Essex Rental's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 6.13 | About: Essex Rental (ESSX)

Essex Rental Corp. (NASDAQ:ESSX)

Q3 2013 Earnings Conference Call

November 6, 2013 9:00 am ET

Executives

Patrick Merola – Manager of Investor relations

Ronald Schad – President and Chief Executive Officer

Kory Glen – Chief Financial Officer

Nicholas Matthews – Chief Operating Officer

Analysts

John Tanwanteng – CJS Securities, Inc.

Daniel Halpert – Oppenheimer & Co.

Matthew Dobson – J. West

Ted Grace – Susquehanna

Operator

Good day everyone and welcome to the Essex Rental Corp Third 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 like to turn the conference over to Patrick Merola, Manager of Investor relations for Essex Rental Corp. Please go ahead, sir.

Patrick Merola

Thank you, operator. Good morning and thank you for joining us. Our speakers today will be Ron Schad, President and CEO; Nick Matthews, Chief Operating Officer; and Kory Glen, Chief Financial Officer of our Essex Rental Corp.

Before we get started, I’d 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 for 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 our supplement forward-looking information discussed on this call, whether to reflect change 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.

Ronald Schad

Thank you, Patrick. Good morning and welcome to our third quarter 2013 conference call. Before we begin, I would like to offers on inside into the current market environment and then I will turn the call over to Nick and Kory to summarize the third quarter results. The construction market is in the midst of an ongoing economic recovery, that current macroeconomic issues had caused a general uncertainty that is temporary slowed – lease slowed progress.

These issues including but not limited to the potential government shutdown and budget sequestration have cost some of our customers and others within the industry to delay decisions are to start of new large projects until there is more clarity and they have more confidence in the future. The decline in rental revenues in the third quarter of 2013 compared to 2012 was driven primarily by the lack of power related projects on the West Coast and the pacific North West.

This end market is the only one where we have seen a material decrease in the third quarter as compared to the same period in 2012. We feel that power provides the biggest upside as it servers our rough terrain crane, boom truck and crawler crane fleets. It has historically them responsible for 20% to 25% of our revenues. Currently it is in the 10% to 15% range.

Despite the fact that the third quarter results for lower than we anticipated we are still optimistic regarding the outlook for 2014 and beyond for the following reasons. We don’t believe that the delays in project awards will extend into 2014 as we feel that the infrastructure projects especially those related to transportation and power are unlikely to be pushed out any further.

Roads and bridges need to be rebuild, once more clarity has been provided companies will again begin investing in discretionary projects rather than just mandatory maintenance. We have a strong foothold in the Gulf Coast. This region has provided a more rapid and sustained economic recovery, compared to other parts of the country. Our current backlog confirms that this region will continue to provide our strongest results. Essex will continue to leverage its strong reputation and footprint take advantage of opportunities that this region offers.

Our crawler crane backlog as of September 30, 2013, is 28% larger than it has it was in September 30 of 2012. We recently secured several long-term rentals for power and petrochemical projects that will enhance our 2014 results. The Architecture Billings Index, which is a leading economic indicator of construction activity has being in the positive territory in 13 months of the past 14 months, which reflects continued increases versus prior months albeit of a low basis. As the economy continues, its recovery, we remain focus our managing what we can control internally. As we have mentioned previously, there were initiatives implemented at the beginning of 2012 with a focus on creating a lean environment to capitalize on our revenue streams.

Selling, general & administrative expenses including non-cash compensation were down by 10.5% in the third quarter of 2013, compared to the same period in 2012. I will reiterate, we are not satisfied with our third quarter results and are tempering our expectations as we head into our seasonally slow fourth quarter. But we maintain a positive outlook for 2014 and beyond.

I will now turn the call over to Nick to discuss some of the operational results in more detail.

Nicholas Matthews

Thank you Ron. The third quarter of 2013, we continue to experience an increase in the demand of our crawler crane fleet. Offset by a decrease in the demand for our other rental offerings. While our Equipment Distribution segment continue to achieve superior improvement, compared to prior year. Our Parts and Service segment has performed below our expectations. Crawler crane utilization increased to 48.3% for the quarter ended September 30, 2013, compared to 43.4% for the quarter ended September 30, 2012.

