H&E Equipment Services Inc (HEES) 2009 Q2 法說會逐字稿

Good day and welcome to H&E Equipment Services' second quarter 2009 conference call. Today's call is being recorded.

And at this time I would like to turn the call over to Mr. Kevin Inda. Please go ahead sir.

Thank you, Nichole, and welcome to H&E Equipment Services' conference call to review the company's results for the second quarter ended June 30, 2009, 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 will refer to certain non-GAAP financial measures, and we reconcile 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 to 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 any 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. Welcome to H&E Equipment Services' second quarter 2009 earnings call. On the call with me today is Leslie Magee, our Chief Financial Officer.

Please proceed to slide three. This morning I will give an overview of our second quarter results. I will also discuss continued actions to manage our business in a very difficult environment. This has resulted in very low demand for our products and services. Leslie will then go over our financial results in more detail. When Leslie concludes we'll be happy to take questions.

Please proceed to slide five. We mentioned during our last call that we were not benefiting from seasonality at that time. We are disappointed that we finished the second quarter without seeing any seasonal improvement in our end markets. In fact, we saw further softening in our non-residential construction and industrial markets.

As a result, our revenue, EBITDA, and net income were down year-over-year and sequentially from the first quarter. Revenue declined 36.2% to $180.2 million from $282.6 million a year ago. EBITDA decreased to $34.6 million from $64.6 million a year ago. And we generated $300,000 of net income compared to $16.1 million a year ago. We were able to generate positive earnings when most companies in our sector are reporting substantial losses.

We are managing our business by aggressively reducing our operating costs and tightly controlling our capital spending. This has resulted in a 21.2% decrease in our SG&A expense and negative net CapEx for the second consecutive quarter. These actions have, and will, generate cash, increase liquidity, and maintain a very strong balance sheet, which is reinforced by low cost capital structure and debt maturities well into the future.

Please proceed to slide six. We have always said that our geographic diversity is one of the strengths of our company. We still believe that is the case. Although no region within our footprint has escaped a heavy impact by the recession, our Gulf Coast states continue to outperform our other regions. We believe that this portion of our footprint, combined with our product offering in these geographies, has significant exposure to the industrial sector. The industrial sector is down but still providing us with more opportunity than other sectors in the economy.

We also believe that with commodity prices stabilizing, the industrial sector could recover ahead of non-residential construction.

We are still optimistic that the government stimulus package could be a positive driver in our business. Little of the budgeted money has been spent and we are hopeful that stimulus spending will accelerate and eventually benefit the markets we serve.

Proceed to slide seven, please. We continue to operate in a very difficult and challenging environment. Funding for construction projects remains difficult to access. This is resulting in significant project cancellations and/or delays. As a result, non-residential construction and industrial spending will continue to decline for the foreseeable future.

The weakened demand for construction equipment is creating excess capacity in the marketplace. This is obviously impacting price and utilization. We continue to see extreme rate pressures throughout our footprint. Many of our competitors are showing little discipline when it comes to pricing. Unfortunately, there's no common method for calculating rate movement within our sector. This makes comparisons somewhat meaningless. We believe that our rates are above competitor averages and this varies somewhat by product type.

Despite the challenges we face, we're encouraged by recent developments. The banking system appears to have stabilized and the credit markets have improved. There are expectations that stimulus spending may increase during the second half of the year. The economy appears to have stabilized. We are also encouraged to see our physical utilization show signs of stability.

Please proceed to slide eight. To summarize, we expect the market to remain challenging for the remainder of '09. However, we believe our integrated business model, geographic diversity, and exposure to the industrial markets will continue to soften the impact of the current economic downturn to our business.

Our product support business continues to perform well in this difficult environment and is generating blended gross margins north of 40%.

Our rental fleet is young, extremely well maintained, and comprised of the type assets that are conducive to aging when necessary.

Our business is very well capitalized with low cost debt and no short-term maturity dates.

Our strong balance sheet allows us to walk away from unprofitable rental business and eliminates the need for us to dump fleet through the auction process.

Although utilization has been weak and new sales have declined, we are still able to maintain strong margins on fleet sales. This is evidenced by 23% gross margins on sales from our fleet in the second quarter.

Our primary focus during this recession continues to be maintaining low leverage, ample liquidity, and a very strong balance sheet.

To close, I want to emphasize that we remain very confident in our business model, our management team, and our ability to scale our business to this difficult environment. Our business will be very well positioned to take full advantage of the upturn when it occurs.

At this time I'll turn the call over to Leslie and then we'll take questions.

Thank you, John. Good morning. I'll continue this morning's presentation with a more detailed review of our second quarter results beginning on slide 10.

