H&E Equipment Services Inc (HEES) 2011 Q2 法說會逐字稿

Good day, and welcome to today's H&E Equipment Services First Quarter 2011 Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Mr. Kevin Inda. Please go ahead, sir.

Thank you, James. And welcome to H&E Equipment Services' conference call to review the Company's results for the second quarter ended June 30, 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 reconcile these measures to GAAP figures in our earnings release, which is available on our website.

Before we start, let me offer 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. Welcome to H&E Equipment Services' second quarter 2011 earnings call. On the call with me today is Leslie Magee, our Chief Financial Officer.

This morning, I will give an overview of our second-quarter performance, including an update on the specific regions we serve and provide our view of the current market conditions. Leslie will summarize the quarter's financial results. When Leslie concludes, I'll provide our thoughts on the next quarter, and we'll then be happy to take your questions. Please proceed to Slide 5.

We expected very solid performance this quarter and were thrilled to have achieved such strong results and also which had exceeded our own expectations in many areas. Our second quarter performance was very encouraging despite no material recovery in non-residential construction markets. Every business segment delivered solid year-over-year improvement led by the continued strength in our rental business and a spike in demand for new equipment sales which doubled last year's levels.

Total revenue increased 40.7% or $53.3 million to $184.3 million compared to $131 million last year. EBITDA improved significantly, up 89.1% to $35.2 million, and EBITDA margins improved to 19.1% compared to 14.2% a year ago. We achieved bottom line profitability for the quarter with net income of $2.7 million or $0.08 per share compared to a net loss of $7.1 million or $0.20 per share in the second quarter of 2010.

The investments we have made in our rental fleet are paying off as average time utilization based on original equipment cost increased to 70%, which is an improvement in excess of 1,200 basis points over the prior year's level. We were also very pleased with the progress that we made on rental rates this quarter. While growing our fleet and increasing our utilization, we achieved a 6.4% increase over last year's rates. As a result, our rental business posted solid year-over-year improvements with revenue increasing 33.8%, rental gross profit increasing 75.3%, rental gross margins up to 40.7% versus 31.1%, and dollar utilization up 570 basis points to 31%.

We have added approximately 650 units or about 6% in dollars based on OEC to our rental fleet this year to capture the increased market demand. As planned, our fleet growth was frontloaded in the year and has begun and will continue to moderate for the remainder of the year. Our fleet age at the quarter-end remained very low at 43 months compared to an industry average of 53 months. As I have stated before, we believe our fleet is a very young fleet particularly for our fleet mix and is also a very well maintained fleet.

Proceed to Slide 6 please. The contribution from our various regions remains very consistent. Our Gulf Coast and Intermountain regions are our most productive geographies due to our significant exposure to the industrial sector. The oil patch, petrochemical industries and mining sectors continued to be significant drivers of our business. We are also pleased to see year-over-year improvement in our other less industrial markets.

Proceed to Slide 7. Current market conditions remain positive for our sector. Rental companies as a whole are delivering strong year-over-year results with our end market showing increased demand for rental equipment. Utilization rates were high and most companies were reporting strong rate increases.

Specific to our business, the industrial markets are strong and are expected to remain strong. On the negative side, the construction markets are weak and crane demand is spotty. The economic recovery remains uncertain, which may negatively impact the distribution side of our business.

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

Thank you, John and good morning to everyone. If you will turn to Slide 9, I will move right into the details of the quarter. As John indicated, we had a very strong second quarter from many perspectives. We are pleased to see significant top line growth combined with gross margin expansion, cost leverage and a return to bottom line profitability.

First from a high level, total revenues were $184.3 million, an increase of 40.7% and gross profit was $47.8 million, an increase of 47.6%. Higher demand was driven primarily by new equipment sales and equipment rentals, but revenues in all segments of our business again improved over the prior year.

Let me walk through each segment on a revenue basis and then a gross profit basis before moving to the next side. I will begin with our rental business.

Rental revenues were $55.8 million for the quarter, a 33.8% increase over a year ago. The majority of the increase is due to significantly higher demand combined with a larger fleet available for rent. Average time utilization based on units increased 1,220 basis points to 67.1%. And as John stated, time utilization based on OEC increased at a consistent rate of 1,210 basis points to an average of 70% for the quarter.

Demand was higher in all product lines with the exception of earth-moving due to mix changes within our earth-moving category. Demand was also higher in all regions of our footprint.