Crawler crane utilization has increased on a quarter-over-quarter basis in each of the past six quarters and is at its highest level since the first quarter of 2009. Our increased utilization is not derived for any project concentration. We currently do not have a single job site with more than five crawler cranes on it. Averaged monthly crawler crane rental rate decreased by $51 or less than 1%, to $17,509 for the quarter ended September 30, 2013, compared to $17,560 for the quarter ended September 30, 2012. This slight decrease is primarily attributable to the mix of cranes and rent.

We continued to closely monitor the performance of our hydraulic crawler crane fleet. These cranes are 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 17.9% for the quarter ended September 30, 2013, compared to 63.5% for the quarter ended September 30, 2012.

Utilization has also increased on a sequential quarterly basis, compared to 67.6% for the quarter ended June 30, 2013. The utilization levels we have been experiencing on our heavy lifting hydraulic crawler cranes have resulted in increasing rental rates. Average rental rates on a model-by-model basis have increased by an average of 7% compared to the third quarter of 2012 with some models experiencing increases of over 15%.

Industrial, marine and energy related projects in the Gulf Coast have been particularly strong for our crawler cranes. The Gulf Coast continues to provide the strong contribution to our crawler crane revenue. We have also notice increased activity in the South East extending through the East Coast.

Although our crawler crane rental business is improving, it remains highly dependant on significant infrastructure and industrial projects. Many of which are discretionary and require to continue confidence of North American industrial and energy owners to expand and invest in their facilities. Based on recent quoting and order activity, we expect rental revenues related to our crawler cranes to remain relatively flat in the fourth quarter.

We have notice some delays in project that demand these units and the fourth quarter has historically been impacted by seasonality. However, based on orders we have received particularly for larger crawler crane attachments, we are excited about the opportunities per year-over-year revenue growth in 2014 as compared to 2013.

Utilization on our rough terrain crane fleet was 50.5% for the quarter ended September 30, 2013 compared to 69.3% for the quarter ended September 30, 2012. The decline in utilization was driven by decrease in the general building and power end markets in the pacific North West and most significantly impacted our larger capacity rough terrain cranes. We are somewhat encourage about July despite the lowest month of utilization percentage it grew from that low point throughout the quarter. This trend of increasing utilization has continued in October.

Boom truck utilization was 52% for the quarter ended September 30, 2013 compared to 61.9% for the quarter ended September 30, 2012. Boom truck demand was negatively impacted by the lack of power related projects specifically solar and substations on the West Coast. We attributed a portion of the decrease in boom truck utilization calculated on the day’s basis to the shorter duration of the rentals that we have seen on this particular asset costs. Although, shorter duration rentals have negative impact on utilization they result in higher average rental rates. Average rental rates increased 9% in the third quarter of 2013 as compared to the third quarter of 2012.

Our boom truck fleet remains very active and achieved 85.6% utilization on a hits basis in the third quarter of 2013. The projects that utilizes our large tower crane fleet have long lead times and average approximately a year in duration. This sometimes leads to fluctuations in the utilization of these assets; the decline in utilization for our large tower crane fleet is due to the rentals and many of these long-term jobs recurring in the second quarter and into the third quarter. We expect the utilization on this cost will improve the fourth quarter of 2013 and into 2014 based on quoting activity and signed orders in hand.

Our parts and service segment revenue for the quarter ended September 30, 2013 were down 18% compared to the same period in 2012. This segments performance has not met our expectations and it remains one of our primary objectives to grow our offering in this non-capital intensive line of business. The focus will be on expansion of our service offerings which offer higher margins in order to achieve improvements.

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

Kory Glen

Thank you Nick. Equipment rental segment revenues were $14.4 million for the quarter ended September 30, 2013 down 16.5% compared to $17.3 million for the quarter ended September 30, 2012. much of the $2.9 million decrease was driven by $1.19 million decrease in used rental equipment sales. The remainder was attributed to lower utilization on our rough terrain, boom truck and tower crane fleet, which was partially offset by increased revenues on our crawler crane fleet.

