H&E Equipment Services Inc (HEES) 2008 Q4 法說會逐字稿

Good day, and welcome to today's H&E Equipment Services fourth quarter 2008 conference call. Today's call is being recorded.

At this time I'd like to turn the call over 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 fourth quarter and year ended December 31, 2008, which were released earlier this morning. The format for today's call includes a PowerPoint presentation which is posted on our website at www.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'll 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 as 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 statement. 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 to 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' fourth quarter 2008 earnings call. On the call with me today is Leslie Magee, our Chief Financial Officer.

Please proceed to slide three. The focus of my comments this morning will be how we are managing our business in a very challenging and uncertain environment, and to discuss the current trends we are experiencing in our markets. Leslie will summarize the quarter and full year financial results. When Leslie concludes, we will then take questions.

Proceed to slide five, please. We're very pleased with our fourth quarter results, in spite of the extraordinary economic challenges that occurred throughout the year. Despite the impact of the tightened credit markets on our end-users, we again delivered solid financial results. Even with end-users canceling or postponing projects due to lack of funding, our revenue declined only 9.6% to $261.9 million in the fourth quarter. Keen in mind our year-over-year numbers were up against some record comps in 2007. Adjusted EBITDA decreased $7.5 million to $59.8 million, and our margin declined slightly to 22.8%.

In light of the current economic climate, our primary focus is on protecting our balance sheet and cash generation, with less focus on short-term results. We're committed to taking the appropriate steps in our business to maintain our financial strength. We have begun to reduce the size of our fleet, and are being very selective with replacement CapEx. We plan to significantly reduce our replacement spending in the current year. This reduced capital spending will generate free cash flow, which we intend to use to pay down debt. Also managing our inventory levels is a very high priority for our business. These actions will further protect the strength of our balance sheet, which is also reinforced by a low-cost capital structure and debt maturities well into the future. We have also taken steps to reduce our operating costs. These include a 9% workforce reduction, a general hiring freeze, and elimination of Executive and other key Management incentive pay for the foreseeable future.

Please proceed to slide six. We continue to believe our geographic diversity is a strength for our Company, in spite of the worldwide credit crisis and worsening U.S. economy. We have markets in Texas, Louisiana, and Arkansas that are holding up better than most areas in the U.S.. Our strong presence in the Gulf Coast will also provide opportunity for our Company, as a substantial portion of the hurricane protection work is yet to occur. The Corps of Engineers recently announced they will let $4 billion worth of storm protection work in 2009. Our footprint also gives us tremendous exposure to the industrial sector, which is down but still stronger than most sectors in our economy.

We believe our integrated business model provides us with the flexibility to manage assets and generate strong cash flow, even in a historical economic downturn like we are currently experiencing. We have multiple sources of revenue and gross profit, and our high margin parts and service business historically holds up well in economic downturns.

The recently passed Government stimulus package could also prove to be a positive driver in our business. Roughly $60 billion has been earmarked as part of the package for the tight infrastructure work we could participate in. A recent report shows that 58% of 4,483 shovel-ready projects fall within our footprint. Thus far, there's little clarity as to the timing or magnitude of these projects, or the release of these funds, but this component of the package could benefit our business into the future.

There is substantial challenges we face until the economy improves. Lending remains at a standstill, which is resulting in project delays and/or cancellations. The economy remains weak, and is forecast to remain weak throughout 2009. As a result, non-residential construction in industrial spending is forecasted to decline this year. As such, it is extremely difficult to predict trends in our business.

Please proceed to slide seven. To summarize, we are pleased with our performance in the fourth quarter and year, despite the credit crisis and other macroeconomic issues that are impacting the non-residential construction and industrial markets. We expect the challenging conditions to continue through 2009; yet we believe our integrated business model, geographic diversity, and exposure to the industrial markets will help to mitigate the impact of the current economic downturn to our business. Our rental fleet is very young, very well maintained, and these are the type of assets that are conducive to aging when market conditions so dictate. All of these factors, combined with our strong balance sheet, put us in what we believe is the best position possible to deal with the challenges that lie ahead.

As I mentioned earlier, we have and we will continue to take proactive steps to maintain a strong balance sheet, generate cash, control costs, and protect our margins during this period of declining activity in the non-residential construction and industrial markets. These very challenging times, but we remain confident in our business and ability to adapt to the current environment. However, with the current lack of visibility, due primarily to the frozen credit markets, volatile commodity prices, and general uncertainty in the overall economy, we believe it is not appropriate to provide guidance at this time.

