H&E Equipment Services Inc (HEES) 2008 Q3 法說會逐字稿

Please stand by. We're about to begin. Good day and welcome today's H&E Equipment Services third quarter 2008 conference call. Today's call is being recorded. At this time I'd 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 third quarter ended September 30, 2008, which were released earlier this morning. The format for today's call includes a PowerPoint presentation, which is posted on our website at he-equipment.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 two.

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 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 words such "may", "could", "believe", "expect", "anticipate" and similar expressions constitute forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties which could cause actual results that differ materially from those contained in any forward-looking statements. These risk factors are included in the Company's most recent annual report on Form 10-K and quarterly report on Form 10-Q. Investors, potential investors and other listeners are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.

The Company does not undertake any publicly update or revise any forward-looking statements after the date of this conference call.

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

Thank you, Kevin, and good morning everyone. Welcome to H&E Equipment Services third quarter 2008 earnings call. On the call with me today is Leslie Magee, our Chief Financial Officer. Please proceed to slide three.

This morning I will summarize our third quarter results and discuss the key drivers of our business. I will also talk about how we are managing our business in a very challenging and uncertain environment. Leslie will then go over our financials in more detail.

When Leslie concludes, I will discuss our outlook for the remainder of the year and at that time we'll be happy to take questions. Please proceed to slide five.

Despite a global credit crisis that is beginning to impact most of our end markets, H&E Equipment Services delivered solid financial results in the third quarter. Revenue increased 3% to $278.6 million versus $270.6 million a year ago. EBITDA decreased to $67.2 million compared to $69.2 million of EBITDA. And net income decreased to $17.6 million or $0.50 per diluted share compared to $20.2 million or $0.53 per diluted share a year ago. We are pleased with this performance in light of much weaker markets and challenging year-over-year comps.

We have been and are currently taking the appropriate steps in our business to ensure that we deliver solid results in what we believe will be a challenging environment well into 2009. During the course of this year we will eliminate growth CapEx in our fleet spending and have been very selective with replacement CapEx which has resulted in improved fleet mix. We also have a very young fleet age. Our young fleet combined with our disciplined fleet spending ideally positions us to deal with this challenging environment. We have also maintained a strong balance sheet and have low cost capital structure with maturity dates of 2011 for our senior secured credit facility and 2016 for our senior unsecured notes. Our reduced capital spending will generate free cash flow, which we plan to use to pay down debt and/or repurchase shares. Would you please proceed to slide six?

Our geographic diversity continues to provide opportunity for our company in spite of the worldwide credit crisis and worsening US economy. As we have stated in the past, Florida and Southern California continue to be our most challenging markets. As we expect these markets to remain soft well into 2009, we have downsized our fleets and reduced overhead in Florida and Southern California to adjust these businesses to current market conditions.

Our mid-Atlantic region continues to be negatively impacted by strong ties to the earthmoving markets. This is partially offset by the strength of their crane markets. Earthmoving markets are down significantly across our footprint, with the exception of earthmoving businesses with exposure to oil and gas exploration and production.

Our strong presence in the Gulf Coast and Intermountain regions continues to provide our company with exposure to the petrochemical, oil patch, energy and mining sectors. We believe the uncertain credit markets, which are beginning to impact the non-residential construction sector, will have much less impact on the industrial sector. We expect the industrial sector to continue to provide opportunity for our company.

We also believe we benefit from our integrated business model in times of economic uncertainty. We have multiple sources of revenue and gross profit and our high margin parts and service business historically holds up well in economic downturns. Please proceed to slide seven.

To summarize, we are very pleased with our performance in the third quarter, in spite of the credit crisis and other macroeconomic issues that are impacting the non-residential construction markets, we delivered solid results for the quarter. Our geographic diversity and strong exposure to the industrial markets continue to provide opportunity for our company. We have a very young, well maintained rental fleet and the type of assets that are conducive to aging when market conditions so dictate. We believe our young fleet and strong balance sheet put us in the best position possible to deal with the challenges that lie ahead. In these difficult market conditions we plan to manage our business to maintain a strong balance sheet, generate cash, control costs and protect our margins.

At this time I'll turn the call over to Leslie for the financial review.