Equipment rental segment gross profit decreased by $900,000 to $3.8 million for the three month period ended September 30, 2013 compared to $4.7 million for the three month period ended September 30, 2012. Approximately $200,000 of the decline was due to the reduction in used rental equipment sales.

Equipment distribution revenue, which includes the retail distribution of new and used equipment, but excludes the proceeds received from the sale of used rental equipment, was $3.8 million for the quarter ended September 30, 2013 compared to $1.2 million for quarter ended September 30, 2012. The revenue generated in the third quarter of 2013 was the highest quarterly output we have ever achieved for the equipment distribution segment.

Parts and service revenue equaled $4.6 million for the three month period ended September 30, 2013 down 18% compared to the same period in 2012. Gross profit was $1.3 million for the quarter ended September 30, 2013 compared to $1.7 million for the quarter ended September 30, 2012.

We continue to monitor and manage our overhead, selling general and administrative expenses excluding non-cash stock compensation decreased by approximately 11% or $600,000 to $5.6 million for the quarter ended September 30, 2013 compared to $6.2 million for the quarter ended September 30, 2012. The decrease is primarily related to a reduction in wages and salaries and professional fees.

There was approximately $100,000 of non-cash compensation for the quarter ended September 30, 2013 and $400,000 for the quarter ended September 30, 2012. adjusted EBITDA before non-cash compensation and non-recurring expenses for the three month period ended September 30, 2013 was $4.5 million; a 13% decrease compared to $5.2 million for the three month period ended September 30, 2012.

While we are disappointed with the third quarter results, the consistent year-over-year improvements in prior quarters are apparent in our trailing 12 month results. Adjusted EBITDA before non-cash compensation and non-recurring expenses for the trailing 12 months period ended September 30, 2013 was $19.5 million a 36.2% increase compared to $14.3 million for the trailing 12 month period ended September 30, 2012.

Further more adjusted EBITDA as a percentage of total revenue was 20.2% for the trailing 12 month period ended September 30, 2013 compared to 14.7% for the trailing 12 month period ended September 30, 2012. we continue to focus on the sale of rental fleet assets to both reduce debt and rebalance our fleet mix. During the nine months ended September 30, 2013 we sold $9.9 million of rental equipment at approximately 113% 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 $4.5 million or over nine-month period ended September 30, 2013 and has decreased $15.4 million or 7% over the past 21 months. During the third quarter of 2013, the company completed the sale of property that had not been used in the operation of the business in recent years. Proceeds net of transaction expenses were approximately $1.8 million; resulting gain on sale was approximately $550,000 and is included in other income within the consolidated statements of operations.

I will now turn the call back over to Ron.

Ronald Schad

Thanks Kory. Throughout the balance of 2013 and into 2014 we were aggressively focused on improving asset utilization across our entire rental fleet to enhance our return on invested capital. Disposing of under utilized 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 in our parts and services business lines.

Although, our third quarter results were disappointing to us, we continue to feel that we are in the midst of multi-year recovery and anticipate a strong 2014. That being said, and given the delay in some of the drivers of our business during the third quarter and the seasonal impact of the fourth quarter, we are reducing our guidance for 2013 EBITDA before non-cash compensation and non-recovering expenses to be in the range of $80 million to $21 million.

We would like to now open up the call for your questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). And our first question comes from the line of John Tanwanteng with CJS Securities. Please proceed with your question.

John Tanwanteng – CJS Securities, Inc.

Good morning guys, thanks for taking my question.

Ronald Schad

Thank you.

John Tanwanteng – CJS Securities, Inc.

Just wondering where are you getting conference going into 2014, in recovery and power in the west, given ongoing budget concerns or uncertainty and that the government has extended to January and February?

