H&E Equipment Services Inc (HEES) 2011 Q4 法說會逐字稿

Good day, everyone, and welcome to today's H&E Equipment Services fourth-quarter 2011 conference call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Kevin Inda. Please go ahead, sir.

Thank you, Jenny, and welcome to H&E Equipment Services conference call to review the Company's results for the fourth quarter and year ended December 31, 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 have 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 will now turn the call over to John Engquist.

Thank you, Kevin, and good morning, everyone. Welcome to H&E Equipment Services' fourth-quarter 2011 earnings call. On the call with me today is Leslie Magee, our Chief Financial Officer.

Please proceed to slide 3. This morning, I will give an overview of our fourth-quarter performance, including a quick update on the specific regions we serve and current market conditions. Leslie will summarize the quarter and full-year financial results. When Leslie concludes, I will provide our thoughts on the first quarter of 2012, and then we will be happy to take your questions.

Proceed to slide 5, please. Our fourth-quarter performance was exceptionally strong, and we are pleased with our numbers and the momentum we had moving into 2012. Industry-wide performance during the fourth quarter was solid and demonstrates that the cycle is improving as more customers show confidence in the recovery. Rentals continue to grow at robust levels, and this is the fifth consecutive quarter of year-over-year rental growth in excess of 20%. The performance of our distribution business far exceeded our expectations in the fourth quarter, and I'll elaborate further on those trends in a minute.

Our exposure to high-growth industrial segments continues to be beneficial to our Company, as demand was particularly strong in this sector. Commercial construction activity also started to show modest but noticeable improvement during the fourth quarter. In terms of the numbers, let me highlight a few significant gains for the quarter. Total revenues increased 24.3% to $217 million this quarter on a year-over-year basis, with all segments delivering solid increases. Once again, our rental business was robust in terms of revenue growth, rate increases, and utilization.

As I mentioned a moment ago, our distribution business was strong, as we sold a number of large crawler cranes in December. We believe our strong new equipment sales were driven by a combination of pent-up demand, renewed confidence in the economy, and customers taking advantage of the bonus depreciation benefit. EBITDA improved significantly again, up 61.3% to $43.4 million, and EBITDA margins increased to 20%, compared to 15.4% a year ago. All of these factors resulted in a significant bottom-line increase for the fourth quarter of 2011, with net income of approximately $7.9 million or $0.23 per share, compared to a net loss of approximately $2.5 million or a loss of $0.07 per share in the fourth quarter of 2010.

Please proceed to slide 6. The contribution from our various regions remained consistent, but I want to highlight some positive areas. First, our two core regions, the Gulf Coast and Intermountain, remain our two most active regions, due to our exposure to the oil patch petrochemical and mining industries. Demand for our equipment and services in both regions, especially with respect to the oil patch industry, are increasing dramatically due to the price of oil and the uncertainty overseas. Second, our remaining regions, which are generally less industrial focused, are seeing increases in demand at levels we have not experienced in several years, in particular, the West Coast and Southeast regions. We believe our end users are bidding more work than they have in years, and we are seeing a definite increase in small to medium-sized projects that have been scarce in the recent past. We believe these are positive indicators that we are moving into an expansion cycle.

Proceed to slide 7, please. It is clear that while economic uncertainty remains, market conditions for our business continue to make measurable improvements. Demand for our equipment and services continues to increase, and our industrial markets are expanding with activity. Our end users are more comfortable with the recovery and are talking about and making more capital purchases than in the recent past. Commercial construction, and to a far lesser degree, residential construction, is showing signs of recovery across the country. We believe that the trends in our business and industry today are the most encouraging that our industry has seen in several years, and we feel we have reason to be very optimistic as we enter 2012.

At this time, I will turn it over to Leslie for the financial review.

