H&E Equipment Services Inc (HEES) 2015 Q2 法說會逐字稿

Good day, everyone, and welcome to the H&E Equipment Services second quarter 2015 earnings call. Just a reminder, today's call is being recorded. For opening remarks and introductions, I'll turn the conference over to Mr. Kevin Inda. Kevin, please go ahead.

Thank you, Debbie, and welcome to H&E Equipment Services conference call to review the Company's results for the second quarter, ended June 30, 2015, which were released earlier this morning. The format for today's call includes a slide presentation, which is posted on our website at www.heequipment.com.

Please proceed to slide 1. Conducting the call today will be John Engquist, Chief Executive Officer, Brad Barber, President and Chief Operating Officer, and Leslie Magee, Chief Financial Officer and Secretary.

Please proceed to slide 2. During today's call, we'll refer to certain non-GAAP financial measures, and we've reconciled these measures to GAAP figures in our earnings release, which is available on our website.

Before we start, let me offer the cautionary note that this call contains forward-looking statements within the meaning of 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 call.

With that stated, I'll now turn the call over to John Engquist.

Thank you, Kevin, and good morning, everyone. Welcome to H&E Equipment Service's second quarter 2015 earnings call. On the call with me today are Leslie Magee, our Chief Financial Officer, and Brad Barber, our President and Chief Operating Officer.

I'll focus my comments this morning on the significant impact from the extreme weather we encountered during the second quarter, the ongoing oil patch situation and overall market conditions. Then Leslie will review our second quarter results. When Leslie concludes, I'll discuss our outlook for 2015. After, we will take your questions.

Please proceed to slide 5. Leslie will go through our financials in more detail, but let me summarize by saying that overall, the second quarter presented a tremendous challenge, primarily as a result of the record-setting rainfall and subsequent flooding that occurred from April through June. The extreme weather hit the bullseye in our Gulf Coast region, which comprises the majority of our revenue and gross profit, and where nearly 50% of our fleet is deployed. I'll discuss the specific impacts in a moment.

Ongoing softness in the oil patch continued, but this was expected. Both the weather and soft oil patch issues are transitory and, hopefully, behind us for the most part, but we expect our distribution business, specifically new crane sales, to be soft in the near term. Despite these significant headwinds, demand for our rental equipment remains strong for the quarter, with revenues increasing 9.9% from a year ago.

And despite a 6.4% decline in total revenue, we achieved positive EBITDA growth compared to (technical difficulty) continued to maintain industry-leading utilization, even with the challenges I just mentioned. More importantly, we believe overall market conditions remain strong, and our outlook remains positive for the balance of this year and over the long term for the foreseeable future.

Please move to slide 6. As usual, we have included our map detailing revenue and gross profit by region. Our Gulf Coast and Intermountain regions continued to account for the majority of our business, so the wet weather had a material impact on our business.

Let's move on to slide 7, where I will dig deeper into the impact from the extreme weather. You'll see from the NOAA data on this slide that Texas encountered record-setting amounts of rainfall from April through June, most of which occurred in May. To put this in perspective, Texas had more precipitation in this three-month period than any other period since the NOAA began tracking the data in 1895.

The rest of our Gulf Coast region, as well as our Intermountain region, also experienced significantly above average rainfall. And as I mentioned earlier, nearly 50% (technical difficulty) resides in Texas, Louisiana, Arkansas and Oklahoma. The impacts to our business were significant, as construction activity experienced unusual delays.

Please proceed to slide 8. To further demonstrate the significance of the weather impacts, we included two graphs comparing our total weekly utilization versus our Texas weekly utilization. You'll see from the chart on the left, our total weekly utilization dropped to a low of 65.2% in March of this year, largely as a result of the weakness in the oil patch. But since this low point in March, utilization has increased more than 800 basis points to 73.6%.

On the right graph, at the high point of flooding in May, our Texas weekly utilization dropped to a low of 65.6%. On the positive side, since this low point in May, Texas utilization has increased nearly 800 basis points to 73.4%. Given the scale of our presence in Texas, these branches represent approximately one-quarter of our total Company original equipment costs. I would like to point out that our 73.6% utilization during the week of 7/21 marks the first time we have seen year-over-year utilization growth this year.