Thank you, John. Good morning. I would like to go through our financials providing more detail on our third quarter results beginning on slide nine.

Our total revenue increased $8 million or 3% to $278.6 million year over year. The current quarter reflects a full three months' results from the mid-Atlantic region, as compared to the prior year's quarter which reflects one month of results from the acquisition. The mid-Atlantic revenues increased to $38.8 million as compared to $10.1 million a year ago. Top line revenue growth exclusive of the mid-Atlantic revenues declined 7.9%. On an organic basis our product support business reflected growth, offset by declines in rentals and new and used equipment sales. These year-over-year declines are reflective of a more challenging environment.

Moving onto detailed results on a segment basis. Rental revenues increased $2.6 million or 3.4% over the prior year. Rental revenue from the mid-Atlantic was $4.5 million as compared to $1.3 million a year ago. On an organic basis, rental revenues declined 0.8% due to weakness in our aerial markets.

Dollar return was 38.8% for the third quarter of 2008 as compared to 41.9% for the same period in 2007, but improved over second quarter returns of 37.5%. Year-over-year dollar return was negatively impacted by a 2% average rate decline on new contracts, lower time utilization and the impact from the rental operations in the mid-Atlantic. Our average time utilization for the quarter was 67.4% as compared to 70.7% a year ago, with declines in each product line. Third quarter time utilization was down just slightly from the second quarter, which was 67.9%.

Aerial utilization is down as a result of lower demand for this product which has begun to spread into markets other than Florida and Southern California. Earthmoving utilization is down in most of our markets and cranes remain highly utilized but have been impacted by lower demand for boom trucks.

I'd like to break out the 2% average rental rate decline on a product line basis. Our crane rental rates increased 1.4% over the prior year due to strength in crane demand. Aerial rates declined 2.5% over the prior year and earthmoving rental rates declined 1.1%. We were, however, pleased with our ability to protect rates on a sequential basis. Rates increased slightly at 0.1% from the second quarter to the third quarter.

New equipment sales grew $3 million or 3.3% over the prior period. Mid-Atlantic new equipment sales were $20.5 million, as compared to $3.1 million a year ago. The demand for cranes remained strong, but our third quarter sales were limited by product availability. On an organic basis, new equipment sales declined in all product lines with the exception of new lift trucks.

Used equipment sales decreased approximately $4.6 million or 10.3%, partially offset by a $3.5 million increase in used equipment sales from the mid-Atlantic region. On an organic basis, all product lines decreased year-over-year with the exception of the sale of used lift trucks. Although demand for cranes remains strong, we controlled the sale of our used cranes from our rental fleet to [maintain] adequate fleet available for rent.

Our parts and service business continues to show solid growth at 13%, or $5.7 million on a combined basis, due to revenues from the mid-Atlantic and increased demand. The mid-Atlantic contributed $3.8 million of the increase in total product support revenues. On an organic basis, product support revenues increased 4.4%.

Our total gross profit margin decreased to 29.6% as compared to 31%. The margin decline is due to a 16.9% gross margin on $38.8 million of revenues from the mid-Atlantic operations. Our gross profit margin, exclusive of the mid-Atlantic, increased to 31.7% in the third quarter, as compared to 31.3%.

Next I'd like to discuss gross margin by each segment. We experienced declines in rental gross margins to 50.3% from 52.9% in the prior year. Rental depreciation has increased $1.9 million or 7.8% and was 33.7% of rental revenues in the current quarter, as compared to 32.4% in the prior year. As we've explained in the past, our rental business has been impacted by the mid-Atlantic's focus on distribution versus rentals. Also, as I mentioned earlier in today's discussion, our rental returns were negatively impacted by lower rental rates and time utilization on a year-over-year basis.

Margins on new equipment sales decreased to 13.4% from 13.9% a year ago due primarily to the mix of new equipment sold. Margins on new sales of $20.5 million in the mid-Atlantic were 13.2%. Our overall gross margin was impacted by a decline in used equipment gross margins to 23.3% from 24.1%. Used equipment margins declined due to lower margins on fleet sales in the mid-Atlantic, due again to fair value adjustments required by purchase accounting.

Margins on both parts and service revenues remained strong and had no impact to our overall gross margin in comparison to the third quarter of 2007. Parts gross margins increased to 29.5% from 29.3% and service gross margins increased to 64% from 63.7%.

