Essex Rental's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug.10.13 | About: Essex Rental (ESSX)

Essex Rental Corp. (NASDAQ:ESSX)

Q2 2013 Earnings Conference Call

August 8, 2013 09:00 ET

Executives

Ron Schad - President and Chief Executive Officer

Kory Glen - Chief Financial Officer

Nick Matthews - Chief Operating Officer

Laurence Levy - Chairman

Analysts

Scott Schneeberger - Oppenheimer & Company

Jon Tanwanten - CJS Securities

Matthew Dodson - J. West & Company

Operator

Good day, everyone and welcome to the Essex Rental Corp Second Quarter 2013 Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are currently are in a listen-only mode.

I will now turn the conference over to Mr. Kory Glen, Chief Financial Officer of Essex Rental Corp. Please go ahead, sir.

Kory Glen - Chief Financial Officer

Thank you, operator. Good morning and thank you for joining us today. I will be speaking today along with Ron Schad, CEO of Essex Rental Corp. Nick Matthews, Chief Operating Officer, and Laurence Levy, Chairman of Essex Rental Corp will join us for the question-and-answer session of the call.

Before we get started, I would like to review the company’s Safe Harbor statement. Remarks made on this call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 23E of the Securities Exchange Act of 1934 as amended. All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of the company. Listeners are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof.

In evaluating such statements, perspective investors should review carefully various risks and uncertainties identified in this conference call and matters set in the company’s SEC filings. These risks and uncertainties could cause the company’s actual results to differ materially from those indicated in the forward-looking statements. Essex assumes no obligation to update or supplement forward-looking information discussed on this call, whether to reflect changed assumptions, the occurrence of unanticipated events, or changes in future operating results, or financial conditions or otherwise.

I’d now like to turn the call over to Ron Schad, President and CEO of Essex Rental Corp. Please go ahead Ron.

Ron Schad - President and Chief Executive Officer

Thank you, Kory. Good morning, and welcome to our second quarter 2013 conference call. This has been a good quarter with continued improvement in our results. As we have previously announced, we have made two senior management changes. Nick Matthews was recruited as our Chief Operating Officer of Essex Rental Corp. Nick brings approximately 20 years of operational experience, most recently at GATX Corporation as Vice President and Group Executive, where he was in charge of Operations, Purchasing, Quality, Safety and Engineering departments. We are very pleased to an added executive with Nick level of experience to our senior management team. In this newly created role, Nick will be primarily focused on refining our existing performance metrics to enhance our profitability, monitoring fleet data to optimize our asset utilization, and growing our parts and service business lines.

Marty Kroll, our Senior Vice President and Chief Financial Officer, has resigned his position to pursue other opportunities. Kory Glen, the Director of Finance at Essex for the last four years has been named our new Chief Financial Officer. Kory has been intimately involved in all facets of our finance department, including the integration of the Coast Crane acquisition. I am pleased that he and the rest of the finance and accounting team have made this a smooth transition.

We will now summarize the second quarter results, share our insights on our expectations for the remainder of 2013 and then open up the call for your questions. Adjusted EBITDA before non-cash compensation and non-recurring expenses for the quarter ended June 30, 2013 increased 27.1% to $5.5 million, compared to $4.3 million for the quarter ended June 30, 2012. This is the highest quarterly EBITDA achieved since the second quarter of 2009.

We have outperformed prior year quarterly results in 9 of the past 10 quarters. In each of the last six sequential quarters, our results have exceeded those of the prior quarter. While these results are encouraging and we anticipate that this trend will continue for the two remaining quarters of 2013, we believe we are still experiencing a gradual construction recovery.

Crawler crane utilization increased to 46.6% for the quarter ended June 30, 2013 compared to 39.4% for the quarter ended June 30, 2012. Crawler crane utilization is at its highest level since the first quarter of 2009 and the improvement in utilization has continued into July. Our increased utilization is not derived from any project concentration. We currently do not have a single job site with more than five crawler cranes on it. Average monthly crawler crane rental rate increase by $143 or 1% to $17,184 for the quarter ended June 30, 2013 compared to $17,041 for the quarter ended June 30, 2012.