Please move to slide 9. Let me now provide an update on the current trends we're experiencing in the oil patch. When we first detailed our exposure on our fourth quarter call, oil and gas accounted for 13% of our total revenue in 2014. Today, our exposure is nearly half of that, at 7% in the second quarter, down from 11% in the first quarter. The decrease is a result of a combination of factors, including lower overall demand, fleet reallocation and lower new crane sales, which are down 42% year over year.

The majority of our oil and gas exposure continues to be an upstream activity, and we estimate this was around 6% of total revenue, followed by 1% in midstream and less than 1% in downstream activity, during the second quarter. Of the 6% upstream exposure, we continue to estimate that 95% is tied to production, which has proven to be less sensitive to volatile oil prices and expiration.

As I mentioned earlier, the weakness in oil and gas has significantly impacted the market for new cranes, and visibility on future demand is limited. Again, we have successfully mitigated these impacts to our rental business by efficiently moving fleet from the oil patch markets to our high activity, non-res construction markets.

Year to date, we have transferred approximately $51 million of fleet measured in original equipment cost. Of this, we transferred $21 million, as stated during our first quarter call, and another $30 million was transferred earlier in the second quarter. We believe we have appropriately adjusted our fleets in the oil patch and currently do not anticipate moving significant fleet out of these markets in the future.

Please proceed to slide 10. As a reminder, especially for those that are new to our calls, the majority of our oil and gas exposure is in the Gulf Coast, at 72% of our total 7% exposure. We believe the current trends are positive in Texas as well as our entire Gulf Coast region.

Currently, time utilization in our three largest oil patch branches, which are located in Texas, has improved more than 1000 basis points on average from their lows in May. These three branches are currently averaging near 75% utilization. These stores are significant to the overall Company and comprise approximately 9% of our total fleet. Their fleets were reduced, on average, by 8% since the low point of demand in the second quarter.

Further, the majority of our rental fleet in Texas is in the Eagle Ford Shale, which is one of the lowest lifted cost per barrel shale plays in the US. Lastly, it is important to note that more than 80% of our total revenue in Texas is tied to construction activity other than oil and gas, which remains very strong.

Move to slide 11, please. I just want to reemphasize again the importance of our strong fleet management systems and fleet mix. None of our fleet is specialized for applications in the oil and gas industry or any other industry, for that matter, and is 100% transferrable between our end markets.

Slide 12. The data points on this slide should not be a surprise to anyone on this call, with the broader indicators pointing to a positive trajectory in the non-residential construction markets through 2017. I'll also point out that the June ABI came in very strong, up to 55.7 from 51.9 in May.

At this time, I'm going to turn the call over to Leslie.

Good morning, everyone, and thank you, John. I'll begin on slide 14. As John mentioned in his comments this morning, the second quarter presented an unanticipated challenge with the extreme rainfall combined with the ongoing weakness in the oil and gas industry.

To summarize, total revenues decreased 6.4% to $262.4 million and gross profit decreased 3% to $86.4 million compared to the same period last year. The net decline in our top-line revenues is directly tied to the weak demand in new equipment sales -- more specifically, new cranes -- due to the continued softness in the oil and gas markets.

However, our rental business performed solidly (technical difficulty) weakness in equipment sales. Rental revenues increased 9.9%, to $108.6 million for the quarter, over the same period a year ago.

Physical utilization levels were impacted by the extreme weather conditions and the decline in the oil and gas activity. We average time utilization based on OEC of 70.3% for the quarter, compared to 72.7% a year ago.

To further understand these results, it may be helpful to know that in our stores with the most oil and gas exposure, utilization was down from a very high rate of 79.1% a year ago, to 68.8% this quarter.

Further, it is difficult to separate the 10.3% decline in utilization between weather versus the oil and gas issues, since many of these locations sit in the regions with historically high rainfall and flooding this quarter. John provided a good bit of color around weather in his comments to, hopefully, help bridge this gap. In our non-oil filled markets, time utilization was actually up 40 basis points, to 70.7%, compared to the second quarter of 2014.

