H&E Equipment Services, Inc.
Q4 2008 Earnings Call Transcript

Published: 4 Mar 2009

[Operator:]

Welcome to today’s H&E Equipment Services fourth quarter 2008 conference call. Today’s call is being recorded. At this time I’d like to turn the call over to Mr. Kevin Inda.

[Kevin S. Inda:]

Welcome to H&E Equipment Services conference call to review the company’s results for the fourth quarter and year ended December 31, 2008 which we released earlier this morning. The format for today’s call includes the 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 Engquist, 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’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, 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, belief, expect, anticipate and similar expressions constitute forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties which could cause actual results that differ materially from those contained in forward-looking statements. These risk factors are included in the company’s most recent annual report on Form 10K and quarterly report on Form 10Q. 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 publically update or revise any forward-looking statements after the date of this conference call. With that stated I’ll turn the call over to John Engquist.

[John Engquist:]

Welcome to H&E Equipment Services fourth quarter 2008 earnings call. On the call with me today is Leslie Magee, our Chief Financial Officer. Please proceed to Slide Three. The focus of my comments this morning will be how we are managing our business in a very challenging and uncertain environment and to discuss the current trends we’re experiencing in our markets. Leslie will summarize the quarter and full year financial results. When Leslie concludes we will then take questions. Proceed to Slide Five please. We’re very pleased with our fourth quarter results in spite of the extraordinary economic challenges that occurred throughout the year. Despite the impacts of the tightened credit markets on our end users, we again delivered solid financial results. Even with end users cancelling or postponing projects due to lack of funding, our review declined only 9.6% to $261.9 million in the fourth quarter. Keep in mind our year-over-year numbers were up against some record comps in 2007. Adjusted EBITDA decreased $7.5 million to $59.8 million and our margin declined slightly to 22.8%. In light of the current economic climate our primary focus is on protecting our balance sheet and cash generation with less focus on short term results. We’re committed to taking appropriate steps in our business to maintain our financial strength. We’ve begun to reduce the size of our fleet and are being very selective with replacement cap ex. We plan to significantly reduce our replacement spending in the current year. This reduced capital spending will generate free cash flow which we intend to use to pay down debt. Also, managing our inventory levels is a very high priority for our business. These actions will further protect the strength of our balance sheet which is also reinforced by low cost capital structure and debt maturities well in to the future. We have also taken steps to reduce our operating costs. These include a 9% work force reduction, a general hiring freeze and elimination of executive and other key management incentive pay for the foreseeable future. Please proceed to Slide Six. We continue to believe our geographic diversity is a strength for our company in spite of the worldwide credit crisis and worsening US economy. We have markets in Texas, Louisiana and Arkansas that are holding up better than most areas in the US. Our strong presence in the Gulf Coast will also provide opportunity for our company as a substantial portion of the hurricane protection work has yet to occur. The Core of Engineers recently announced they will let $4 billion worth of storm protection work in 2009. Our footprint also gives us tremendous exposure to the industrial sector which is down but still stronger than most sectors in our economy. We believe our integrated business model provides us with the flexibility to manage assets and generate strong cash flow even in a historical economic downturn like we’re currently experiencing. We have multiple sources of revenue and gross profit and our high margin parts and services business historically holds up well in economic downturns. The recently passed government stimulus package could also prove to be a positive driver in our business. Roughly $60 billion has been earmarked as part of the package for the type infrastructure work we could participate in. A recent report shows that 58% of 4,483 shovel ready projects fall within our footprint. Thus far there’s little clarity as to the timing or magnitude of these projects or the release of these funds but this component of the package could benefit our business in to the future. There are substantial challenges we face until the economy improves. Lending remains at a standstill which is resulting in project delays and/or cancellations. The economy remains weak and is forecast to remain weak throughout 2009. As a result non-residential construction and industrial spending is forecasted to decline this year. As such it is extremely difficult to predict trends in our business. Please proceed to Slide Seven. To summarize, we are pleased with our performance in the fourth quarter and year despite the credit crisis and other macroeconomic issues that are impacting the non-residential construction and industrial markets. We expect the challenging conditions to continue through 2009 yet we believe our integrated business model, geographic diversity and exposure to the industrial markets will help to mitigate the impact of the current economic downturn to our business. Our rental fleet is very young, very well maintained and these are the type of assets that are conducive to aging when market conditions so dictate. All of these factors combined with our strong balance sheet put us in what we believe is the best position possible to deal with the challenges that lay ahead. As I mentioned earlier, we have and we will continue to take proactive steps to maintain a strong balance sheet, generate cash, control costs and protect our margins during this period of declining activity in the non-residential construction and industrial markets. In these very challenging times we remain confident in our business and ability to adapt to the current environment. However, with the current lack of visibility due primary to the frozen credit markets, volatile commodity prices and general uncertainty in the overall economy, we believe it is not appropriate to provide guidance at this time. At this point I’ll turn the call over to Leslie for the financial review.

