H&E Equipment Services Inc (HEES) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's H&E Equipment Services third quarter 2011 conference call. Please note today's call is being recorded.

At this time, I'd like to turn the conference over to Mr. Kevin Inda. Please go ahead, sir.

Thank you, Holly, and welcome to H&E Equipment Services conference call to review the Company's results for the third quarter ended September 30th, 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 one.

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

During today's call, we'll refer to certain non-GAAP financial measures and we've reconciled these measures to GAAP figures in our earnings release, which is available on our website.

Before we start, let me offer the cautionary note that this call contains forward-looking statements within the meaning of the federal securities laws. Statements about our beliefs and expectations and statements containing words such as "may," "could," "believe," "expect," "anticipate" and similar expressions constitute forward-looking statements.

Forward-looking statements involve known and unknown risks and uncertainties which could cause actual results 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 third quarter 2011 earnings call. On the call with me today is Leslie Magee, our Chief Financial Officer. Please move to slide three.

This morning I'll give an overview of our third quarter performance including a quick update on the specific regions we serve. Leslie will summarize the quarter's financial results. When Leslie concludes, I'll provide our thoughts on the rest of the year, including current market conditions, and at that point we'll be happy to take your questions. Please proceed to slide five.

Our business performed very well during the third quarter. Despite a lack of a full scale recovery in the construction markets, our Company delivered very solid results and remains focused on the priorities of capturing opportunities in the market and running efficient and effective operations.

Total revenues increased 19.8% this quarter on a year-over-year basis. Our business delivered not only significant top line growth but, more importantly, we delivered very strong growth in profitability. Once again, our rental business was robust in terms of revenue growth, rate increases, and utilization.

This is our fourth consecutive quarter of year-over-year rental revenue growth in excess of 25%, which we believe is impressive and continues to outpace the growth rates shown by our peers.

Our distribution business also showed continued strength. This quarter on a year-over-year basis, our used equipment sales volume nearly doubled and our parts and service business had a low double-digit percentage increase.

We've discussed many times the volatility in our new equipment sales in today's environment. And the third quarter reflected a small year-over-year decline, yet sales activity remained solid.

EBITDA improved significantly again, up 65.2% to $40.4 million, and EBITDA margins improved to 21.9% compared to 15.9% a year ago. We achieved bottom line profitability for the quarter with net income of approximately $4.8 million, or $0.14 per share, compared to a net loss of approximately $3.8 million, or a loss of $0.11 per share, in the third quarter of 2010.

Average time utilization based on original equipment cost increased to 71.8%, which is an improvement of 590 basis points over the prior year's level.

I'm very proud of our sales force and management for the further progress they've made on rental rates. Our rates increased 8.9% this quarter over last year's rates and increased 4.1% from the second quarter of this year. Please proceed to slide six.

The contribution from our various regions remains 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 continue to be significant drivers of our business.

The activity in our less industrial focused markets also continues to improve. Slide seven, please.

There are many positives to report from our end markets. Our industrial markets are very active and we see no sign of this activity decreasing in the foreseeable future. Rental demand remains strong, driving increased utilization and improved pricing across our sector.

We are also pleased to see our distribution business not only stabilize but show steady improvement. This is evident in our solid improvement in our parts and service business and the strong pricing we're seeing on used equipment.

The news in our market is not all positive. There has been little to no improvement in the residential markets, which is a drag on the overall economy. And the nonresidential construction markets are recovering at a very slow pace.

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

Thank you, John, and good morning. I'll begin on slide nine.

We're very pleased to discuss such strong financial results with you this morning. And while our top line reflects healthy levels of growth again this quarter, all measures of profitability, whether it's gross margin, operating profit, net income, or EBITDA, are expanding faster than our revenues, highlighting the significant leverage that exists within our business model.

From a summary viewpoint, this quarter total revenues were $184.3 million, an increase of 19.8%, and gross profit was $53.7 million, an increase of 41.7%, in each case compared to the same period last year. Higher total sales were driven primarily by equipment rentals, used equipment sales, and product support revenues compared to last year.