In general, our second quarter results look similar to our first quarter. We did not experience any seasonal uptick in demand and, to the contrary, we saw further pressure on year-over-year rental rates and slightly softer utilization of our rental fleet during the second quarter as compared to the first quarter of the year.

On a year-over-year basis, total revenues decreased $102.4 million or 36.2%, to $180.2 million as we continued to see significant contraction in demand.

Revenues declined in all business segments, but with our parts and service segments holding better that equipment sales and rentals as compared to the second quarter of '08.

By segment our rental revenues decreased $25.1 million or 33.4% over the prior year. Rentals were weaker in all product lines and were mostly affected by weaker demand for aerial work platforms.

Year-over-year, aerials were down 38%, earthmoving rentals declined 27.1%, and cranes were down 21.2%.

Our dollar return was 27.1% for the second quarter of '09, as compared to 37.5% for the same period in '08. Dollar returns were affected by lower time utilization of 1,260 basis points and a 15.8% decline in average rental rates.

While we are disappointed in the year-over-year rate declines, I think it is important to point out that this comparison only applies to newly opened contracts in the quarter compared to new contracts in last year's second quarter.

New contracts typically average about 25% to 30% of our total revenue billings in a given period.

Our average time utilization for the quarter was 55.3%, as compared to 67.9% a year ago with declines in each product line. Aerials and cranes were each down over 1,000 basis points and earthmoving time utilization was down 650 basis points.

Sequentially, we also saw declines in the utilization of both cranes and aerials, but the declines were partially offset by an improvement in earthmoving demand in the second quarter compared to the first quarter of the year. The first quarter time utilization was 56.2%.

New equipment sales declined by $40.8 million, or 40.7% over the prior year period. Approximately half of the total decline occurred in new crane sales.

Used sales were down 56.5% or $26.7 million over the second quarter of 2008. All of our product lines decreased with used cranes and used aerials accounting for almost three-fourths of the total decline.

Similar to the first quarter, parts and service performed better than our other operating segments. On a combined basis, product support revenues declined $5.1 million or 10.9%.

From here I'll discuss the performance of each segment at the gross profit line.

Our total gross profit margin decreased to 24.7%, as compared to 28.5%, primarily due to a decline in margins on rentals and used equipment sales.

For a sequential comparison, our gross margins were 27% in the first quarter of '09. In our rental segment, margins declined to 32.5% from 49.3% in the prior year. Following the same trend we've seen for a few consecutive quarters, rental revenues declined faster than our rental cost of sales. Rental depreciation decreased $3.2 million or 12.1% with a 33.4% decline in revenue.

As a result, depreciation expense increased to 45.7% of revenue as compared to 34.6% a year ago.

Also, the declines in average rental rates and time utilization have affected our rental gross margins.

Other rental expenses, primarily comprised of maintenance and repair costs, decreased 10.4%.

Margins on new equipment sales were 12.8% in both periods.

Gross margins on used equipment sales declined to 18.3% from 22.7% in the prior year.

The used equipment sales line item includes both facilities inventory and the sale of our rental fleet. The combined margin was largely impacted by pass throughs of trade-in inventory. Carving out rental fleet sales only we were pleased that margins on the sales of our rental assets were less volatile, or down 290 basis points to 23.4% in the current quarter as compared to 26.3% a year ago and flat compared to the first quarter this year.

Of our rental fleet sales, pricing was weakest in aerial work platforms.

Margins in our parts and service business declined to 41.2% from 42.5% in the prior year. Parts gross margins decreased to 28.4% from 29.1% and service gross margins were 63.1% versus 64.6% a year ago.

As for other revenue, gross margins declined to a negative 4.2% in the current quarter compared to a breakeven at the gross profit line a year ago. The decline in margins is due to lower revenues from high margin support activity such as damage waivers on rental equipment.

Slide 11 please. Income from operations decreased $26.2 million or 75.3% to $8.6 million. We've made additional progress in reducing costs, however, SG&A costs have not declined at the same rate as revenues and gross profits. SG&A declined 21.2% compared to the second quarter of '08.

Proceed to slide 12. Net income was $300,000 as compared to $16.1 million in the second quarter of last year. On an EPS level this calculates to $0.01 per share as compared to $0.45 per share a year ago. The effective tax rate was 65.1% versus 37% in the prior year due to the affect of permanent differences on lower pre-tax income.

For the quarter, interest expense decreased $1.5 million over the prior year to $8 million as a result of lower interest rates, lower outstanding floor plan payables, and average debt under the senior credit facility.

Slide 13 please. EBITDA decreased $30 million or 46.5% to $34.6 million, with margins decreasing to 19.2% from 22.9% compared to a year ago.