We continue to closely monitor the performance of our hydraulic crawler crane fleet. These cranes have high dollar rental rates and account for approximately 70% of the value of our crawler crane fleet and approximately half of the orderly liquidation value of our entire fleet. Utilization of our heavy lifting hydraulic crawler crane class increased to 67.6% for the quarter ended June 30, 2013 compared to 55% for the quarter ended June 30, 2012. Utilization has also increased on sequential quarterly basis compared to 60.5% for the quarter ended March 31, 2013. And this trend up consecutive increases has continued into July. The utilization levels we have been experiencing in our heavy lifting hydraulic crawler cranes have resulted in increasing rental rates. Average rental rates on a model-by-model basis have increased by 6% compared to the second quarter of 2012 with some models experiencing increases of over 15%.

Although our crawler crane rental business is improving it remains highly dependent on significant infrastructure and industrial projects many of which are discretionary and required the continued confidence of North American industrial and energy owners to expand and invest in their facilities. Based on our recent quarter quoting an order activity, we expect rental revenues related to our crawler cranes to continue to improve in the third quarter. Industrial, marine and energy related projects in the Gulf Coast have been particularly strong for our crawler cranes. The Gulf Coast has provided a more rapid and sustained economic recovery compared to other parts of the country. Essex will continue to leverage its strong reputation and footprint to take advantage of the opportunities that this region offers. In addition, we have seen an increase in certain water related projects in the North East and Canada.

We are also experiencing strong demand for our boom truck and self-erecting tower crane fleets. Boom truck utilization increased to 60.4% for the quarter ended June 30, 2013 compared to 43.1% for the quarter ended June 30, 2012. As anticipated, boom truck utilization rebounded from the impact of seasonality in the first quarter when utilization was 43.4%. We anticipate continued strong demand for boom trucks in our rental and retail distribution segments. We believe that the improvement in both boom truck and self-erecting tower crane utilization is being driven by increased activity in residential construction. Activity for these two asset categories is the strongest in the Pacific Northwest.

The projects that utilize the assets in our large tower crane fleet have had long lead times and average about a year in duration. This sum sometimes leads fleets to fluctuations in the utilization of these assets. The decline in our utilization for our large tower crane fleet is due to rent in hand of many of these long-term jobs occurring in the second quarter. We expect the utilization on this class will improve in the third and fourth quarters of 2013 based on quoting activity and signed orders in hand. Utilization on our rough terrain cranes fleet was 60.3% for the quarter ended June 30, 2013 compared to 67.6% for the quarter ended June 30, 2012. Our 2012 rough terrain utilization was enhanced by our major refinery shutdown project in the Pacific Northwest that utilized 9% of our RT fleet. While utilization was down for rough terrains on a quarter-over-quarter basis due in part to that large project ending, it has improved on a sequential quarterly basis compared to 58.4% for the quarter ended March 31, 2013.

Our parts and service segment revenues for the quarter ended June 30, 2013 were flat at $5.4 million compared to the same period in 2012. As I mentioned earlier, one of Nick’s primary objectives is to grow our offering in this non-capital intensive line of our business. We are focusing on leveraging the coast brand within existing markets and identifying other potential growth opportunities derived from our equipment rental activities.

I will now turn the call over to Kory Glen to discuss our financial results.

Kory Glen - Chief Financial Officer

Thanks, Ron. I will now review the financial results for the second quarter of 2013. Before I begin to review the second quarter results, I would like to point out that we made a change to the way we report segmented information. In the past, billable repair and maintenance work performed on our own fleet was included in the equipment rental segment. For the second quarter of 2013 and going forward, these revenues and related expenses will be included within the parts and service segment. All prior period information has been adjusted for comparability.

Equipment rental segment revenues were $18.9 million for the quarter ended June 30, 2013 versus $20.6 million for the quarter ended June 30, 2012. The improvement in utilization that Ron mentioned resulted in an increase in equipment rental revenue to $12.2 million for the quarter ended June 30, 2013 compared to $11.1 million for the quarter ended June 30, 2012. The increase in equipment rental revenues was driven by an increase in days on rent and average monthly rental rate for our crawler crane, self-erecting tower crane, and boom truck equipment. The improvement in rental revenue income was offset by a $2.5 million decrease in used rental equipment sales and a $300,000 decrease in transportation revenues. Used rental equipment sales in the second quarter of 2012 included approximately $600,000 associated with aerial work platform units, which we completed the divestiture of in January 2013.