Now I'd like to provide a few details of each business segment, first on a revenue basis and then on a gross profit basis. And I'll begin with our rental business.

Rental revenues were $61.2 million for the quarter, a 26.8% increase over a year ago. We have a larger rental fleet available for rent and our rental fleet is also in much higher demand. Compared to a year ago, we've increased our total fleet by approximately 9% on both a unit and on an OEC basis.

Average time utilization based on units increased 660 basis points to 68.9%. And as John stated, time utilization based on OEC increased 590 basis points to an average of 71.8% for the quarter.

Demand was higher in all product lines except earthmoving, and also higher in all regions of our footprint compared to a year ago. The variance in earthmoving time utilization was due in large part to mix changes within the earthmoving product line.

In addition, rental revenues are higher as a result of an 8.9% increase in average rental rates in comparison to a year ago.

Our dollar returns resulted in significant expansion and improved to 33.7% compared to 29.2% a year ago. This is a 450 basis point improvement due to the strength in both time utilization and rental pricing.

Compared to the second quarter, rental revenues increased $5.4 million, or 9.7%. Utilization increased 180 basis points, and average rental rates were up 4.1%. These results drove a 270 basis point increase in our dollar returns on a sequential basis.

New equipment sales were $46.5 million, or a $1.2 million or 2.4% decrease over the prior year period. The net decrease was primarily a result of lower new aerial work platform sales compared to a year ago. Sequentially, new sales were down approximately 19.6% due to the volatility in new crane sales.

Used sales were $27.2 million, a $12.5 million or 84.8% increase over the third quarter of 2010. The majority of the increase was related to more than a 150% increase in earthmoving fleet sales. Cranes and aerial used sales were also strong.

Business activity in our parts and service segments improved as revenues increased 10.9% on a combined basis to $38.8 million with both segments generating increases from a year ago.

Now let me address the gross profit by segment. Total gross profit for the quarter was $53.7 million compared to $37.9 million a year ago, an increase of 41.7% on a 19.8% increase in revenues. From a gross margin perspective, consolidated margins were 29.2% compared to 24.6% a year ago.

The single largest factor in the expansion of our consolidated gross margins continues to be higher margins in our rental business. I'll begin with rental gross margins and provide a few more details.

Our rental business delivered margins of 44% compared to 37.5% last year, an increase of 650 basis points due to higher demand and better rates combined with lower depreciation and rental expense as a percentage of rental revenues. Margins on new equipment sales increased 170 basis points to a 11.6%, due primarily to better crane margins.

Gross margins on used equipment sales decreased to 23.4% from 24.6% in the same period last year. Included in these results were margins on rental fleet sales of 28.6% this quarter versus 28.9% in the same period 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, which we sold more of this quarter compared to a year ago.

Parts gross margins were 26.7% compared to 26.1% a year ago. And service gross margins were 61.6% versus 58.3% a year ago.

Recently we've talked about our focus on obtaining better recovery rates in our other revenue category. These are support activities such as equipment hauling and parts rate. We're pleased to report further improvement from our last call, improvement that we feel is meaningful.

We've reduced our gross loss from $1.6 million a year ago to near break-even levels. Margins this quarter were a negative 2.6% on $10.5 million in revenues compared to negative 20% on $8.2 million in revenues last year. This is also impressive improvement from the second quarter where our results included negative margins of 15.9% for a gross loss of $1.5 million.

Slide 10, please. Our results include income from operations of $15.1 million, or an 8.2% margin, compared to income from operations of $1.5 million, or a 1% margin, a year ago. Our results reflect both significant margin expansion from our business segments and operating cost leverage as our business continues to improve.

Proceed to slide 11. Net income was $4.8 million, or $0.14 per share, compared to net loss of $3.8 million, or a loss of $0.11 per share, a year ago.