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

Thank you, John. Good morning. First, I'll go through our quarterly results, and then I'll summarize the full year's financial results.

I'll begin on slide nine. Our total revenue decreased $27.8 million or 9.6% to $261.9 million year-over-year. Just a reminder as it relates to the results of our Mid-Atlantic operations, the quarters are now comparative, as the Mid-Atlantic acquisition was completed during the third quarter of the prior year. On a segment basis, revenues declined in the range of 9% to 16% across-the-board, with the exception of our parts and service operations, which increased slightly over the prior quarter. These year-over-year declines are reflective of worsening economic conditions, resulting in weaker demand for our products.

On a more detailed basis, rental revenues decreased $7.4 million or 9.5% over the prior year. Rentals were weaker in all product lines, but were driven primarily due to weaker demand for aerial work platforms. Overall dollar return was 35.6% for the fourth quarter of '08, as compared to 39.1% for the same period in 2007 and 38.8% for the third quarter of 2008. Year-over-year dollar return was negatively impacted by lower time utilization, and a 3.4% average rate decline. Our average time utilization for the quarter was 63.8% as compared to 67.8% a year ago, with declines in each product line. Fourth quarter time utilization was also down from 67.4% in the third quarter of '08.

Aerial utilization declined as a result of lower demand across essentially all of our markets, but specifically our Intermountain locations have suffered a very sharp and rapid decline in demand. Earth moving utilization is down in most markets, and cranes are still highly utilized, but demand did weaken during December due to boom truck demand and also due to some plant closures.

The break out of the 3% average rental rate decline on a product line basis is as follows. Aerial rates declined 3.5%, crane rental rates decreased 2.5%, and earth moving rental rates declined 4.1%. Rates also declined on a sequential basis but to a lesser degree. New equipment sales declined by $14.4 million or 12.5% over the prior period; all product lines experienced lower demand. Used equipment sales decreased $6.2 million or 16%. Used crane sales increased over the prior year, and were offset by declines in the sale of used aerial and earth moving equipment. Our parts and service business remains strong at 1.6% growth, or an $800,000 increase on a combined basis.

Moving on to gross profit. Our total gross profit margin decreased to 28.4% as compared to 29.4%, primarily due to a decline in our rental gross margins. Specifically in our rental segment, we experienced declines in rental gross margins to 45.6% from 51.9% in the prior year. Rental revenues declined faster than our costs. Rental depreciation decreased $600,000 or 2.3%, and was 36% of rental revenues in the current quarter as compared to 33.3% in the prior year. Also the declines in rental rates and time utilization that I mentioned earlier in my comments have negatively impacted our rental gross margins. Other costs associated with the fleet, such as property tax and maintenance and repair costs, were higher.

Margins on new equipment sales decreased to 12.9% from 13.3% a year ago, due primarily to margin pressures on earth moving equipment. Margins in our product support business declined to 42.1% from 44% in the prior year, mostly as a result of difficult comp and parts gross margins. Parts gross margins decreased to 29% from 31.3%, and service gross margins decreased to 63.9% from 64.6%, due primarily to revenue mix. These gross margin declines were partially offset by improvement in gross margins on used equipment to 25.8% from 22.8%. This was largely the result of lower sales volume of rental equipment acquired in the Mid-Atlantic acquisition. These sales have historically resulted in lower margins, as a result of purchase accounting. Also, gross margins on other revenue improved to 8.8% from 3.3%, as cost of fuel declined significantly in the fourth quarter. Slide 10, please. Let me take just a few minutes to discuss a non-cash item. Our fourth quarter results reflect non-cash goodwill and intangible asset impairment charges totaling $22.7 million that were identified in connection with our annual goodwill impairment testing, and also a preparation review of our year-end financial statements. These impairment charges will not affect our availability, and will be excluded from the EBITDA calculation for purposes of our covenant tests under our senior secured credit facility. For these reasons, I'll discuss most of the remaining financial results on an as adjusted basis or excluding the charge, as we believe the comparisons on this basis are a more meaningful presentation of our financial performance. Income from operations as adjusted decreased $6.1 million or 16.3% to $31.2 million. The decline in EBIT is due to declines in revenues and gross margins that I just finished outlining.

