H&E Equipment Services Inc (HEES) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to H&E Equipment Services first-quarter 2011 conference call. This call is being recorded. Now, I'd like to turn the conference over to Mr. Kevin Inda. Please go ahead, sir.

Thank you, Jennifer, and welcome to H&E Equipment Services conference call to review the Company's results for the first quarter ended March 31st, 2011, 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 1.

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

During today's call, we will refer to certain non-GAAP financial measures, and we've reconciled these measures to GAAP figures in our earnings release, which is available on our website. Before we start, let me offer the precautionary note, 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. 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 now turn the call over to John Engquist.

Thank you, Kevin, and good morning everyone. On the call with me today is Leslie Magee, our Chief Financial Officer.

Proceed to slide 3, please. This morning, I will give an overview of our first-quarter performance, including an update on the specific regions we serve and provide our view of the current market conditions. Leslie will then summarize the quarter's financial results. When Leslie concludes, I'll provide our thoughts on the next quarter, and we'll then be glad to take your questions.

Slide 5, please. Our first-quarter performance was solid, despite normal seasonality compounded by extreme weather that significantly impacted a number of our locations. We had multiple branches that were shut down for days at a time due to ice and snow storms. Nonetheless, we delivered significant gains on a year-over-year basis in many financial metrics. Our rental business continued to strengthen and was a primary driver of the 17.6% increase in total revenue to $134.9 million versus a year ago. On a sequential basis, total revenue was down 22.7% from the fourth quarter. The majority of this decline was due to seasonality issues, and, as we stressed before, we believe the fourth-quarter to first-quarter comps are not as meaningful as our other reporting periods. As a reminder, the fourth quarter included very strong sales quarter, largely due to a handful of large crawler crane sales.

EBITDA improved significantly, up 93.6% to $21.3 million, and EBITDA margins improved to 15.8% compared to 9.6% a year ago. Our net loss for the quarter was $6.5 million, or $0.19 per share, compared to a net loss of $12.1 million, or $0.35 per share, in the first quarter of 2010.

Fleet utilization continues to be a positive indicator for our rental business, as average time utilization increased to 64.9% based on OEC compared to 51.2% a year ago. As a result, our rental business posted solid year-over-year improvements with revenue increasing 33%, rental gross profit increasing 116.7%, rental gross margins up to 35.4% versus 21.7%, and dollar utilization up nearly 600 basis points to 27.9%. This is the third consecutive quarter that our rental segment delivered positive year-over-year results. I think it is also worth highlighting that our rental revenue growth on a year-over-year basis at 33% compares very favorably to the rental growth rates we've seen reported thus far. And lastly, our fleet age at the quarter end remained very low at 43.2 months, compared to an industry average near 53 months.

Please proceed to slide 6. I won't spend too much time on this slide, as the performance of our various regions remains very consistent. Our significant exposure to the industrial sector, mainly the oil and gas and petrochemical industries, mining, and infrastructure projects drive the majority of revenue and gross profit from our Gulf Coast and inner mountain regions. Our other markets remain challenging. If nonresidential construction begins to recover in 2011, as expected, we hope to see a modest increase in demand in these less industrial markets.

Please proceed to slide 7. Current market conditions have not changed materially since our last call. So let me provide a quick overview of the current environment. While our business improved on a year-over-year basis across all segments with significant improvement in our rental results, the market remains challenging, and we do not expect a material recovery in nonresidential construction until 2012. On the positive side, the sector as a whole is delivering improved year-over-year results, driven by an increased demand for rental equipment. Rates have stabilized and are now beginning to increase. Very specific to our business, the industrial markets we serve remain strong and are forecast to grow. Other industry-specific indicators we have discussed previously also remain positive. The economic forecast remains upbeat, so the overall market environment is certainly better than we've experienced in several years.

At this point, I'm going to turn the call over to Leslie for a more detailed financial review.

Thank you, John.

As usual, my discussion this morning will include a more detailed review of our first-quarter results. We were very pleased that for the first time in three years our business delivered year-over-year growth across all segments of our business. And as John indicated, weather presented some serious challenges during the quarter, yet, our rental business showed tremendous improvement from a year ago and held up well compared to a seasonally strong fourth quarter. Based on the strength and demand, we continued to allocate capital to increase fleet spending in the quarter.