Thank you, John, and good morning. I will begin on slide 9. Not to be too repetitive with John, but the fourth quarter was exceptionally strong from many perspectives. Again, this quarter our Company was successful in delivering both impressive revenue growth and profitability growth. From a summary viewpoint, the fourth quarter total revenues were $217 million, an increase of 24.3%, and gross profit was $56.1 million, an increase of 34.2%, in each case compared to the same period last year. All segments increased over the fourth quarter of 2010, but in large part, the increases were driven by new equipment sales and equipment rentals.

I will begin with our rental business and provide more details behind the numbers, first on a revenue basis, and then I will provide some highlights on a gross profit by segment. Rental revenues were $62.6 million for the quarter, a 21.4% increase over a year ago. We have a larger rental fleet available for rent, and our rental fleet is also in much higher demand relative to the fourth quarter of 2010. Compared to a year ago, we have increased our total fleet by $51.5 million or 7.5%, based on original equipment cost. Average time utilization, based on OEC, increased 530 basis points to an average of 72.3% for the quarter. Based on units, average time utilization increased 460 basis points to 67.3%, and demand was higher in all product lines. In addition, rental revenues were higher as a result of a 6.5% increase in average rental rates in comparison to the fourth quarter a year ago, and the improvements have also been broad-based across all product lines.

Our dollar returns improved to 33.9%, compared to 30.2% a year ago. This is a 370 basis point improvement, due to the strength in both time utilization and rental pricing. New equipment sales were $86.6 million, a $23.2 million or 36.7% increase over the prior-year period. Keep in mind, going into the fourth quarter of this year, we had concerns that the prior year's comp may prove to be a challenging hurdle for us. This was not the case, as the demand for cranes increased substantially. Like John mentioned, we believe the quarter's increase was partly due to the customers taking advantage of the year-end bonus depreciation benefits and improved end-user confidence. Used equipment sales were $19.7 million, a $3.5 million or 21.4% increase over the fourth quarter of 2010, due to higher demand for used earthmoving equipment. Business activity in our parts and service segments improved, as revenues increased 6.9% on a combined basis to $37.2 million, with both segments generating increases from a year ago.

Moving onto gross profit by segment. Total gross profit for the quarter was $56.1 million, compared to $41.8 million a year ago, an increase of 34.2% on a 24.3% increase in revenue. From a gross margin perspective, consolidated margins were 25.8%, compared to 23.9% a year ago. Expansion of our consolidated gross margin was primarily due to higher gross margins in our rental business and other revenues. Our rental business delivered margins of 44.5%, compared to 39.2% last year. The increased margin is consistent with recent quarters, which demonstrated high demand and higher rates combined with lower depreciation and rental expense as a percentage of rental revenue.

Margins on new equipment sales were 10%, which were down 0.5%, primarily due to slightly lower crane margins as a result of the mix of the types of cranes sold. Gross margins on used equipment sales increased to 25.9% from 22.5% in the same period last year, also due to the mix of equipment sold. Parts gross margins were 27%, compared to 25.7% a year ago, and service gross margins were 60.2%, versus 62.4% a year ago. Similar to the third quarter, we continued to improve recovery rates relative to the same period last year in other revenues, such as equipment hauling and parts freight revenues. Margins this quarter were a negative 2.2%, compared to a negative 30% in the fourth quarter last year.

Slide 10, please. I will move quickly through these next few slides, since we've been through the major drivers of the financial results at this point. Income from operations for the fourth quarter of 2011 was $17.7 million or an 8.1% margin, compared to income from operations of $2.8 million or a 1.6% margin a year ago. The margin expansion of nearly 650 basis points comes from the improved performance of our business segments, combined with operating cost leverage as our markets improve. Proceed to slide 11. Our bottom-line also improved significantly, as net income was $7.9 million or $0.23 per share, compared to a net loss of $2.5 million or a loss of $0.07 per share a year ago.

Please move to slide 12. EBITDA was $43.4 million or a 61.3% increase over the same period last year, outpacing our revenue growth of 24.3%. EBITDA margins were 20%, compared to 15.4% in the same period a year ago, an expansion of 460 basis points. Next, slide 13. Despite the growth in our business, we basically held SG&A expenses flat compared to last year. SG&A was $38.7 million, a decrease of $300,000 or roughly 1% lower than the same period last year. As a result, SG&A declined as a percentage of revenue to 17.8% this quarter, compared to 22.4% a year ago.