[Leslie S. Magee:]

First, I’ll go through our quarterly results and then I’ll summarize the full year’s financial results. I’ll begin on Slide Nine. Our total revenue decreased $27.8 million or 9.6% to $261.9 million year-over-year. Just a reminder, as it relates to the results of our Mid Atlantic operations, the quarters are now comparative as the Mid Atlantic acquisition was completed during the third quarter of the prior year. On a segment basis, revenues declined in the range of 9% to 16% across the board with the exception of our parts and service operation which increased slightly over the prior quarter. These year-over-year declines are reflective of worsening economic conditions resulting in weaker demand for our products. On a more detailed basis, rental revenues decreased $7.4 million or 9.5% over the prior year. Rentals were weaker in all product lines but were driven primarily to weaker demand for aerial work platforms. Overall dollar return was 35.6% for the fourth quarter of ’08 as compared to 39.1% for the same period in 2007 and 38.8% for the third quarter of 2008. Year-over-year dollar return was negatively impacted by lower time utilization and a 3.4% average rate decline. Our average time utilization for the quarter was 63.8% as compared to 67.8% a year ago with declines in each product line. Fourth quarter time utilization was also down from 67.4% in the third quarter of ’08. Aerial utilization decline as a result of lower demand across essentially all of our markets but specifically our inner mountain locations have suffered a very sharp and rapid decline in demand. Earth moving utilization is down in most markets and cranes are still highly utilized but demand did weaken during December due to weak boom truck demand and also to some plant closures. The breakout of the 3% average rental rate decline on a product line basis is as follows

[Operator:]

(Operator Instructions) Your first question comes from Henry Kirn – UBS.

[Henry Kirn:]

I was wondering if you could talk about the new crane market? How much more runway is there? When does the backlog run out and could you characterize cancellations in the market?

[John Engquist:]

Sure, I’ll be glad to. There’s no question that the crane markets are slowing considerably particularly in the smaller cranes. You get in to rough terrain cranes under 60 tons, that has slowed quite a bit, you get in to crawler cranes under 300 tons, there’s been some softening in the market. The big stuff both in lattice booms and the big German cranes are holding up still very well. It’s a strong market but there’s definitely been softening in the smaller end of the crane markets.

[Henry Kirn:]

Could you characterize the competitive landscape for pricing in each of the categories that you compete?

[John Engquist:]

Are you speaking new sales or rentals or both?

[Henry Kirn:]

Both but, I was thinking more on the rentals side and either by geography or by product category.

[John Engquist:]

I think on the dirt business when you look at our earth moving business in the Gulf Coast, primarily Louisiana and Arkansas, pricing has been pretty stable there. You get in the Mid Atlantic, pricing on the earth moving equipment has been very difficult. The inner mountain region, the pricing there has been very difficult but, it’s held up pretty good in the Gulf Coast. Aerial pricing across the board is taking a beating right now. I think there’s a supply and demand issue that’s developed in the last four or five months and there’s a lot of pricing pressure on the aerial business. Cranes are still holding up relatively well and we expect it to for the immediate future.

[Operator:]

Your next question comes from Adrienne Colby – Deutsche Bank.

[Adrienne Colby:]

Could you update us on our revenue mix as of the yearend? I’m talking about end market residential versus non-residential versus industrial?