Slide 9, please. I'll discuss revenue by segment for the comparative periods, and then I'll address the changes in gross profit before proceeding to the next slide. First, from a high level, total revenues were $134.9 million, an increase of 17.6% and yielding gross margins of 26% in the first quarter of 2011 versus 20.8% in the first quarter of 2010. Higher demand was driven primarily by equipment rentals, but, as just mentioned, each segment of our business improved over the prior year. In fact, all segments, with the exception of new equipment sales, reflected double-digit growth from a year ago.

On a segment basis, rental revenues were $48.5 million for the quarter, a 33% increase over a year ago. Nearly 80% of the increase was due to higher earth moving and aerial rentals combined. Our dollar returns were 27.9% for the first quarter of this year as compared to 22% in the first quarter of 2010, an improvement of 590 basis points.

Higher time utilization has continued to yield improved dollar returns. Time utilization based on units was 61% compared to 49.7% a year ago. With the exception of lift trucks, which experienced a slight decline in demand, all product lines reflected higher demand than this time last year. Time utilization based on OEC was 64.9% this quarter versus 51.2% last year, an increase of almost 1,400 basis points. Demand was higher in all regions of our footprint.

As for average rental rates, rates on new contracts were down 1.1% in comparison to a year ago, but, as John indicated, rates on new business turned positive in the month of March. It was worth pointing out that new contracts typically account for 25% to 30% of total billings in a period. Rates were down 2.1% compared to the fourth quarter, with such decrease primarily due to the month of January. Sequentially, rates were lower in January, essentially flat for the month of February, and turned positive in March.

New equipment sales were $29.2 million, a $1.9 million or 6.9% increase over the prior-year period. New earth moving sales were strong again this quarter and more than doubled from a year ago. Partially offsetting the increase in earth moving was a decline in new crane sales of about one-third when compared to last year. Used sales were $15.4 million, a $2.0 million or 14.8% increase over the first quarter of 2010 due primarily to higher used aerial and earth moving sales.

Business activity in our parts and service segment improved as revenues increased 10% on a combined basis to $34.2 million with both segments generating increases from a year ago.

Now I'll provide some more details on gross profit changes in each of our segments.

Total gross profit for the quarter was $35.1 million compared to $23.9 million a year ago. From a gross margin perspective, consolidated margins were 26% compared to 20.8% last year. Overall, higher margins in our rental business are driving the gross margin expansion, but new and used equipment sales also contributed to the improvement in margin. Our rental business delivered margins of 35.4% compared to 21.7% in the prior year period. These results are due to more efficient utilization of our fleet. Margins on new equipment sales were 10.8% this quarter compared to 8.7% a year ago. Gross margins on used equipment sales increased to 25.1% from 20% last year. Included in these results were margins on rental fleet sales of 29.8% versus 23.6%. Parts gross margins were 26.6% compared to 27.4% a year ago, and service gross margins were 61.1% versus 61.9%.

Margins on other revenues, which are equipment support activities, declined due to higher transportation and freight costs, resulting from higher fuel costs.

Slide 10, please. Our results included a loss from operations of $2.9 million or a negative 2.1% margin compared to a loss from operations of $11.9 million or a negative 10.4% margin a year ago. For the second consecutive quarter, we've succeeded in growing revenues faster than costs, which led to a 76 improvement of operating line this quarter.

Please proceed to slide 11. For the quarter, we reduced our net loss by more than 45% to a loss of $6.5 million of $0.19 per share compared to a net loss of $12.1 million or $0.35 per share a year ago.

Please move to slide 12. EBITDA nearly doubled from a year ago. EBITDA was $21.3 million or a 93.6% increase over last year, exceeding our revenue growth and resulting in margin gains. This magnitude of improvement in profitability at the EBITDA line is a reflection of operating leverage in our business as the demand environment improves. EBITDA margins were 15.8% compared to 9.6% a year ago.