As you can see, the momentum has continued to build in our rental business, which has aided our success on the pricing front. We achieved a 6.4% increase in average rental rates in comparison to a year ago and a 4.2% increase compared to the first quarter. Our dollar returns improved to 31% compared to 25.3% a year ago due to the strength in both time utilization and rental pricing.

New equipment sales were $57.9 million, a $29 million or 100% increase over the prior year period. Both new cranes and earth-moving sales were strong and each more than doubled from a year ago, accounting for nearly all of the increase in new sales. New sales were $23.1 million, a $5.2 million or 28.6% increase over the second quarter of 2010.

Business activity in our parts and service segments improved as revenues increased 8% on a combined basis to $38.2 million with both segments generating increases from a year ago.

Now let me address the gross profit by segment. First, our total gross profit for the quarter was $47.8 million compared to $32.4 million a year ago. From a gross margin perspective, consolidated margins were 25.9% compared to 24.7% a year ago.

Higher margins in our rental business continue to be the single largest driver and the expansion of our consolidated gross margins. However, new equipment, parts and other revenues also contributed to the improvement in margins this quarter.

It's important to understand the impact of revenue mix on our consolidated margin. At first glance, you may expect that our gross margins should have expanded more with such improvement in our rental business. Keep in mind we had a shift in revenue mix to our new equipment sales this quarter. More than half of our revenue growth was at a 10% to 12% gross margin.

Our rental business delivered margins of 40.7% compared to 31.1% last year, an increase of 960 basis points due to higher demand and better rates combined with lower depreciation and rental expense as a percentage of rental revenue.

Margins on new equipment sales increased 180 basis points to 11.7% due primarily to better crane margins. Gross margins on used equipment sales decreased to 21.7% from 22.7% last year. Included in these results were margins on rental fleet sales of 31% this year versus 27.9% last year, which reflects continued strength in used pricing.

Also included in these results are the sales of used inventory, for example, trade-in inventory. We sold more used inventory equipment including some large [dollar capacity] transactions this period, which obviously do not carry the same level of margins as our rental fleet and thus this activity lowered our total used equipment sales margin.

Parts gross margins were 26.8% compared to 26.1% a year ago, and service gross margins were 61.2% versus 66.2%. The decline in service gross margins was due primarily to revenue mix.

Throughout our company, we are focused on improving our recovery rate within the items classified as other revenue. These are support activities such as equipment hauling, service trust, parts rate, and damage waivers. We are pleased to begin to see results in this area as our negative gross margins improved this quarter. Margins were a negative 15.9% on $9.4 million in revenues compared to a negative 24.7% on $7.1 million in revenues last year. We also made significant progress from the first quarter. However, there is plenty of room for further improvement in this area and we intend to stay focused on this.

Slide 10 please. Our results include income from operations of $10.3 million or 5.6% margins compared to a loss from operations of $4.3 million or a negative 3.2% margin a year ago. Really been through the drivers to this point and don't need to be repetitive, but you can see that our results reflect both significant margin expansion from our business segments and operating cost leverage as the business improves.

Proceed to Slide 11 please. It's been two years since we've been in a position to report net income, so we are pleased to report net income of $2.7 million or $0.08 per share compared to a net loss of $7.1 million or $0.20 per share a year ago.

Slide 12 please. For the second consecutive quarter, EBITDA nearly doubled from a year ago. EBITDA was $35.2 million or an 89.1% increase over last year, significantly outpacing our revenue growth of 40.7%. EBITDA margins were 19.1% compared to 14.2% a year ago.

Next Slide 13. SG&A expenses were $37.5 million, an increase of $700,000 or only 2.1%. As a result, SG&A declined as a percentage of revenue to 20.4% this quarter compared to 28.1% a year ago on higher revenue.

Slide 14. Based on higher demand, we've increased the size of our fleet by $39.8 million during 2011. Our gross fleet capital expenditures for the quarter were $50.8 million, including non-cash transfers from inventory. Net rental fleet capital expenditures were $35.7 million. For the quarter, gross PP&E CapEx was $2.9 million and net was $2.7 million. Our average fleet age at the end of June was 43 months, essentially flat with the average age at year-end.

Slide 15. Our fleet based on original equipment cost at the end of the quarter was $724.9 million versus $685.1 million at the end of 2010 and $657.7 million at the end of the quarter a year ago.

On slide 16 and 17, we have included the usual information regarding our capital structure and our senior credit facility. We have allocated capital complete investment during the early stages of this recovery and we've tapped it to our senior credit facility. At June 30th, our outstanding balance under the ABL was $15.2 million. This left us with $297.8 million of availability at quarter end under the $320 million ABL facility as noted on slide 17.

