H&E Equipment Services Inc (HEES) 2010 Q1 法說會逐字稿

Good day, and welcome to today's H&E Equipment Services first quarter-2010 conference call. Today's call is being recorded.

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

Thank you, Lena, and welcome to H&E Equipment Services' conference call to review the Company's results for the first quarter ended March 31, 2010 which were released earlier this morning.

The format for today's call includes a PowerPoint presentation, which is also 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 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 the forward-looking statement. These risk factors are included in the Company's most recent annual report on Form 10-K.

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 duty to 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' first-quarter 2010 earnings call. On the call with me today is Leslie Magee, our Chief Financial Officer.

Proceed to slide three please. This morning I will give an overview of our first-quarter performance, discuss specific regions we serve, and provide our thoughts on the current market outlook. Leslie will summarize the quarter's financial results. When Leslie concludes, we'll take questions.

Slide five please. As we indicated on our fourth-quarter conference call, we fully expected a challenging first quarter. First, this period is historically our weakest quarter due to seasonality. The conditions were also compounded by unusually adverse weather across many of our markets and a continuation of weak demand and pricing.

As a result, revenue declined 38.4% to $114.7 million from $186.2 million a year ago. EBITDA decreased $27.1 million to $11 million on a margin of 9.6% versus 20.4% a year ago and also declined sequentially. We posted a net loss for the quarter of $12.1 million compared to net income of $2.2 million a year ago. Net loss per share was $0.35 versus net income of $0.06 in the first quarter a year ago.

However, for the first time since the onset of the recession, we began to see some positive signs in our business including improved fleet utilization throughout the quarter. I'll elaborate on this and some additional positive indicators later in my remarks.

Please proceed to slide six. While all demand remains soft, some of our end markets are performing better than others due to our industrial exposure. Our Gulf Coast region still accounts for the majority of our revenue and gross profit at 56% and 61%, respectively. In Texas and Louisiana, we have significant exposure to the oil and gas and petrochemical industries, and these segments have held up better than our other end markets during the recession.

With oil prices high and gas prices projected to rise, we are seeing new activity in these sectors. Forecasts call for an acceleration of stimulus spending, and we hope to benefit from these projects once they commence. Our intermountain region continues to be our second largest region generating 20% of our revenues and gross profit. Our exposure to the mining sector is significant, and with strong commodity prices we expect to see increased activity and demand in this region. Furthermore, major equipment manufacturers are forecasting higher demand for mining-related machines, which signals improved conditions for mining and related projects.

The balance of our regions, Mid-Atlantic, Southwest, Southeast, and West Coast, account for approximately one-quarter of our revenue and 19% of our gross profit. Our customers in these markets are far less industrial and more nonresidential construction focused. Thus, these markets continue to be very weak. Funding for commercial projects remains very tight.

Proceed to slide seven please. As far as our current market outlook, challenges persist. Demand and pricing for our products and services remains at historically low levels. The nonresidential construction markets we serve are expected to lag the recovery of the general economy. Lending is still very tight for nonresidential construction projects, and commercial real estate is still forecasted to be problematic for the economy, at least through this year. Lastly, even though we are seeing some positive signs in our business, visibility is still very limited.

There are an increasing number of positive indicators for our business. The economy is improving and the financial markets have been performing well. Earnings continue to point to an improving world economy. Residual values on used equipment have improved and we saw increased activity in our earthmoving business, which is an early cycle product, and gradually, from January through April, we experienced material increases in our on-rent levels with current levels above 53%. This compares to a historically low level of less than 48% units on rent at one point during the month of January.

Bidding activity for construction projects earmarked for stimulus spending is expected to accelerate and ABI levels are improving. Commodity prices remain at solid levels. We also see increased activity in the petrochemical and oil patch markets we serve.

Please proceed to slide eight. In conclusion, we expect the challenging conditions to persist throughout 2010, and in light of limited visibility, we are not providing specific guidance. We do expect sequential improvement in our rental business in the second quarter, but the other segments of our business are very difficult to predict under the current conditions. As a result of ongoing rate pressure and other market conditions, we do not expect year-over-year, top-line revenue growth for the next several quarters at the earliest. We do, however, expect 2010 to be the bottom of the cycle for our sector.

We are continuing to take proactive steps on the current market conditions, shrinking our fleet to adapt to demand and focusing on cost. Our strong ties to the industrial sector are benefiting our Company, and increased activity, especially in the petrochemical and mining sectors, is a positive for our business. Our balance sheet is strong and our capital structure is solid allowing us to take advantage of improved market conditions and opportunities. Lastly, we are cautiously optimistic about the recent indicators in our business.