Proceed to slide 11. Net loss, including the impairment, was $600,000 or a loss of $0.02 per share. On an adjusted basis, net income was $13.8 million in the current period as compared to $17.1 million. On an EPS level, this calculates to $0.40 per share on a lower share count, as compared to $0.45 per share. The effective tax rate adjusted for the impairment was 38.2%, as compared to 37.7% in the prior year. For the quarter, interest expense decreased $1.1 million over the prior year to $9.1 million, as a result of lower interest rates and lower outstanding floor plan payables. We've not made any additional repurchases of our common stock in the open market since the third quarter of '08. This is indicative of our current focus of managing our business for cash. Our stock repurchase program expired by its terms on December 31, 2008.

Slide 12, please. Adjusted EBITDA decreased $7.5 million or 11.1% compared to the fourth quarter of '07, with margins decreasing slightly to 22.8% from 23.2%. We continue to generate strong cash-on-cash returns; on a trailing 12-month basis, our cash-on-cash return was 28.3%.

Next, slide 13. Our SG&A costs decreased $5 million or 10.4% to $42.9 million. Lower SG&A costs are primarily due to reduced labor and wages, and other employee costs such as travel and entertainment. As a percentage of revenue, SG&A costs were 16.4% as compared to 16.5% a year ago.

Slide 14. I'd also like to summarize the full year 2008 financials. As a reminder, the current year reflects the full 12 months results from the Mid-Atlantic acquisition, compared to only four months of results in 2007. Revenues increased 6.6% to $1,069,000,000, and decreased 3.7% on an organic basis. The year-over-year declines are mostly driven by lower demand for earth moving, crane, and aerial new equipment. We finished the year with gross margins of 29% as compared to 30.5% in the prior year. This in part is due to the comparative impact of the Mid-Atlantic operations, and their business mix and distribution-oriented focus. Other contributing factors are lower rental gross margins and other gross margins. Pre-tax earnings, excluding the impairment charges, were $92 million as compared to $106 million, a decrease of 13%. Adjusted EBITDA was $248 million compared to $247 million, or $235 million on an organic basis compared to $242 million, a decline of 2.5%.

Slide 15. Our gross fleet capital expenditures for the quarter were $14 million, and net fleet capital expenditures were a negative $10 million. Our fleet at the end of the year was $785.6 million, which has decreased $17.6 million since the beginning of the year; all the reduction occurred in the fourth quarter. Our gross PP&E CapEx for the quarter was $8.1 million and net was $8 million. For the full year, our gross rental fleet CapEx was $168 million and net CapEx was $45 million. This is a 35% reduction of gross purchases, and a 67% reduction of net CapEx compared to 2007. We plan to significantly reduce our fleet spending this year. Our fleet age at the end of the year was 33.3 months, as compared to 31.8 months a year ago.

Last, before opening the call to questions, I'd like to elaborate just a little on some of John's comments. On our third quarter call, I touched on our capital structure as economic uncertainty resulted in a revised emphasis on the importance of a company's liquidity. As we all know, this has become increasingly more important. I want to reemphasize that we have no need for access to the credit markets. Our senior secured credit facility is a $320 million facility, which matures in August of 2011. We have a significant cushion in our one covenant, which is a springing fixed charge covenant of 1.1 to 1, and triggers only if availability drops below $25 million. Our availability at the end of the year was $236 million under the credit facility, and with the expectation of increasing availability in the current year as we further reduce our debt.

Furthermore, we continue to maintain significant excess collateral value, well above the $320 million facility size. At year-end, the excess collateral value relative to the size of the facility was greater than $200 million. We also have $250 million of senior unsecured notes that carry a coupon of 8 3/8 and a maturity date of 2016. Again, 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, we'll now take your questions. Operator, please provide instructions for our Q&A session.

Thank you, ma'am.

(Operator Instructions)

We'll go first to Henry Kirn with UBS.

Good morning, guys.

Good morning.

I wonder if you could talk about the new crane market. How much more runway is there? When does the backlog run out, and could you characterize cancellations in the market?

Sure, I'll be glad to. There's no question that the crane markets are slowing considerably, particularly in the smaller cranes. You get into rough terrain cranes under 60 tons, that has slowed quite a bit. You get into crawler cranes under 300 tons, there's been some softening in the market. The big stuff, both in the lattice booms and the big German cranes are holding up still very well. It's a strong market, but there's definitely been softening in the smaller end of the crane markets.

Okay. And could you characterize the competitive landscape for pricing in each of the categories that you compete?

Sure. Are you speaking new sales or rentals or both?

