question that our business in that New Orleans area has improved from the second quarter. We are seeing just a slow steady improvement there. I think I spoke to some major lettings of levy work on our last call to the tune of maybe $500 million. That has not happened. What we are seeing is that work being let in smaller increments, so $50 million -- $40 million, $50 million increments. We have seen some demolition work let recently. One job was about $50 million. I think you're going to see that continue to pick up consistently and accelerate, and I think that will go on for some time.

Would the pending Wardell legislation -- is that something incremental to what you have been seeing?

I think it will be, yes.

Switching gears a little bit, on the crane business last quarter I think you mentioned you have been taking orders out into 2009. Is that still -- does the outlook there continue to be as good as you have ever seen it?

The demand is just amazing right now. It is as good as I have ever seen it. I think that our crane business and Manitowoc's crane business has a lot of runway in front of it.

Then last question on Burress, I know you're not giving guidance, but they did $10 million in the month of September, is that fair number to think about to annualize that kind of number?

I think it will -- you can be in that range. I think maybe it will be a little better than that. But again I can't give you a lot of help there right now because we're really just now finalizing our budgets.

(OPERATOR INSTRUCTIONS). Phil Gresh, JP Morgan.

Just one other question on the Burress acquisition, just to kind of understand. Previously you had said you expected it to be accretive to 2007. I know it got pushed back a little bit. But I guess I am a little bit surprised not to see any accretion for the fourth quarter. Is that just a function of timing or did something change there?

I think some of it is timing. We're dealing with a much shorter time frame than we originally were when we said they would be accretive. We want to get more comfortable with their forecasting and what not. I think we're trying to take a reasonable conservative approach there.

On the rates, you had previously said flat to slightly up for the second half. Obviously, they were down. You talked about weakness in Florida. You said you are saying some civilization there, but what are you looking for for Q4 and on into Q1 of next year? Do you have pretty good visibility there or what is your sense?

I think we do have some visibility there. And I'm pretty comfortable that the deterioration we have seen is going to flatten out. I really don't see further deterioration in the fourth quarter. I have missed on the rate issue here in the past somewhat. We have seen some slight declines in rates, but I think that is going to flatten out in the fourth quarter.

Just relative to your previous commentary, was the weakness, relative to your previous guidance, more on the AWPs or was it also on the earthmoving, which were down 3%. Was that expected?

Yes. Again, the weakness -- I don't even call it weakness -- the decline we saw on the aerial side is related to Florida. I think Florida has bottomed out, and I think we're going to see some improvements there next year.

Our earthmoving rates, I don't see further decline there. And I think -- again I think that is issue of us getting the right balance between pricing and time utilization, because our dollar returns, which that is the most important thing to me. That is what we work for is to create dollar returns and returns on our investment. And our dollar returns on our earthmoving business are up.

Just one more question on the share repurchase. I believe you are restricted after this Burress acquisition for a period of -- I can't remember if it was 60 or 90 days. At what point can you actually start doing a share repurchase?

We were restricted due to the financials that needed to be filed related to Burress. And we have filed those this morning in the form of an 8-KA. So we are in good shape.

We can start.

Philip Volpicelli, Goldman Sachs.

Good quarter. First question, with regard to the share repurchase and leverage, you mentioned that you would be using working capital and borrowings on the revolver. Can you give us some thoughts as to just how far -- how much each of those will contribute, and what kind of leverage I guess you would not be comfortable going above?

We have stated in the past more than once that we would like to long-term keep our leverage in the two times range. We think our modeling tells us we can do $100 million stock repurchase and be levered around 1.5, 1.6 times. So our leverage is going to stay well within our comfort range after the stock repurchase.

That's great. And with regard to the floor plan financing, can you give us the balance at the end of the quarter? And then also the fleet original acquisition costs at the end of the quarter?

Sure. $160 million of floor plans at the end of the quarter. And the fleet, including Burress, is $779 million in OEC at the end of the quarter crude.

Then to go back to the comments on Florida, I think I heard you say that you are mostly aerial there. Do you have any earthmoving there? And can you comment on how much worse it is there versus other parts of your markets?

We don't have earthmoving exposure in Florida. So I really don't have a lot to comment on. Our exposure there is in the aerial business.

As you look ahead, most of us are expecting that CapEx will come down next year. I know you haven't put out any guidance. Have you given any thought to -- are we down 10%? Are you going to be opportunistic? Do you think there are areas where you can grow the fleet, or is it mostly next year playing defense?

We're going to be opportunistic. And again I think availability is pretty good for most of the manufacturers we represent, so I think we can take a very short-term approach to fleet investment. So we will take an opportunistic approach. I can tell you we feel good about '08. I think the things that drive our business are going to be there, and we look for good things in '08.

Last question. Any idea of how many more new stores you would open or acquisitions you would focus on?

We will not be focused on acquisitions in '08. As you know, we have done a couple of acquisitions recently. We want to get those probably integrated, get our arms around them, really take advantages of the upside we see there. I'm not going to tell you that is the right opportunity came along, with the strength of our balance sheet, that we wouldn't take a look at something, but that is clearly not a focus for us at all in '08.

Greenfields are a focus for us. I have said in the past that we would like to do maybe four a year. We would like to look at probably increasing that over time. We have been very effective with our greenfields. We get great returns, and I view that is a low-risk way to grow our business.

Chris Doherty, CIBC World Markets.

Leslie, just one cleanup question. What was the gain on the sale of used equipment that would be taken out of the cash-flow statement from ops?

At $36 million of proceeds -- one second. Let me get that. The gain for the quarter was about $10 million in rough terms.

Then, John, can you comment on the Asian market for used equipment, and how long you think that strength is going to be there? Is the strength related to the buildout for the Olympics, and should we be expecting some sort of fall off in terms of rental used equipment market sort of as we go into '08?

I don't think so. When you look at the construction activity over there, what is going on in this country absolutely pales by comparison. I think that activity is going to continue for a long time. The Olympic buildout is part of it, but there's so much going on beyond that. Then you get into the areas like Dubai in the Middle East, that is staggering what they're doing. I do not think that is short term. I think that is going to go on for some time.

Can you explain why the age of the stuff that you are selling over there is just so old? Why would they be willing to take 7, 8 year old stuff thinking that the life it is probably only a couple of more years, and still be paying what appears to be historic premium on the equipment?

You got to understand that the rental business in those markets is very much in the embryonic stages. They are still using scaffolding and whatnot and just labor, manual stuff on projects that we wouldn't use. This country would even consider it. They are a very different market. The rental business there is really in the embryonic stages. I expect over time that will evolve, and that demand for the older equipment over there will change. But today that older type equipment is in great demand there.

With no further questions holding, I would like to turn the conference back over to Mr. John Engquist for any additional or closing remarks.

Thank you, operator. I appreciate everybody being on the call. We had a very strong quarter crude. We feel good about the drivers of our business. And we're going to keep working real hard to generate shareholder value. So we look at -- we look forward to talking to you on the next call. Thank you.

Thank you for your participation. That does conclude today's conference. You may disconnect at this time.