Next, slide 13. SG&A expenses declined as a percentage of revenue to 28.2% this quarter compared to 31.3% a year ago. SG&A increased $2.2 million or 6.2% to $38.1 million. We incurred an increase of $2.9 million in wages, taxes, and benefits, and this increase was due to higher commission and incentive pay combined with increased salaries and benefits, due to an increase in the number of employees compared to a year ago. Partially offsetting these increases were declines in most other SG&A categories.

Slide 14. Based on higher demand, we increased the size of our fleet by $14.6 million since year-end. Further, on an average OEC basis, we maintained a $30 million larger fleet than a year ago, while at the same time significantly improving rental metrics, such as time utilization, dollar returns, and gross profit. Our gross fleet capital expenditures for the quarter were $28.8 million, including noncash transfers from inventory. Net rental fleet capital expenditures were $17.0 million. For the quarter, gross PP&E CapEx was $3.4 million and net was $3.3 million. Our average fleet age at the end of March was 43.2 months, essentially flat with the average age at year-end. Our fleet, based on our original equipment costs at the end of the quarter, was $699.7 million versus $685.1 million at the end of 2010 and $660.0 million at the end of the quarter a year ago.

On slide 16 and 17, we've included the usual information regarding our capital structure. There have been no material changes. We have maintained a solid capital structure and our strong liquidity position. Under our $320.0 million ABL facility, our availability was $313.0 million, net of outstanding letters of credit of $7.0 million as noted on slide 17.

Before opening the call to Q&A, I'll turn it back to John for our view of the remainder of 2011.

Thank you, Leslie. Our current outlook for 2011 remains unchanged; however, we are not providing specific guidance. We are very pleased with our first-quarter performance and the continued momentum from the back half of 2010, despite seasonal issues. We've had two consecutive strong quarters with double-digit top line year-over-year growth, about 18% this quarter and 27% in the fourth quarter. However, we remain cautious about the remainder of the year, as we do not believe a full-scale recovery in our end-user markets will occur until 2012.

Nonetheless, our overall outlook for 2011 remains positive. Our focus on the industrial sector continues to be a major plus for our business, as the diversified industries we serve remain very strong. Construction activity is slowly recovering in several of our markets that were hit the hardest by the recession, and overall economic conditions are expected to further improve during the year. As a result of our rapidly improving rental business and expected gains in other aspects of our business, we continue to expect year-over-year top line revenue growth and improvements in other financial measures this year.

As we think about the second quarter, the momentum has continued to date, and we expect to achieve double-digit top line growth. With less visibility on the distribution side of our business, we are more cautious in projecting year-over-year growth rates for the second half of the year. However, we do expect our losses to continue to moderate for the remainder of the year. To the extent that we can, we'll provide more color down the road as the recovery unfolds.

We have demonstrated our ability to adapt to changing market challenges and leverage any improvements in market conditions. With a solid balance sheet and capital structure, we have the flexibility to take advantage of improved market conditions and opportunities. We are pleased with our performance and remain extremely focused on profitable growth.

We'll now be happy to take your questions. Operator, please provide instructions.

(Operator instructions.) Phillip Volpicelli with Deutsche Bank.

Good morning. This is Shawn Wandrack sitting in for Phil. First question, do you think you could please provide us with a balance on your manufacturing floor plan payables?

$74.0 million.

$74.0 million. Okay, great. And then also, I know you guys -- I appreciate it. You spoke to on a monthly basis what rates were doing year over year. Cumulatively for the quarter -- and I could've missed this -- but what was the actual rate change year over year?

Down 1.1% for the full quarter.

All right. And strengthening toward the end of the quarter.

Yes. We turned positive in March, and we're seeing nice gains in April year over year. So we're trending very positively in the right direction.

That's great. And is it going towards a specific kind of equipment? Is it more aerial and earth moving, or are you seeing that across the aboard?

It's across the board. We've seen real, real strong results in earth-moving equipment, but we're also seeing rate gains across the board. So we're pleased with the direction rates are taking.

All right. Thank you.

Henry Kirn of UBS.

Good morning. It's Eric Crawford on for Henry.

Good morning.