Slides 14 and 15 include our rental fleet statistics. During the fourth quarter, we increased the size of our rental fleet by $10.5 million, based on our original equipment costs. Our gross fleet capital expenditures for the quarter were $37.2 million, including non-cash transfers from inventory. Net rental fleet capital expenditures were $21.4 million. For the quarter, gross PP&E CapEx was $6.4 million, and net was $5.9 million. Our average fleet age at the end of December was 43.3 months. Our fleet based on our original equipment costs at the end of the year was $736.6 million, versus $685.1 million at the end of 2010.

On slide 16, you'll find information regarding our current capital structure and credit statistics. We are pleased to announce an amendment to our senior credit facility. This amended agreement remains a $320 million ABL facility. This amendment extends the maturity into 2017, subject to an extension of our refinancing of our notes -- I'm sorry, subject to an extension or refinancing of our notes. The other principal changes relate to our leverage-based pricing grid. With the revised pricing, our interest costs will decrease by 50 basis points.

Also, our unused commitment fee is now based on a usage grid, providing for a fee of either 50 or 37.5 basis points, compared to a fixed 50 basis point fee under the previous agreement. There were no changes to our covenants or springing liquidity limitations. We believe our amended ABL facility supports the future growth of our Company, and we appreciate the long-term relationships with our lenders. At the end of the year, our outstanding balance under the ABL was $16.1 million. This left us with $297 million of availability at year end under the $320 million ABL facility.

Slide 17, please. Let me briefly review our full year 2011 results. To summarize, business conditions improved sequentially throughout the year, resulting in total revenues of $720.6 million, a 25.5% increase in revenues, a 41.8% increase in gross profit, and a 3% expansion in gross margin. Based on demand, we've invested in our rental fleet and increased the size by $52 million or 7.5%, $737 million in total OEC. While growing our fleet, we approached periods of near historical peak physical utilization levels in the latter half of the year, and we raised rental rates 5.2% on average for the full year.

Our income from operations increased to $40.1 million on a 5.6% operating margin, compared to a loss from operations of $11.9 million on a negative 2.1% margin. Our net income increased substantially to $8.9 million or $0.26 per diluted share in 2011, versus a loss of $25.5 million or $0.73 per diluted share in 2010. EBITDA increased $59.3 million to $140.3 million on a margin of 19.5%, compared to $81 million on a margin of 14.1% a year ago. We can summarize 2011 with a few key points, improved market conditions, solid execution by our employees, significant operating leverage, and cost control.

Just as important that we finished the year with momentum heading into 2012, which I will let John elaborate on at this point before opening the call to questions.

Thank you, Leslie. Let me just conclude by stating that our fourth-quarter performance was outstanding, and I applaud the efforts of our employees. We believe we are successfully leveraging our business strategy in the cycle improvement seen so far to generate significantly improved results. As we enter 2012, the momentum in our business continues, but it is important to note the first quarter is always the most challenging of the year, due to normal seasonality in our markets. With that said, we expect strong year-over-year improvement in the first quarter. We also plan to further grow our fleet in 2012.

We stated in the past our fleet planning is dynamic and can be scaled back or stepped up, depending on demand. We believe our position in the market is strong, and we are very well poised to benefit from increased demand in our markets. Further, the strength in our balance sheet provides us with the flexibility to take advantage of expansion opportunities that may arise as we move into 2012.

At this time, we would like to take your questions. Operator, please provide instructions.

Thank you, sir. (Operator Instructions). We will go first to Henry Kirn with UBS.

Is distribution trending higher than your expectations again in the first quarter, or should we look for a little steeper drop from the accelerated depreciation pull-forward?