Next, slide 14. Our SG&A costs decreased $9.7 million or 21.2% to $36.1 million. Lower SG&A costs are due primarily to headcount reductions and related employee costs made throughout the course of 2008, combined with an additional 8.7% headcount reduction in the first half of 2009.

As a percentage of revenue, the SG&A costs were 20% as compared to 16.2% a year ago.

For a more relevant trend, SG&A improved as a percentage of revenues from the first quarter of the year, reflecting continued progress on cost reductions on lower sequential revenue.

Slide 15. Our gross lease capital expenditures for the quarter were $5.6 million including non-cash transfers from inventory. And net fleet capital expenditures were a negative $9.5 million. Our fleet at the end of the quarter was $732.9 million, which has decreased $52.7 million since the beginning of the year or another $30.3 million since the end of the first quarter.

For the quarter, gross and net PP&E CapEx was $5.3 million and $5 million respectively.

Our fleet age at the end of June was 35.9 months as compared to 31.2 months a year ago and 33.3 months at the beginning of this year.

Slide 16. This last slide, or slide 16, continues to be our key area of focus in today's environment. I'll point out a few items worth highlighting. Our debt consists of a senior secured facility which does not mature until August 2011, and our 8.375 senior unsecured notes which are due in 2016.

Our leverage remains low at 1.5 times on a debt to EBITDA basis.

We reduced our senior credit facility by $23 million and ended the quarter with $45 million drawn on the line. After considering debt drawn at quarter end and outstanding letters of credit, our net availability is $267 million on a $320 million facility.

Another key point is that we continue to operate our business without covenant concerns. Our financial covenant comes into play only if availability drops below $25 million. At that point, the minimum fixed charge covenant requirement would be 1.1 for 1.

Eligible assets supporting this credit facility exceed the $320 million facility by more than $200 million.

In closing, the strength of our balance sheet and capital structure provide us security in today's environment, which we expect will translate into opportunity and flexibility during better times in our industry.

That concludes my comments on our financial results so we'll take your questions. Operator, please provide instructions for our Q&A session.

(Operator instructions.) Henry Kirn with UBS.

Hey, good morning, guys.

Good morning, Henry.

Wonder if you're seeing the sequential improvement in earthmoving as any kind of early indicator of demand or was that more of just a seasonal improvement?

I think earthmoving is a early cycle product and when things start improving that's an area that we'll probably see some improvement in first. I think it's stabilized. I don't think we're seeing decline, but I don't think we're seeing a whole lot of improvement there either.

Okay. And pricing sequentially, could you talk about the pricing across the rental fleet sequentially and then maybe also what you're seeing in cranes?

We're seeing -- cranes are holding up better than other areas. Leslie is going to get some specifics -- do you have some specifics by product line, Leslie?

Yes. Sequentially in the quarter -- obviously we were most impacted at the AWP product line. On average our sequential rate decline was 7.5%, and cranes were down about 4%, and AWPs were down almost 9% on a sequential basis.

Okay. And are there any targets or goals for the second half of the year that you're willing to share at this point?

Yes. Henry our focus is going to continue to be our balance sheet. It's a tough environment, these rate pressures are going to continue for awhile. I don't think there's any question about that. We're starting to see some sequential stabilization. Year-over-year comparisons are going to continue to look bad for awhile. So, our focus is very much on our balance sheet, out liquidity, and being ready to take advantage of the upturn when it comes. That will remain our focus.

Okay, that's helpful. Thanks a lot, guys.

Thank you.

(Operator instructions.) Philip Volpicelli with Cantor Fitzgerald.

Thanks, it's Phil Volpicelli. Good morning.

Hi Phil.

I was just wondering what the floor plan financing was at the end of the quarter? And then the second question, because that's an easy one, with regards to the crane backlog in terms of new sales, are you seeing cancellations? Give us a little color on that.

Sure. The floor plan payable balance was $105 million at the end of the quarter.

As far as cancellations, I think that we have received the cancellations that we expect to. We think the order of backlog that we have now is firm. Now, that could change. The bulk of what we have on backlog now, the larger crawler cranes above 300 tons, the big German all-terrain cranes, and we believe those orders are firm right now.

And are most of those going into oil, gas, chemical, that kind of world? Or is it more construction related?

It's energy related, yes. Primarily energy related.

Okay, that's great. And then in terms of the target, leverage or I guess maybe debt levels that you guys want to get to by the end of the year, is the goal to pay down the entire credit facility or are you paying down the floor plan financing first? Which is the -- I guess, the more expensive piece?

We'll pay down the senior credit facility first.

