H&E Equipment Services Inc (HEES) 2015 Q3 法說會逐字稿

Good morning and welcome to the H&E Equipment Services Third Quarter 2015 Earnings 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, Karl, and welcome to H&E Equipment Services conference call to review the Company's results for the third quarter ended September 30, 2015, which were released earlier this morning. The format for today's call include the slide 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, 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 will refer to certain non-GAAP financial measures and we have reconciled these measures to GAAP figures in our earnings release, which is available on our website.

Before we start, let me offer the cautionary note that this call contains forward-looking statements within the meaning of the federal securities laws. Statements about our beliefs and expectations and statements containing words, such as may, could, believe, expect, anticipate and similar expressions constitute forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement.

These risk factors are included in the company's most recent Annual Report on Form 10-K. Investors, potential investors and other listeners are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after the date of this conference call.

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

Thank you Kevin and good morning everyone. Welcome to H&E Equipment Services third 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 direct my comments this morning to our third quarter highlights, our business, and overall market conditions. Then Leslie will review our financial results. When Leslie concludes, I'll discuss our outlook for the remainder of 2015. After that we'll be happy to take your questions.

Slide 5 please. Overall, our business delivered solid results for the third quarter with strong rental demand and achieved a 9.1% increase over a year ago. We're proud of our ability to maintain industry leading utilizations that was near 74% this quarter, which reflects a nice gap above our competitors' utilization levels. We also achieved higher rental rates during the quarter over a year ago. Despite the ongoing weakness in new equipment sales, we generated year-over-year revenue and EBITDA growth as end-user demand and the industrial and construction markets we serve remains strong. As we mentioned during our last call, it seems that activity in our oil patch markets has stabilized and very minimal fleet transfers were required during the quarter.

Slide 6 please. As usual, we have included our map detailing revenue and gross profit by region. Our Gulf Coast and Intermountain regions continue to account for the majority of our business. Proceed to Slide 7. I'll now elaborate on the current trends we're experiencing in the oil patch. And as I indicated earlier, it seems activity has stabilized in our oil and gas heavy markets. As a reminder, when we first detailed our exposure on our 2014 fourth quarter call, oil and gas accounted for 13% of our total revenue in 2014. Today, our exposure is less than half of that at around 6%, down from 11% in the first quarter and 7% in the second 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 34% year-over-year compared to the third quarter of last year.

The majority of our oil and gas exposure continues to be an upstream activity and we estimate this is now around 4% of total revenue followed by 1% in midstream and less than 1% in downstream activity during the third quarter. Of the 4% upstream exposure we continue to estimate that 95% is tied to production, which has proven to be less sensitive to volatile oil prices and exploration.

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

Proceed to Slide 8, please. Let me now quickly provide an update to our oil and gas revenue by region. The majority of our oil and gas exposure is in the Gulf Coast. It's 71% of our total 6% exposure. Currently time utilization in our three largest oil patch branches, which are located in Texas, continues to average around 75% utilization.

These stores are significant to the overall Company and comprise approximately 9% of our total fleet. 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 85% of our total revenue in Texas is tied to non-residential construction activity other than oil and gas, which remains very strong.

Slide 9 please. I think this slide is self-explanatory. The key takeaway here is that none of our fleet is specialized for applications in the oil and gas industry, or any other industry for that matter and is 100% transferable between our end markets.

Slide 10 please. The data points on this slide continue to indicate positive trends in the non-residential construction markets through 2017. While there have been some recent reports hinting that commercial construction activity could be nearing the peak of the cycle, we certainly don't adhere to that train of thought. End user demand in our construction market continues to remain at very healthy levels and the vast number of chemical manufacturing projects planned along the Gulf Coast will provide opportunity for our business for years to come.

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

Good morning everyone and thank you, John. I'll begin on Slide 12. Just to reiterate John's comments this morning, the third quarter results were solid and were driven by the strength in our rental business, despite the continued headwinds and challenges in new equipment sales, specifically new cranes in the oil and gas market.

To summarize, total revenues increased 0.7% to $276.9 million, and gross profit increased 1.9% to $92.8 million, compared to a year ago. As for the rental segment, rental revenues increased 9.1% to $118.1 million for the quarter over the same period a year ago. Physical utilization rebounded from the second quarter with average time utilization based on OEC of 73.3% for the quarter, compared to 74.1% a year ago. In an effort to provide more granularity into our end markets and both their strength and stabilization, it may be helpful to know that physical utilization in our non-oilfield markets was 73.3% this quarter, up120 basis points from a year ago. And our oilfield markets physical utilization was a strong 74.9%, up significantly from the second quarter, reflecting the stabilization we've referred to numerous times. However, it was down 370 basis points from extremely high levels a year ago.