Yes. Look, Henry, there's no question the fourth quarter was exceptionally strong, particularly December. I think we sold $52 million worth of cranes in December, which is an exceedingly high number. Part of that is -- I think is pulling sales forward due to the bonus depreciation. I think some of it's pent-up demand, the Crawler Crane markets have been very soft, and we sold a number of big Crawler Cranes. And I think some of it's confidence in the economy. But there's no question that I would not use the fourth quarter as a run rate. I think some of that is pulled forward.

That's helpful. And then, right now, are there any product shortages on the distribution side of the business, either in cranes or dirt moving?

Yes, I mean, lead times are getting pushed out by most of our manufacturers, probably on average right now from 4 to 6 months. So there's no question that lead times are getting extended.

Than one final one, if I could, on CapEx. Where would you like the fleet to be over the next few quarters, and where do you see opportunities to go out and expand the fleet?

Henry, we're going to grow our fleet in 2012, no question about it. As I stated, our fleet planning is very dynamic. We try and make short-term decisions or as short of term decisions as we can. You can certainly expect capital spending on our fleet equal to what we did last year. And based on demand, it could be a little more than that.

That's helpful. Congratulations on a good quarter.

Thank you.

We will go next to Seth Weber with RBC Capital Markets.

Thanks. Good morning, everybody.

Good morning, Seth.

I guess, sticking on the crane theme for a second, I was a little confused by the sale, the distribution margin being down related to mix. I would think that the crawlers would be higher margin for you. Is that not the right way to think about it?

Just the opposite, Seth. Crawlers are real high dollars, but there's significantly lower margin. We just have a lot less discount on the big crawlers than we do the hydraulic side. It is just the opposite. Crawlers carry a lower margin.

That's helpful, thanks. Are they going to -- primarily to the energy patch, or are they going to other rentals?

Yes, it is heavily weighted to energy and infrastructure projects, but yes, heavily weighted to energy.

Okay. Then on the rental business, are you -- are your crane rental rates up year over year?

They are. Yes. Leslie -- they are up. All of our rates are up year over year.

Okay. And I guess just flipping over to the rental business, broadly. I mean, we are 2 months into the first quarter here. Can you give us any more color on what the first quarter is looking like, whether your comp, your rate comp is actually still fairly manageable? Because last year was still a negative number, so should we expect the same kind of rate increase here year-over-year that we saw in the fourth quarter again in the first quarter?

Yes, look, our utilization levels are very strong right now. I think looking at utilization yesterday, we were like 71.5% of our OEC was on rent. January rates were up 8% year-over-year, February rates were up 10% year over year, and we saw a sequential increase from January to February of 1.5%. We are in a very positive environment for pushing rates, as our competitors are.

Sounds like you anticipated my question there, John. Leslie, any color on what tax rate we should use for 2012?

Not specifically. I would just point to the next couple years we will still be using our NOLs, and that will generate somewhat of a benefit related to some permanent differences there. So I would just expect that in the next couple years.

Okay. 2011 came in 26%, 27%. Is that --

It is all a function of the -- to some degree, the denominator, the PBT, so it is going to fluctuate based on -- there's a whole lot of dynamics there, moving pieces, but some benefit in the next few years.

Okay. Thanks very much, guys.

You bet.

We will go next to Neil Frohnapple with Northcoast Research.

Good morning, John and Leslie. Congrats on a nice quarter.

Thank you.

Just on equipment rental, can you give us your general thoughts on how you think the industry consolidation will impact you guys, particularly with regard to rates?

I think it is a very positive development for this sector, and I think it is a positive development for us. They are creating an entity there of the size that I think can truly move the needle on rates. And from what we are seeing right now, both United and RSC are being disciplined, and they are pushing rates hard. I think it is very positive for our sector. I think it is positive for us.

All right. Great. Have you seen some of your previous rental customers begin to purchase new equipment now, with improved confidence in the construction recovery that could begin to moderate the growth rates in equipment rental and maybe accelerate the growth rates in your distribution business?

