H&E Equipment Services Inc (HEES) 2012 Q3 法說會逐字稿

Good day and welcome to today's H&E Equipment Services third 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 Michelle and welcome to H&E Equipment Services conference call to review the Company's results for the third quarter ended September 30, 2012 which were released earlier this morning.

The format for today's call includes 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 Enquist, 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 reconcile 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 that are 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 the Form 10-K. Investors, potential investors, and other listeners are urged to consider these factors carefully in evaluating any 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.

I will now turn the call over to John Enquist.

Thank you Kevin and good morning everyone. Welcome to H&E Equipment Services third quarter 2012 earnings call. On the call with me today is Leslie Magee, our Chief Financial Officer.

This morning I will give an overview of our third 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'll provide our thoughts on the balance of this year and into 2013 and then we'll be happy to take your questions.

Proceed to slide five, please. In summary, the third quarter was another very solid quarter. We also positioned our business for the secular shift towards rentals occurring in the industry and the continued strength in end user demand. Utilization levels of our rental equipment were again strong and as a result, we continued to invest in our fleet at record levels during the quarter.

Other segments of our business delivered solid results again as well. We are very encouraged by the trend in our business which we believe will continue into 2013.

Lastly, we are pleased to have completed our successful notes offering which allowed us to pay the $246 dividend to our shareholders, extend our long term debt maturity profile until 2022, and enhance our liquidity under the senior credit facility to take advantage of future market opportunities.

In terms of the financial highlights, total revenues increased 11% to $204.5 million this quarter on a year over year basis with significant growth of 27.2% in our rental business. Adjusted EBITDA increased 38.3% or $15.5 million to $55.9 million compared to $40.4 million a year ago.

Adjusted net income for the quarter was $10.9 million or $0.31 per share compared to net income of approximately $4.8 million or $0.14 per share in the third quarter of 2011.

I want to make a few comments regarding our rental fleet and business. We continue to operate near record utilization levels at 72.9% based on OEC versus 71.8% a year ago.

Rental revenues grew 27.2% while rental gross margins grew to 48.9% compared to 44% a year ago. Rental rates improved 10.2% from a year ago and more importantly, 2.9% from the second quarter of this year. Dollar utilization also increased to 36.7% from 33.7% over the same period last year. As I mentioned a moment ago, we continued to make heavy investment in our fleet which is 20% larger than a year ago.

Please proceed to slide six. One key and encouraging point I want to make on this slide is that for several consecutive quarters, our less industrial focused markets which were hit the hardest during the recession are continuing to see increased demand. We believe this is indicative of modest improvement in both the residential and non-residential construction markets. As we've reported in the past, the industrial sector, most significantly the oil patch and petrochemical sectors, continue to be strong drivers of our revenue and gross profit.

Proceed to slide seven, please. While there are concerns with the macro environment domestically and abroad we believe market indicators are largely positive and market conditions are strong as evidenced by industry performance over the last several quarters. The significant growth in the rental business, record levels of utilization, and continued increases in rates are all very positive trends and we believe they indicate that our end user markets are no longer a headwind.

At this time I'm going to turn the call over to Leslie for the financial overview.

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

We are pleased with the continued strength in our business which is demonstrated by our financial results released this morning. From a summary viewpoint, third quarter total revenues were $204.5 million, an increase of 11% and gross profit was $66.9 million, an increase of 24.5%, in each case compared to the same period last year.

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 $77.8 million for the quarter, a 27.2% increase over the same period a year ago. Due to the strength in demand for rental equipment, we have a much larger rental fleet available for rent compared to the third quarter of 2011. We have increased our total fleet by approximately $145 million or 20% based on original equipment cost, or OEC, over the last 12 months. Average time utilization based on OEC increased 110 basis points to an average of 72.9% for the quarter. Based on number of units available for rent, average time utilization was 68.9% which was basically flat compared to a year ago.

In addition, rental revenues were higher as a result of a 10.2% increase in average rental rates in comparison to the third quarter a year ago and 2.9% compared to the second quarter of this year. The improvements have also been broad based across all product lines.

Our dollar returns improved to 36.7% compared to 33.7% a year ago. This 300 basis point improvement was due to the strength in both rental pricing and time utilization.