Again, this is not unexpected or concerning since running near 80% physical utilization is not a normal trend or a reasonable metric to maintain for any extended period of time. Further, we were pleased that we achieved positive year-over-year rental pricing with average rental rates increasing 1% over a year ago. Our dollar returns were 36.4% compared to 36.9% a year ago.

We again experienced weak new equipment sales, specifically cranes used in oil and gas activities. Thus new equipment sales were $66.6 million, down 17.6% from $80.8 million a year ago, largely driven by a 34.3% decline in new crane sales, and partially offset by a 12.8% increase in newer moving sales. Used equipment sales were $29.1 million, up 15.5% from the third quarter of 2014.

Sales from our rental fleet comprised 82% of total used equipment sales this quarter compared to 76% in the third quarter a year ago. Our parts and service segments delivered $45.7 million in revenue on a combined basis, up 2.4% from a year ago. Total gross profit for the quarter was $92.8 million compared to $91.1 million a year ago, an increase of 1.9%, on a 0.7% increase in revenues. Consolidated margins expanded to 33.5% compared to 33.1% a year ago and were the results of a shift in revenue mix to rentals.

Rental gross margins for the quarter were 49% compared to 50.5% last year, which resulted from higher rental expenses combined with slightly lower physical utilization. Margins on new equipment sales were 9.8% this quarter compared to 11.3% a year ago, due to lower margins on new crane sales after results of weaker demand.

Used equipment sales gross margins were 30.4% compared to 31.1% last year. (Inaudible) in used equipment sales in more detail, margins on rental fleet sales only were 34.4% compared to 38.2% a year ago, due largely to lower margins on aerial and earthmoving equipment compared to a year ago. Parts and service gross margins were 41.6%, the same as the year ago on a combined basis.

Slide 13 please. Income from operations for the third quarter decreased 3.8% to $38.5 million, compared with $40.0 million last year on a margin of 13.9% compared to 14.5% in the third quarter of last year. Income from operations declined on nearly flat revenues and higher SG&A due largely to a challenged new equipment crane market combined with higher costs from new branches openings compared to a year ago.

Proceed to Slide 14 please. Net income was $14.8 million or $0.42 per diluted share compared to $15.3 million or $0.43 per diluted share in the same period a year ago. Our effective tax rate was 42.1% compared to 43.6% a year ago.

Please move to Slide 15. Despite a less than 1% increase in revenue, EBITDA was $86.2 million or a 3.7% increase over the same period last year and EBITDA margins were 31.1% compared to 30.2% a year ago. The improved EBITDA margins were due primarily to a shift in our revenue mix to the rental business.

Next on Slide 16, SG&A was $54.7 million, a $3.1 million or 6.1% increase over the same period last year. Branch expansions contributed $1.4 million in SG&A during the quarter. SG&A as a percentage of revenue was 19.8% this quarter compared to 18.8% a year ago, also due to a decrease in total revenues driven by lower demand for new equipment sales.

Slides 17 and 18 include our rental fleet statistics and during the quarter, we increased the size of our fleet by $23.8 million or 1.9% 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 third quarter were $72.6 million, including non-cash transfers from inventory. Net rental fleet capital expenditures for the quarter were $48.8 million. Gross PP&E CapEx for the quarter was $9.4 million and net was $8.8 million. Our average fleet age as of September 30th was 32 months. I don't have material updates to our 2015 CapEx plans, so just as a reminder, we intend to decrease 2015 gross CapEx approximately 50% from 2014 gross CapEx spending levels, resulting in modest fleet growth over last year.

Next, slide 19. At the end of the third quarter, our outstanding balance under our $602.5 million ABL facility was $249.6 million and therefore we had $345.7 million of availability at quarter end under our ABL facility, net of $7.2 million of outstanding letters of credit.

At this time, I'll 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 21. Before we open the call to questions, let me quickly close by saying we remain encouraged by the ongoing strength in our rental business. We believe solid growth opportunities will continue in the 2016 and beyond driven by strong construction activity and the massive capital projects planned along the Gulf Coast.

We're also pleased that it appears the activity in oil and gas markets we serve has stabilized. And our hopeful the oil patch begins to rebound in 2016 as many experts predict. Our overall outlook remains positive for our business. As we've indicated for several quarters we continue to have very limited visibility in our distribution business, specifically our new equipment sales. Demand for new cranes remains soft, and we do not expect the normal ramp-up in crane sales during the fourth quarter as we have experienced in previous years.