Actually in London. Good morning. I was wondering if you could provide a little more color on your commentary, expecting losses to moderate in 2011, given the improvements we're seeing in utilization and rates now on a year-over-year basis, despite the challenging seasonality that you saw. I was wondering, yes, if you could just touch upon that, and do you think you can be profitable in some of these quarters going forward?

Well, I don't want to give guidance there. We're going to see continued real, real positive results on the rental side of our business. We feel real good about that. I think that our distribution side of our business is going to improve as the year goes on, but we don't have near the visibility on the distribution side of our business and the pace of that recovery as we do on the rental side. So we're just being cautious. I think that whether or not we turn profitable is going to be very dependent on the distribution side of our business, but we're not prepared to forecast that. (Inaudible.)

Eric Crawford. Okay. That's helpful. If I could, one more. I see that crane utilization in your fleet was up 300 bps year over year. Could you update us on what you're seeing in terms of demand for your crane end markets?

Demand is good. Our utilization on our primary crane fleet, which is rough terrain cranes, is very strong. Our utilization on boom trucks is not as strong as our rough-terrain cranes, but the demand in our crane end markets has been good. We've got strong utilization there. We hope to start getting some rate gains on the crane side of our business also, because we're certainly at a utilization level we can start pushing that.

That's helpful. Thank you very much.

Seth Weber; RBC.

Good morning, everybody. A couple of questions. On the new equipment sales, Manitowoc had talked about some of their business getting pushed from first quarter to second quarter due to a supplier issue. Was that any impact to your quarter? Did you see any of that push out?

Yes. We had the same issue Manitowoc did on some of the hydraulic crane product relating to tier 4 engines. So, yes, we had some product slip.

Like single-digit millions? Like $5.0 million?

I mean, it's not a real big number. Seth, I think when you look at either year over year or sequential declines in our new equipment crane sales, it primarily relates to crawler cranes. We're seeing good strong demand right now on the hydraulic crane side, both rough terrains and all-terrain cranes, but this is very typical of this point in the cycle. The crawler crane demand or lattice-boom demand typically lags hydraulic demand 6 to 8 months, and that's what we're seeing right now. So the differences, both year over year and sequentially, are lack of crawler crane sales.

Okay. And then I guess you had cited weather -- difficult weather at the beginning part of the quarter. Is it possible to quantify how much you think that affected your business during the quarter?

Well, I think it is difficult to quantify, but we had probably 6 or 8 branches that were shut down for days a time due to ice and snow. So I mean, it had an impact. It's somewhat difficult to quantify.

Okay. Have you noticed any uptick in your repair and maintenance costs on the rental fleet?

No. Actually as a percentage of revenue, we're down. And we don't expect -- our fleet age is young. The type assets we have age very well. I don't think that's going to be an issue.

Okay. And then just lastly, I'm just trying to understand your point about -- in the back of the presentation, you're talking about some rental rate pressure still, which is a little inconsistent with what some of your peers are talking about, where they're able to push rates more aggressively. I think some of your peers were up in the 4, 3, 4 -- 2, 3, 4% range this quarter. So I'm just wondering, what's the source of the rate pressure that you guys are seeing?

I think where we see rate pressure today is more specific to big, long-term projects. People get real aggressive on those, and you can afford to take less rate on those projects. Your equipment is utilized for a long period of time; you handle it less; you touch it less. So I mean, you can certainly afford -- but we're seeing still real aggressive pricing on some of those projects. But with that said, our rates are trending very positively, and we expect at the end of the second quarter to report some really nice rate gains. So we feel good about where our rates are going.

Okay. And is that pressure coming from the national rental companies, or is it more from the local, regional, smaller guys?

Both, but the national players get real aggressive on big projects.

Okay. All right. Thanks very much, guys.

Joe Box of KeyBanc Capital Markets.

Good morning, guys.

Good morning.

I just want to follow up on the new crane market. Can you guys just talk a little bit about what you're seeing in terms of recent crane inquiry levels? I'm wondering, you know, are they generally supportive of a run rate that's closer to what you saw in the back half of last year, or do you think that the trend could potentially be closer to what you saw here in 1Q?