Ronald Schad

Well, as we said we have quite a backlog compared to last year. A lot of that is in the Gulf Coast which as we said in comments and in our release has been a very good territory for us and is very strong for our crawler crane fleet especially. We’ve got bookings for several large projects into next year and we are tracking several multibillion dollar projects throughout next year. Also the Pacific north-west and the west markets for our crawler and our RTs although they have been soft last couple of quarters appear to be strengthening. And as we said since July we’ve been picking up utilization, for example in RTs. And that’s on going into October.

John Tanwanteng – CJS Securities, Inc.

Okay so just to be clear you do expect utilization in rental rates to improve in Q1. Any idea what the magnitude of those could be?

Ronald Schad

We would be expecting it to be as good as Q1 of 2013 or better.

John Tanwanteng – CJS Securities, Inc.

Okay great. And then just on the Gulf and Marine strength you mentioned, are you expecting any impact from the recent passage of [indiscernible]?

Ronald Schad

It’s a little early to tell what we see there, I mean we are more focused on the projects that are coming straight ahead from the petrochemical and the highway bill, bridge projects that we’re tracking.

John Tanwanteng – CJS Securities, Inc.

Okay and then just in terms of used the equipment sales, how does the market look for given the near-term headwinds you faced?

Ronald Schad

Rental equipment sales out of our fleet we continue to believe it strong we see that remainder of this year we have several deals already booked, a lot of them on the line and going into 2014 we expect it to be a robust year for both new equipment sales and the equipment sales out of our rental fleet.

John Tanwanteng – CJS Securities, Inc.

Okay and then finally are there any other operating leverage that you think you can pull given the reduced near-term demand?

Ronald Schad

We are looking at our entire cost structure and continue to focus on some synergy capabilities where we have the opportunity to reduce some overhead in management type things combined sales and activities wherever possible. So there is some ability to that.

John Tanwanteng – CJS Securities, Inc.

Okay. Thank you very much guys

Ronald Schad

Thank you.

Operator

And our next question comes from the line of Scott Schneeberger with Oppenheimer. Please proceed with your questions.

Daniel Halpert – Oppenheimer & Co.

Good morning guys this is Daniel Halpert, filling in for Scott. You touched on this a little bit earlier but looking across all the rental categories and annually looking to 2014, just give us a sense of contract size and length with the pipeline currently.

Ronald Schad

Let’s start with the crawler cranes and the attachments the quoting activity that we’re currently seeing and some of those orders that we talked about that are giving us the backlog into 2014 are quite long. For example, we have two of our large attachments for our crawler cranes that our high dollar attachments booked for 12 months to 14 months. So those are longer than our normal six month to nine month type of order. I think when I looked that the average quote of our crawler crane the quotes were ranging and eight months to 10 month range so in general slightly longer.

Our boom truck business starting then going to the other end has been very slower rental as we said on the call days type rental versus the longer, certainly those cranes are very easy to mobilize so contractors use them has a tool and when they don’t have a lot of certainty they just rent them on a daily basis and turn them back in.

The rough terrain tend to follow that although there we are seeing some lengthening of our quoting activity to longer projects again especially in the power in general building sectors and then finally the tower cranes those tend to be longer and I think going forward the quotes I have seen and the order going in, in general have been longer than they have been for the last couple of year. So I think it covered them all.

Daniel Halpert – Oppenheimer & Co.

Okay excellent. I also on the coast integration can you just highlight any incremental synergy you expect over the next 12 months to 18 months.

Ronald Schad

Well a couple of things going there is especially in light of the rough terrain crane utilization drop that we see, we are actively quoting our rough terrain cranes and some of our stronger locations of the crawler crane business and we’ve trained up both our sales and our service staff to support those, so there is a synergistic ability to use those assets we’ve talked about that before but we are actually first announcing some of results of that going forward. And additionally, we are looking at combining some of the management and service particularly on the West Coast to make our operations for our crawler cranes more efficient. And if you look at our granular results of us, we’ve actually increased utilization in our business on the West Coast with crawlers in the last year and that’s a result of the lot of that activity where we’re synergizing the crawler crane fleet with the rest of our rental assets.