Despite the decrease in equipment rental segment revenues, gross profit increased by $700,000, or 17.1% to $4.7 million for the three-month period ended June 30, 2013 compared to $4 million for the three-month period ended June 30, 2012. The majority of the improvement in gross profit was due to the $1.1 million increase in equipment rental revenues. Equipment distribution revenue, which included the retail distribution of new and used equipment, but excludes proceeds received from the sale of used rental equipment, was $900,000 for the quarter ended June 30, 2013 compared to $1.3 million for the quarter ended June 30, 2012.

Despite the decline in equipment distribution revenue, we are encouraged by the outlook for this segment. Specifically, in the month of July 2013, our revenues exceeded those generated in the entire quarter ended June 30, 2013. Furthermore, the revenues generated during the first six months of the year have already surpassed those generated in the entire year of 2012. Parts and service revenue equaled $5.4 million for both the three-month period ended June 30, 2013 and 2012.

Gross profit was $1.6 million for the quarter ended June 30, 2013 compared to $1.3 million for the quarter ended June 30, 2012. Gross profit margin in this segment increased to 30% for the quarter ended June 30, 2013 compared to 24% for the quarter ended June 30, 2012. We are pleased that the initiatives that we implemented to cut costs throughout 2012 helped increase gross profit margin in this segment, but still feel that there is abundant growth opportunity on the revenue side of this segment. Despite a $2 million decrease in total revenues, consolidated gross profit increased by $1 million, or 20%, $6.4 million for the quarter ended June 30, 2013 versus $5.3 million for the quarter ended June 30, 2012.

Gross profit margin was 25% for the quarter ended June 30, 2013 versus approximately 20% for the quarter ended June 30, 2012. The increase in gross profit and gross profit percentage is attributable to a heavier mix of revenues that achieve higher margins such as rental revenue and operating initiatives geared towards lowering overhead that were deployed throughout 2012. Selling, general, and administrative expenses, excluding one-time non-recurring expenses decreased by $500,000 to $6 million for the quarter ended June 30, 2013 compared to $6.5 million for the quarter ended June 30, 2012. The decrease is primarily related to a reduction in legal expenses, business tax expense, and travel expenses. There were approximately $300,000 of non-recurring severance-related expenses, and $500,000 of non-cash compensation for the quarter ended June 30, 2013. There was approximately $400,000 of non-cash compensation for the quarter ended June 30, 2012.

Based on stock compensation awards outstanding, non-cash stock compensation expense for the remainder of 2013 will be approximately $135,000 per quarter. The steady improvement in utilization in average rental rates along with the implementation of a number initiative geared towards reducing expenses and improving our operating performance has resulted in an increase in adjusted EBITDA before non-cash compensation and non-recurring expenses of 27.1% to $5.5 million for the quarter ended June 30, 2013 compared to $4.3 million for the quarter ended June 30, 2012.

Adjusted EBITDA before non-cash compensation and non-recurring expenses for the trailing 12-month period ended June 30, 2013 was $20.2 million compared to $12 million for the trailing 12-month period ended June 30, 2012. We continue to focus on the sale of rental fleet assets to both reduced debt and rebalance our fleet mix. During the quarter ended June 30, 2013, we sold $4.8 million of rental equipment at approximately 110% of Orderly Liquidation Value.

Consistent with our objective to reduce leverage, the proceeds received from the sale of these assets were used primarily to pay down debt with a portion used to replenish rental assets. Total debt decreased by $6.9 million over the three-month period ended June 30, 2013 and has decreased $17.2 million, or 7.5% over the past 18 months.

I will now turn the call back over to Ron.

Ron Schad - President and Chief Executive Officer

Thanks, Kory. Throughout the balance of 2013, we will work to assimilate our new executive team and progress with our stated objectives that include improving unit asset utilization and rental rates across our entire rental fleet to enhance our return on invested capital, disposing of underutilized equipment and using the proceeds to reduce debt, and capitalizing on a number of identified opportunities to improve the profitability of our new equipment distribution and our parts and service business lines.

Given the overall gradual recovery in the end markets that we served and while we have been experiencing a year-over-year improvement in our operating results, we remain cautiously optimistic for the remainder of 2013. Based on our actual first half results and our visibility for the remainder of the year, we reaffirm that our full year 2013 EBITDA before non-cash compensation and non-recurring expenses is expected to be in the range of $21 million to $26 million, which is consistent with the earnings items that we provided at the beginning of this fiscal year. We would now like to open up the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from Scott Schneeberger with Oppenheimer & Company. Please proceed with your question.