No. I think I expect our demand to improve as we move into the year. Manitowoc reported, you know, order intake doubling in the first quarter year over year. I think we've got to keep in perspective that that's from a really low level. In the first quarter of 2010, the dealers were carrying tremendous inventories to the tune of some 250 machines. Today, dealers are carrying about 80 machines in inventory, which is -- that's a big change, and it's on the low side. So demand is picking up. But when Manitowoc quotes order intakes doubling, that's from a pretty low level.

But again, we're seeing strong demand on hydraulic cranes, rough terrains, and all-terrain cranes. What we're not seeing right now and what's still is pretty soft is the big crawler crane market, and that's nothing unusual. It's very typical of a recovery period, and those crawler crane demand typically lags about 6 to 8 months. So we expect that to start picking up in the latter part of the year.

Great. Last question for you here. I just want to dig in a little into your negative gross profit in the other category. First, can you quantify what the diesel impact was in the quarter? Second, now that we're starting to see some positive rental rate momentum, is it reasonable to assume that the margin drag from fuel could start to abate?

Yes. I think our fuel cost is up some 40%. So it's been significant. I can tell you in the rental sector, when things go south and the market deteriorates, one of the first things people start to give away is hauling. They start delivering stuff for free. We're at a point in the cycle we expect to start seeing some improvement there, but that's been slow to come, and it's an area that we're focused heavily on, in freight recovery and loss damage waivers, and stuff like that. So we do expect for that margin drag to improve.

Joe Box. Great. Thanks, guys.

Adrienne Colby of Deutsche Bank.

Thanks for taking my question. I was wondering if you could talk about how much of your rental business is on a daily basis versus longer term.

Well, daily would be not a big part of our business. I think -- and, Leslie, correct me if I'm wrong -- our average rental's in the 50 --

Average rental contracts?

Yes. 50 days.

Yes. I was going to say 40 to 45 days is more the average.

Yes. That's our average rental contracts. So I hope that answers your question.

Sure. I guess maybe you could speak to it if you do have some contracts that are extended beyond that, a couple of years. I don't know if you do any type of longer-term contracts like that.

Well, we do on the crane side of our business. We'll put cranes on a project or in a refinery, and they may be there three years. That's not the norm. But, yes. We, from time to time, have cranes on very long-term contracts.

Great. And I was wondering if you could talk a little bit about the used equipment gross margin. It sounded like you saw an increase certainly in the rental fleet sales side. I was just wondering if you could talk about in terms of percentage, how much of the used equipment sales were from the rental fleet as opposed to inventory?

Almost -- the vast majority is from our rental fleet.

It's about 75% of our used equipment sales were from our rental fleet.

Okay. That's helpful. Just one more. If you could just update us on what percent of cranes were in terms of new equipment sales category and maybe on a total revenue basis.

New equipment sales, cranes were down to about 40% of total new equipment sales.

Okay, and just a couple of housekeeping questions. Could you tell us what the quarterly fleet transfers were?

$15.4 million.

And what your operating cash was?

Almost neutral, $300,000.

Terrific. Thank you.

Joe Mondillo of Sidoti & Company.

Good morning, guys.

Good morning.

Most of my questions were asked, but I was just wondering if maybe you could just give a little color in terms of how April looked compared to the trend throughout the quarter. It sounds like things are improving, but maybe just a little description on what you saw there on the month-to-month basis.

Yes. April, all the rental metrics are very strong. We've been adding some fleet and at the same time improving utilization, both time and dollar. Rates are trending very positively in April. We're seeing real solid year-over-year gains in rates. So just real positive on the rental side. And we've seen some improvement on sales, but that's going to be lumpy. Again, that's the most difficult part of our business to forecast right now. We think for the next quarter or so sales will be somewhat lumpy. But the rental metrics are very positive.

So what kind of commentary are you hearing from your customers involving new equipment? What kind of environment do we need to improve to where new sales are going to really start going?

Well, I think it's a confidence issue, and I think that where we are today is what we've seen in past cycles. You know, early in a recovery period, people tend to rent. As they get comfortable that this thing has legs and that we're in a multi-year expansion, they'll go back to their normal historical patterns of owning and renting equipment, and we don't expect that to be any different this time. We're just not quite there in the cycle. (Inaudible - multiple speakers.)