Please move to slide 12. EBITDA was $40.4 million or a 65.2% increase over the same period last year, significantly outpacing our revenue growth of 19.8%. EBITDA margins were 21.9% compared to 15.9% in the same period a year ago, an expansion of 600 basis points.

Next, slide 13. SG&A expenses were $39 million, an increase of $2.4 million, or 6.7%, over the same period last year. As a result, SG&A declined as a percentage of revenue to 21.2% this quarter compared to 23.8% a year ago on higher revenues. The net increase in SG&A is due to increased commission and incentive pay that resulted from higher rental and sales revenue.

Moving on to slides 14 and 15, based on higher demand we've increased the size of our fleet by $41 million during 2011. And nearly 100% of the investment in our fleet growth occurred prior to the third quarter.

Our gross fleet capital expenditures for the quarter were $38.8 million, including non-cash transfers from inventory. And net rental fleet capital expenditures were $18.2 million.

For the quarter, gross PP&E CapEx was $5.7 million and net was $5.2 million.

Our average fleet age at the end of September was 43.2 months, essentially flat with the average age at year-end.

Our fleet, based on original equipment cost, at the end of the quarter was $726.1 million versus $685.1 million at the end of 2010 and $665.5 million at the end of the quarter a year ago.

On slides 16 and 17, we've include the usual information regarding our capital structure and senior credit facility. And there's really no new material information to discuss here. At September 30th, our outstanding balance under the ABL was $13.6 million. This left us with $299.4 million of availability at quarter end under the $320 million ABL facility as noted on slide 16.

Before opening the call to Q&A, I'll turn it back to John for our thoughts on the rest of the year.

Thank you, Leslie.

Our outlook for the fourth quarter is very positive. We have seen the first half of the fourth quarter unfold with strong momentum. Demand for our products and services are strong, and the industrial markets we service remain very active. Year-over-year pricing and utilization trends have continued in a positive direction since the close of the third quarter.

Discussions with our customers regarding equipment sales have increased. However, whether any of these discussions result in sales and, if so, the timing of any such sales remains very difficult to determine. But, we are encouraged by the increased level of activity. Based on this and normal seasonality, the third quarter could be our peak period of the year.

In closing, the third quarter was a great quarter as we continued to deliver solid year-over-year revenue growth, margin expansion, and significant increases in EBITDA and bottom line earnings. If the market continues to recover, we would expect to continue to see strong margin expansion in our business. We're excited about the opportunities as we move forward.

At this point in time, we'd like to open things up for questions. Operator, please provide instructions.

Thank you so much. (Operator instructions.) Henry Kirn with UBS.

Hey, good morning, guys.

Morning, Henry.

When do buyers have to make a decision to get equipment by the end of the year? And I guess if the new equipment sales don't come in the fourth quarter, when would you expect them?

Henry, I mean, everybody's situation is different. I mean, obviously there's some tax incentives in place to buy by year-end. Some people can utilize those and some can't. They may not need tax incentives but may still need the piece of equipment.

The timing of their need to place an order is dependent on whether I have that piece of equipment in inventory or whether, say, Manitowoc or Komatsu has it in inventory. So, there's a lot of factors at play there.

I can tell you there's still a lot of uncertainty there. And when you look at us on a top line basis, particularly on a year-over-year basis, I would remind you that the fourth quarter of last year we had exceptionally strong equipment sales. New equipment sales were $63 million in the fourth quarter last year. And we have not seen that level of activity in any reporting period this year.

So, we're going up against a real tough comp there. But, I'll tell you this. Irrespective of whether we're up, flat, or down a little bit on the top side, our bottom line is going to improve dramatically in the fourth quarter. And I think that's what people should focus on.

That's helpful. And as you look at your own CapEx for the fourth quarter, how should we be thinking about that?

Henry, we could have a little fleet growth in the fourth quarter. It won't be real significant. Typically we don't grow our fleet in the fourth quarter because we're entering seasonal periods where you get some level of slowdown due to weather and holidays.