Yes, I do. I think that confidence in the economy is a huge factor when it comes to our end-users making capital purchases. Typically, when we come out of a recession and start to turn up early in the cycle, people tend to rent over purchasing. As they gain confidence, they tend to return to their historical patterns of owning and renting equipment. I think there's been a secular shift to rentals here because of the depth and the severity of this recession. I think some of it will stick, but all of our end-users own a certain amount of equipment, all of them rent a certain amount, and I think that will continue. But obviously, we are seeing some increase in demand due to confidence in the economy.

Great. Thank you very much.

We will go next to Joe Box with KeyBanc Capital Markets.

Good morning, guys.

Hi, Joe.

Just wanted to follow up real quick on Neil's consolidation question. I guess with the combination of URI and RRR, can you maybe just talk to your strategy to garner share, just from natural customer attrition? And maybe just talk to the opportunities that you are seeing currently.

I think obviously there will be customer attrition. I think that will benefit us and other rental competitors. Beyond that, obviously, they've stated they are going to take a tremendous amount of cost down of the combined operations, something north of $200 million. That's going to be accomplished through facility closures and headcount reductions. And obviously, that potentially will create some opportunities for us and other rental companies. We will watch for those opportunities closely.

Do you also see an opportunity to either pick up sales guys or potentially even some facilities?

Absolutely. All of the above.

Okay. I just want to drill into the new equipment sales a little bit more. If you look over the last couple of years, new equipment sales has fluctuated by about 30% to 40% in 1Q from 4Q. Given you guys are about 2 months into the quarter, do you think we that we are looking at a decline in line with this order of magnitude for 1Q? Or could we maybe be looking at a stabilization more similar to what we've seen kind of in the '06 to '07 time frame?

My expectation is that seasonality will run pretty true to form in the first quarter. I would expect us to show year-over-year improvement, but both on the rental side and on the sales side, I think normal seasonality will apply.

Leslie, a few quick questions for you on SG&A. Number 1, how much did you benefit from lower legal and professional fees in the quarter? And number 2, is it reasonable to think that SG&A as a percent of sales could moderate down to that high-teen percentage in 2012?

Right. I believe the benefit in the fourth quarter related to lower professional fees was close to -- I'm going to say was $0.5 million. And as far as the percentage of revenues, I would say that, that was definitely a top-line issue in the fourth quarter, and that to the lower teens going forward into 2012 is maybe not a good run rate. We are certainly going to increase -- we are expecting to increase our headcount some into 2012, because we feel like we are operating at a pretty lean rate as it relates to our headcount. So we will increase our headcount some in 2012, and we will see some increases there in SG&A, mostly related to people cost. We will see some increases there. So I'm not sure that on a quarter-to-quarter basis that high, mid-teen is necessarily a good run rate.

Do you think, then, in total for 2012, it is fair to see that percent of sales kind of pull in from where was in 2011 but maybe not to the order of magnitude we saw this quarter?

Yes.

Yes. That's reasonable, yes.

Last question for you on the parts and service business. Obviously, you guys are seeing some growth there, but it doesn't seem to have recovered as much as some of your other businesses. How should we think about the typical cadence over the course of this cycle of a recovery in parts and service? Is this something that we might have to wait to see maybe more of meaningful recovery in non-res construction? Or is maybe there something different with this cycle relative to the last cycle?

I think probably the biggest issue we've had is the softness in the Crawler Crane markets. Utilization levels on Crawler Cranes have been weak, and we had the oil spill, which had a significant impact to us in 2011. We are over that now. But Crawler Crane demand -- and you see that in Manitowoc's reporting and on their call -- crawler crane demand is still relatively soft, and we are not seeing the level of major rebuild activity that we have in the past. We think that's going to come back. I'm not exactly sure the timing on it, but that is a very substantial driver of our parts and service business.

That's helpful. Thank you.

Thank you.

(Operator Instructions). We will go next to Joe Mondillo with Sidoti & Company.

Good morning, John, Leslie. First question, just to tag onto that question from fourth quarter to 1Q trending. Last year, we saw some pretty tough weather conditions. This year, we are seeing record mild type conditions. Is that benefiting your business at all this year in the first quarter here?