Scott Schneeberger - Oppenheimer & Company

Thanks. Hey, good morning everyone. I guess could we start off? Ron, I guess could you go around the hornet, you touched on in a bit with regard to end market, but a couple interesting things that you said that surprised me. One was you said you don’t have more than five crawlers on any site. So, I guess could you count in on transportation and energy and let us know if there is prospects for big projects, where that could happen? And then could you speak a little bit, you already touched on the Gulf Coast strength, but could you speak to the energy vertical in oil and gas outside of the Gulf Coast area? Thanks.

Ron Schad

Thanks, Scott. Sure, well, you are right we are not seeing the very large projects that you see in a more robust economy. We see those on the at the design stage but there are many of those are not at the build stage to where the big crawler cranes are used. Our utilization increase is coming from a divers group of projects in diverse geography and diverse end markets as we said heavier in Gulf Coast and both in transportation, petrochemical infrastructure the Gulf Coast has been stronger than the rest of the country. And again if we look at the large projects on the table, there are several of those slated for that Gulf Coast region particularly in the end markets of energy and related projects. When we talk about industrial marine I should point out also that those projects tend to be often times in fabrication yards where equipment is being built that supports the energy markets offshore drilling and related industries.

Scott Schneeberger - Oppenheimer & Company

Thanks. And with regard to the competitive dynamic out there and this question is specifically in crawlers upfront, I would like to open up to other categories as well. Are you seeing any on-discipline behavior anything you need worth mentioning?

Ron Schad

Certainly as utilization of our fleet climbs utilization of some of our competitor fleets are climbing and that’s causing them to act more rationally and that’s improving the overall ability for us to get better deal as you can see by the increase that we talked about in our high capacity crawler crane increase in rental rates, our ability to get those higher rental rates is really driven somewhat by the competitive nature of the business strengthening where we are in a better position to lead the market and leave the rate increases that we feel are necessary to be invested in these assets. I’d say that type of thing is happening in many of our other asset class, boom trucks for example we are seeing utilization climb nicely and there as well we are able to move our rates to where they should be more reasonably and our competitor is we believe are following that rate increase and allowing us to do that.

Scott Schneeberger - Oppenheimer & Company

Thanks. And then one more from me with regard to the used sale, could you speak about geographies where that’s going is (Panamax) taking any and do you anticipate that increase and decrease in the back half of the year your run rate? Thanks.

Ron Schad

Most of our used sales have been domestic to end markets where on our crawler cranes to people who use them in what I would call a permanent installation, not construction where the client is going to be moving in and out for projects but for use on a site over long-terms and that really construction related to our normal rental business which seems some overseas sales and we are quoting quite a bit of the activity in South America places like you mentioned Panama, Brazil, Chile but most of the sales in the quarter were domestic sales.

Scott Schneeberger - Oppenheimer & Company

Okay, that’s the end of my questions.

Ron Schad

Thank you

Operator

Thank you. Our next question is coming from Jon Tanwanten from CJS Securities. Please proceed with your question

Jon Tanwanten - CJS Securities

Good guys. Thanks for taking my questions.

Ron Schad

Thank you

Jon Tanwanten - CJS Securities

You just mentioned that a lot of the big projects you guys are seeing on the design stage versus the build stage, I am just wondering if you’re seeing any inflection point somewhere down the line you know we are more than go the door stage or this is more of a gradual improvement over the next year or so?

Ron Schad

We are optimistic that that inflection point is coming that the large – driven by larger projects and then a continued support from the mid-size and smaller projects that we are currently servicing and especially in the energy sector as we mentioned the Gulf Coast there is a lot on the table down there. I was looking last night through some of our marketing information and there is several over multi-billion dollar construction projects and things like LNG production and methanol production facilities, so and those are going to be strong for us.

Jon Tanwanten - CJS Securities

Okay, thanks. And then just touching on the used sales again, can we expect that run rate that you did in the quarter be sustainable or is it going to be you know something less in the back half?

Ron Schad

It’s a harder one for us to predict because we have to make - play a matchmaker whether the customer is going to rent, buy used or buy new and I would optimistically say it will be similar to what we saw in the last quarter.