And before I open the call to Q&A, I'll turn it back to John for our thoughts on the next quarter.

Thanks Leslie. The outlook for our business is positive and we believe the momentum in our business will generate another strong quarter for us. We believe the ability to grow our fleet, while increasing our rates and utilization is indicative of the beginning of a growth cycle. As for our rental business, we expect the positive trends to continue with sequential and year-over-year growth in the third quarter. We also expect to see strong rental performance in the fourth quarter with normal seasonality to apply.

With the economy recovering at a slow pace and the poor economic data that has been reported lately, our distribution business continues to be more difficult to predict. We expect our equipment sales to be inconsistent for awhile as construction markets remain weak and crane sales are spotty. As a result, we cannot predict with certainty that our second quarter equipment sales will repeat in the second half of the year.

Regardless of market conditions, we have demonstrated our ability to adapt our business to changing market conditions. Our strong margin expansion and EBITDA growth last quarter demonstrates significant operating leverage in our business. With the solid balance sheet and capital structure we believe we have the flexibility to take advantage of improving market conditions and opportunities. We will continue to do so.

Operator, we would now like to open the call up for questions. Please provide instructions.

Thank you. Today's question and answer session will be conducted electronically. (Operator Instructions). We will take our first question today from Seth Weber with RBC Capital Markets.

Hey. Good morning everybody

Good morning.

Morning Seth.

I guess a couple of questions here. On the distribution business, can you give us some color, where those cranes went here in the second quarter and as far as your more cautious outlook, I mean are you actually seeing orders get canceled at this point or it is just kind of your gut saying that you think you are not seeing the pickup here in the second half?

No, we are not having any orders canceled. But a lot of the sales that we are experiencing right now are what I could call popup sales. We are doing a lot of quoting, people are concerned about this economic data, they are concerned about the strength of the recovery and to be blunt people are somewhat hesitant to make major capital expenditures, so we just have less visibility than we would typically have. But we are definitely not getting orders canceled.

Okay. And then the orders that you shipped in the quarter, is it primarily oil patch, mining that kind of stuff, or is there any color on that?

It is, and then some product going to rental companies that are adding to their fleets, maintained and operated rental type companies, oil patch, petrochem, all of the above.

Okay. And then -- thank you. If I could ask a question on rental business. Can you give us what the pace of pricing was through the quarter monthly and maybe where it shook out for July relative to June?

Well, we saw a pick up every month of the quarter sequentially and nice increases that we went through. July is looking very strong for us. I would rather not give monthly rate gains, we report on a quarterly basis. But we are continuing to see very nice sequential increases and July is no exception, it looks real, real good.

Okay. And then I guess just a clarification, did I hear you say earth-moving demand was actually down in the quarter and there is some sort of mix issue or something?

Yes. The demand is not down, our time utilization is down and that's related to a mix issue. We have added quite a bit of smaller earth-moving equipment to our fleet, utility type equipment, which typically carries a lower time utilization, although a higher dollar return. It's a mix issue, but demand is not down.

I see. Okay. So then will that affect any kind of margin pull-through in the third quarter then or...?

It won't be negative. There will be no negative impact on margins.

Okay. All right. Thank you very much guys.

Thank you.

Next, we will hear from Adrienne Colby with Deutsche Bank.

Hi, thanks for taking my question. It looks like you closed two branches in the Mid-Atlantic region in the quarter. I was hoping you could provide a little color on that decision and maybe help us to know if you are planning any other openings in other areas.

We did close two stores actually, it wasn't in the Mid-Atlantic, it was in Indianapolis and Louisville. Those are stores that we were not getting the traction in we expected from a utilization or rate stand point. We were able to redeploy about $15 million of fleet put it to work, essentially immediately at better rates. And so it was just a business decision but we did close two stores one in Indy and one in Louisville and we have gotten very positive results from that.

Are you planning any other branch openings?

Well, we are continuously looking at that. There's no -- we are doing some market studies right now, but nothing is imminent. But that's part of our business plan and we are always looking at that.

On the map that you provided us, it looks like the gross profit in your Gulf Coast region dipped by about 2%, I guess from a contribution standpoint. Just wondering if you're seeing more competition in that market or if there is some different pricing dynamics going on?

Yes. That's a revenue mix issue. We had a tremendous sales quarter. And as you know, our equipment sales are 10%, 12% margin, so the dip in gross margin is related to revenue mix.