At this point, I'm going to turn the call over to Leslie, and then we'll be glad to take questions.

Thank you, John. My comments this morning will include a more detailed review of our first-quarter results. These results reflect a difficult operating environment, which continued to affect the demand for our products and services. Low levels of demand again produced sharp declines in our top line and pricing pressures in many of our business segments. Consequently, we recorded lower margins across the board and weak bottom line results.

First, on slide ten, you'll see a comparison of year-over-year total revenues and gross profit. As usual, I will address the changes in revenue by segment, and then I'll do the same for gross profit. Total revenues decreased 38.4% to $114.7 million with lower revenues across all business segments. Rental revenues decreased $19 million or 34.3% compared to a year ago. Rentals declined in all major product lines. Aerial and crane rentals both declined in the 40% range while rentals of earthmoving equipment declined approximately 16%.

Our dollar returns were 22% for the first quarter of this year as compared to 28.7% last year. Our dollar returns were negatively impacted in the quarter by lower time utilization of 49.7% versus 56.1% in the first quarter of '09.

On a product line and a year-over-year basis, lower demand for aerials and cranes continued to drive the declines in time utilization. Both our earthmoving and lift truck fleet utilization increased by nearly 500 basis points compared to the first quarter of 2009. Sequentially, time utilization decreased 360 basis points from the fourth quarter and decreased in all product lines.

As John noted in his remarks, time utilization, which is calculated as a percent of total number of units available for rent, improved each month of the quarter and also continues to strengthen throughout this point of the second quarter. Our on-rent percent has improved due to the combination of placing nearly 700 additional units on rent since the start of the year while at the same time reducing our total unit count by roughly 500 units.

Our dollar returns were also affected by lower rental rates. For the quarter, rates were down 13.9% on new contracts compared to a year ago. Sequentially, rates declined 2.2%.

New equipment sales declined $37 million or 57.4% over the prior-year period and was driven by lower demand for cranes. New aerial sales increased slightly on both a year-over-year and a sequential basis. Also, new earthmoving sales increased slightly compared to last year. Used sales were down $2.7 million or 16.5% over the first quarter of 2009 due to lower demand for used aerial equipment.

Business activity in our parts and service segments was also down and our results reflected similar year-over-year results as in the fourth quarter. On a combined basis, revenues declined $10.4 million or 25%.

Now moving on to gross profit in each segment. Total gross profit for the quarter was $23.9 million compared to $50.3 million a year ago. From a gross margin perspective, consolidated margins decreased to 20.8% as compared to 27% primarily driven by lower gross margins on rentals, other revenues, and new equipment sales. For a sequential comparison, our gross margins were 22.3% in the fourth quarter.

In our rental segment, margins declined to 21.7% from 36.7% in the prior year. The declines in average rental rates and time utilization previously mentioned have affected our rental gross margins. Partially offsetting the impact of rates and utilization were lower rental cost of sales. Rental depreciation and other rental expense decreased almost 19%.

Margins on new equipment sales were 8.7% this quarter compared to 13.6% in the prior year and 9.6% in the fourth quarter of '09 due principally to lower margins on cranes. For the second consecutive quarter, new earthmoving margins reflected positive trends.

Gross margins on total used equipment sales declined to 20% from 21% in the prior year. Included in these results were margins of 23.6% on rental fleet sales.

Margins in our parts and service business declined to 40.1% from 41.6% in the prior year. Parts gross margins decreased to 27.4% from 28.8% and service gross margins were 61.9% versus 63.1% a year ago due primarily to revenue mix. Margins on the other revenues, which are equipment support activities, declined in conjunction with lower revenues in our primary business activities.

Slide 11 please. We recorded a loss from operations of $11.9 million compared to income from operations of $11.1 million a year ago. Margins were negative 10.4% compared to 6% a year ago. These results reflect the impact of sharp declines on our top line due to still challenging conditions. With lower demand and pricing pressures, our profitability has been negatively impacted.

Proceed to slide 12. My remarks from previous slides certainly also apply here on slide 12. For the quarter, net loss was $12.1 million or a loss of $0.35 per share compared to net income of $2.2 million or $0.06 per share.

Please move on to slide 13. EBITDA decreased $27.1 million, 71.1%, to $11 million with margins decreasing to 9.6% from 20.4% compared to a year ago. The largest factor in the year-over-year EBITDA decline is the weakness in our rental revenues as noted in my earlier remarks. Lower revenues and gross profit in all other business segments were also a drag on year-over-year EBITDA. Partially offsetting these top line and gross profit declines were lower SG&A costs.