Despite pressure in rates from the wet weather and the oil and gas markets, we obtained positive year-over-year rental pricing, with average rental rates increasing nearly 1%, with at least flat to positive rate trends in all product lines over a year ago. Our dollar returns were 34.2%, compared to 36.3% a year ago.

Once again, we anticipated a decline in new equipment sales, specifically cranes used in oil and gas activities. This played out again in the second quarter, as new equipment sales were $64.4 million, down 28.9% from $90.6 million a year ago almost entirely due to new crane sales. Also, the second quarter of 2014 presented the most challenging new equipment sales comp of the year.

Used equipment sales were $28.9 million, down 7.9% from the second quarter of 2014. As a reminder to our listeners, this decline is mainly a result of our young fleet age. Sales from our rentals fleet comprised 82% of total used equipment sales this quarter, compared to 88% in the second quarter a year ago. Our parts and service segments delivered $44.1 million in revenue on a combined basis, basically flat with a year ago.

Total gross profit for the quarter was $86.4 million, compared to $89.1 million a year ago, a decrease of 3% on a 6.4% decrease in revenues. (Technical difficulty) margins expanded to 32.9%, compared to 31.8% a year ago, and were primarily driven by a shift in revenue mix to rentals.

Rentals gross margins for the quarter were 46.7%, compared to 48.4% last year, which resulted from higher rental and depreciation expense due to fleet growth since a year ago combined with lower physical utilization. Margins on new equipment sales were 11.8% this quarter, compared to 12.3% a year ago, and used equipment sales gross margins were 32.2%, compared to 32.9% last year.

Breaking used equipment sales down further, margins on rental fleet sales were 37.2%, compared to 35.4% a year ago. You may recall that used equipment sales are primarily comprised of sales from our rental fleet. We are pleased that margins on our fleet sales continue to be strong and even exceeded the prior year's margins. Parts and service gross margins were 41.6%, compared to 42% a year ago on a combined basis.

Move to slide 15, please. Income from operations for the second quarter decreased 13.1% to $33 million, compared to $37.9 million last year, on a margin of 12.6%, compared to 13.5% in the second quarter last year. Income from operations declined on lower revenues and higher SG&A.

Proceed to slide 16. Net income was $11.5 million, or $0.33 per diluted share, compared to $15.7 million, or $0.45 per diluted share, in the same period a year ago. Our effective tax rate increased to 40.9% compared to 38% a year ago due to a decrease in favorable, permanent differences in the current quarter.

Please move to slide 17. Despite a 6.4% decrease in revenue, EBITDA was $79.4 million, or a 1% increase over the same period last year, and EBITDA margins were 30.3% compared to 28.1% a year ago, a 220 basis points increase. Our revenue mix adjusted to the rental business, positively impacting margins.

Next, slide 18. SG&A was $54.4 million, a $2.5-million, or 4.9%, increase over the same period last year and driven primary by employee travel, training, professional and other service fees, and promotional and marketing expense. Branch expansions contributed $800,000 in SG&A during the quarter. SG&A as a percentage of revenue was 20.7% this quarter, compared to 18.5% a year ago, largely as a result of the current year decrease in total revenues driven by lower demand for new equipment sales.

Slides 19 and 20 include our rental fleet statistics. During the second quarter, we increased the size of our fleet by $22.6 million, or 1.8%, based on original equipment costs. We ended the quarter with an original equipment cost of our fleet of $1.3 billion.

Our gross fleet capital expenditures during the second quarter were $69.2 million, including non-cash transfers from inventory. Net rental fleet capital expenditures for the quarter were $39.1 million. Our gross PPE CapEx was $6.4 million, and net was $4.9 million. Our average fleet age as of June 30th was 32.3 months.

As you recall, we discussed on our first quarter call our intent to decrease 2015 gross CapEx by 40% to 50% from 2014 levels. While we'll now end closer to the top of the range, this level of spending remains our plan. You may also recall that our original 2015 plan announced in 2014 year-end call was a reduction of 25% to 30%, based solely on the three consecutive years of significant reinvestment in the fleet. Very early in 2015, we adjusted this further based on the weakness in the oil and gas markets and the fleet reallocations that have taken place.