Daniel Halpert – Oppenheimer & Co.

Okay thank you. And also on housekeeping, rental duration in the quarter?

Ronald Schad

Excuse me, say that again.

Daniel Halpert – Oppenheimer & Co.

Rental duration in the quarter? How would that trend sequentially?

Ronald Schad

I think it was about the same, I don’t think there was any dramatic change in any of the assets. I think crawlers was slightly longer than previous quarters.

Daniel Halpert – Oppenheimer & Co.

Okay thanks a lot. Thank you.

Operator

And our next question comes from the line of Matthew Dobson with J. West. Please proceed with your question.

Matthew Dobson – J. West

Hey Ron. Can you talk just a little bit or may be help us understand, when you have your conference call on August 8, you are basically said you thought that trends will continue and that utilization will continue to increase and your EBITDA will be up in the Q3 and Q4. And you also said that you thought utilization of the towers would get better the self directing and you did not know would get better? And obviously that didn’t materialize, but it sounds like your quoting activity is really strong. So do you feel like this is just an execution issue and you guys are [indiscernible] on the market or what?

Ronald Schad

No I think, I feel like we have many, or a small dip and what is on a longer-term basis a steady increase and in the RTs and the boom trucks are very easy, the rentals for those are short. They are even for our RTs they tend to be two to, three and maybe four months rentals. And after our conference call on August, we saw a lot of releases of RTs and we didn’t see a pickup of them until later in the quarter and we lost that revenue. They are picking up now.

Matthew Dobson – J. West

Can you just – so when you had the conference call you didn’t know that they were going to get released, or...

Ronald Schad

Yes, we don’t get a lot of visibility on the boom trucks and RTs of a release. On our crawler cranes and our tower cranes we have more knowledge, we have a stronger contracts on minimum duration, but a lot of our boom trucks and RTs or either daily or monthly business and they will from month-to-month week-to-week. So we don’t get a lot of notification when they get released.

Matthew Dobson – J. West

Is this is self-erecting in the city, this self-erecting in the city and tower those are very long lead projects and you thought those would be up sequentially?

Ronald Schad

Right.

Matthew Dobson – J. West

So because you said that, I mean, I can read the quote from here, from the transcript about how you said that you had ordered in hand, et cetera, that’s why you say like they were good. So or is just you didn’t execute, or what?

Ronald Schad

Yes. I mentioned…

Matthew Dobson – J. West

Nobody else in the market is saying this, I mean like the guys that are H&E had a blow of quarter on crane sales, obviously those are sales. Manage block in – that the U.S. was the best market, little bit slower, but, et cetera. So you seem to be the only one that saying it. So do you think you’re losing share?

Ronald Schad

No we don’t think we’re losing share. Let me go back to your tower question. Yes we did, the towers and self-erectors are sorter duration from the city and the larger tower are longer duration and contractual, we have towers come down in second and third quarter, we had what we believe were projects that were going to start for those towers that are still just starting now and will start into the fourth and the first quarter of next year.

So the delays – that starts have been delayed, we began conversation with those customers months-and-months before, we track the start dates of those projects, but we can’t force a contractor to break ground and again work and put up his tower crane and so we have to work with them as those start dates push out and that’s really what happened on the towers from – and we didn’t expected when we had the call that they would push out is bad as they did.

So we don’t believe we are losing share, as it relates to H&E call we would agree that the Gulf Coast, which is they have a very limited portion of their fleet of cranes about 13% of their rental fleet is rough terrain cranes and some boom trucks that is primarily focused in the Gulf Coast as we said our Gulf Coast market has been very strong for our crawler cranes where we are positioned with our crawler crane fleet and we are predicting in 2014 a continued growth in that region. So we would agree with many of the comments made by H&E about the strength of the rental market in the Gulf Coast driven off of petrochemical and many of those large billion dollar projects.