Great. And then in terms of you should generate some cash, any thoughts to buying back stock or buying back any of the existing notes?

We have no plans for that right now. We like our capital structure, we like the pricing on our senior credit facility. To go out and do anything that requires bank consent that would reprice our facility we wouldn't be real interested in that right now.

Understood. Thank you.

(Operator instructions) And we'll go next to Adrienne Colby with Deutsche Bank.

Hi, good morning, thanks for taking my question. I'm wondering if you closed any branches in the quarter and if you see room for additional branch closures and also headcount reductions in the second half?

We have one small branch that we're looking -- that we will be closing in the third quarter and it's a satellite branch to our Salt Lake City branch. It's in very close proximity. It's Ogden, Utah. That's the only thing we're looking at closing right now. And that's a third quarter closing.

Okay. And then what about additional headcount reductions as we go into the second half?

There will be some headcount reductions going forward. Some of it will be just through hiring freezes and -- but we're looking at that on a daily basis and looking at it by region.

Great, thanks. And I was wondering if you could just provide a little bit more color around the tax rate for this quarter. Again, what we should be modeling going forward.

Yes, I mean the effective tax rate is just more sensitive given the lower pre-tax income and then the affect of the permanent differences. So, based on what we see today I would look more towards the year-to-date rate than what you saw in the quarter.

Great, thank you very much.

And we will take a follow-up question from Philip Volpicelli with Cantor Fitzgerald.

Thanks. I'm just wondering, with regard to the over capacity in the industry, too much equipment out there, are we starting to feel that that's getting better? How far along are we in that process of people selling fleets down to the right size?

That's a good question, Philip. I mean I think that progress has been made. I think all of the big rental companies have de-fleeted. I expect to see some more de-fleeting. I mean utilization rates are pretty low right now -- physical utilizations are pretty low so I would anticipate some further de-fleeting.

We're going to continue to de-fleet through our retail sales organization where we can maintain strong margins. We're not going to dump fleet through the auction process and I don't think we have to. We've got a balance sheet to where we can carry this for awhile and not give away our rental power. But I think you'll see some continued de-fleeting.

And is it too soon to think about adding tuck-in acquisitions or making a strategic acquisition?

We're not really looking at acquisitions. We're evaluating possibly some green field starts to de-fleet some areas that are really depressed right now. But as far as acquisitions that's not something we're -- that we're pursuing.

Great, thanks, John. Good luck.

Thank you.

[Jay Seen] with [Talamont] Asset Management.

Yes, hi, am I correct in remembering that you guys had another appraisal done in June?

The appraisal is in process. It is done as of the June 30 evaluation date. We don't have those results quite yet.

Okay. But when should we expect that then?

Typically that'll come in about 45, 60 days after the close of that period. So we should be seeing it fairly soon.

Okay. And then I guess just a follow-up then, what was your comment then about value in excess of collateral for the revolver, it was over $200 million? Because if I remember right I think last quarter that was something like $175 million.

Yes. It did increase and it increased as a result of some assets that were not previously included in the borrowing bank certificate back to an '07 acquisition we did. And it was just a matter of our lenders going through their process to include those assets in the borrowing base.

So it did increase and so that's the number I gave, over $200 million, is basically the suppressed availability at June 30th.

Okay, thank you.

And we'll go next to Barry Haimes with Sage Asset Management.

Good morning. Had a question. If you look at average rental rates for the quarter and then compare those to either where you exited the quarter or perhaps what you're seeing in July, any feel for whether there's been more movement?

I can tell you that if you look at July sequentially, the rate of decline that we've seen has slowed down. I think it's stabilizing a little bit. Again, year-over-year I think the comparisons are going to continue to be difficult for awhile but we anticipate sequential declines to moderate.

Great, thank you.

And we'll go next to Greg Kennelly with Safe Works.

Good morning. When do you see aerial work platforms turning around? I assume that's late cycle. Is that a 2010 event turnaround?

I certainly hope so. I think aerials are tied more to commercial construction than some of our other products are and that's a very depressed sector right now. There's no question about it. But I think yes, it certainly is -- we anticipate it remaining very difficult for the remainder of this year and probably into '10 and hopefully get some recovery at some point in '10.

Thank you.

(Operator instructions.)

And at this time there are no more questions in the queue. I'd like to turn it back over to our speakers for any additional or closing remarks.

Thanks, everybody. I appreciate you attending the call, and we're going to continue to focus on our balance sheet and maintain liquidity and be ready to take advantage of this upturn when it comes. And have a good day. We look forward to talking to you on our next call. Thank you.

And that concludes today's conference. Thank you for your participation.