Yes, think it is. The winter has been relatively mild, and I think we've -- I think everyone has had some benefit from that. It is hard to quantify or put a number on it, but our utilization levels in our rental business are really strong right now for this time of year, and some of that is just a much better environment, much better end market, and some of it, I think, is milder weather patterns.

Okay. That actually brings me to my next question. In terms of utilization rates, the utilization in terms of units actually ticked down from the third quarter. I imagine what you just referenced, it is ticking back up in the first quarter here. How do you manage those utilization rates? And sort of where is your target or do you have a target that you like, and how do you budget your rental fleet investments in terms of that?

I'm not sure I understand your question. You are speaking first quarter or just --

Just in general, really. How do you manage your utilization rates in general, in terms of how you are investing in the rental fleet?

When we are trending above 70% utilization, that creates investment opportunity for us. When we get in the 72% to 74% range, that's kind of peak utilization for us. We get any higher than that, we're burning rubber, and so anything above 70% utilization -- I'm speaking original equipment cost, OEC -- that creates opportunity for us to invest in our fleet.

Okay. I think that's it for me. Thank you.

We will hear next from Philip Volpicelli with Deutsche Bank.

Hi there. This is Sean Wondrack sitting in for Phil. First question is a quick housekeeping. I'm not sure I saw it in the release. Can you please provide us with the floor plan payables for the quarter?

Sure, they ended up $58.3 million.

Okay. Thank you very much. Then also with respect to CapEx, if possible, could you let us know what area you'd be focusing on in terms of equipment, which specific types you may invest in more this year as compared to last year?

Our aerial business is very strong. Utilization levels are very high in our aerial business, and we are certainly investing in that aspect of our fleet. We will be investing on the earthmoving side. Crane side is pretty broad-based. We are seeing demand across all of our product lines. I think that our investing will somewhat mirror our fleet mix. I think you could refer to that, and that will be pretty close to the way we invest.

Okay, great. That's helpful. Thank you.

Thank you.

(Operator Instructions). We will hear next from Seth Weber with RBC Capital Markets.

Hi, just a quick follow-up. John, the 71.5% utilization that you referenced, is that OEC basis or unit, and was that quarter to date or just current where you're at now?

It was a snapshot. It is where we were yesterday, and it is OEC based.

And would you say that's -- it is been pretty consistent at that level through the quarter?

No, it has trended up to that point. Obviously, in early, mid-January, we were somewhat below that level, and we are currently trending up, which is just very typical, very normal seasonality.

Right. Okay. Thank you very much, guys.

Thank you.

We will hear next from Matthew Dodson with Edmunds White Partners.

Obviously, pricing was really strong in the fourth quarter. Can you talk a little bit about the sequential cadence that you think about pricing and is -- obviously, pricing is up year over year in Q1. It is up sequentially from Q4 also?

Yes, slightly. We had a slight increase sequentially from Q4, and then what I referred to earlier from January to February, we had a 1.5% sequential increase.

Then can you talk just a little bit about from the standpoint, as you get into the busier season in your second and third quarter, because of the merger between URI and RRR, do you think there is potentially opportunity for pricing to accelerate more this year?

I do. I think, again, as you get into the busier part of our season, utilization will increase. And when we get well north of 70% of our fleet on rent, get up to 72%, 73%, 74%, wherever we peak out, that's just a -- you're at a utilization level where you can push rates hard. And I assure you we are going to, and I have every expectation that our large competitors are going to do the same thing. So we are going to be in a good environment for rate increases.

Thank you.

Mr. Dodson, did you have anything further?

No, thank you.

Thank you.

It appears that there are no further questions at this time. Mr. Engquist, I'd like to turn the conference back over to you for any additional or closing remarks.

I appreciate everybody being on the call. I appreciate your interest in H&E Equipment Services. We feel good about '12. I think we are definitely in a better and improving environment, and we look forward to speaking with you on our next call. Thank you for being on the call.

Again, that does conclude today's call. We thank you for your participation.