Next slide 14 please. Our SG&A costs decreased $3.2 million or 8.2% to $35.9 million. Consistent with recent quarters, we incurred lower salaries, wages, incentives, and benefits. We also benefited from lower bad debt expense of approximately $600,000. Offsetting these savings was an increase in costs relating to our ERP system implementation in the first quarter. These costs included additional consulting fees of approximately $1.1 million and also increased depreciation expense of $1.1 million.

Slide 15. Our gross fleet capital expenditures for the quarter were $6.1 million including noncash transfers from inventory, and net fleet capital expenditures were negative $4.8 million. Our fleet at the end of the quarter was $660 million based on original equipment costs which decreased $15.1 million during the quarter.

Gross and net PP&E CapEx for the quarter was $700,000 and $600,000, respectively. Our fleet age at the end of March was 41.8 months as compared to 40 months at the beginning of this period.

Slide 16. This last slide is an update on our capital structure and credit statistics. There have been no significant changes in our capital structure since the end of the year and we remain pleased with our exceptional balance sheet and liquidity position. We continue to operate with full access to the credit facility and we currently have $312 million available, which is net of outstanding letters of credit of $8 million.

I think it's important to point out our leverage. Despite significant declines in earnings, our leverage remains low at 2.2 times.

In closing, our focus remains centered on protecting our balance sheet as difficult business conditions persist in the near term. We believe this focus will provide the flexibility we'll need to drive our performance when the environment improves.

We'll now take your questions. Operator, if you'll please provide the instructions for our Q&A session. Thank you.

(Operator instructions.) And our first question comes from Henry Kirn with UBS.

Hey, good morning, guys.

Good morning, Henry.

Wondering if you could chat on the parts sales at the dealerships, if you're seeing some improvement there as an early indicator.

We're not yet, Henry. I mean, our parts and service business has been soft. It was soft in the first quarter. We still believe that's going to be an early indicator for us. We're definitely seeing fleet utilization pick up and not just our fleet, our end-users' owned fleets. We're seeing some increase in utilization. So we expect to start seeing some benefit from that in our parts and service business, but we did not see that in the first quarter.

Okay, and could you talk about crane pricing today? Where does it compare to a year ago and maybe a quarter ago, and is the market becoming more competitive?

Absolutely, and when you speak of crane pricing, you're talking about the margins we're getting?

Right. Both the new price and the margins you're getting on the rental.

Well, there's really been no material change from manufacturers on their pricing. I can tell you they haven't been reducing pricing. I think they've been pretty disciplined in holding their price. We have seen our margins come down significantly. The crane market turned down so fast that every dealer in the country got caught with excess inventory, a lot more inventory than they needed. And I can tell you the market's come way down and when there's a deal out there right now it's very, very competitive, so we've seen a lot of pressure on crane margins.

As these inventories bleed off and come back down to the right size, I expect crane margins to come back significantly, but right now there's a lot of pressure on margins.

That's helpful. Maybe if I can squeeze one more in. How were the April trends compared to March and February? Did you see the continued sequential uptick there?

Yes, we have. It -- and we're speaking rental business, right?

Right.

Right. Yes, our utilization, our end -- on-rent has continued to improve. It's just every day we're getting little upticks, and we're very encouraged by what we're seeing there.

That's helpful. Thanks a lot.

Thank you.

And we'll go next to Adrienne Colby with Deutsche Bank.

Hi. Thanks for taking my question. How close do you think you are in terms of right sizing the rental fleet? I'm just wondering about the levels of used equipment sales we should be expecting throughout the remainder of the year. I know you won't give specific guidance, but if you could sort of speak to if this is sort of a regular run rate or if you're holding equipment a bit because pricing has been weak.

Well, I don't know that we've been holding equipment. We have not accessed the auction channels and don't intend to because we think we can get a lot more money for our equipment. I think you can kind of expect our fleet sales to continue at about the pace they're at. We don't intend to access auctions. We'll continue to retail equipment, and again, we're somewhat encouraged by recent activity in our rental business, and have no intention of accessing auctions and dumping our fleet and losing rental power. Hopefully, this trend we're seeing right now continues.

If I could ask one more. Do you have any plans to open up new locations in 2010?

Well, we have opened a handful of locations here recently, and I think we're going to focus on those locations, really get our arms around them, and get them to where we want them, then we'll re-evaluate. Fourth-quarter call we said we could open as many as ten stores. I think we've opened half that, and once we're satisfied with where we are on these five stores we've opened, we very likely could open some more.