Matthew Dobson – J. West

And a last follow-up so you sold basically equipment at about a 115% of the value that you carry. If the market is strong you have a tremendous amount of assets, which are being utilized. Do you think you accelerate the sales here in the fourth quarter and as you in 2014 because I mean you guys always talk about that the company as $5 if you liquidated right now on the asset value? So it seems like potentially you could get closer to that if the market starts heat up. So do you think that’s the strategy or what…

Ronald Schad

Yes. That is definitely the strategy to continue to focus on selling those under utilized assets we – with orders in hand in the quoting activity we are going to believe we see a strong fourth quarter in that area. Some of it may roll into 2014 and we believe that the strengthening of the market as you just explained will create a much higher ability to move on those assets and sell them at really the value they are – they have so that’s going to be a focus in 2014 to continue to push on those under utilized assets and reduce the debt with those proceeds.

Matthew Dobson – J. West

Okay. Thanks.

Operator

And our next question comes from the line of Ivan Sacks. Please proceed with your question.

Unidentified Analyst

Good morning gentlemen.

Ronald Schad

Hi, Ivan.

Unidentified Analyst

Hi there. Could you please just give us a little bit of a history lesson in terms of the peak in the plus of both the coastal as well as the Essex business just in terms of – just try to get a little bit of perspective on things like…

Ronald Schad

Yes. Kory help me here, but the peak for the crawler crane business and that rental fleet produced EBITDA in the range of over $48 million on the trailing 12 months basis early – if you looked that it in early 2008 before the sort of financial amount down so and in fact we have been proved Essex rental fleet since that time, we were still bringing assets into the fleet that have never fully been utilized, so from our perspective peak utilization for the Crawler crane fleet would produce with higher rental rates, would produce EBITDA in excess of 50 million.

Coast Crane looking back at its history had EBITDA in the range of $20 million to $25 million, $23 million on a trailing 12 month basis again. So and we’ve also improved that company dramatically as rental fleet is as strong as it was at that period, but we think we are positioned for the retail business in the future actually better, once customer against are buying new equipment.

Our parts and service business has been struggling, but Nick Matthews as COO has launched several initiatives there including for the first time in Coast’s history v have some sales people specifically focused on selling the service to the customers indemnifying the installed base of cranes and equipment that we can service and selling directly to those customers instead of sort of waiting for the business to come into door which is historically how people sell service. So Ivan, I’m glad you point that out from a peak perspective, this company is in the early, early stages of a recovery.

Unidentified Analyst

No, because I mean I’m looking now to $18 million EBITDA versus lets say a peak at one point. The question really that bakes to be answered in a way is like has there been shift into business since these peaks, I mean is that recoverable I mean has there been anything that would tend to like maybe have changed within the industry or within the economy that would maybe possibly be holding back those kind of peaks or what is holding back the – lets say the acceleration, lets say going from where we were – like right lets say we had $18 million to $71 million. There is a huge gap over there and obviously there is huge opportunity or is it something that we might be missing that we might be looking on a little bit of hope but not actuality.

Ronald Schad

I think the holdback is the uncertainty for owners to release large projects and sort of the disarray of our government in the bipartisaness of it to push forward to build a – rebuild nations infrastructure sewer and water and highway systems. The general economy has affected the municipalities in the states and they play a big role in supporting that infrastructure rebuild, but they are strengthening twice as like the Gulf coast where states like Texas are much stronger and we are seeing much more government push public type works projects being pushed through and expect those to continue.

As far as the shift I don’t think – the only shift I can tell you is that actually contractors to a large degree are selling out of their rental fleet particularly the crane end of things and so we think long-term as the construction economy recovers from these dramatic depression that occur post-2008, 2009 that the actual demand from crane rentals will be higher because the installed base has shrunk some and the contractors don’t own as many as the they used to. So they will have to rent.

Unidentified Analyst

Got it. On the mix – we have wind farms in Texas over here that our sprouting up everywhere and then everyone is talking about the bridges. Now when we look at wind far or if we are looking at bridges, what type of cranes within your fleet would be the ones to used, are those the ones that already been rented or are those ones that are in the 52% in your non-utilize...