New equipment sales were $49 million, a $2.5 million or 5.3% increase over the prior year period. The net increase was due primarily to higher crane sales.

Used equipment sales were $25 million, a $2.2 million or 8% decrease over the third quarter of 2011. The net decrease was primarily due to lower earth moving sales.

Business activity in our parts and service segments improved. Those revenues increased 4.3% on a combined basis to $40.5 million with both segments up from a year ago.

Moving on to gross profit by segment, our total gross profit for the quarter was $66.9 million compared to $53.7 million a year ago, an increase of 24.5% on an 11% increase in revenue. From a gross margin perspective, consolidated margins were 32.7% compared to 29.2% a year ago. Expansion of our 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 48.9% compared to 44% last year. Strong demand which is driving higher volume and rates combined with tight control of rental expenses continues to result in rental gross margin expansion. Margins on new equipment sales were 11.5%, essentially flat compared to last year. Gross margins on used equipment sales increased to 26.4% from 23.4% in the same period last year.

Parts gross margins were 26.7%, the same as a year ago and service gross margins were 61.1% versus 61.6% a year ago. Margins on other revenues such as equipment hauling and parts freight revenues were 6.7% compared to a negative 2.6% in the third quarter of last year.

Slide ten, please. I have only a few comments related to the next couple of slides as key drivers of our financial results have been covered at this point.

Our results again reflect significant operating cost leverage. The improvement in profitability is reflected in an increase in income from operations for the third quarter of 2012 to $25 million or a 12.2% margin compared to $15.1 million or an 8.2% margin a year ago.

Proceed to slide 11, please. Net income was $3.7 million or $0.11 per share compared to $4.8 million or $0.14 per share in the same period a year ago. Our net profits for the third quarter on a GAAP basis were negatively impacted by a $10.2 million or $7.2 million after tax loss on the early extinguishment of debt. Net income as adjusted for the loss on early extinguishment of debt was $10.9 million or $0.31 per share.

Please move to slide 12. Adjusted EBITDA was $55.9 million, a .3% increase over the same period last year which again outpaced our revenue growth of 11%. Adjusted EBITDA margins were 27.3% compared to 21.9% in the same period a year ago, an expansion of 540 basis points.

Next, slide 13 please. SG&A was $42.4 million, an 8.6% increase over the same period last year. However, SG&A declined as a percentage of revenue to 20.7% this quarter compared to 21.2% a year ago.

Slide 14 and 15 include our rental fleet statistics. Our fleet, based on original equipment cost, at the end of the third quarter was $871 million versus $726 million a year ago. During the third quarter we increased the size of our fleet by $61.7 million based on original equipment cost. Our gross fleet capital expenditures for the quarter were $94.6 million including non-cash transfers from inventory. Net rental fleet capital expenditures for the quarter were $74.2 million. For the quarter, our gross PP&E CapEx was $7.6 million and net was $7 million. Our average fleet age at the end of June -- I mean, I'm sorry, at the end of September was 38.6 months which was declining as a result of fleet spending.

Next, slide 16. I'll spend a bit more time on this slide as our capital structure has changed as a result of our recent notes offering which closed in August 2012 where we issued $530 million of new ten-year, 7% senior unsecured notes. Proceeds from the offering were used to repurchase or redeem our then outstanding eight-and-three-eighths senior unsecured notes, to fund a dividend to shareholders of approximately $246 million, and for other corporate purposes.

We also upsized our existing ABL credit facility by approximately $83 million to $402.5 million by exercising its accordion feature. At the end of the quarter, our outstanding balance under the ABL facility was $130.7 million and accordingly, we had $265.3 million of availability at quarter end under our ABL facility, net of our $6.5 million of outstanding letters of credit.

In summary, our business delivered strong results during the third 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. Based on our strong third quarter results and our view of ongoing business trends, our outlook for the balance of this year and into 2013 is positive. While there is still some uncertainty on a macro level, demand in our end user markets is strong and we believe indicative of a secular shift toward rentals in the industry. Leslie and I have already discussed the strength in our rental business but we expect the trends to continue for the foreseeable future.