Great. If I can just sneak in a few housekeeping questions. Could you tell me what the quarterly fleet transfers were and also what your operating cash flow ex non-cash transfers were?

Okay. So our quarterly transfers were $9.9 million and operating cash ex the transfers would be $20.4 million.

And are those six months numbers or just the quarter?

That's just the quarter.

Thank you very much.

Thank you.

Henry Kirn with UBS has our next question.

Hey, good morning guys.

Good morning Henry.

Wondering if you could talk a little bit about the customer sentiment. You said the customers are hesitant to make capital spending decisions. Are you seeing that benefit your rental business for now? And then maybe coupled with that, are you throughout your region seeing signs of projects that could be cancelled or postponed?

Well, on a project side, no we are not. I mean, demand is pretty good right now. Henry I've talked before on these calls that it's typical for us to see increased rental demand early in a cycle and we are seeing that right now. You combine that with some pretty tough economic data that's been coming out lately, I think that it's making people hesitant, I think they are being somewhat cautious and that does help our rental business. And I think it shows in the numbers with the kind of growth rates we're getting in rentals, margin expansion, rate increases. So yes, I mean, there is some confidence issues out there right now that our impacting our equipment sales.

That's helpful. And as you look at your fleet right now, what categories do you think you could still have some room to add in and where do you think you're set for now? And maybe also region by region, are there pockets where you think that there is some opportunity you can still take advantage of in the back half of the year?

Well one, and I think, I stated in my remarks that we'll probably slow our fleet growth somewhat in the second half, we will be spending some CapEx obviously, but it will be more maintenance. And I think our fleet growth will slow in the second half of the year. But, we're seeing increased demand very broad-based; the Gulf Coast remains far and away our strongest region, and it's oil patch related, it's petrochem related. Same applies to the intermountain region. It's primarily oil patch and mining. But we are seeing improvement, very broad based and our strongest area, right now is our rental business.

I can tell you I would not be surprised to see a $15 million swing in our numbers in any given quarter on sales, one way or the other. I mean I think there is that kind of uncertainty. And I think it's been demonstrated in what we have done. You saw a very strong fourth quarter in '10 from us on equipment sale side, lot softer than the first, really strong second quarter. I think for the remainder of the year, it could go either way. We're quoting a lot of equipment but, people are somewhat cautious right now in making major capital expenditures.

That's really helpful. And as you went through the second quarter on the crane sales, was there any trend within the quarter either up or down, that you can draw conclusions from?

Well, the strength we are seeing is in rough terrain cranes and all-terrain cranes. The weakest part of the crane market in North America is crawler cranes. That's very soft right now, and primarily the activity we are seeing on crawlers is to the smaller end of the crawler line. But, rough terrain demand is decent, and all-terrain demand has been pretty decent. But the crawler side which are, big ticket items for us has been really soft.

Thank you very much. Good quarter.

Thank you.

Our next question comes from Nick Coppola with Thompson Research Group.

Hey good morning.

Good morning.

On rates do you see comps getting more difficult at some point here and can you just talk about your ability to keep getting rates up and drivers there?

Well, at some point comps are going to start getting tougher. But I think we are going to continue to get nice rate increases for the remainder of the year. But, I mean, obviously comps will start to be a factor at some point, but we are confident we can continue to get nice year-over-year increases for the remainder of the year.

So, are there any specific drivers there, I mean is it just as utilization stays up, or are you seeing anything in terms of market, I mean the competitive environment or specific areas of your business something out there?

Yes. I mean, I think it's all of the above. I think, one, our utilization is very strong at -- over the 70% for the quarter, when you get to that level you can push on rates pretty hard and our competitors are saying the same thing, at least our major competitors are. They got strong utilization levels and I think they are pushing rates. So it's all of the above.

Okay, perfect. Thank you.

Thank you.

(Operator Instructions). And we now go to Philip Volpicelli with Deutsche Bank.

Hello.

Hi Philip.

Can you hear me?

Yes, I can hear you.

Okay. Sorry I am on a train. I was just wondering if you could talk a little bit about the crane sales. Do you know if those are just replacing older units or are they adding incremental units to their fleets?

I think it is some of both. I mean the crane sector went through a period where there weren't much capital investments, I think some of it is probably replacing older fleet and I think some of it is just for current opportunities. So I think it's both.

Okay. And then with regard to the level of sales, do you get any indication that this is sustainable or is it something where you think it's going to come off as the economic data weighs on peoples mind?