Next slide, 21. At the end of the second quarter, our outstanding balance under our $602.5 million ABL facility was $257.1 million, and therefore we have $338.1 million of availability at quarter end under our ABL facility, net of $7.2 million of outstanding letters of credit.

I'll now turn the call back to John to discuss our current outlook, and then we'll open the call for questions.

Thank you, Leslie. Please proceed to slide 23. Before we open the call to questions, let me quickly close by reiterating our belief that solid growth opportunities will persist throughout the remainder of 2015 and over the long term for the foreseeable future. Activity increased significantly in June, and this momentum is continuing into July. Overall momentum in the non-residential construction markets remain strong, despite the ongoing softness in the oil patch.

The major industrial expansion along the Gulf Coast presents a significant opportunity for our business, as evidenced by several additional multi-billion dollar projects announced in Louisiana during the quarter. Unfortunately, much of our footprint experienced historic rainfall and flooding during the second quarter.

Due to this and ongoing softness in the oil and gas markets, we're adjusting our annual guidance. For 2015, we now expect our revenues to range of $1.030 billion to $1.052 billion and EBITDA in the range of $319 million to $335 million. As a note, we do not currently intend to provide guidance for periods beyond 2015.

Lastly, as we announced in our press release this morning, our Board of Directors has declared a regular quarterly cash dividend of $0.275 per share of common stock, an increase of 10% from the first quarter and our fifth consecutive quarter paying a dividend. The dividend will be paid on September 9, 2015, to stockholders of record as of the close of business on August 24, 2015. We intend to continue the quarterly dividend going forward, subject to Board review and approval each quarter.

Our Company remains focused on solid execution, greater productivity and returns for our shareholders. We are pleased with the overall trends in our business and opportunities as we move further into this year.

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

Thank you. (Operator Instructions). Joe Box, KeyBanc Capital Markets.

So slide 7 and 8 were really helpful in terms of our understanding on just the trajectory and utilization. Can you maybe help us parse out how much impact there ultimately was to the incremental gross profit margins within the rental business? I think it came in at 30%. Any help on that number?

I would say, Joe, that really it was direct impact from the lower utilization, that really if utilization had been at at least what it was last year, that we probably wouldn't be having this conversation. It'd be at more normal incremental flow through rates.

So it'd be more in the 50%-plus range?

I think so, yes.

Yes. Yes. I think all of that was tied to utilization.

Understood completely. So maybe in that same vein, if we're talking about utilization trending up year over year here in July, can you maybe just give us a feel for how volume of fleet on rent has trended post quarter?

Yes, Joe, I mean, look, we've had a tremendous increase in utilization since those low points we showed you in May. I mean, as of this morning, we were running north of 74% utilization. We've been north of 74% for a week. The rental demand is just strong, and we're actually running a little higher utilization today than we were a year ago at this time on a much larger fleet, so very, very positive trends there.

Okay. And then maybe just one on pricing, and then I'll hop back in queue. I mean, you've got the industry leader out there implying that rental rates could be negative in the back half of the year. Obviously, your utilization is healthy so far in July. I'm curious, aside from that high utilization, what type of levers do you have where you can pull those levers and keep rates positive when you've got the industry leader out there pointing towards negative?

Well, Joe, number one -- and Leslie spoke to it (technical difficulty) further on CapEx. We last quarter told you we were going to cut our growth CapEx 40% to 50%. We're going to be at the high end, so we're pulling our CapEx in a little bit and being pretty conservative there. We saw what United reported. I can tell you we do not expect to see negative rates in the second half of this year. We think our rates will be positive.

Thank you, guys. I'll get back in queue.

Steven Fisher, UBS.

What is your opinion about the level of supply in the overall market? And if you believe it's oversupplied, kind of where is it more oversupplied today? Is it the Gulf Coast, or is it other regions?

Well, one, I don't think there's any significant oversupply in the market. I think when everybody started reallocating fleet out of the oil patch into the construction markets, it gave the markets some indigestion, and there was a lag that hit utilization a little bit and hit rates, and then we had weather on top of that.