I can tell you we're ordering equipment right now for delivery in the first half of next year. But, if we have fleet growth in the fourth quarter, it'll be fairly minimal.

And then, one more if I could. How much of the -- how much rental growth are you seeing from the former Burress business?

It's growing, I mean, no question about it. I don't have a number in front of me, but their rental business is improving.

And we're very focused on that market. We've had to take them from very much a distribution culture into a rental culture. And we've got some good people in place and we are seeing improvement there.

That's helpful. I'll pass the baton. Thanks a lot.

Thank you, Henry.

Neil Frohnapple with Northcoast Research.

Morning, John and Leslie.

Good morning.

As a follow up to (technical difficulties) increasing CapEx on the growth side for 2012 versus 2011.

Well, a couple of comments. One, we are in the process of finalizing our fleet plan and our budgets right now. So, we haven't totally made those decisions. But, all things being equal and market continuing on the current trends, I would think we would be investing in our fleet next year.

But, as you know, we don't give CapEx guidance. And frankly, we're just now completing fleet plans and our budget. So, that kind of remains to be seen.

All right, great. And then, was there is a pickup in activity for crawler cranes in the quarter, particularly for the larger crawlers?

No. Large crawler crane demand across North American is really weak right now. And that's one of the things that makes our forecasting new equipment sales pretty difficult right now. We seem to get one to fall here and there, but typically it's not something we're necessarily forecasting.

And whereas demand on the hydraulic side is pretty strong right now, demand on crawler cranes, particularly larger crawler cranes, is pretty weak across North America.

Great. And then lastly, can you update us on your plans for branch openings, particularly related to 2012?

We're doing market studies as we speak. And, I mean, we're taking a look at some of the shale plays and whatnot for potential branch openings. We haven't made any firm decisions right now, but I can tell you we will be opening some branches in 2012.

All right, great. Thank you.

Thank you.

Joe Box with KeyBanc Capital Markets.

Hey, good morning, guys.

Morning.

John, can you just give us an update on what your customers are saying in the offshore drilling market? And I think in the past you talked about a lot of cranes that have moved out of the Gulf. I guess with permits starting to flow again, I'm just curious what their crane fleet looks like and if they're starting to come back into the market for either new equipment or service.

The answer is no. I mean, things are still pretty slow there. And to say that they're issuing permits again, I mean, it's at a very, very slow rate. There's no question that we lost some rigs to that moratorium as some people pulled out.

I have every expectation that we're going to see things start to improve there. That has not happened yet. And I think that's been a real drag on our crawler crane business that shows up in our sales, particularly in Louisiana. Our crawler crane sales this year in Louisiana have been extremely soft by any historical measure.

So, I think we're still being impacted by the moratorium and kind of a de facto moratorium that's still in place, because it's very difficult to get permits right now. But, I do expect to start seeing some improvement in that area, and I think that's going to be upside for us to the future.

Great. That's good color. Just a follow up for you on the cost of recovery in your other segment. I guess really solid performance in the quarter. Is that primarily a focus on recovering delivery margins? And I guess the more important question is, is it possible to see margins turn positive in 4Q?

One, that's -- and you can tell by our results, that's an area of focus with our management team and it's an area we're pushing on real hard. And we're been very successful in improving our bottom line.

I am doubtful that you would see positive margins there in Q4, because we're going to be entering some seasonal periods where you get some slowdown in your rental business and in your utilization, which will create increased pressure in the other revenue category.

So, we're going to remain focused on it. But, Q4 and Q1 are seasonally your weakest rental periods. And I would expect to see some increased pressure in that category as people fight to keep equipment on rent.

Do you think that full year 2012 could see a positive margin?

That's possible, yes. I wouldn't commit to that by any means. But, yes, that's definitely possible.

Okay. One last one for you and then I'll turn it over. Just based on rental rates, looking at the contracts that you have with your customers, I'm just curious. Does it seem like there's still a lot of upside to rental rates or have you pretty much already harvested a lot of the low hanging fruit?