[John Engquist:]

I’ll be glad to and again, I don’t want to get too specific here because that’s challenging to really pin those numbers down. We believe that the industrial markets continue to drive half of our revenue and the residential markets we believe are still less than 10% of our business. So, we’re heavily weighted to non-res and industrial.

[Adrienne Colby:]

Within the rentals segment I understand that you’ve had, at least in the past, more of a non-residential emphasis. Has that mix shifted?

[John Engquist:]

No, we’re heavily weighted to the non-residential side in our rental business. We don’t have a lot of residential exposure.

[Adrienne Colby:]

One more if I could, what percent of your revenues right now are from government sources? Again, so it will be segments that would benefit from a potential stimulus spending?

[John Engquist:]

I don’t know that I can quantify that. We deal with a lot of contractors that do governmental work. We’re not dealing directly with a governmental entity but we’re dealing with a contractor that for instance does heavy civil work like water treatment or sewer treatment plants or we deal with a contractor that in New Orleans is doing Core of Engineers work. We’re dealing with a contractor not directly with the government but it’s government related. It’s a fairly significant piece of our business particularly on the earth moving side.

[Operator:]

Your next question comes from [Chase Beck] – Credit Suisse.

[[Chase Beck]:]

A question for you in terms of when you look at your used equipment margins they’re actually a little bit better than what we thought given you had revenues down over 15%. I was wondering if there was anything in there? If you could elaborate a little bit more on that?

[John Engquist:]

No, we’re seeing our used equipment margins in our core business, the daily sales that we get in of our rental fleet have held up pretty well and we think they’re going to. The area we’re concerned about is the aerial markets, particularly the older aerial equipment. As I’ve stated in the past we’ve had some really strong outlets in the Asian markets for older aerial equipment and that has slowed down considerably. So, we expect to see some pretty strong pressure on pricing on aerial equipment and I think that was evident in the recent Ritchie Brothers auction.

[[Chase Beck]:]

If you think about the overall age of your fleet relative to the last downturn that we had, how would you say your fleet is positioned? When do you think – how long can you fleet go before you think you really actually have to come in there and start doing a lot of replacement cap ex?

[John Engquist:]

We could go a long way and we’re in much better shape than we were last down turn. I think last down turn our fleet got in the upper 40s close to 50 months of age, today we’re at 33 or 34 months. You really need to focus on the type assets we have in our rental fleet. They’re all large long life assets, we don’t deal with a lot of small stuff like some of the rental companies do and we could age our stuff a long way if the market so dictated. So, we’re extremely comfortable with our fleet age. Going beyond 50 months on the type assets we have would be no issue at all.

[Operator:]

Your next question comes from Seth Weber – Bank of America Merrill Lynch.

[Seth Weber:]

John, just following up on that last question, would you expect your net rental cap ex in 2009 to be positive or negative?

[John Engquist:]

In likelihood it will be somewhat negative.

[Seth Weber:]

Given that we’re two months in to the first quarter here, is it possible – I know you’re not giving ’09 guidance but can you give us a view as to do you think the first quarter will be profitable or not profitable?

[John Engquist:]

I believe we’ll be marginally profitable.

[Seth Weber:]

Then just on the cost reductions, does that include store closings?

[John Engquist:]

No, we have not closed any stores Seth and that’s something we continue to evaluate literally on a daily basis and to this point we have no plans to close any stores.

[Seth Weber:]

Just one follow up for Leslie, is there a number for the floor plan payable?

[Leslie S. Magee:]

At year end it was $128 million.

[Operator:]

Your next question comes from Chris Dougherty – Oppenheimer & Co.

[Chris Dougherty:]

Leslie, just one bookkeeping item, what was the inventory level at the end of the year?

[Leslie S. Magee:]

$129 million and that’s new, used and parts inventory combined.

[Chris Dougherty:]

John, one to clarify one of your previous comments, when you mean a negative net cap ex, that’s a use of cash right? I just want to make sure I understand that right.

[John Engquist:]

No, it’d be an in flow?

[Chris Dougherty:]

Can you just talk about what your philosophy is in managing the fleet size? I mean, are we getting to a point where it may not make sense to adjust the fleet to demand because of used pricing?

