H&E Equipment Services Inc (HEES) 2012 Q2 法說會逐字稿

Good day and welcome to today's H&E Equipment Services second-quarter 2012 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, Chris, and welcome to H&E Equipment Services conference call to review the Company's results for the second quarter ended June 30, 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 reconcile these measures to get 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, expects, 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 statements.

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 second-quarter 2012 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 second-quarter performance, including an update on the specific regions we serve and current market conditions. Leslie will then summarize our quarter's financial results. When Leslie concludes I will provide our thoughts on the third quarter of 2012, and we will then be happy to take your questions.

Slide 5, please. In summary, our second-quarter performance was very strong as demand in our end-user markets continued to increase, particularly along the Gulf Coast, where energy-related activity remains high. A modest recovery in commercial construction activity is also helping drive significant improvements in our rental business.

Our rental results were once again very strong, and we generated impressive year-over-year gains, driven by higher demand and better pricing. The operating leverage in our business model was evident this quarter as we delivered a nearly 300% bottom-line improvement on a 13.4% growth in revenue.

In terms of the financial highlights, total revenues increased 13.4% to $209 million this quarter on a year-over-year basis. EBITDA increased an impressive 46.8% or $16.5 million to $51.7 million compared to $35.2 million a year ago.

Our bottom line improved significantly as well, with net income of approximately $10.5 million or $0.30 per share compared to net income of approximately $2.7 million or $0.08 per share in the second quarter of 2011. Again, our bottom-line gains demonstrate the leverage in our business model and our ability to take advantage of improvements in the business cycle.

Let me conclude with a few comments regarding our rental fleet and business. As a result of the strong demand for rental equipment we are approaching record utilization levels at 73.5% based on OEC versus 70% a year ago. Rental revenues grew 26.4%, while rental gross margins grew to 47.5% compared to 40.7% a year ago. Rental rates improved 11% from a year ago and 5% from the first quarter of this year. Dollar utilization also increased to 35.6% from 31% over the same period last year.

As a result of these strong metrics and trends in our rental business, we are continuing to increase our fleet size, which has surpassed previous peak OEC levels as of June 30.

Proceed to slide 6. As I mentioned previously, the strong demand related to the oil patch and other energy-related sectors continues benefit our Gulf Coast and Intermountain regions, which generate the majority of our revenues and gross profit. Activity in our other less industrial focused regions is also beginning to materially improve as a result of a modest increase in commercial construction activity.

Slide 7, please. I have already touched on most of these points in my previous comments, so to summarize, we are extremely pleased with the current market environment and believe this can be seen from our performance this quarter -- that the cycle is improving and our business is certainly benefiting from these improvements.

At this time, I am going to turn the call over to Leslie for the financial review.

Thank you, John, and good morning. I will begin on slide 9. We continue to be encouraged and pleased with our financial results. From a summary viewpoint, second-quarter total revenues were $209 million, an increase of 13.4%, and gross profit was $64.2 million, an increase of 34.4%, in each case compared to the same period last year.

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 gross profit by segment. Rental revenues were $70.5 million for the quarter, a 26.4% increase over the same period 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 second quarter of 2011. Compared to a year ago we have increased our total fleet by approximately $84.4 million or 11.6% based on original equipment costs, or OEC.

Average time utilization based on OEC increased 350 basis points to an average of 73.5% for the quarter. Based on units, average time utilization increased 160 basis points to 68.7%, and demand was higher in all product lines.

In addition, rental revenues were higher as a result of an 11% increase in average rental rates in comparison to the second quarter a year ago and 5% compared to the first quarter of this year. The improvements have also been broad-based across all product lines.

Our dollar returns improved to 35.6% compared to 31% a year ago. This 406 basis point improvement was due to the strength in both time utilization and rental pricing.

New equipment sales were $64.7 million, a $6.8 million or 11.7% increase over the prior-year period. This increase was due primarily to higher crane and aerial work platform sales.

Used equipment sales were $23.6 million, up $500,000 or 2.3% increase over the second quarter of 2011. Business activity in our parts and service segment improved, as revenue increased 1.1% on a combined basis to $38.6 million, with parts slightly down and service up from a year ago.

Moving on to gross profit by segment, total gross profit for the quarter was $64.2 million compared to $47.8 million a year ago, an increase of 34.4% on a 13.4% increase in revenues. From a gross margin perspective, consolidated margins were 30.7% compared to 25.9% 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 47.5% compared to 40.7% last year. Higher demand, resulting in increased volume and rental rates, continued to result in expansion of rental gross margins.

Margins on new equipment sales were 10.9%, slightly down from 11.7% last year based on the mix of new cranes sold. Gross margins on used equipment sales increased to 30.5% from 21.7% in the same period last year.

Parts gross margins were 28% compared to 26.8% a year ago, and service gross margins were 62.8% versus 61.2% a year ago. Margins on other revenues, such as equipment hauling and parts freight revenues, were 7.4% compared to a negative [15.9%] in the second quarter of last year.

Slide 10, please. I will make just a few brief comments on the next couple of slides, since the key drivers of our financial results have been covered at this point. Our results again reflect strong operating cost leverage; the significant improvement in profitability is reflected in an increase in income from operations for the second quarter of 2012 to $23.5 million on an 11.2% margin compared to $10.3 million or 5.6% margin a year ago.

Proceed to slide 11. As a result, our bottom line also improved significantly, as net income was $10.5 million or $0.30 per share compared to $2.7 million or $0.08 per share in the same period a year ago.

Please move to slide 12. EBITDA was $51.7 million or a 46.8% increase over the same period last year, which again outpaced our revenue growth of 13.4%. EBITDA margins were 24.7% compared to 19.1% in the same period a year ago, an expansion of 560 basis points.

Next, on slide 13, SG&A was $41.4 million, a 10.4% increase over the same period last year. However, SG&A declined as a percentage of revenue to 19.8% this quarter compared to 20.4% a year ago.

Slides 14 and 15 include our rental fleet statistics. Our fleet, based on original equipment costs at the end of the second quarter, was $809.3 million versus $724.9 million a year ago. During the second quarter we increased the size of our fleet by $63.6 million based on the original equipment costs.

Our gross fleet capital expenditures for the quarter were $97.5 million including non-cash transfers from inventory. Net rental fleet capital expenditures for the quarter were $76.6 million.

For the quarter gross PP&E CapEx was $10 million and net was $9.2 million. Our average fleet age at the end of June was 40.4 months, which has been declining as a result of our fleet spending.

On slide 16 you will 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 $71.3 million. We had $242.2 million of availability at quarter-end under our $320 million dollar ABL facility.

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

Thank you, Leslie. Everyone please proceed to slide 18.

Our outlook for the balance of this year remains positive based on our view of the current trends in a business. Even though the macro environment is difficult to predict, we continue to believe we are in the early stages of an expansion cycle, with the construction market starting to show modest improvement.

Demand for rental equipment remains strong and rates are continuing to increase into the third quarter. We are approaching record levels of time utilization, and our dollar returns will allow us to continue to increase our fleet size throughout the balance of this year.

As we have previously noted, our fleet size remains dynamic and is tied to demand. If the demand continues to increase, we expect to continue to increase our fleet size accordingly. We are also preparing two new stores for opening in Texas this year, Midland and Mesquite, to serve increased demand in those areas.

Our focus on the energy sector, especially the oil and gas and petrochemical sectors, continues to be a tremendous benefit to our business. Activity in the energy sector remains elevated, and many industries that use natural gas as a feedstock are benefiting from low gas prices.

Our distribution business remains strong but difficult to predict. We are seeing increased quoting activity for hydraulic cranes primarily used in energy-related activities.

In closing, we are very pleased with the second quarter performance, the ongoing improvements in market conditions, and our ability to execute in the current environment. Once again, I congratulate our employees for their excellent execution, and we remain focused on profitable growth opportunities.

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

(Operator Instructions). Seth Weber, RBC Capital Markets.

Good morning. Adam on Seth here. Good quarter, guys. I'm just wondering if you could provide any color on the cadence of rates and utilization through the quarter and hopefully through July?

Yes, I can speak to July. I don't know if Leslie has anything on the cadence or not, but rates were up again solidly year over year in July, double-digit year-over-year growth, and we saw a solid sequential improvement again.

And in utilization?

Utilization remains solid. We are running, on average, in that 73.5%, 74% range, so it remains very solid.

Without giving specific numbers, I would just say that the progression throughout the quarter was very positive, both sequentially and year over year.

Great, thanks. And just as a follow-up, the breakout between all-terrain and crawlers as far as what you are seeing in ordering activity in quotations?