Both but more -- I was thinking more on the rental side and either by geography or by product category?

I think on the dirt business, when you look at our earth moving business in the Gulf Coast, primarily Louisiana and Arkansas, pricing has been pretty stable there. You get into the Mid-Atlantic pricing on the earth moving equipment, it has been very difficult. The Intermountain region, the pricing there has been very difficult, but it's held up pretty good in the Gulf Coast. Aerial pricing across-the-board is taking a beating right now. I think there's a supply-and-demand issue that's developed in the last four or five months, and there's a lot of pricing pressure on the aerial business. Cranes is still holding up relatively well, and we expect it to for the immediate future.

That's helpful. Thanks a lot.

Sure.

We go next to Adrienne Colby with Deutsche Bank.

Hi, thanks for taking my question. Could you update us on your revenue mix as of the year-end, and I'm talking about end-market, residential versus non-residential versus industrial?

I'll be glad to, and again I don't want to get too specific here, because that's challenging to really pin those numbers down. We believe that the industrial markets continue to drive half of our revenue, and the residential markets we believe are still less than 10% of our business, so we're heavily weighted to non-res and industrial.

Okay, thank you. And within the rental segment, I understand you've had at least in the past more of a non-residential emphasis. Has that mix shifted?

No. We're heavily weighted to the non-residential side in our rental business. We don't have a lot of residential exposure.

Okay, thank you. And one more, if I could. What percent of your revenues right now are from Government sources, again so it would be segments that would benefit from a potential stimulus spending?

I don't know that I can quantify that. We deal with a lot of contractors that do Governmental work. We're not dealing directly with a Governmental entity, but we're dealing with a contractor that, for instance, does heavy civil work like water treatment or sewer treatment plants, or we deal with a contractor that in New Orleans is doing Corps of Engineers work. You know, we're dealing with a contract not directly but -- with the Government, but it's Government-related, so it's a fairly significant piece of our business, particularly on the earth moving side.

Great. Thank you very much.

Yes, ma'am.

We go next to Chase Becker with Credit Suisse.

Good morning.

Good morning.

A question for you in terms of when you look at your used equipment margins, they were actually a little bit better than what we thought, given you had revenues down over 15%. Was wondering if there was anything in there, if you could elaborate a little bit more on that?

No. We're seeing the -- our used equipment margins in our core business, the daily sales that we get out of our rental fleet have held up pretty well, and we think they are going to. The area we're concerned about is the aerial markets, particularly the older aerial equipment. As I've stated in the past we've had some really strong outlets in the Asian markets for older aerial equipment, and that has slowed down considerably. So we expect to see some pretty strong pressure on pricing on aerial equipment, and I think that was evidenced in the recent Ritchie Bros. auction.

Okay, very helpful. And then if you think about the overall age of your fleet relative to the last downturn that we had, how would you say your fleet is positioned? When do you think that -- how long can your fleet go before you really actually think you need to come in there and start doing a lot of replacement CapEx?

We could go a long way, and we're in much better shape than we were the last downturn. I think the last downturn our fleet got in the upper 40s, close to 50 months of age. Today we're at 33 or 34 months. You really need to focus on the type assets we have in our rental fleet. They are all large and long-life assets. We don't deal with a lot of small stuff like some of the rental companies do, and we could age our stuff a long way if the market so dictated. So we're extremely comfortable with our fleet age. I mean going beyond 50 months on the type assets we have would be no issue at all.

Okay, great. Thank you very much.

We go next to Seth Weber with Banc of America/Merrill Lynch.

Thanks. Good morning, everybody. John, just following up on that last question, would your expect your net rental CapEx in 2009 to be positive or negative?

In likelihood, it will be somewhat negative.

Okay. Given that we're two months into the first quarter here, is it possible -- I know you're not giving '09 guidance, but can you give us a view as to do you think the first quarter will be profitable or not profitable?

I believe we'll be marginally profitable.

Okay. And then just on the cost reductions, does that include store closings?

No. We have not closed any stores, Seth, and that's something we continue to evaluate, literally on a daily basis, and to this point we have no plans to close any stores.

Okay. And just one follow-up for Leslie. Is there a number for the floor plan table?

At year-end it was $128 million.

Great. Thanks very much.

Sure.

Thank you.

(Operator Instructions)

We go to Chris Daugherty, Oppenheimer & Co.

Good morning John and Leslie.

Good morning.

I want to -- a bookkeeping item. What was the inventory level at the end of the year?