Last question. In terms of pricing on new equipment and used equipment, how has that been trending in the market?

Well, our margins are up year over year on new equipment, and they're up year over year on used equipment. Used equipment pricing is very strong and, it's improved significantly over the last several quarters. You can see that in auction results. You can see it in our margin, and you can see it in other people's margins.

And you expect that can continue?

Yes, I do. And one thing I'd point out on equipment sales, our earth-moving sales in the quarter were very, very strong. They doubled year over year, and that's an early cycle product. So we're a little early here in the cycle here on the crane side, but we do expect to see improvement going forward.

Great. Thank you very much.

(Operator instructions.) Brian Rayle of Northcoast Research.

Good morning.

Good morning.

Quick question regarding the -- most of the question's been answered -- but the M&A environment with sort of the lag in terms of the recovery on the construction side new sales. Are people more willing to sell, or are they waiting for an upturn here? What have you seen with multiples and willingness of people to come to you guys?

Well, I don't think we've seen a whole lot of activity. There's been a lot of talk, and there's a lot of rumors. But really, there's not a whole lot has happened in our sector in terms of M&A. So I think we're just going to have to see how that plays out.

Okay, so you've seen no real change there. Then just to ask the question, on slide 19 here, the phrase -- loss is expected to continue to moderate on a year-over-year comparison. What does it implicate? I mean, are you saying that for the full year and quarterly progression for earnings?

Well, I'm saying that our financial metrics are going to improve as we go through the year, and, as I stated earlier, whether or not -- what our bottom line ultimately does is going to depend a lot on the distribution side of our business. We can forecast the rental side of our business very closely, and it's been certainly meeting our expectations and in some cases exceeding our expectations. The distribution side is going to be a little bit lumpier. We're not going to guide to, you know, a bottom line number at this point.

No, and I absolutely understand that. I guess the most important part of that bullet point is the first [order,] which is losses and what -- if you were to read that literally, it would say that you're going to lose money every quarter. I'm not saying that's -- obviously, that's not what I have forecast or I don't think anybody else does. But if you were to read that literally, it would say that the losses were going to get less over the course of the year. Is that how we should interpret it?

Well, they are. But I'm certainly not speaking to a quarter-by-quarter basis there. I'm not guiding by quarter. I'm telling you that our financial picture is going to improve substantially over the course of the year. And again, whether or not we end up in a -- you know, what our bottom line turns out to be is going to be very dependent on the distribution side of our business and the strength of that recovery.

Okay. So we shouldn't take the word "losses" literally?

On a quarter-to-quarter basis, no.

Okay. And I'm just talking for the full year. Most of -- quite frankly, the good questions have been asked. But I'm just saying, if we read the presentation that way, it does imply that it's going to be less losses that way, and I just want to make sure that we're all clear on that.

And I think that's what we're telling you. Our bottom line is going to improve significantly, but that doesn't necessarily mean we're going to be in a positive position at the end of the year. Again, that's going to be dependent on the strength of the recovery on the distribution side of our business.

Okay. Great. Thank you for the clarity. I really appreciate it.

Thank you.

We'll move to a follow-up question from Seth Weber with RBC.

Just real quick. Have you seen any increase since the moratorium on the deep-water drilling has been lifted?

Yes, we have. They have started issuing permits. They've issued quite a few shallow water permits, you know, in less than 500 foot of water, and they have issued some deep-water permits. So that's been a real positive for Louisiana.

And what type of equipment do they typically use from you guys?

Well, the way it impacts us is the fabrication yards that build these offshore structures and then the shipyards that support them. So it's primarily cranes.

Okay. Thanks very much.

We have no other questions in the queue. I'll turn the call back to our speakers for any closing or additional remarks.

I appreciate everybody being on the call. Again, I think we've got a lot of momentum in our business. We're starting to see some nice year-over-year rate gains, and we expect that to continue, and we look forward to talking to you on our next call. I think we're going to report some nice results. Talk to you then.

That does conclude our conference. Thank you all for your participation.