But those issues are transitory, and like I said, our utilization is north of 74%. I mean, that's -- we're approaching about as high as we can run, so I do not view there being an excess capacity in the marketplace right now. There might have been for a short period of time due to transitory issues, but those have, I think, run their course, and I think you're going to see most people running high utilization levels, so I don't view there being an excess capacity today.

Okay. And then I know you're pulling back on the CapEx. What was your free cash flow in the first half of the year, and how are you thinking about free cash flow for the full year at this point?

We're running about $17 million in free cash flow, and our -- it's directly tied, obviously, to our CapEx spending, and it's very much -- it's typically the back half is more of a free cash flow generator than the first half, is not an unusual pattern, so I would expect that to increase relative to the first half.

Yes, without just giving you a solid -- an exact number, we're going to have significant free cash flow in the second half.

I mean, am I thinking about it correctly that if you're taking $100 million to $200 million of CapEx out this year, I mean, that in itself should translate to that amount of free cash flow?

Yes, I would say more to the lower end of what you just said, but yes.

Okay. And then it's a little early, but given how you're viewing the market, how are you thinking about CapEx in 2016?

Well, I think you're right it's a little early. I mean, we'll -- when we get into our budgets and whatnot -- and look, we're always thinking about it, but I'm not prepared to give you a number. It's a little bit early, and we'll see how the fall plays out here, but we feel good about our end markets right now, and we are -- we're confident that this cycle hasn't peaked. I mean, we think we've got some multi-year runway in front of us here.

Okay. Thanks very much.

Nick Coppola, Thomson Research Group.

So I looked at this Texas utilization chart you guys provided, which was really helpful. Can you just talk a little bit more about the drivers of the recent improvement? Any way you can talk about how much of that you view as a result of just getting through the rain and the ground drying out or seasonality or any change in market demand?

Well, I think it's -- and Brad may want to add some color on this. I think it's certainly heavily weighted to things just drying up. I mean, the rainfall in Texas was just brutal, and it really impacted our business, but we've also right-sized our fleets in the oil field markets in Texas. We've cut those fleets back about 8%, and today, as a result of that, I mean, their utilization levels are very strong. We've got branches in the oil field markets approaching 80% utilization today, so I think it's a combination of rainfall and right-sizing those fleets.

Okay, that's great. And then my second question here -- we've been hearing about used equipment prices turning lower a bit recently, but I see your used sales margins, particularly for your rental fleet, were actually up year over year. I guess we're not sure how much of that is a result of mix, but can you just talk a little bit more about the used equipment price environment, what you're seeing and if there's any read through for the broader rental industry?

I think the used equipment markets are very healthy. I don't think our margin improvement was necessarily a mix issue. I think it's just a healthy used equipment market. I don't think we're continuing to see used prices increase. You may have a category here or there that's softened a little bit, but overall it's just a strong, healthy used equipment market, and we expect that'll continue for the foreseeable future.

Okay, that's great. Thanks for taking my questions.

(Operator Instructions). Emily McLaughlin, RBC Capital Markets.

I just wanted to talk a little bit more about CapEx. What do you consider a maintenance CapEx level?

Could you repeat that? You weren't coming across real good.

Sorry. Can you hear me?

Yes, now I can. Thank you.

I'm wondering what you guys consider a maintenance CapEx level.

That's going to be directly related to how much is coming out of the fleet as far as sales as the age of what's coming out of the fleet. If you just looked over the history of the last couple years, that's ranged probably from 150 to 180, something like that -- 150, 180 million, so that's probably a fair range to look at, and so I would -- I'd probably leave it at that.

(Inaudible)

I said it's directly tied. I started by saying it's directly tied to the volume of fleet coming out, so you have to remember that.

And then can you just comment how rental rates were in July versus June?

I really don't like to give monthly guidance, but they -- and we're closing the month out right now, but we feel they'll be positive, slightly positive.

Thanks very much, guys.

Joe Box, KeyBanc Capital Markets.