Thank you.

Thank you.

And we'll go next to David Wells with Thompson Research Group.

Good morning, everyone.

Hey, David.

First off, I just want to do a little bit more digging on the demand that you are seeing in your markets and maybe starting with the energy market, kind of the petrochem and oil space. What type of projects are you seeing that are coming out that are requiring equipment and any thoughts on the duration? I mean, are these longer duration project or is it shorter-term maintenance work where two or three months down the road we could suddenly be in a position where a lot of that equipment comes back off rent?

Well, I think you've got some of both, David. On the petrochemical side, there's some turnaround activity and there's some more coming. That's relatively short duration, but I think it's not all going to hit at one time. I mean, I think there's some pent-up demand on turnarounds and so we'll see those coming throughout the year. From an oil patch perspective, we've just seen a material increase in the rig counts and the activity. We've got strong activity in the Haynesville Shale. We've got strong activity in the Fayetteville Shale. I mean, they're punching holes in the ground, and that's a benefit to our business. So I see that a little more long term because there's a lot of activity there. We're seeing an increase in the oil patch activity in the Intermountain region also, so a little bit of both.

That's helpful. If you could remind us again, on the mining front, what commodities are you primarily exposed to there? And is there a significant amount of coal exposure and is that differing from what you're seeing in some of the other categories?

Our coal exposure is fairly minimal. I mean, we've got some lignite activity and some power plants that we support on lignite mine. Understand, we're not providing heavy, heavy stuff to the mining sector for removing overburden. We're more of a support activity and we rent all kinds of equipment to them, but we're a support group, not -- we're not stripping dirt.

Okay. That's helpful. And then lastly, as you've seen the fleet on rent continue to move up, what have you seen kind of corresponding on the rate front and how did rental rate declines progress across the quarter? And any color as well on what's going on in the competitive environment with regards to rates, as I think the feedback seems to be generally more positive about utilization right now. Just wondering if that has carried over to the pricing front.

Probably not. I mean, that's been a little disappointing. There's still tremendous rate pressures out there, and it's pretty broad-based. I mean, we've seen some of the big rental companies really take their gloves off and get real aggressive. We've been seeing that from smaller, regional players, but there's a lot of price pressure out there right now. Hopefully, if this utilization trend continues and we continue to see improvement there, we're going to start seeing some more rational behavior, but there's plenty of price pressure out there right now.

All right. That's very helpful. I'll get back in the queue. Thanks.

Thank you.

And we'll go next to Seth Weber with RBC Capital Markets.

Hey, thanks. Good morning, everybody.

Hey, Seth.

Hey. Just following up on that last question. I mean, is it possible to talk about differences in your industrial business versus construction? I mean, without getting into specifics, but can you give us some sense of the delta between rate pressures on one versus the other?

I don't think there's any question that the rate pressures are more severe on the construction side. I don't think I can give you real solid numbers there. I just don't have it broken out for this call, but I can tell you there's more -- there's definitely more rate pressure on the construction side.

Okay. I mean, how -- what's your average length of contract on the industrial side? Is it multiyear or how should we think about how often those come up?

No, it's not multiyear. I think it's probably longer in duration than on the construction side, typically, but it's certainly not multiyear.

Okay. And then on -- just a couple of -- on the SG&A increase related to the ERP, is that an ongoing -- I mean, should we assume that that's going to continue for the next couple quarters or is that a -- just a one-off kind of cost?

Well, a lot of it's depreciation, so that'll continue.

Certainly, the depreciation would continue. And on the consulting side, it was probably a little heavier weighted in the first quarter, but we will continue to see some increased costs throughout second and third quarter at least.

Okay. And then lastly on the -- I think, John, you had mentioned that rates were down something like 2% sequentially, fourth quarter to first quarter, is that normal or is that not as bad? I mean, I know seasonally it's a weak quarter so I would think that that's not a bad number that you would typically expect. Is that kind of better or worse than you would usually see from fourth quarter to first quarter?

Yes, I mean, that number, being -- for a lot of reasons, being first quarter, being the severe weather that the sector dealt with, I mean, that was not an alarming number to me. So that's probably to be expected.

Okay. Great. Thanks very much, guys.

(Operator instructions.) And we'll go next to Chris Doherty with Oppenheimer & Co.

Leslie, can you just -- a housekeeping item. Can you tell us what inventory was at the end of the quarter?

Sure. Inventory was $87 million.