Well, it might be fair to say that we've harvested the low hanging fruit, but I absolutely believe we have runway in front of us. When all of your bigger players are running 71%, 72%, 73% utilization, you've got the ability to really drive rates. So, I think we've got significant runway in front of us on rate expansion.

Great. Thanks. Nice quarter.

Thank you.

(Operator instructions.) David Wells from Thompson Research Group.

Hi. Good morning, everyone.

Hey, David. How are you?

Doing well. Doing well. Just wanted to dig a little bit more into your commentary about weakness in earthmoving and some mix shift there. Could you talk a little bit more? Are you seeing a shift to smaller away from larger? And any thoughts on if -- I mean, earthmoving typically is thought of as an early cycle category. Is that -- bode ominously for 2012?

Not at all. And I would not say we're seeing weakness in earthmoving. I don't think it was taken that way.

We are seeing a shift on the rental side to some smaller products, utility type products that typically carry lower utilization levels such as Takeuchi mini excavators and stuff like that, skid steers. But, I would certainly not say we're seeing weakness in the earthmoving business by any means.

Okay. Given the used activity in the quarter and the continued new sales, how do you feel about your equipment inventories for sale going into next year? Do you anticipate, if the market continues to improve, that that would be -- you would look to add more inventory and it'd be a use of cash?

Well, actually we're probably right now pulling our inventories down a little bit going into year-end. And we'll take a look next year based on market demand. We try to make inventory decisions on as short a term basis as possible.

But, clearly if we see the demand, we'll be bringing in some inventory. But, here as of late, we've been actually pulling our inventories down a bit.

Okay. That's helpful.

Henry, I would also -- or, I'm sorry, David, I would also point out that on earthmoving equipment our dollar utilization is up. So, I just want to emphasize we're not seeing weakness in that category.

Okay. Appreciate that. And I guess lastly, as you look at the crane rental business, I know there was a question earlier about large crawler, we've heard some commentary from some of the other crane rental folks that there was maybe a bit of a slowdown in the midsummer, but then things for '12 were looking better on a quoting basis. Any thoughts on the outlook for that? And are you seeing -- I guess are you able to see rate improvement yet in the crane business as well?

Yes, we are seeing rate improvement. And we actually, in October, saw a fairly nice rate improvement on the crane side.

We don't rent crawler cranes. That's really not a bare rental item. Most of the crane rental companies, like a Maxim that rent on a maintained operated basis, do that business. So, we don't rent crawler cranes.

But, the demand on our hydraulic crane side where we rent this equipment on a bare basis, just the equipment, our utilization levels are very high. And we've been pushing prices and getting some positive results there.

Excellent. Well, I'll turn it back over. Thank you.

Thanks, Dave.

Seth Weber from RBC Capital Markets.

Hey, good morning, guys.

Morning.

John, appreciate the color on, I guess, trends here in the fourth quarter. Can you comment -- can you give us any direction on whether rates were up in October versus September sequentially?

They were. We were up about a percentage point, which is a real solid increase, in my opinion.

Super. Great. And then, I guess as we look at the fleet age, so your AWPs are up to about 50 months here. Is that a comfortable level for you guys, or is that an area that you think you would want to bring down?

No. I mean, that's absolutely a comfortable area. And we'll start addressing that by selling off some of the older stuff in the backend of our fleet.

We've intentionally slowed some of our fleet sales a little bit in certain categories just because we've had such high demand and getting good dollar returns on it. But, that's something that we can address by selling off the backend and bringing in some product.

But, 50 months does not concern us at all. And I think that's pretty in line with -- it's well below industry average on aerials, let me put it that way.

Right. Okay. Who is buying the used equipment? Is that going offshore, or do you have any sense for how much of that is staying local versus going overseas?

I couldn't give you a percentage, but it's both. I mean, we're selling -- we're still selling into the Asian markets, and we've seen some increased demand there. And then, there is definitely a secondary market in the US. So, it's some of both.