Utilization and rates continue to hover around yearlong highs. Through the end of the third quarter we have invested $240 million in our fleet of which a little more than half has been dedicated to growth CapEx. The industrial markets we serve, particularly the petrochemical and oil and gas sector, are very strong as a result of increased exploration and production. Even our less industrial focused markets are improving as a result of increased construction activity.

We are also pleased with the performance of our distribution business. Albeit it difficult to predict, it has delivered solid results throughout the year on the whole.

In closing, we are very pleased with our third quarter performance, the positive market environment and our ability to deliver solid results. We undertook several significant steps during the quarter to better position our Company for future growth opportunities and remain focused on solid execution, operating leverage, cost control and marketplace trends. Once again, I congratulate our employees for their excellence performance as we pursue profitable growth opportunities.

At this time we'll be happy to take question. Operator, please provide instructions.

(Operator Instructions)

And we'll take a question from Joe Box with KeyBanc Capital Markets.

Can you maybe talk to the fleet growth in the quarter? I'm just curious how the market absorbed it and maybe how utilization trended throughout the quarter and so far into October.

Obviously, that was heavy investment in the fleet for us. It's kind of an historical investment for us. Throughout the quarter we've increased utilization. We have increased rate. All the trends continue to be very, very positive which I think speaks to the strength of our rental business when we can make that kind of investment, increase rate and utilization at the same time. During October, we're probably averaging around 74.5% utilization.

John, correct me if I'm wrong but I think that your prior view was focused more on fleet growth at the expense of free cash flow. With your leverage ratio now being higher and your fleet about 8% above the prior peak, does that change the way or at least start to change the way that you're thinking about fleet growth versus free cash flow?

No, it doesn't change the way I'm looking at things. We're comfortable with the use of cash this year and potentially, the use of cash next year. We have not completed our fleet planning yet. It's in process. I think next year you'll probably see on our base fleet more replacement spending as opposed to growth and I think you'll see the growth spending related to Greenfield startups next year but I would expect we will bring our leverage down during the course of next year.

And can you give us maybe a target in terms of what you're expecting from Greenfields?

We're doing market research on a lot of different markets. The key driver to us entering any market is finding the right manager. We do not go into a market until we have the right person. I would hope we could open six plus stores next year. We've opened Midland and Mesquite very recently as you know. We're very, very pleased with the results we're getting there. We're close to opening a store in Fort Worth. We're close to opening a store in Seattle but I think that six store openings is reasonable for us next year.

And last question, then I'll turn it over. What gives you the confidence that customers are going to show up and place equipment orders in 4Q? Are you seeing elevated inquiry levels or did customers tell you that they're going to push their order into 4Q?

We get feedback from obviously a very large sales force out there that are staying in constant contact with customers. There are still some pretty significant tax incentives for yearend buying and our expectation is that we'll see some increased activity from that. Will it be to the level we saw last year with 100% bonus depreciation? I don't know. I can't answer that question but our expectation is we will see some increased activity in the fourth quarter.

Yes, got it. It's clearly a tough hurdle. I'll hope back in queue, thank you.

And next we'll move on to Seth Weber with RBC Capital Markets.

I was particularly struck with the sequential change in rate, the strength there in the quarter, up I guess 2.9%. Can you give us some sort of cadence monthly through the quarter how that trended and you gave us a utilization number for October to date. Have rates continued to improve sequentially here into October?

Yes. I mean, we're continuing -- the cadence was positive throughout the quarter. Each month was better obviously, sequentially it was, to have a 2.9% sequential increase from the second quarter so the cadence was very positive. We're still seeing positive rate increases and our expectation is that that is going to continue. Everybody is running at very strong utilization levels. That is probably going to moderate in the fourth quarter when utilization comes down due to typical seasonality but our outlook for rates is very positive and I think that our Management Team -- Brad Barber and the Divisional Managers that work on him are doing a really fine job of pushing rates and making sure our people are focused on that. We're very pleased with our rate performance.

So you think fourth quarter could be a high single digit year over year type of number?

That is reasonable.

And then I guess on the new sales commentary, can you give us a little bit more color? I mean, it sounds like you think that the crane business has potential to be pretty strong fourth quarter here. Obviously, a tough comp but on an absolute basis it sounds like crane sales could be pretty good. Is that across all product lines or is that really skewed towards the smaller stuff still at this point?