Yes, it is the same story I told on the last call. The hydraulic crane market is solid. We've got a lot of activity on rough-terrain cranes, truck cranes, and all-terrain cranes. The crawler crane markets are still pretty mushy.

As I have said in the past, crawler crane activity generally lags the hydraulic side by 6 to 8 months, so we are hopeful to start seeing some increased activity there. But strong on the hydraulic side, still a little soft on the crawler crane side.

Great, thank you.

Neil Frohnapple, Northcoast Research.

Good morning, John and Leslie. Without giving CapEx guidance, has your thoughts on CapEx changed at all over the last few months for 2012? In other words, do you plan to spend more than you thought 3 months ago?

Probably so. The only thing limiting our CapEx right now is our ability to get equipment. When we can get availability on stuff that fits our fleet mix, we are going to buy it right now. That will continue certainly through the third quarter, and then I think you will see some slowdown in our spending in the fourth quarter, just because we will be facing seasonality issues.

Okay. And are your bigger rental competitors still exercising discipline with regard to rental rates? And do you anticipate rental rates to continue to move higher this year from current levels?

We do. I think everybody is running at high utilization levels right now, and it's a great environment to push rates. And yes, we are seeing discipline from our larger competitors, particularly United. They have been disciplined in their approach to rates, and I think it is benefiting everybody.

Great. And then last one, are there any signs of deterioration in the rental or distribution businesses that may be creeping in, given the downward movement we have seen in the ABI over the last couple of months, or is your visibility pretty good, and everything is still going strong?

Look, I think our visibility on the rental side is good, and it is very strong. We have less visibility on the distribution side. It is much more difficult for us to forecast.

But we are certainly seeing no softening on the rental side. As I speak to our operations people, our divisional managers and branch managers, the demand is very, very strong there.

Thank you very much.

Henry Kirn, UBS.

Good morning, guys. First of all, congratulations.

Thank you.

On the growth in the fleet, how much of that is to support the new Texas locations, and how much for additional demand elsewhere? And then maybe with that, is there any focus at this point to de-aging the fleet, or does that just fallout from the higher fleet CapEx?

I mean, the de-aging of the fleet -- and obviously, I think we have got the lowest fleet age in this sector, so we have no need to de-age our fleet, necessarily. That is just a function of our capital spending and selling off the back side of our fleet. And I expect our fleet age to come down some more.

Those two stores in year one will probably absorb $20 million worth of fleet, somewhere around there, and then some additional investment in the second year. But so -- we are spending CapEx across the board, throughout our footprint right now, and some of it is going to those two new stores.

That is helpful. You mentioned growth opportunities. Can you talk about what you are really thinking there? Is it mostly cold starts, or is M&A on the table?

No, I think our focus right now is going to be cold starts. I think we can -- here recently as we have looked at multiple expectations and fleet issues we have to deal with through an acquisition, I think it makes a lot of sense for us to approach this from a greenfield standpoint. We can get our fleet mix right going in, it is all brand-new equipment, so we're pretty comfortable with that approach right now.

That makes sense. Thanks a lot.

Joe Box, KeyBanc Capital Markets.

Good morning, guys. So if you look at the Rouse data, which I believe came out yesterday, it shows a little bit of a leveling off in used equipment prices. I guess, one, does that change the way that you think about bringing your used equipment to the market? And two, what do you think it is telling us about the broader end markets?

Well, I think that there has been such aggressive growth in residual values that it just -- I mean, at some point it has to level off. So that does not concern me at all.

It does not change our approach on how we bring our used fleet to market. We are going to continue to sell our fleet through our retail outlets through the distribution side of our business, so nothing changes there. But the fact that these prices have leveled off a little bit is not concerning to me. They have to at some point.

Okay. And can you just talk to your capacity levels on the equipment rental side? You are back to your prior peak fleet levels. Can you just give us a sense on where you are sitting in terms of personnel and overall infrastructure? Do you need to make some new investments here, or is there still plenty of capacity?

We are adding some people as we speak, technicians and people to support this larger fleet. But I think you will continue to see our SG&A -- although the dollars will go up somewhat, as a percentage of revenue, that will be very flat.

So we are watching our headcount closely, and you will not see us go back anywhere near prior peak levels of headcount, I can tell you that. So I think we are doing a good job of controlling that. What was the rest of your question, Joe? I apologize.

I was just thinking about how much leverage you had, and I think you pretty much touched on it. But I guess a follow-up to that, if you look at incremental rental gross profit margins, over the last 6 quarters they have been in the 70%-plus range.

Given some of the investments you are making in the two new stores, how should we think about the incremental margins? Is there not really enough to move the needle? Should we still expect them in that range, or will they be lower?

No, I would expect similar incremental margins in our rental business as we have been delivering.

Okay, that is it for me. Thank you.

Joe Mondillo, Sidoti & Co.

Good morning, guys. The first question -- I was just wondering if you could address the used equipment margins. Over the last two quarters, they have been quite high compared to your historic margins. Is that just pricing, or what is that, and how sustainable is that?

I think it is primarily pricing, and it is also probably a function of the age of what we have been selling. We have been selling older stuff in our fleet, which has been carrying strong margins. I think it is some of both, but certainly for the foreseeable future we think those margins are sustainable.

Okay, and in the back half of the year -- I guess you touched on it earlier -- but just given the environment, your expectations for new equipment in the back half of the year compared to the second-quarter run-rate?

For new equipment sales?

Yes, that is correct.

Well, one thing I will tell you is we move farther into the year, we are going to go up against some pretty stiff comps there, a lot tougher comps. Again, we are in somewhat of an environment of uncertainty, and I think that is one of the things that is driving this super strong growth in our rental business.

So I do not have as much visibility on the new equipment sales as I do on the rentals. We expect continued really strong year-over-year growth in rentals, and on the sales side, not as much visibility, and we will certainly be going against some tougher comps -- particularly in the fourth quarter.

Okay, and last question just regarding the balance sheet. First off, what was the manufacturing tables line at the end of the quarter? And also, just given it looks like your debt to GDP is around 2.5 times or so, if I am doing that calculation right. What is your feeling on that and your expectations on managing the balance sheet?

The fourth line of payables is $64.1 million at June 30, and we tend to look at it on a -- our leverage on a debt to EBITDA basis, which was just under 2 times at June 30. I'm not sure what your measurement is.

Okay, I must have done something wrong there. But what -- is that a comfortable level, or what is your ceiling? What's your thought process on that?

Look, obviously that is extremely low leverage in this sector. Super conservative balance sheet. If our leverage through some type of transaction went to 3.5 times, that would not concern me at all. So we have very, very conservative leverage on our balance sheet.

Okay, great. Thank you.

Nick Coppola, Thompson Research Group.

Hey guys. Looking at slide 6, where you break out revenue and gross profit by region, if you were to parse out just the rental business, is there any areas of strength or weakness just within rental?

We are getting to that slide. If you would ask your question again, I apologize?

Were there any areas of strength or weakness in specifically rental, was really the question?

Yes, I mean there is no question that any area with heavy exposure to the oil patch is exceptionally strong right now. You get into South Texas around that Eagle Ford shale -- our utilization is running north of 80% in those markets, and in markets like San Antonio and Corpus Christi. The same thing goes for the Gulf Coast area. You get up into the Dakotas, into Montana, into Utah; same thing. Exceptionally high utilization, and it is primarily driven by oil and gas exposure.

But with that said, we are seeing nice year-over-year improvement in our less industrial markets, like Florida and Arizona, Southern California. Arizona has been a real, real surprise for us. I mean, that market has turned around just dramatically from where it was. So our improvement is very broad-based, but the real strength is in the oil and gas fields.

Okay, that is helpful. And then, looking at used equipment sales, that is one of those segments that saw more modest year-over-year revenue growth. Is that entirely a function of wanting to hold on to more rail equipment, or is there another piece of the puzzle there that is maybe more demand driven, or what is your take on that?

I'm not sure I understood your question. I think Leslie got it.

He is talking about our used equipment sales, how there has not been a lot of growth there, which is really a function of, yes, trying to -- (multiple speakers) keep more --

Absolutely, yes.

Hold on to rental equipment.

Yes, absolutely. We are trying to grow our fleet, not shrink it. And it is one of the reasons you're seeing such strong margins on our fleet sales. We are not selling anything unless we get a very strong price for it.

Okay, yes, that makes sense. That is all the questions. Thank you.

(Operator Instructions). Philip Volpicelli, Deutsche Bank.

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

My first question is with regard to CapEx. Can you give us any kind of parameters in terms of maybe gross spend that you would consider going up to this year, or possibly, if we look at it the other way, would you consider going free cash flow of negative as you spend on the fleet?

Yes, absolutely we would go free cash flow negative. That would not be an issue for us at all. And with our level of spending, we would expect to have a use of cash this year. It is not going to be a big number, but we would absolutely expect to use some cash this year and have no issue with that whatsoever.

And I guess the parameter you would consider, John, would be nothing more than to get you up to that 3.5 times leverage -- I mean, I guess that would be a lot of spending. But could you give us a sense of how much free cash flow negative you would consider?

We could not spend enough on fleet to get to that level of leverage.

Yes. Okay, but you would not say less than $50 million, or less than $100 million free cash flow negative?

Yeah, I mean if we were -- if we burned $50 million or $75 million in cash, that would not bother me at all.

Okay, that is great. And then your rate performance was better than all of your peers. Is that because of the type of equipment that you are renting, or the locations you are renting? Could you just give us some color there as to -- I think URI was somewhere in the 6% and ES was in the 9%, and you guys are here at 11% rate growth.

Probably all of the above. Maybe -- it could be a fleet mix issue, or our fleet mix is a little different than those guys. Some of it could be geography related. We have got some heavy exposure in some real strong areas.

So I think it is probably a little bit of everything, and frankly, I think our management team is doing a really good job of pushing rates hard. That is something we are very, very focused on and spend a lot of time on. So probably all of the above.

The last one from me with regard to the cold starts and the potential for acquisitions, are you going to stay within your contiguous markets, or are you looking to expand your footprint geographically? Your two Texas locations are obviously within the footprint.

Yes, those are within the footprint. And I think as we expand, we would like to keep that expansion as contiguous as possible. It does not have to be totally contiguous, but as much as possible, because we do like the ability to move fleet around, and we really would not want to have an island out there that was difficult to move fleet to and from.

Okay. And sorry, just going back to rates, I think if my memory serves, that rates got stronger in the second half of last year, so your comparisons get a little bit more difficult. Can you give us any guidance as to what you think rates could be in the second half of the year? Are they going to be up double digits, or is it high single digits you are expecting?

Well, look. We are going to continue to get real solid rate increases. I think as we move through the year the expectation should be that they start to moderate some. I mean, they are going to have to. But part of it is tougher comps, and just -- we are going to be getting back to peak rate levels, and I would expect them to moderate somewhat.

That is great. Thank you very much. Good luck.

Joe Box, KeyBanc Capital Markets.

A couple of follow-ups for you guys. URI is pretty well into its branch consolidation program. Number one, are you guys seeing any business opportunities in terms of showing up on an approved vendor list? And number two, are you seeing any interesting properties or employees become available?

That is something we have got a team of people looking at, and we are certainly looking for opportunities. And it is guaranteed -- I think the last I heard they were going to shut down 180 stores, so there is going to be some facilities become available and certainly some people become available. And we have got a team here that is keeping a very close eye on that, looking for opportunities for us.

And I guess more specifically, John, have you been approached by any customers yet, or is it still too early?

Look, there is going to be some fallout there. There is going to be some opportunities for us and other people. I mean, that is a massive integration, and it will create some opportunities for us.

Okay. Last question for you -- just on the new cold starts, could there be any potential impact to either time utilization are even rates by entering those new markets?

That is a good question. I don't think so. I think that we have picked two really good markets there. Midland obviously has heavy oil field exposure. We are already sending fleet in there in advance of opening the store. That store is close -- I mean, it is a couple of weeks out, but I have got fleet in there, and it is going on rent and staying on rent. So I don't really see any negative implications to our utilization in either one of those stores.

Great, thanks guys.

(Operator Instructions). Seth Weber, RBC Capital Markets.

I just wanted to get a sense of where rates are versus past peak?

We are still below past peak. It is a little bit hard to quantify, but I would say 5% to 8% below past peak, somewhere in that range.

Great, thanks. That is all I have.

And there are no further questions -- one more question here. Matt Berg, York Capital.

Just a quick question. Do you anticipate that rates this cycle will exceed past peaks?

I think that is possible, but my expectation is they will get back to prior peaks, and it is possible they could exceed prior peak.

Great, thank you.

And now there are no further questions, so I will turn the conference back over to Mr. Engquist for additional or closing remarks.

I appreciate everybody being on the call. We had a great quarter, feel good about our end markets, and we are going to keep working hard and generate positive results. Thanks for being on the call.

This concludes today's presentation. Thank you for your participation.