Jon Tanwanten - CJS Securities

Okay, great. And then finally just it is nice job keeping your SG&A low, I am just wondering if that $6.3 million is the correct run rate to use going forward?

Kory Glen

I think it’s about the correct run rate. There was nothing unusual other than our continued cost cutting. And in SG&A $6.3 million does include $300,000 of severance expenses, so it’s a little higher then what we would expect.

Jon Tanwanten - CJS Securities

Great. Thank you very much guys

Operator

Thank you. (Operator Instructions) Our next question is coming from Matthew Dodson from J. West & Company. Please proceed with your question.

Matthew Dodson - J. West & Company

Hey Ron, can you just talk a little about – you talked about the crawlers continued to better than in July, can you give the sense of how much better utilizations got – better kind of sequentially as you ended the quarter going into July. And then can you also talk a little bit about if you are seeing the lower end assets starting to get utilized was it primarily coming from the bigger hydraulic?

Ron Schad

It’s been primarily coming from our bigger hydraulics that $67 million whatever it was 4% of our crawler - heavy crawler, hydraulic crawler utilization played a big role in our improvement in our overall utilization. Our traditional crawler smaller crawlers were above flat quarter-over-quarter. We are still looking for improvement in infrastructure work, highway build work to drive that business and tightening of the availability of the hydraulic crawlers will help that is as well. With regard to what we are seen going forward July was a good month as far as improvement in our utilization on our crawlers, we picked up some there. And looking at quoting and order activity coming in the door, we look to hold or improve in the third and fourth quarters in our overall utilization of the heavy – of the crawlers.

Matthew Dodson - J. West & Company

So, if you look at the utilization on hydraulic side I mean does it increase in July by a couple points or can you give us any kind of metric of kind of where it is now?

Ron Schad

No, we really don’t want to get into kind of too much forward-looking, but I would say a couple of points in the quarter is reasonable in the third quarter.

Matthew Dodson - J. West & Company

Okay and the other thing at the Shareholders Meeting you were talking about potentially doing booms and doing some parts work at some of the existing Essex locations, have you done more research on that, can you talk a little bit about what you are seeing or what you’re planning on doing relative to that?

Ron Schad

We continue to look at that, I think that’s something that we will do. I am not ready to talk about exact locations where we were going with that. But I will tell you that our Gulf Coast Southeast regions of North America of the United States are strong for us on a crawler crane footprint. And there is a opportunity for us to use that footprint to broaden our rough terrain and boom truck utilization into those markets.

Matthew Dodson - J. West & Company

Okay and then can you just talk a little bit about your thoughts relative to the city towers you talked about some that came down do you think that gets better or is it just on job specific issue or there is any kind of visibility there?

Ron Schad

Yeah, we think it will get better. We had several of our large towers come down, a hospital project for example with multiple towers on it to complete. There is more health – hospital projects with the same client being looked at in third and fourth quarters that they already have the business so it’s likely we will see some of those towers return that’s why we say – as we said we expect that tower utilization to pick back up.

Matthew Dodson - J. West & Company

Okay and then the last question I have for you any thoughts strategically about going manned or to have manned (indiscernible) or have you done anything relative to that on a strategic standpoint?

Ron Schad

One of the things we are doing there is where one of the elements of manned offering is to supply the crane to the customer fully rigged and assembled. And we are more aggressively looking at opportunities where we could bid the project a crawler crane project particularly turnkey as they call fully delivered, rigged and assembled. And then the very much like a manned crane that a company would do. The difference being once the crane is then handed over to the customer they put their operator on it versus the man would supply the operator so that aspect of expanding our offering and trying to work our way in with some of the larger contractors to projects that may have been looked at as manned has been successful and we have gain some opportunities and jobs that way. So we will continue to look at that and learn more about what the opportunity is there and what’s profitability of those and risk of those projects are as we go forward.

Matthew Dodson - J. West & Company

Great, and thank you.

Operator

Thank you. (Operator Instructions) If there are no further questions at this time, I’d like to turn the floor back over to management for any further closing comments.

Ron Schad - President and Chief Executive Officer

Thank you all for joining us today and for you continued interest and investment in Essex. If you have any additional questions, please feel free to contact call Kory or me at any time. Thank you and have a great day.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!