As a result, we now expect 2015 revenues in the range of [$1.028 billion to $1.037 billion] and EBITDA in the range of $315 million to $320 million. Lastly, we paid our fifth consecutive quarterly cash dividend on September 9. As we announced in our second quarter earnings press release, this dividend payment was increased 10% to [$0.275] per share of common stock. 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're pleased with the overall trends in our business and opportunities as we close this year and move into 2016.

Operator, we will now take questions. Please provide instructions.

Thank you. (Operator Instructions) And we'll take our first question from Joe Box with KeyBanc.

So I hear you guys that you're not ready to give a specific CapEx number for next year yet, but now that utilization has really kind of retraced back to a healthy level, just from a high level, how are you guys directionally thinking about CapEx and fleet growth in this type of environment?

Joe, look we're going to have some fleet growth next year. We're going to grow our core fleet some. We're going to do some greenfield stores, which will add some fleet growth. But we're kind of in the process of completing our budgets. It's really a little early to give you anything concrete, but we're going to have some fleet growth, because we see really, really strong rental demand continuing next year.

Okay. And I just wanted to dig into the used sales a bit. Can you maybe just put a little bit more color around the acceleration year-over-year? Is it a one-time true up or should we expect to see the number kind of continue up year-over-year? And any clarity on what you are selling would be helpful.

Joe I think that was just a function of us targeting some underperforming assets and aggressively getting rid of them. So fleet sales were up a little bit. Brad, you might have some color on that.

It was a pretty steady mix, Mainly, it was heavily led by aerial work platforms. As John said, we probably took a little bit more of an aggressive approach than typical. Our fleet's in great condition. The age is in great condition, the mix, the profile. So we probably pushed a little harder, just to try to get cleaned up for year end. That's not dissimilar to our typical practices but that's what impacted that quarter.

Okay, so as we think about the model going forward, we shouldn't think about a year-over-year growth in the used equipment sales. In fact, it actually -- it could come back down sequentially.

That's correct.

Okay. And then I wanted to ask you just on the dealer inventory side, I think in the past you've said that you've been about $20 million too high on the inventories. Curious where you're at currently and then just, where we could ultimately see this business migrate to. I mean, is the 2010 lull a possibility here, or do you think we're getting close to bumping on the bottom?

From an inventory perspective -- so, Joe, this is Brad. From an inventory -- from a new inventory related to distributions right, and some of those fees are rental fleet, we are going to continue to triple down. Now, whether we get to the 2010 level or not, I don't know that we get that low. We're going to inventory the products we need to fill replacement growth and then the retail opportunity.

And as we spoke about, cranes are the largest single assets that we can employee. We're certainly bringing our crane inventory down to match that opportunity that we see in the field, which is very limited. So further reductions are expected. Don't know that we will get as low as the levels you're referencing in 2010, but we'll make sure we'll get it at a healthy level to represent the opportunity and that is lower than we are today.

Understood on that front, Brad. I guess I probably should specify, where do you ultimately see the revenues trending toward? I'm just wondering how much downside risk there actually is within the dealer business, if any at this point.

Joe, look, I think, a lot depends on what occurs in the oil patch over the next couple of years. You get oil back to $70, it's going to be a whole new game. That would change crane demand dramatically and I personally don't have a good feel for where oil is going, but I think -- and I'm speaking specifically of the crane side. You get oil up to above $60. We're going to see some increase in demand on the crane side.

We'll take our next question from Steven Fisher with UBS.

This was the first single digit growth rate in rental revenues since 2010. I'm just kind of wondering how sustainable you think that single-digit growth rate is. And if you can talk a little bit more about your strategies of keeping it in positive territory in the face of lower CapEx. And I know you said that you're going to have some greenfield. I'm just kind of wondering, is your fleet growth in -- more from existing operations? Is it going to be more from new greenfields? Just how to think about that and the growth rate in rental business.

Well, like I said earlier, it's going to be a mix. We're going to grow our core fleet next year. And again, it's a little early for us to give you anything concrete. I mean, is that going to be 5% or 8%. I mean, we're going through that process right now. And we're going to do probably a minimum of three greenfields next year. That could be five, but you can kind of factor that out, and we're going to have some fleet growth. And we're very confident that we're going to show rental revenue growth for some time into the future. I mean we're in a very positive environment right now.

Okay. I don't know, if I missed this in your disclosure somewhere, but what was your cash flow from operations in the quarter?

Let's see -- we don't have that in our disclosure but I can get that for you. Just give me one second here. Cash flow from ops in the quarter was $65 million.