[John Engquist:]

We’re not there yet. Now, I can tell you some of the pricing I saw in this last Ritchie Brothers auction particularly on the aerial side, I would be very hesitant to put stuff in an auction today but I think we still have the retail organization and the means to liquidate our fleet profitably and I think we’re going to be able to right size our fleet to the current market conditions.

[Chris Dougherty:]

Would that still be somewhere utilization – I guess what’s your target utilization as you think about that?

[John Engquist:]

Well, our target utilization today is probably different than it was six months ago. There’s no question that the market softened and there’s some capacity issues in the marketplace right now. But, 60% is probably a range that we’re shooting for right now in trying to maintain.

[Operator:]

Your next question comes from [Philip Voltachelli] – Cantor Fitzgerald.

[[Philip Voltachelli]:]

Could you talk a little bit about the timing of the $4 billion storm protection work that you’ve got? Then, should the stimulus funds come through when do you think that kind of work would affect your business or help your business? Would that be more like 2010 than 2009?

[John Engquist:]

That’s a good question Phil and let me speak to the stimulus first. I mean, there’s just not a lot of clarity on how fast that can hit the marketplace. I don’t have a lot of color on that. I think that potentially it’s going to benefit our company and probably to the later part of the year. As far as the Core work, the storm protection work in New Orleans, it’s announced that it will be let. I believe it’s going to be about 115 different lettings which we like. We like it split up like that. I think it gives us more opportunity. We’ve seen some of it already let, some smaller jobs and I think that will accelerate throughout the year.

[[Philip Voltachelli]:]

Just in terms of the crane market, I think the gentlemen earlier asked about the number of cancellations and I think you gave us some good color but you didn’t necessarily give us cancellations. Have you seen that jump dramatically in terms of new crane sales?

[John Engquist:]

We have, yes. We have received some cancellations and we in turn have cancelled some of the stuff we’ve had on order to offset that. We’ve worked closely with Manitowoc, they’ve been very reasonable with us and I think vice versa but yes, there have been some crane cancellations no question.

[[Philip Voltachelli]:]

And it’s mostly you have options so you’re not stuck with the equipment – how soon before delivery can you cancel something with your manufacturers?

[John Engquist:]

Again, that’s a negotiated situation and Manitowoc has been very reasonable with their distributors in that area and giving us some leeway. Obviously, if something is in the build schedule and fixing to roll off the line, we’re not going to leave Manitowoc sitting with that. But, we do have a level of flexibility and Manitowoc has been very reasonable with their distributors.

[[Philip Voltachelli]:]

Last question for me, as the market weakens and some of your competitors may be under financial strain, what are your thoughts with regards to acquisitions? Is it something you will entertain or is it something you are not looking to entertain?

[John Engquist:]

I don’t like to say never because maybe situation arrives that would make sense for us. I think for us to go out and do an acquisition it would probably entail getting our credit facility repriced and we have extremely favorable pricing on our credit facility right now so I don’t know if it would make sense or not. But, I can tell you we’re not actively looking for acquisitions.

[Operator:]

Your next question comes from Philip Hogan – Deutsche Bank.

[Philip Hogan:]

A quick housecleaning question, first if I could, Leslie can you just give us what the cash from operations was for Q4?

[Leslie S. Magee:]

Could you move on to your next question and I’ll get that for you?

[Philip Hogan:]

The second one, just as far as priorities with regard to debt pay down, I mean obviously you guys have plenty of availability under the revolver right now, would you be looking to possibly repurchase bonds or is the priority still the revolver and just to increase the liquidity there?

[John Engquist:]

I think we’re focused on liquidity. We would pay the revolver down.

[Leslie S. Magee:]

Phil, for the quarter that was $26 million cash from ops.

[Operator:]

At this time I’d like to turn the call back to Mr. Engquist for any additional or closing comments.

[John Engquist:]

I appreciate everybody being on the call. Obviously, this is a very challenging environment and 2009 appears that it is going to be a very difficult year. We’re very confident in our business model, the strength of our balance sheet and our ability to generate cash and we’ll weather this and be ready to really run when this market turns and it will turn. Thank you for being on the call.

[Operator:]

That does conclude today’s call. Thank you for your participation. Have a good day.