Still skewed to the hydraulic side. I mean, we're having some conversations on some crawler cranes, some big crawler cranes but those markets are still pretty soft by historical standards. We do expect strong crane sales and again, let's go back to the prior year. That's a very difficult comp. I think we sold $50 million worth of cranes in December of last year so you know, pretty tough comps there but we do anticipate strong crane sales in the fourth quarter.

If I could just ask one follow-up, the rental margin this quarter, obviously very strong, the gross margin high 48%, almost 49%. That is still pretty well below the mid-50s that you were running back, I think it was '06, '07 for the third quarter. Is there any reason why you couldn't get back to that kind of number or exceed that?

No reason we can't get back or exceed that. We still have some ground to make up on rate and we're paying more for equipment today than we were back then which is somewhat of an offset but no, there is no reason we can't get back to prior peak levels or exceed them.

And we'll move on to Neil Frohnapple with Northcoast Research.

As a follow up to Seth's question, the rental revenue growth rate of 27% in the quarter was very strong. Would you expect rental revenue on a dollar basis to decline in the fourth quarter from the third quarter, understanding that it is a seasonally weaker period but looking back the last couple years you guys have still been able to drive rental revenue a bit higher and just kind of wondering your thoughts there.

I would not expect a decline in the fourth quarter. I think it will probably be similar to up slightly from the third quarter.

Given that a lot of the OEMs are cutting construction equipment production due to weaker than expected demand, are you heavy on any new equipment inventory categories versus where you'd like to be maybe on earth moving or outside of crane?

We're pretty comfortable with where we are. I'm definitely comfortable with our crane inventories right now. If we're heavy anywhere it would probably be earth but that is not a concern. If we're heavy it's by a small amount. (cross talk)

Just finally, wondering if your guys' appetite has changed regarding acquisitions with the recent financing actions raising your leverage or are you just going to continue to focus on Greenfields from here?

We have looked at acquisitions. We looked at stock buybacks and we settled on this dividend as the right thing to do to create shareholder value, the right thing to do for our shareholders so obviously that has increased our leverage for a period of time. For the foreseeable future until we bring our leverage back down we'll be focusing on Greenfields.

And Nick Coppola with Thompson Research Group will have our next question.

What are you seeing in terms of used sales pricing? I mean, [RALPH] is showing monthly declines so if your used sales margins are down sequentially from the prior quarter, is that fluctuation a softening in pricing or is there a mix impact? Do you have any comments around that?

No, I don't think our sales margins are down from the prior quarter, are they? Am I missing something?

Year over year they're up but they were --

Oh, I see, from the prior quarter -- no, I think that's a mix issue. We're not seeing any softening in the prices we're getting for our used fleet right now. Again, we're selling on a retail basis as opposed to taking this stuff to auctions. The residual values have been ramping up so strong for so long they had to level off. I don't see anything in used equipment pricing that concerns me at all right now.

In talking to folks across the industry we've heard a lot about a pause that has been occurring because of the Presidential election, the fiscal cliff. Is that something that you're seeing, I guess maybe particularly on the distribution side of the business? Do you have any thoughts about getting over those hurdles and then maybe where construction goes in '13 more philosophically?

I think most people have to believe that this fiscal cliff will be resolved. I'm sure there is some concern about it. I think the election is, obviously creates a lot of uncertainty. It's kind of a coin toss right now so I'm sure that has had some impact and I think the impact is probably on the distribution side of our business, probably favors the rental side. When there is uncertainty, people tend to rent as opposed to buy. The impact, whatever impact we're seeing I'm sure is on the distribution side of our business.

(Operator Instructions)

Next we'll move to Eric Crawford with UBS.

Most of my questions have been answered at this point. I appreciate the color on new equipment sales and cranes but could you speak a little bit as to the, I think someone asked about it but the order activity specifically for cranes, the inquiries and what you're seeing for 4Q now that we're a month in?

I would say inquiries are solid, pretty strong and our expectation again is, I'm repeating myself, is that we're going to see increased activity in the fourth quarter. I would be careful comparing it to the prior year because that was so exceptionally strong. That is a very tough hurdle but on an absolute basis we think that crane sales are going to be quite strong in the fourth quarter.