Okay. So I guess I am just trying to think about how much cash you anticipate generating in the fourth quarter with CapEx coming down a lot this year. This is the year you are going to be kind of generating -- supposed to be generating cash. Just trying to think about putting some kind of range on what that could be for the year.

I mean obviously the fourth quarter is going to be a strong quarter for us in cash generation, there's no question on that. It'll be by far the strongest quarter of the year for us.

Okay. And then just maybe one last question on the part sales and margins. Was there any particular downtime for any service operations? Was it a calendar thing or maybe customer utilization levering on the margins? Is it mix or is it any kind of pricing pressure causing the margins to be lower there, year-over-year?

On a combined basis, they were flat year-over-year.

Right, I know you mentioned that, but I'm just looking at the parts was about 27.2 versus 28.6 on the margins in the year ago.

Within parts, there is some mix impact within parts alone.

Yes, look, there always can be mix. I mean the sale of the service parts versus counterparts, versus parts we're selling for large crane rebuilds. I think what I would say to you, is you shouldn't be concerned that you're going to see a downward trend in parts margin.

That won't happen, yes.

That is going to be just a typical mix issue that can occur on a quarter-to-quarter basis.

Okay, that's what I wanted to k now. All right, sounds good, thanks.

(Operator Instructions) We'll take our next question from Nick Coppola with Thompson Research Group.

In the rental business, one of the things we keep hearing about obviously is excess fleet in the market from fleet transfers and potentially some over investment across the industry. And so can you guys just talk a bit about the supply of equipment that you're seeing out there in the market and what you would expect it will ramp to look like in terms of the absorption of that excess fleet?

Yes. Nick, I tell you, we do not believe there's any significant capacity issue in the marketplace right now. There's some specific markets that we've seen some capacity issues in like Dallas, where you had a lot of the big players bring a lot of fleet down the oilfield into the construction markets in Dallas. And that gave that market little indigestion for a while, but I don't see any broad based capacity issue. We've been running for most of October in the 75% range on physical utilization. You just don't do that if there's a capacity issue.

So obviously, there was a timeframe to digest this fleet coming out of the oil patch that created some short-term issues that put some pressure on some specific markets. But today, we think the market is in pretty good shape from a capacity standpoint.

That's good to hear. And then second question here, I was just wondering if you can add any color about the multi-year industrial expansion in the Gulf and how you see that playing out.

Yes. I mean it seems like we never have a week or two go by without some other project being announced. Most of these projects are chemical manufacturing projects, be it ethylene, ammonium, methanol, or nitrogen, that type of stuff. Anything that uses natural gas as a feedstock, and it's just unlike anything we've ever seen before. And it continues. I've said many times all of these projects that are announced won't happen. But it just a -- if half of them happen or less than half of them happen, it's going to be good for our business.

There's currently in Lake Charles, Louisiana, in that MSA there is almost $40 billion worth of industrial expansion underway. There is probably another $40 billion that's been announced. Now, all of that's not going to happen. Some of it's going to fall by the wayside, but from an industrial expansion standpoint in the Gulf Coast, we're in a real good spot.

And have you seen any crane inquiries as a result of that work?

Yes, Brad, might be better for this question. We certainly will at some point. Brad?

We will, but it's not been particularly strong. I mean, our opportunities on these types of projects is heavily weighted to the rental opportunity. We benefited from the sales opportunities on earthmoving as we're a Komatsu distributor in Louisiana.

And there have been limited opportunities on cranes. I would just say that it's not to a magnitude that excites us internally. So is there opportunity? Absolutely. Our utilization on our crane rental fleet specifically has been running exceptionally high by our own expectations for many months now. But from a distribution sales opportunity, not as much as we'd like to see.

We'll take our next question from Seth Weber with RBC Capital Markets.

I hope you are doing well. So dollar utilization was stronger than what we were looking for in the quarter. I think you've previously talked about positive rate growth here in the back half of the year and utilization seems to be stabilizing. So is it -- would it be realistic to assume that dollar utilization could be up year-over-year here in the fourth quarter?

That's possible Seth. I mean we're running at very high utilization levels and we still expect positive rates. They are going to be modest, but we do expect to be right positive, yes.

Yes, Seth I think the thoughts in mind is we -- I don't know, that I've looked -- I've not looked at that. We invested really heavy in the Q4 of last year, and we've been fighting the economic headwinds of replacement capital and inflation. But to John's point, it's reasonable to think that that's possible. Probably want to do a little deeper dive, but things are good. We are going to continue to raise rental rates. It's our view that we can be positive in Q4, and that the utilization will remain strong while we're doing so.