Okay. So, do you think that the used margins, then, are fairly sustainable around here?

Yes.

Okay. And then, I guess just lastly, is there -- Leslie, I'm sorry, I think I might have missed it, the transfer number that's in that CapEx.

For the quarter, that was $2.4 million.

Okay. And could we also get the financing, the --.

Floor plan?

Yes, floor plan. Thanks.

$63 million.

$63 million, perfect. Thanks, guys.

Philip Volpicelli from Deutsche Bank.

Good morning.

Hey, Philip.

So, the ARA put out some new definitions for metrics. Are you guys going to conform to the new definitions for rental rates that change and time utilization, all that kind of stuff?

We're looking at that right now. We are generally very supportive of developing a common platform for these metrics. We certainly support that. We've done a lot of work with Rouse in developing internal metrics where we can evaluate ourselves internally against our peer group, and we like what we've done then.

We're looking at ARA stuff as we speak and working with our IT group to determine just what it means for us to conform. But, I can tell you, in general, we're supportive of developing a common platform.

That's great. And then, when you look at the capital structure, you drew on the revolver for the first time in quite a while. Maybe if either of you could talk about that, and if you think about growing the fleet next year ahead of what looks like another year of good numbers, if you'd talk a little bit about the dynamics of what you might do in terms of free cash flow negative, if you would consider that.

Yes, we would consider free cash flow negative, absolutely, based on market demand. And again, we're currently, as I stated earlier on the call, finalizing our fleet plan and our budgets. And so, it kind of remains to be seen.

But, I would certainly not be uncomfortable being slightly cash flow negative in 2012 if demand dictates we do so. That would not bother us.

Okay. And the last question for me, acquisition appetite. You guys have had success in the past. Is there anything out there that looks interesting? And are you still looking at tuck-ins or would you consider something larger?

Probably more of a tuck-in situation. And, I mean, we don't have anything that's imminent by any stretch. I think I've said in the past we've got a very strong balance sheet and a lot of liquidity and we would be opportunistic.

But, if the right deal comes along, we'd certainly take advantage of it. But, probably more of a tuck-in type situation as something real major.

That's great. Thank you very much. Good luck.

Thank you.

Jon Evans from Edmunds White Partners

Could you just talk -- you alluded to that October rates were up sequentially from September, I guess because of the seasonality. Do you expect rates to keep going down? Or, I mean, do you expect them to go down from there, or do you expect them to go up in November?

That's a real good question, and that's something that's pretty difficult to forecast. I can tell you right now our utilization is holding at a very strong level.

And at some point you start getting around these holidays and you start getting some weather impact, there will be some kind of impact to your utilization and seasonality will set in. Now, what that does to rates remains to be seen.

But, on a longer term basis, forget one reporting period or the fourth and first quarter, we definitely expect to continue to see rate increases.

Got it. And then, just a follow to that, if you exit kind of -- let's say you don't have any rate increases from where you finished kind of in October through the year, what kind of rate increase will you have kind of built in on a year-over-year basis as you go into '12? Does that make sense?

If you're talking about for the year '11, I'm not sure. I mean, I think we've looked at a implied rate increase for '12 if we were not to get any kind of rate gains from there. I mean, I think we'd be positive 2.5% or 3%, things remaining the same, fleet size, utilization, and no rate increases. But, I haven't looked at it for the remainder of the fourth quarter.

Okay, great. So, it'd be 2.5% to 3% you'd be up if you got no more rate increase.

In '12, correct.

'12. Great. Thank you so much.

(Operator instructions.) At this time we have no further questions in the queue. I'll turn the conference back over to our speakers for any addition closing remarks.

Appreciate everybody being on the call. Again, we've got a lot of momentum in our business. And we feel good at this point about the trends and about what we're going to be seeing in '12. So, we look forward to speaking to you on our next call early next year. Thank you.

Thank you. That does conclude our conference for today. We thank you for your participation. You may now disconnect.