Yes, just one quick follow up relative to capital allocation. The stock already has a dividend yield that's north of 6%. Can you maybe just put some color around why you guys decided to go out and raise the dividend further?

I think it's a function of we're going into a period of time when we're going to be generating significant cash flow, and we view returning cash to our shareholders right now very positively, and we've got the capacity to do it, and it's just the right time.

Okay. So clearly, enough visibility in the business to do it. I mean, do you expect to do a blend of debt pay down as well, or is it primarily going to be geared towards dividend increases and modest fleet growth?

No, Joe, we'll definitely be paying down the debt. As I stated earlier, we are confident and it's our belief that this cycle still has legs and multiple years in front of us of a really good environment. We may take a different approach if we thought this thing was -- the cycle had run its course, but we don't think that's the case at all. We've got runway in front of us here.

I appreciate it. Thank you.

Nick Coppola, Thomson Research Group.

So just as a follow up here, can you talk a bit more about the multi-year expansion you're expecting in the Gulf as far as kind of downstream work, and have you run into any delays there? And maybe just an update on expectations.

I'm going to let Brad take that.

Nick, our view remains the same. I mean, we've had some delays. We've also had some additional announcements. For example, recently Shintech announced a 1.4 (technical difficulty) right here in Iberville Parish, within 50 miles of our corporate headquarters. So our view has not changed on that front. There have been some minor delays, but they're all within the normal course of business, and there have also been some more announcements, as John mentioned earlier.

Okay. And then can -- is there any additional color you can add just about new branches in the year, maybe how the recently added branches are performing and where we should expect new rollouts?

Sure. Well, so I'll steer away from where the new rollouts will likely be, but I will say they certainly won't be in the oil field heavy markets. In 2012, we started this expansion with two locations. In 2013, we added four locations. In 2014, we only opened three locations, and this year we expect to have five or six. We have announced one opening in Charlotte -- excuse me, Charleston, South Carolina. We've got a second that's opening literally next week in Freeport, Texas. And then we've got at least three others that are in process, and again, I'd prefer not to disclose locations and give those guys a chance to get up and running.

As a collective group, whether you take it by year class or in aggregate of all the locations I just mentioned across those years, we have continued to exceed our internal expectations for both growth and return on capital.

Okay. Thanks for taking my follow ups.

Steven Fisher, UBS.

I'm still just trying to reconcile the difference in message on rate growth and oversupply between you and some of the others. Maybe can you just talk about how is your rate growth in the Gulf Coast compared to the rest of your markets?

Steve, this is Brad. It's very similar. Look, I'll tell you let's -- it's a supply-and-demand market, right? So first of all, I think everyone should pay attention to the fundamentals of the business. I'm a little shocked that anyone is projecting rate decreases in the environment we're in and the more recent improvements. Through yesterday, our non-oil field locations were running almost 75% utilization. As John stated, collectively, all of our locations this week have been running north of 74% utilization. And he said earlier that we expect slightly positive rates for the remainder of the year.

So those are excellent dynamics. I can't speak to why other folks have a different view of the business, but at these utilization levels, everyone should be focused on the quality of revenue, and we are. We're going to accomplish positive rates for the year. That's our view, and we think that our utilization can maintain the current strength. As for why others and how you reconcile that, honestly, I'm not sure what they're considering.

I don't think I've ever seen a point in time when our utilization was running where it is today that we couldn't get some positive rate traction, so we're pretty confident we'll be positive for the rest of the year.

I was almost wondering if perhaps the industrial side of the Gulf Coast is actually a better place to be exposed today than some other general non-res markets, where you have perhaps some of the smaller, independent rental companies being a little bit more aggressive. I don't know if you have a view on that, but it sounds like your rate growth is kind of similar across your business.

It's pretty consistent.

Okay. Thank you.

Thank you.

And with no other questions in queue at this time, Mr. Engquist, I'll turn it back to you for closing remarks.

All right. Look, we had a challenging quarter due to some transitory issues. We think those have run their course. I think that shows in our current utilization, which is very strong. We're going to have a better second half of the year, and we look forward to talking to you on our next call. Thanks for joining us.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference.