H&E Equipment Services Inc (HEES) 2012 Q1 法說會逐字稿

Good day and welcome to the H&E Equipment Services first quarter 2012 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 first quarter ended March 31, 2012 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 the forward-looking statement. These risk factors are included in the Company's most recent Annual Report on Form 10-K. Investors, potential investors and other listeners are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The Company does not undertake 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 first quarter 2012 earnings call. On the call with me today is Leslie Magee, our Chief Financial Officer. Slide 3 please.

This morning, I will give an overview of our first quarter performance including an update on the specific regions we serve and current market conditions. Leslie will then summarize our first quarter financial results. When Leslie concludes, I'll provide our thoughts on the second quarter of 2012 and will then be happy to take your questions. Slide 5 please.

The first quarter proved to be another strong period for our business with growth in every operating segment. I'm especially proud of our performance given the first quarter is typically almost challenging quarter. Our rental results were very strong and this was a seventh consecutive quarter where our business generated impressive year-over-year gains driven by improving demand and better pricing.

Equipment sales and parts and service also produced solid year-over-year gains. Our performance clearly validates our ability to capitalize on cycle improvements and reflects the significant operating leverage in our business model. Overall market conditions continue to improve and specifically construction activity is gaining traction.

Our solid results this quarter were also a result of our industrial focus. Demand in the oil patch and other energy-related sectors where we are heavily embedded in our Gulf Coast and Intermountain regions has been high primarily due to increased oil prices and expanding capacity. In terms of the financial highlights, we delivered across-the-board improvements.

Total revenues increased 28.7% to $173.7 million this quarter on a year-over-year basis with all segments delivering solid increases. EBITDA increased an impressive 82% to $38.7 million compared to $21.3 million a year ago. Our bottom line showed significant improvement as well with net income of approximately $4 million or $0.11 per share compared to a net loss of approximately $6.5 million or a loss of $0.19 per share in the first quarter of 2011.

Let me just provide a few comments on our rental business. Again this quarter, our rental revenues grew more than 20% on a year-over-year basis. We were very pleased to have captured double-digit rental rate gains this quarter and solid sequential rate gains from the fourth quarter, one of our historically strongest quarters.

Utilization remains strong and as a result, our rental performance such as rental gross margins and dollar utilization continued to improve. Slide 6 please. Our Gulf Coast and Intermountain regions still continue to generate the majority of our revenues and gross profit especially given the elevated demand related to the oil patch and other energy-related sectors.

The key point I want to make on this slide is that we are now beginning to see increased demand in our other regions which are less industrial focused. Slide 7. Our overall view of the market remains very positive. Our performance as well as that of our peer group which continues to report improving results supports this view.

The rental sector as a whole is focused on driving rates up and expects to add fleet based upon equipment demand. Customers are committing to large capital purchases again. Forecast for construction in general are more positive than they have been in years. It is important to note that the strength not only in our rental business but also the improvements we have seen in our distribution business which we feel is very encouraging.

We believe the cycle is improving and that we are well positioned to benefit from these improvements.

At this time, I am 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 9. As John stated, we are pleased with our performance this quarter. The improvements in profitability once again outpaced our top line revenue growth rate. From a summary viewpoint, the first quarter total revenues were $173.7 million, an increase of 28.7% and gross profit was $52.7 million, an increase of 49.9% in each case compared to the same period last year.

All segments increased over the first quarter of 2011 on a revenue, gross profit and gross margin basis. I'll begin with our rental business and provide more details behind the numbers, first on a revenue basis and then I'll provide some highlights on gross profit by segment.

Rental revenues were $59.6 million for the quarter, a 23% 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 first quarter of 2011. Compared to a year ago, we have increased our total fleet by approximately $46 million or 7% based on Original Equipment Cost or OEC.

Average time utilization based on OEC increased 460 basis points to an average of 69.5% for the quarter. Based on unit, average time utilization increased 480 basis points to 65.8% and demand was higher in all product lines. In addition, rental revenues were higher as a result of a 10.1% increase in average rental rates in comparison to the first quarter a year ago and the improvements have also been broad-based across all product line.

Our dollar returns improved to 32.3% compared to 27.9% a year ago. This is a 440 basis point improvement due to the strength in best time utilization and rental pricing. New equipment sales were $41 million and $11.8 million or 40.5% increase over the prior year period. The increase is due to higher crane sales.

Used equipment sales were $26.5 million, an $11.1 million or 72% increase over the first quarter of 2011 primarily due to higher demand for used earthmoving and crane.

Business activity in our parts and service segment improved as revenues increased 7.2% on a combined basis to $36.7 million with both segments generating increases from a year ago. Moving on to gross profit by segment. Total gross profit for the quarter was $52.7 million compared to $35.1 million a year ago, an increase of 49.9% on a 28.7% increase in revenue.

From a gross margin perspective, consolidated margins were 30.3% compared to 26% a year ago. Expansion of our consolidated gross margins was largely driven by improved performance from our rental business, better recovery rates on other revenues and higher used equipment margins. Our rental business delivered margins of 42.4% compared to 35.4% last year. Higher demand resulting in increased volume and rental rates continue to result in expansion of our rental gross margins.

Margins on new equipment sales were 12.3%, up from 10.8% last year, new crane margins were the main driver of this improvement. Gross margins on used equipment sales increased to 29.8% from 25% in the same period last year. Parts gross margins were 27.6% compared to 26.6% a year ago and service gross margins were 61.5% versus 61.1% a year ago. Margins on other revenue such as equipment hauling and parts freight revenues were a negative 2% compared to a negative 33.1% in the first quarter last year.

Slide 10 please. I'll make just a few brief comments on the next couple of slides since the key drivers of our financial results have really been covered at this point. Income from operations for the first quarter of 2012 was $12.3 million or 7.1% margin compared to a loss from operations of $2.9 million or a negative 2.1% margin a year ago. The significant improvement in profitability as a result of the improved performance of our business segments combined with operating cost leverage in our business as the sectors in which we operate have improved.

Proceed to slide 11 please. Our bottom line has also improved significantly as net income was approximately $4 million or $0.11 per share compared to net loss of approximately $6.5 million or a loss of $0.19 per share a year ago.

Please move to slide 12. EBITDA was $38.7 million or an impressive 82% increase over the same period last year which again outpaced our revenue growth of 28.7%. EBITDA margins were 22.3% compared to 15.8% in the same period a year ago, an expansion of 650 basis points.

Next slide 13. SG&A was $40.7 million, a 6.9% increase over the same period last year. However SG&A declined as a percentage of revenue to 23.4% this quarter compared to 28.2% a year ago. Slide 14 and 15 include our rental fleet statistics. Our fleet based on our original equipment cost at the end of the first quarter was $745.7 million versus $699.7 million a year ago.

During the first quarter, we increased the size of our fleet by $9.1 million based on our original equipment cost. Our gross fleet capital expenditures for the quarter were $47.9 million including non-cash transfers from inventory. Net rental fleet capital expenditures were $24.2 million. For the quarter, gross PP&E CapEx was $9.4 million and net was $8.9 million. Our average fleet age at the end of March was 42.8 months.

On slide 16, you'll find the usual information regarding our current capital structure and credit statistics. At the end of the quarter, our outstanding balance under the ABL was $22.4 million, this left us with $291 million of availability at quarter end under the $320 million ABL facility.

In summary, our business delivered strong results during the first quarter and we're focused on continuing to capitalize on the market improvement. I'll now turn the call over to John to discuss our current outlook and then we'll open the call for questions.

Thank you, Leslie. Please proceed to slide 18. Let me just conclude by saying that our first quarter performance increases our confidence that we are in the early stages of an expansion cycle. We believe that the construction markets are improving, our current outlook remains positive based on the current trends and market conditions.

In addition, we feel that all indications are that rental demand and rates are continuing to increase as we move into the second quarter. Based on the increased activity levels we are experiencing across all regions, we expect continued fleet growth through the third quarter this year. Our exposure to the industrial sector, especially the oil and gas and petrochemical sectors continues to be a tremendous benefit to our business given the elevated levels of activity in the energy sector.

We are also pleased to see solid improvement in our distribution business which we believe indicates that our end users are gaining confidence in the recovery. As we move further into 2012, our position in the market remains strong and we are well poised to benefit from increased demand in our markets. Once again, I want to congratulate our employees for their excellent execution and we remain focused on profit -- profitable growth opportunities.

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

Thank you. (Operator Instructions). Henry Kirn, UBS Financial Services.

Hi. Good morning, guys.

Good morning.

Congratulation on a nice quarter.

Thank you.

There is a lot that can change (technical difficulty) going into 2012. Do you think that you can maintain the year-on-year strength in new and used equipment for the year and maybe a little color on how (technical difficulty) looked?

Look, we've got really, really strong demand for hydraulic cranes, rough terrains and all-terrain cranes right now heavily tied to the energy sector. Crawler crane demand is still weak that typically lags the recovery in the hydraulic cranes by six months to eight months. And we are still seeing a weak crawler crane market. What I would tell you is that, as we move towards the end of the year, we are going to go up against a very tough comp in the fourth quarter, where we had 80 some odd million dollars of new equipment sales in that quarter. So, that's going to be a difficult comp and we'll see how this plays out if we see any recovery in the crawler crane markets but that's the toughest comp we're going to go up against and I think people should keep that in mind. But we are seeing strong new equipment demand right now particularly on hydraulic cranes.

That's helpful. And how does the strength in the first quarter impact your CapEx plans for the year?

Henry, as you know, we don't give CapEx guidance because our spending is dynamic and we try to make shorter term decisions as possible based on demand. I can tell you we are going to continue to invest in our fleet. We've got very strong demand. I think our utilization is [run] around 74% of our dollars of our ROIC on rent right now. And at that level, we are going to continue to invest. And I think we will continue to grow our fleet certainly through the third quarter again depending on demand. But we will -- we will invest more on our fleet this year than we did last year.

Thanks a lot. Congratulations, again.

Thanks, Henry.

Neil Frohnapple, Northcoast Research.

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

Thank you.

Just as a follow-up to Henry's question. Can you comment on rental rates in April and any other rental metrics you can share with us at this point?

Well, as you know, we showed a 10% increase year-over-year in the first quarter and we had a nice sequential increase of about 2% fourth quarter to first quarter which I think is very strong. We're seeing the same trends. I mean we are continuing to get rate increases and as I just stated, we are running around 74% of our fleet on rent, based on [ROIC] right now. And when we are at that level of utilization, we can push rates hard and I can tell you we are seeing our competitors do the same thing particularly, our biggest competitor United. They are, they are showing a lot of rate discipline. So we are in a really strong environment to get rate gains and I'm very confident we will continue to do so.

Great. Thanks. That's helpful. And with regard to the new equipment sales gross margin in the quarter. There is a nice uptick both sequentially and year-over-year. I know you guys had mentioned that as new crane margins drove the increase. So was there -- I guess a smaller mix of crawler cranes sold in the quarter versus the fourth quarter, that was part of that increase?

Yes. There's no question about it, some of that was a mix issue. Our sales were related to hydraulic cranes which carry a better margin than the crawler cranes did.

Okay. And then lastly, you indicated last quarter that you're seeing a definite increase in small to medium-sized projects. Is this still the case and has the trend accelerated at all?

It's still the case and we're just really pleased to be seeing improvement in the construction markets. And I think we are going to continue to see that. You can look at what the Architectural Billing Index has done for the last seven months or so. It's been in positive territory. And I think this bodes well for the construction markets moving forward. We are not expecting them to skyrocket but we expect to see continued modest improvement. That's very encouraging for us.

All right. Thanks a lot guys.

Joe Box, KeyBanc Capital Markets.

Hi. Good morning, John and Leslie.

Good morning, Joe.

A couple of questions for you on the used equipment market. I think Leslie, you referenced earlier that there was a benefit there from hired crane [and that you are] moving. Can you just tell us how much of that came from fleet sales versus sales of customer's equipment?

So sales -- the used equipment line, about 90% of it came out of the fleet.

Okay. That's helpful. And then typically it's been weaker in 1Q. So can you just help us understand what -- with some of that equipment just pushed out from 4Q or are we potentially looking at a more robust used equipment figure for the full year?

Well, I think we are going to kind of be in control of that. There is tremendous demand right now for good used equipment. But we are going to kind of control that ourselves. We will continue to sell off the back end of our fleet, our oldest products in our fleet. And from there we are going to control fleet sales through pricing. So the demand is there. I think we have the ability to sell as much as we want to but that doesn't mean we necessarily will sell as much as we can. We are going to control that through pricing.

So is this fair then to say John that there wasn't a one-time bump this quarter from something that got pushed out from 4Q?

No. I don't think it has anything to do with being pushed out from 4Q. I think that we've got a segment of our earthmoving fleet, that is of an age and that's very attractive in the secondary markets and crane demand on the hydraulic side is very strong. So, no, I don't think there is anything unusual there.

Okay. Thanks. And just moving over to rental rates. With respect to some of your longer-term contracts. Can you maybe just talk about the type of gains that you are seeing there among those customers versus maybe what you are seeing from some of your shorter duration business?

Well, I think the comment I would -- I'm not sure I understand your question, Joe. Longer-term -- you -- rephrase your question if you could, I'm not sure I understand it.

Sure. I know you guys have a lot of long-term contracts.

Right.

I was trying to differentiate the type of rental rate gains that you're seeing for those long-term contracts maybe versus what you are seeing for a two-week or a one-month long rental?

I got you. I got you. I think it's probably easier to push rates on shorter-term contracts than it is long-term contracts but our rate gains are broad-based. I mean they are very broad-based. Obviously if you tie a piece of equipment out for a year, you can take less rate because you've got such good utilization, you handle it less. I mean there is some real benefits to the long-term rental but our rate gains are broad based.

Okay. That's fair. Then just one last kind of high level question for you. I'm just trying to think about H&E over the next couple of years. Where do you think the big opportunity is for H&E? Is it to grow the rental fleet and maybe get some additional penetration at your existing locations, is it organic, geographic expansion or are you looking at some deals to expand your geographic profile? Any color there would be helpful.

Yes. I mean, I think it's all of the above. We certainly intend to grow our rental business as a percentage of our overall revenue. We are going to be doing some greenfields. We are doing market studies as we speak. We are in the process of opening a store in Midland, Texas and a store in Mesquite, Texas. So Joe, I mean, I think it's a little bit of all of the above and we got a really strong balance sheet and a lot of liquidity. And if the right opportunity comes along from an acquisition standpoint, we are going to take a look at it. So, I wouldn't exclude any of those. I think it's all of the above.

Great. Thanks, guys.

Nick Coppola, Thompson Research Group.

So, I heard you guys talking about, I guess, though environment being strong to push pricing in rental. And we see all the releases out of the large public competitors but do you have any kind of sense for what's going on with smaller rental companies, let's say, the mom-and-pops? Are they having a harder time pushing along pricing and do you have any sense for that?

I think there is tremendous variance there. I mean, I think, we see some smaller local players that are in good shape financially. And I think they are pushing rates like everybody else and then we see some smaller players that are financially stressed and had leverage issues and issues with accessing capital and they tend to be a lot more aggressive on the pricing side. So I don't think you can make one statement there. I think it's a mixed bag.

Okay. And then do you have any update for, I guess, how far off prior peak you are in terms of rental rates?

I can't tell you exactly but I would think we are probably 10% off of peak rates.

Got it. Is there any update on I guess, adopting ARA definitions for rental metrics?

That is something we are looking at. That involves an IT initiative and a project on our part. And as we sit here today, we've got some bigger fish to fry but that is something we'll be looking at.

Okay.

I'm supportive of that of developing the common platform. So we will be looking at that downstream.

Okay. And then I think this is probably kind of a difficult question to answer as well but it sounds like I guess, across the business, there has been obviously the energy market is strong. So you're doing all the industrials, and then non-res is kind of coming back a little bit as well but do you -- how much do you attribute to I guess, non-res market improvement versus industrial improvement in terms of I guess your performance in the quarter and going forward?

Well, I think that there is no question, we are seeing improvement in the construction markets because you can see what we're doing in some markets like Florida and Georgia where we have a minimal industrial exposure. Those businesses are growing their top line strong double digits, their bottom line a lot more than that. They're getting rate improvement. So, we are comfortable that the construction markets are improving and we are certainly seeing that in our less industrial markets.

Okay. All right. Well, thank you.

(Operator Instructions). Philip Volpicelli, Deutsche Bank.

Good morning and congrats on the good earnings.

Thank you.

First question is easy one (inaudible).

Sure. $59.9 million.

Okay. And John as you mentioned, possibly looking at acquisitions as you guys look to capitalize on the growth of the industry, can you give us any kind of metrics of how big of an acquisition you would consider and excuse me, what kind of leverage you would consider going up to?

I mean, I don't know that I can give you a good answer, I mean we would, it just depends on the opportunity, their fleet mix, their geographic. I mean there is a lot of things we've got to look at. I mean I think we've got the capacity to do a sizable acquisition if all of those things fit together and it makes sense for us. From a leverage standpoint, if we did an acquisition, I don't think I would want to take our leverage much beyond three turns.

Okay. And then just the last question with regard to the bonds. They are becoming (technical difficulty) later this year. Any updated thoughts on what you might do, do you plan to keep those bonds outstanding and wait a couple of more years or would you look to try to refinance them given the good credit markets?

Well, obviously the credit markets are exceptionally good right now and so our management and our finance committee are studying that situation right now and we will be making a decision there shortly but it's something we are looking at as we speak.

Great. Thank you very much. Good luck.

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

Thanks everybody. Appreciate you being on the call. As I stated, we are in a strong environment, feel good about our business and we think we are going to have a strong year here. Look forward to talking to you on our next call. Thank you.

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