Gross margins on other revenues, which is primarily related to equipment support activities such as hauling freight and damage waiver, decreased to a negative 0.3% from a gross margin of 11.9% in the prior year. The decline is largely due to increased fuel costs. Slide 10 please.

Income from operations decreased to $37.2 million from $42.4 million. The mid-Atlantic contributed $1.8 million of income from operations as compared to $1 million a year ago. The decline in EBIT is due primarily to the impact of weaker markets and increased depreciation and amortization of $2.9 million. On a sequential basis we realized better operating margins despite lower revenues. Please proceed to slide 11.

Net income was $17.6 million in the current period as compared to $20.2 million in the prior year, on a lower effective tax rate of 36.9% versus 39.4% in the prior year. For the quarter, interest expense increased $0.5 million to $9.5 million over the prior year as a result of maintaining higher average borrowing under our senior secured credit facility.

We repurchased a total of 3.6 million shares or $55.4 million of common stock in the open market since the initiation of our buyback program. Slide 12.

EBITDA decreased to $2 million or 2.9% compared to the third quarter of 2007, with margins decreasing to 24.1% from 25.6%. The mid-Atlantic contributed $3.4 million of EBITDA or an 8.8% margin compared to $1.7 million a year ago. These results reduced our current quarter's consolidated margins by 250 basis points. Our EBITDA margin was 26.6% for the third quarter compared to 25.9% a year ago, excluding the mid-Atlantic results.

We continued to generate strong cash on cash returns. On a [LPM] basis our cash on cash return was 29.8%. Next, slide 13.

Our SG&A costs increased $4 million to $45.6 million. SG&A for the mid-Atlantic region increased $3.6 million to $4.8 million in the third quarter. As a percentage of revenues, SG&A costs were 16.3% as compared to 15.4% a year ago.

And last, slide 14. Our gross fleet capital expenditures for the quarter were $51 million and net fleet capital expenditures were $22 million. Our fleet at the end of the quarter was $806.3 million, which has increased $3.1 million since the beginning of the year. Gross PP&E CapEx for the quarter was $4.8 million and net PP&E CapEx was $4.7 million. Our fleet age at the end of September was 31.2 months compared to 33.4 months a year ago.

Before turning the call back to John, I'd like to touch on the strength of our capital structure which has become increasingly important with today's economic uncertainties. Currently we have no need for access to the credit markets. Our senior secured credit facility is a $320 million ABL facility which matures in August of 2011. Our interest charges are tied to a grid which is based on our leverage. Today we're at the lowest end of the pricing grid due to our extremely low leverage of about 1.4 times. Our current interest rate is LIBOR plus 125 basis points. This ABL facility only carries a springing fixed charge covenant of 1.1 to 1, which is triggered if excess availability falls below $25 million. At the end of the quarter we had $207 million of excess availability. With our focus on cash generation, this gap should only continue to widen. Also, our interest coverage today is just under 6 times.

We also have $250 million of senior unsecured notes that carry a coupon of 8.375 and a maturity date of 2016. We're confident we've put the right capital structure in place that provides us with the liquidity and flexibility necessary to protect our financial strengths during an economic downturn. With our capital structure and counter cyclical cash flow generation we expect to maintain a strong balance sheet, despite the macroeconomic challenges that exist today.

With that overview of our financial results, I'd like to turn the call back to John to go over our 2008 outlook.

Thank you, Leslie. As we've said today, we are dealing with tremendous macroeconomic uncertainty. The outlook for the overall economy in the non-residential construction market has continued to deteriorate. Despite these factors we are reconfirming our guidance for EBITDA and EPS and lowering our revenue guidance to adjust for expected delays in fourth quarter crane shipments. We have also narrowed our guidance on EBITDA and EPS.

Our 2008 annual guidance is as follows. We expect revenues in the range of $1.08 billion to $1.09 billion. We expect EBITDA in the range of $247 million to $253 million. And we expect EPS in the range of $1.60 to $1.68, based on an estimated effective tax rate of 37% and an estimated 35.6 million diluted common shares outstanding, which reflect our stock repurchases through the end of October.

With that, operator, we would now like to move to the Q&A session. Would you please provide instructions?