Ronald Schad

Wind farms was probably one of the biggest impacts on the RT business for coast year-over-year the large RTs in that fleet, a year ago we looked specifically at what they were doing, they were working on wind farms and some solar power projects and there is very little of that going and that’s one of the reasons were looking at shifting those cranes to other wind farm project some of which you just mentioned in places like Texas where they are going again. Also wind farms use our crawler cranes all types of them they use a smaller ones to stage and unload the components and the larger ones to erect the towers and set the [indiscernible] on top of them.

The bridges are primarily crawler cranes and rough terrain cranes and bridges in particular and highway projects use a lot of our mid size crawlers and because they are typically on water require big foundation and tend to use a lot of traditional crawlers which are highly under utilized so a lot of opportunity to pick up in that fleet and we’re booking orders for those now to do things like pile driving and foundation work in association with building a bridge.

Unidentified Analyst

And then Ron just finally I mean what’s happens since I had followed the company from the beginning, there seems to be a little bit of a dislocation in terms understanding the business. Just from a perspective point of view we talk about tower cranes. We talk about crawlers, we talk about rough terrain, boom trucks. Just in terms of lack the percentage of those – of the whole big picture for example obviously crawler cranes I think 75% of assets. And then when we talk about tower is in that lack of very municipal part of the business, but at the same time it seems to be having a bigger impact than it should just in terms of discussion.

Ronald Schad

Yes. Towers are – good point, towers represent 9% of our asset value of rental fleet, boom trucks similarly are very small only represent 4%. So when we really look at the third quarter results, what hit us hard was the RT dropping of in the quarter and particularly July and August utilization being light on our large RTs. And we are please to see some recovery of that and recovery into October, so we again, that’s somewhat transient business they roll month-to-month many of those leases. So we are expecting that business to continue and we’ve taken some strong actions in that RT fleet, we are moving it a lot more than when we traditional did and we are looking at new rental opportunities where we have crawler cranes presence with that fleet. RTs represents 12% and you are right the crawler cranes represent 75% of our assets and their – they had a stronger third quarter than the rest of the rental fleet.

Unidentified Analyst

Very good. I appreciate those insights, thank you.

Operator

And our next question comes from the line Ted Grace with Susquehanna. Please proceed with your question.

Ted Grace – Susquehanna

Thanks. Hey guys thank you for taking my call. I just wondering if you are going to kind of step through the quarter itself month-by-month. Could you just walk the kind of the progression you saw by asset class and the reason I ask is I know you have made a couple comments that RTs – and as my interpretation is RTs progressed July to August to September now into October. But could you just walk us through kind of like what’s you saw from each asset class and if there was a certain month in the quarter in which things just hit a wall with some of the classes that you have highlighted being most challenged.

Ronald Schad

Yes. So, on our crawler crane fleet we saw really in both the traditional and the hydraulic crawler crane we saw progression of the increase from July to August and sort of a flattening in September and into October. The rough terrain cranes July was our lowest we had several releases and then things picked up a little bit in August and September, and they picked up some more in October.

Boom trucks well let’s go to towers because they were next largest class. Towers, both the self-erectors and the city and the large towers all of those were the lowest in July, picked up in end August and September, and that picked up considerably in October, especially with self-erectors. And then boom trucks they were also lowest in July, picked up in August, actually dip down a little bit again in September and are picking back up in October and November.

Ted Grace – Susquehanna

And then year-on-year numbers are those sequential numbers?

Kory Glen

Those are just sequential numbers.

Ted Grace – Susquehanna

Sequential, okay. And then I know you’ve mentioned quoting activity picking up. Do you guys track quoting activities such that you can say what quoting activity look like in the third quarter versus the second quarter and how October was versus kind of the third quarter trend?

Ronald Schad

We do, our quoting activity is always most reliable, on predicting our crawler crane business. Because a) we’ve had the longest history of using the quoting with our salespeople and b) those are longer rental periods. We’ve worked and Nick has worked with the people are particular West Coast sales people, to strengthen the visibility of our quoting activity on our RTs and our boom trucks and get better handle on our towers and try to track better the delays that we talked about earlier. So the answer for your question yes we do that, it’s most reliable as it relates to our crawler cranes.