Well, look, I think our sales are going to be lumpy for a while. I think they are going to be somewhat inconsistent. And then, we will see how this economy pans out going forward. Obviously there has been a lot of pretty negative data come out recently and I think when people are looking in making multi-million dollar capital investments, so they are pretty cautious right now. But we had a strong second quarter and I can't tell you that's going to repeat in the second half of the year, but again some of our sales we're getting right now, what I would call popup sales and they kind of come out of nowhere and so we will see what happens.

Okay. Two cleanup questions. What was the level before plan financing at the end of the quarter?

$66.5 million.

I am sorry. Was that $56.5 million?

$66.5 million.

Okay, great. Thanks Leslie. And then I believe your bonds are callable at the end of month. Any thoughts to refinancing those or what are your plans with cap structure?

We are not going to do anything at this point.

Great. Thank you very much and great quarter guys.

Thank you.

Thank you.

Next question comes from Shawn Wandrack with Deutsche Bank.

Hi there. The majority of my questions have been answered, but I just was curious about the pace of the orders within the crane sales during the quarter. Did they increase more towards the backend or were they pretty steady throughout? I know you said it's lumpy, but any color you can give would be appreciated.

I think it was pretty much throughout the quarter. I don't think there was any increase or decrease in pace. It was just kind of spread out over the quarter.

Okay, great. And at what point do you think you will start increasing pricing as you go through, as you see new equipment sales pick up?

I think we're increasing pricing now. Our margins improved in the second quarter and so I think we are getting price improvement right now.

And that should continue as the year goes on?

Yes. I have no reason to think it won't.

Okay, great. Thank you very much. And good quarter.

Thank you. I appreciate it.

Joe Box with KeyBanc Capital Markets has our next question.

Hey, John. Hey Leslie

Hi, Joe.

Hi, Joe.

I got a question for you on the SG&A. Your revenues in the quarter went up about $50 million sequentially and yet your SG&A was down. I am just trying to understand, is that a timing issue or are you making some structural changes that basically helps to put costs down in the quarter?

Well, year-over-year, our SG&A was actually up a little bit and it was up modestly. But we did have a benefit in the second quarter on some of our health insurance and other liability insurance reserves, but it wasn't a huge impact, but it certainly did lower that number. But I mean I think it came in as a percentage of revenues with the higher revenues. And I think until our business really takes off from the top line, I think it's probably better to look at that from more of a dollar standpoint than it is from a percent of revenue because that's going to potentially bounce around a little bit, but we definitely had some benefit in there this quarter from some reserve adjustment.

Can you quantify what that favorable reserve adjustment was?

I think year-over-year the -- our claims experience, I think we were down about $0.5 million year-over-year and with higher employees you expect that to be up, so that was the year-over-year impact.

Great, okay. One follow-up for you on used equipment prices. I think the latest (inaudible) data that I've seen was actually for May. Can you just give us a sense of what you are seeing maybe through June and July. And does it feel like the sequential increases that we saw in May, is that holding or are you starting to see some softening on the margin?

No, I don't think we are seeing any softening on used equipment prices. I think they are holding up very well and probably continuing to increase. A lot of that is due to the fact that there is just not a lot of good quality used equipment available out there. It's a supply and demand issue, but we think pricing is holding up very well.

Thank you.

Thanks Joe.

Seth Weber with RBC Capital Markets has a follow-up question.

Hey, thanks. Just two quick ones. The strength in the part sales in the quarter, was there a kind of a one-off sale there or is that sort of the new run rate we should be thinking about?

No, I don't...

And then one for Leslie on the tax rate.

No, I think nothing one-off there, that's just normal sales activity.

Okay. And then Leslie, tax rate for the -- I guess for the year?

Yes.

Something we...?

We are dealing with relatively small, I guess, pretax numbers whether it be positive or negative, and so the rate is pretty sensitive to our permanent differences on any changes we make there based on revised estimates. So that's going to continue to be pretty sensitive to relatively small changes in those numbers. So I know that's not extremely helpful, but that is the movement between the year-to-date rate from the first quarter to the second quarter, so.

Okay. I thought I'd try. All right, thanks very much.

(Operator Instructions). And there are no questions. I'd turn the conference over to Mr. Engquist for any additional or closing comments.

I appreciate everybody's participation. We feel real good about our business, the ways it's trending. I think when you look at our performance in the second quarter without a lot of help from the construction markets and relatively spotty crane demand, I think it bodes very well for our business. And when those end markets recover for us, we are going to show you some really positive numbers. Thanks for being on the call.

That does conclude today's conference call. Thank you for your participation.