Yes, sir. (OPERATOR INSTRUCTIONS) We'll go first to Henry Kirn with UBS.

Good morning, guys. A question for you on the longer term outlook for crane demand. What happens if crane demand rolls faster than expected? How solid do you think the orders for 2010 are, say?

Well, I that that -- we have not placed or taken orders for 2010 as of yet. We've taken some probably but they're few and far between. And I think you really need to look at the drivers of our crane business. I mean, it's heavily weighted to the energy sector. You know regulated public utilities, international oil companies, that's big, big drivers of our crane business. And I think those orders are going to remain pretty solid for us. I have no significant concerns there right now.

Okay. And as far as commodity prices pulling back, how do you expect them to impact petrochemical or oil patch or mining demands going forward, if at all?

Well, right now we're seeing tremendous demand in oil and gas exploration. If oil goes to $60 and stays there, could that impact that? Sure it could. Right now we have tremendous demand and I think it's anybody's guess what oil pricing is going to do. Obviously demand is down. It's certainly not going to go back to $140 a barrel, but I don't expect it to stay at $60 either. And I think we're going to continue to see pretty good demand in the oil and gas sector.

How quickly does the demand respond to changes in pricing? Do the producers look further out than the spot price today?

Absolutely. No question about it and they have to. It's been too volatile to make short term decisions.

Okay. Thanks a lot. Good quarter.

Thank you.

We'll go to Seth Weber with Banc of America Securities.

Hi. Thanks. Good morning, everybody. Can you comment on the used equipment market a little bit more? I think I heard you say you made some fair value adjustments to your assumptions there. Can you just talk about what you're seeing on pricing and demand trends in the used market?

Well we didn't make any fair value assumptions. In the Burress acquisition there were some purchase accounting adjustments where we had to re-price that fleet to the fair market value. So that impacted our margins in the Burress territory. But Seth, so far we've seen used equipment pricing hold up very well. Obviously on the crane side it's a supply and demand issue. I mean, those residual values couldn't be stronger. But even in our aerial business and our earthmoving business we have not seen a lot price deterioration. We've seen lower demand, but not a lot of price deterioration. We're very fortunate that our sector today is not dealing with the overcapacity issues we had in the last downturn, if you go back to '01, '02, '03. We had a real capacity issue then. We're not dealing with that today so pricing is holding up quite well.

Okay. Thanks. And going back to the Burress asset. margins, EBITDA margins, there are now sub 10%. Where do you see that settling out? And when do you think that starts to move? I mean, I know it's not going to go back -- it's not going to reach your core business margins. But where do you think that can go to?

In having conversations with our operations people as recently as last night, we believe it's bottomed out there. It's a tough market right now. And we're trying to develop their rental operations and we're making some progress. We brought in some awful good rental people there. I think it's bottomed out and I think you will see some margin improvement moving forward. We need some help from the marketplace, but even in a tough market I think things have bottomed out there.

Okay. John, can you expand on your comment about expected delay in fourth quarter crane shipments? Is there something -- is that just coming from one of your providers that are having some manufacturing issues? Or is there something going on there?

No manufacturing issues. We've had cranes all year long slipping out of one reporting period into another. And we expect that to occur in the fourth quarter also. So whereas we had forecast certain sales in the fourth quarter, I think they're now going to occur in the first quarter. It's not that we're losing the business; we're not getting order cancellations. It's just slipping into another reporting period.

Is that one type of crane? Is it a crawler crane or a tower crane? Is there something you can point to as one specific type?

Some of it is crawler cranes. Some of it's big ATs. It's a mix. Most of our RTs are being delivered timely. But it's a little bit of both, lattice boom cranes and ATs.

Okay. Thanks. And then just finally, Leslie, can you just tell us how much is left on the repo on the program at this point?

Approximately $45 million.

$45 million. Great. Thanks very much.

Thank you.

We go next to Adrienne Colby with Deutsche Bank.

Hi. Thank you for taking my question. I was wondering if you're seeing any offset to the slowing demand in the few markets from the areas that were hit by the hurricanes this fall?