And then, John, is -- you talked about in your prepared remarks the excess inventory that was in the system for new product. Is that a number that you can continue to work down and generate cash from?

Yes, it is. We brought those inventories -- we probably cut them in half or close, and yes, I think we'll continue to see those inventories come down, probably at a somewhat reduced rate from what we've seen, but yes, we'll continue to bleed those inventories off.

And then is there a way to quantify what the weather effect was for the quarter, and do you expect that's just going to get pushed into Q2, Q3 or are those going to be rentals that would be permanently lost?

I don't like to use weather. Typically, we don't discuss that, and I don't like my people to use weather as an excuse to me because it's so hard to quantify. I am positive we had a negative impact from weather. I mean, when you look at what happened in the Mid-Atlantic and Oklahoma and Arkansas, all the ice and snow and -- it was very unusual weather patterns, and I think they impacted us. I don't think those are lost rentals. I mean, it's delayed work. It delayed projects, and I think that'll bleed over into the second, third quarter.

Okay. Thank you.

And we'll go next to Adrienne Colby with Deutsche Bank.

I just wanted to ask a follow-up question. I'm curious if you're seeing any consolidation within the industry or if that's something you're expecting at this point.

No, I don't think we've seen much in the way of consolidation, and I would not be surprised to see some. I mean, I think you've -- there's some players out there that are really struggling right now, and I would not be surprised to see some consolidation, but it's -- there has not been much to this point.

Thank you.

And we'll go next to Lyle Margolis with Fridson Investment Advisors.

Hi. It sounds like cranes were a real trouble spot in the quarter. Can you tell us what percent of your 1Q revenue came -- rental revenue came from cranes?

Sure.

Yes, let Leslie dig that out here.

Probably around 10% or 12%, but let me verify that -- 12%.

12%. Great.

Where we've really felt the impact of the downturn in the crane business is in our new sales. I mean, our sales are off dramatically from the prior-year period.

Can you tell us what percent of new sales was cranes also or --

About 60% compared to this time year it was probably north of 80% of our total new equipment sales.

Okay, great. Are there any other trouble spots that you can identify or is that the big one?

Well, I mean, obviously, that's had a big impact on our business and has turned down hard both on the rental side and particularly on the sales side. Aerials continue to be challenging. I mean, it's -- non-residential construction is tough right now. It's projected to be down for the remainder of the year and probably start recovering in '11, so the crane business and the aerial business are the problematic areas for us right now.

Do you have a 1Q rental revenue for aerials or -- ?

That runs about 60% of our -- let's see. We don't usually give the dollar amount.

Okay.

But, I mean, it's not -- it's usually close to the -- what aerials represent of our total fleet, but with the declines in demand, it's not quite 60% of our total rental revenue.

Okay. And I think you said that fleet can still be a source of cash for the year. Is that -- do you still believe that?

I do, yes.

Okay, and where will that leave you at the end of the year? I mean, as far as the age of your fleet, are you going to next year need to replace any particular type of your fleet actively because it'll be very --

Well, right now our fleet age is around 42 months. We're going to age it a little more this year, probably into the mid 40s, and that's ballpark. We're very, very comfortable with that. I mean, that's not going to create any issues for us whatsoever nor would it force us to spend money. I hope we start spending money because of a demand situation and if this market continues and we're going to need to start investing again. But that won't be driven by fleet age. That'll be driven by demand.

Okay, great. Thank you very much.

(Operator instructions.) And we'll go next to David Wells with Thompson Research Group.

Just a quick follow-up on the crane sales. As you look at that -- the mix, that 60% in the quarter, can you go even further than that and talk about is there some variance between all-terrains and crawlers and -- are particular product category classes performing better than others?

Absolutely. The larger, more technical cranes are in more demand than other proj- -- than other parts of it like big, rough terrain cranes, still reasonable demand. There's some demand on ATs. The bigger, larger, more technical crawler cranes, there's still some demand. But everything's fallen off. I mean, the demand has dropped significantly, but the larger sizes are still in more demand.

That's helpful. Thank you.

And there appear to be no further questions at this time. I would like to turn it back over to Mr. John Engquist for any additional or closing remarks.

Well, thanks, everybody, for being on the call. Obviously, we're seeing some improvement in the general economy. As I've said, I think equipment demand is going to lag that somewhat, but we are cautiously optimistic about some of the signs we're seeing in our business. And hopefully we keep heading in the right direction and continue to get some improvement for the remainder of this year and with '11 being a real year of recovery for us. Thanks for being on the call.

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