$129 million, new, used and parts inventories combined.

And then John, can you just, one, I guess to clarify one of your previous comments. When you mean a negative net CapEx, that's the use of cash, right? I just want to make sure that I understand that right.

No, it would be an in-flow.

You mean an in-flow?

Right.

Okay. And then can you just talk about what your philosophy is in terms of managing the fleet size? I mean, are we getting to a point where it may not make sense to adjust the fleet to demand because of used pricing?

We're not there yet. Now I can tell you the -- some of the pricing I saw in this last Ritchie Bros. auction, particularly on the aerial side, I would be very hesitant to put stuff in an auction today, but I think we still have the retail organization and the means to liquidate our fleet profitably, and I think we're going to be able to right-size our fleet to the current market conditions.

And would that still be somewhere, utilization -- I guess what's your target utilization, as you think about that?

Well, our target utilization today is probably different than it was six months ago. There's no question that the markets softened, and there's some capacity issues in the marketplace right now, but 60% is probably a range that we're shooting for right now and trying to maintain.

That's it, thank you.

Thank you.

We go to Philip Volpicelli of Cantor Fitzgerald.

Good morning. Could you talk a little bit about the timing of the $4 billion storm protection work that you've got? And then, should the stimulus funds come through, when do you think that that kind of work would affect your business or help your business, would that be more like 2010 than 2009?

That's a good question, Phil. Let me speak to the stimulus first. There's just not a lot of clarity on how fast that can hit the marketplace. I don't have a lot of color on that. I think that potentially it's going to benefit our Company, and probably to the latter part of the year.

As far as the core work, the storm protection work in New Orleans, it's announced that it will be let. I believe it's going to be about 115 different lettings, which we like. We like it split up like that, I think it gives us more opportunity. And we've seen some of it already, let some small jobs, and I think that will accelerate throughout the year.

Okay, that's great. And then just in terms of the crane market, I think the gentleman earlier asked about the number of cancellations, and I think you gave us some good color but you didn't necessarily give us cancellations. Have you seen that jump dramatically, in terms of new crane sales?

We have, yes. We have received some cancellations, and we in turn have cancelled some of the stuff we've had on order to offset that, and we've worked closely with Manitowoc, they've been very reasonable with us and I think vice versa, but yes there have been some crane cancellations, no question.

It's mostly you have options, so you aren't stuck with the equipment, you can - [up to it]. How soon before delivery can you cancel something with your manufacturers?

Well, again, I mean that's a negotiated situation and Manitowoc has been very reasonable with their distributors in that area, and giving us some leeway. Obviously, if something is in the bill schedule and fixing to roll off the line, we're not going to leave Manitowoc sitting with that, but we do have a level of flexibility, and Manitowoc's been very reasonable with their distributors.

Great. And last question for me. As the market weakens, and some of your competitors may be under financial strain, what are your thoughts with regard to acquisitions? Is it something you will entertain or is it something you would entertain -- you know, are not looking to entertain?

I don't like to, you know, say never, because maybe a situation arises where it would make sense for us. I think for us to go out and do an acquisition, it would probably entail getting our credit facility repriced, and we have extremely favorable pricing on our credit facility right now. So I don't know that it would make sense or not, but I can tell you we're not out actively looking for acquisitions.

Great. Thank you very much, and good luck.

Thank you.

We go next to Philip Hogan of Deutsche Bank.

Hi, guys, a quick housekeeping question. First, if I could, Leslie can you just give us what the cash from operations was for Q4?

Sure, give me just one second here. Could you move on to your next question, and I'll get that for you?

Absolutely. Second one, just as far as priorities with regards to debt pay down, obviously you guys have plenty of availability under the revolver right now. Would you be looking to possibly repurchase bonds, or is the priority still the revolver, just to increase the liquidity there?

I think we're focused on liquidity. We would pay the revolver down.

Okay.

And Phil, for the quarter that was $26 million cash from ops.

Great. Thanks very much guys.

Sure.

Thank you.

At this time, I'd like to turn the call back to Mr. Engquist for any additional or closing comments.

I appreciate everybody being on the call. Obviously, this is a very challenging environment, and 2009 appears that it's going to be a very difficult year. We're very confident in our business model, the strength of our balance sheet and our ability to generate cash, and we'll weather this and be ready to really run when this market turns, and it will turn. Thank you for being on the call.

That does conclude today's call. Again, thank you for your participation. Have a good day.