Right, right, I mean it sounds like what you are saying though is that we have kind of passed the bottom maybe on the oil and gas comps, Is that fair? I mean, things seem to be --

Absolutely, that's fair.

Right, so I mean, utilization there should be getting better. I mean, it's seems like dollar utilization should be at least pointed in the right direction then. I guess my other -- another question is on the distribution business, which I know doesn't usually get a lot of attention but can you comment on what you're seeing with your rental rate? And I'm just trying to understand, is there risk to the parts and service business? Maybe just using your rental fleet as a proxy for what's kind of going on out there. And whether we -- there could be some softness in the parts and service business going forward in conjunction with the lower sales or lower activity, I guess, I should say.

Yes, I think where we could be impacted is the weak demand in cranes could potentially impact our parts and service business. Crane rebuilds, crane remanufacturing for us is a big consumer parts and labor. And that's soft right now because of soft crane demand. So the weak crane markets potentially could impact our parts and service business. And I'll tell you we're very focused on growing that business, and we're out in the market and we're pursuing other opportunities besides the crane business that I think is an offset to that. But it certainly has the potential to slow our growth there.

Okay, thank you. And then maybe just a last follow up. Brad, can you just comment directionally what -- your used equipment pricing has got a lot of attention over the last, I don't know, six months or nine months. It's clearly kind of coming off of peak level, but do you see it continuing? I mean can it hold here? Or do you think it comes in more? Kind of what are you guys seeing in the market?

Yes, our view is that it's likely to hold at a level that's similar to where it's at today. Some folks are a bit concerned about more recent auction values and they were really mild downward. And I think that's a product of the time of year more than it is indicative of that business declining and used or residual value. So our view is that that pricing will remain very good as it is today and likely stabilize at a level similar to what you're seeing.

Another issue, Seth, is that obviously these oilfield service companies liquidate a lot of equipment, which puts some pressure on pricing but that's temporary. I mean I think that that's pretty much run its course. So we think used equipment prices will be stable.

Terrific. Thank you very much everybody.

We'll take our next question from Joe Box with KeyBanc.

Hey, just a couple of quick follow-ups. So I'm just curious how you marry up your current utilization, which is obviously really good right now with the low rental rate improvement that you are seeing. Is it reasonable to think about that plus 1% maybe accelerating to more of a mid-single digit number to kind of match where your utilization is at? Or are there any headwinds in the market that could potentially impede you guys from seeing a better rental rate environment?

I think the headwinds are what our competitors do, obviously. I mean our rate opportunity is driven by the market and -- but I do think we're going to be in a positive rate environment in 2016.

But I guess maybe just to go back to an earlier question, I mean, what your competitors are doing are really -- it would be in response to the amount of equipment that's floating around in the market right now. Correct?

So let me add this context to it, right. We're happy with our utilization. We're happy with our internal marketing strategies and our focus. I think we can maintain superior utilization over our competitors. We had a 1% price increase year-over-year at sequential gains. I think maybe more importantly every region, we have six internal regions within the Company, every region had positive rate improvement. So we see a lot of positives. If there is disappointment on our side it's that our rate improvement was only 1%, not 2% or 3% year-over-year.

But as John said before, we don't view it as a overcapacity situation, where we're running basically 75% utilization and obtaining sequential and year-over-year price increases albeit very modest, with every region being a positive contributor to those metrics.

And so again, I'll say to John's comment he just made, it's going to depend on what happens with our competitors. We don't think there's overcapacity. Hopefully no one causes there to be overcapacity, and should the dynamics exist for us to do better next year than how we're doing. We sure hope so and we'll tell you that we're focused on, and we have the systems and the focus to make sure that we try to obtain a higher quality of revenue. But again we don't think there's a capacity issue. We hope there does not become a capacity issue and with our current view, we think rates will be very similar to how we're performing.

Okay, I appreciate that. Thanks Brad. And can you maybe just put some context around the -- I know you said it was a 12.8% increase in earthmoving sales. Just curious what drove that?

Just solid demand. It's just a demand issue. There is some big projects in Louisiana that we're in the dirt phase and it's strictly a demand issue.

Okay. So you are seeing some of those mega projects now show up and place some orders.

Absolutely, absolutely.

Okay, that's it for me. Thanks, everyone.

Thank you, Joe.

(Operator Instructions) We have no further questions in queue at this time. I would now like to turn the call back over to John Engquist for any additional or closing remarks.

I just want to thank everybody for being on the call and we look forward to speaking to you after the end of the year here.

This does conclude today's conference call. Thank you all for your participation. You may now disconnect.