So up sequentially but perhaps not year over year?

That is correct.

And next we'll move to Sean Wondrack with Deutsche Bank.

Good quarter. I was intrigued by one of your prepared remarks. One of your, another player in your industry reported yesterday and spoke about a little bit of a pause in the industry that occurred but basically, the demand had since picked up and was still accelerating. I noticed you guys had said that your end user markets are no longer a headwind. I was curious if you could elaborate on that remark a little bit, please.

I think it's just that our demand is very broad based. We're seeing really solid year over year improvement in Florida and southern California and even in Nevada which is arguably one of the toughest markets in the country. Arizona has gone from being a real headwind, tough, tough market to one of our best markets. Generally, we're seeing very positive trends across the board.

Okay great, and then not to say that this is by any means any kind of a threshold that you can't break through but can you comment on where your rates are relative to the prior peak?

That is difficult to quantify but if you look at our monthly rates I think we're probably between 5% and 8% from prior peak rates and I can't really break down the daily and weekly but on a monthly rate we still have a ways to go. We've got some runway in front of us to get back to prior peak.

My last question, I know you gave a lot of good color regarding free cash flow but would there be a ceiling on the degree of negative free cash flow you would be willing to absorb in 2013, maybe $100 million, $50 million?

In '13 it would certainly be significantly less than $100 million and again, I think our spending is going to change particularly on our base fleet. It's going to be more replacement spending as opposed to growth and the growth that we'll have will be related to Greenfields so our intent is to bring our leverage down in 2013.

With your fleet age being so young right now do you think it will kind of revolve around that 38 month level or do you think it has a further ways to go in terms of decreasing?

We have continued to spend on our fleet through October so my expectation is the fleet age will come down another month or so by yearend and it will probably level off there.

And we'll move on to Matthew Dodson with Edmonds White Partners.

Can you kind of help us understand in your mid-Atlantic region with the Hurricane Sandy just hitting and how that is going to affect your utilization and your ability to push rates?

We did not have a big negative impact from the storm. We didn't have a bunch of stores get shut down for any extended period. I think we had three stores that closed for two days out of our mid-Atlantic region so fairly minimal lost time from the storm. There is going to be some benefit to us. Obviously, there is a lot of destruction there and people are going to be looking for rental equipment so I think from this point forward, there is going to be a benefit to our business. It's difficult to quantify but there is going to be a lot of cleanup work and a lot of reconstruction work and we should benefit from that, and the negative impact was fairly minimal.

I understand that. I was looking more for the positive. Will you actually move equipment up to that region to meet the demand?

Absolutely, if necessary. We move equipment all the time.

And we'll move on to Joe Box with KeyBanc Capital Markets.

Just one quick follow up for you, your incremental gross profit margins have obviously been solid over the last couple of quarters. I'm just curious, if you're successful in opening up those six new stores next year, is that high 60%, low 70% number still a decent target or could we be looking at something lower?

If the stores perform like Midland and Mesquite I think we'll maintain that type of incremental margin.

Actually, maybe I'll sneak another one in. John, just in your past experience in dealing with major natural disasters down in the Gulf Coast, can you maybe just talk to what type of demand the equipment rental market typically sees, when it starts and how long it lasts?

Obviously, every storm is different and we've got a lot of experience with storms. The most recent storm we had was probably a negative to our business. I don't think we got much of anything. There was very little structural damage. Most of the damage was water related and we just really don't benefit from that. This storm on the east coast is different, lots of structural damage so I think it's going to impact pretty much all classes of equipment. You're going to get some crane activity in the cleanup. You're going to get aerial activity in the cleanup and the reconstruction, a lot of dirt activity in the cleanup.

Again, the cleanup is one thing. That is fairly short duration. The reconstruction lasts a long time. There is going to be some benefit from this storm for not just us but everybody in that region in our line of work.

(Operator Instructions)

And there are no further questions. I would like to turn the call back over to the speakers for any additional or closing remarks.

Thanks everybody. Again, I think you can tell we're very positive on our business. The trends are really good and we expect good things going forward and we're confident that 2013 is going to be a solid year for us. We look forward to speaking with you on the next call. Thank you for attending.

And that will conclude today's call. We thank you for your participation.