That's a good question. I think initially we probably had a negative impact from the hurricane. But going forward we think it will ultimately be a net positive for us. A lot of the work that has occurred to this point has been clean up work, which we really don't participate in to any great extent. We don't have those kind of assets in our fleet. But we are seeing a positive impact to our aerial business in Houston. And we anticipate a very significant impact to our product support business along the Gulf Coast. There were a lot of big crawler cranes and ATs that were flooded during that hurricane and we're going to get a lot of work from that. So it's going to end up being a net positive for us.

Okay. Great. And I was wondering if you're considering any branch closures or headcount reductions in some of your more difficult markets like California and Florida?

I think we've probably already reduced the headcounts there to adjust to the marketplace. So I don't see a lot of further headcount reductions; we've already done that. And whereas I don't see us exiting any markets, as I said on the last call, we are looking at potentially consolidating some branches where we have two branches in fairly close proximity; we may operate out of one branch. But we're not exiting any markets.

Okay. So you haven't actually consolidated or closed any then since the last quarter?

No, ma'am.

Okay. Thank you.

We'll go to Chase Becker with Credit Suisse.

Hi. Good morning. Thanks for taking my question. Just with respect to if you look at your margins on the parts side, I think if you went back before non-res really picked up and really you saw this booming commodities, your margins were kind of in that 27% range. Is there any reason to believe that, if commodities drop off a cliff and non-res isn't good over the next 12 months, that margins don't deteriorate to that level again? Or is there anything structurally different? I mean, obviously you have Burress and you have the Eagle acquisition, but is there anything out there that would prevent you from maintaining the current margins?

I don't believe so. I don't see anything in this environment that we should see deteriorating margins in our product support business. That's a business that historically has been almost countercyclical to downturns for us. When people quit making capital expenditures they have to maintain their existing fleets. And historically we benefit from that.

Okay. And then with respect to the cash flow -- and I understand the CapEex comments -- are there any other levers that you can pull in the next 6 to 12 months to improve cash flow?

I think the big one is reducing our capital spending and continuing to sell rental fleet. That's obviously the biggest generator of cash in our business.

Okay. Thank you very much.

And we'll go to Chris Daugherty with Oppenheimer & Company.

Good morning, John and Leslie. Leslie, just one clean-up question. What was the floor financing at the end of the quarter?

$141 million.

And then John, can you talk about the mid-Atlantic? Do you think that the pricing there for your rental business is below the market there? Is it just a question of you guys focused more on the rental business and raising the prices? Or is it just that's what the market is right now, it's just a weaker market than your other markets?

Well I think it's some of both and I think you have to look at where their concentration is of equipment in their fleet. It's heavily weighted to earthmoving markets. And those markets are off terribly in the mid-Atlantic. There is very little if any residential development going on. There's none of the big resort-type development going on that was a big driver of their business.

So the earthmoving markets are real tough. I think when we acquired them that they were probably under pricing the market because of their focus on distribution. They were more interested in selling product than they were renting it. I think we're changing that and I think we're getting our prices up more to where it ought to be in that market. But the big issue there is just heavy earthmoving exposure in a real, real soft market. And that's going to come back and I think we've de-fleeted them considerably. And we've taken a lot of earthmoving product out of the mid-Atlantic and redeployed those assets. So that's going to benefit them going forward and it's currently benefiting us because we've put that stuff to work.

And then just since you are one of the sort of larger guys that have both a rental business and a dealer business, are you seeing any of your customers switch from buying equipment to renting, given the credit markets?

That's a real good question and I think that is yet to be determined. I think potentially we're going to see some of that. I think that's certainly a possibility. I think it all depends on how long this credit crisis lasts and when the credit markets open up. If that is -- lasts for a while, I think that scenario could develop where there is some increased rental demand.

And then just lastly, is it still your expectation to reduce the size of the fleet by $25 million to $30 million by the end of the year?

Yes.

All right. Thank you.

And with no other questions in queue I'd like to turn the call back to Mr. Engquist for any additional or closing comments.

Well I appreciate everybody being on the call. As we've said, we're in a tough environment here. I think we're doing the appropriate things to ensure that we continue to deliver solid performance. We've got a great low cost, capital structure with maturity dates well into the future. So I think we're very, very well positioned to weather this storm and we will.

We look forward to talking to you on the next call. Thank you.

And that does conclude today's call. Again, thank you for your participation.