Ted Grace – Susquehanna

Okay. And then coming back and beginning of your comments, you mentioned you thought to the culprit for really kind of the government shut down that went into the affect October 1, was actually at the end of your quarter or was after the quarter. A sequestration which, is that just on public side, but do you think that those were I guess one of the things where Bob struggles was with the crane industry is just what holding thing back. And I know you mentioned you’re confidence that things kind of get better in 2014. But is that, I guess for I think a better way to ask that question is that a hope or is that a confidence outlook? And how would you characterize your confidence of things, but these projects finally go from being less to starting?

Ronald Schad

Well, I think the architectural buildings index is one other things we watch and we track that and we’ve gone black and tracked it against our rental business, all the way back to 2003 or 2004. And we see that as it tracks fairly close. When it’s increasing in the next 12 months to 18 months, we have seen our crawler crane business increase and we expect that the RT and crawler crane will track fairly well with that we have a lot of history of tracking that. So that I’d say is more than a hope.

And then the fact that as you, if you track the some of the other people in the industry talking about the Gulf Coast, we also are seeing that very similar multibillion dollar projects. As I mentioned, we’ve rented a couple of our attachments, those rentals don’t start until 2014, but customers have already booked them because of $1 billion projects in the petrochemical sector. Things like expansion of ethylene and polypropylene production, there’s several LNG type facilities in Louisiana and Texas on the market. So those, everything we’re seeing again is more than a hope there, those projects are real, the owners are real, the funding is real, we don’t expect them to be delayed.

Ted Grace – Susquehanna

But is in – which is great to hear, you’ve mentioned that the West Coast in the Pacific north-west where the two most challenging areas. And so aside from the AVI, I mean, could you may be comment on what you are hearing from you customers and your sales people are, that gives you confidence that those two regions are up? That’s the real headwind of this part right?

Ronald Schad

Correct and I’d say again our customers there, we talked early about the towers and the disappointment there, our customers are telling our salespeople that the projects they are going to release in general building and commercial construction, particularly on the West Coast in 2014 and beyond are going to be much demand, much more of the tower crane fleet.

So we be believe that the customers know what they are talking about there and that they are going to utilize our tower cranes. With that general building, that was one other sectors besides power on a sequential basis that so off on our RTs, general building will support that, and then I think that in a variety of power related and energy related projects will stuck up the rest of our RT and boom truck capacity.

Ted Grace – Susquehanna

Okay then two last questions. So early in the comment I think early in the Nicholas’ commented that there is a confidence that kind of attachment that 2014 revenue are up. I didn’t know how to interpret what the commentary was implicitly on the underlying cranes, but given what you just said, so we also assume that you’re passed about the underlying cranes and then the attachments being up?

Nicholas Matthews

Oh sure. Okay we should have made that clear that the attachments are going with cranes. So the underlying cranes are also increasing and very long durations on those projects.

Ted Grace – Susquehanna

Okay, and then lastly and then I will jump back in queue. If we are going to step back and think about your capacity and will that forward 2014. Given third quarter was down being weaker than expected certainly at the beginning of the quarter and probably early in the year. How does the current environment make you think about your capacity needs that are necessity to grow your fleet in 2014 and hence your CapEx and free cash outlook?

Ronald Schad

Well current capacities we’re seeing that 2014 will be a recovery, we can push as we said we have crawler crane utilization on our hydraulic crawler cranes approaching is 70%. But we know we can push that utilization up to 90% and with that we will come much higher rates. So we’re going to focus on pushing the utilization up and stretching that and I don’t perceive 2014 as a big buy year for us. It’s really a big recovery of utilization and rates. We haven’t seen a lot of the rate hold yet either.

Ted Grace – Susquehanna

And then I know that 75% of your asset fleet, but just in terms of the thought process in RTs and the large RTs in particular?

Ronald Schad

We have a large RTs in particular what happens there is, we will probably sell some other rental fleet. And they are probably some opportunity to replace some of that and as we do with that fleet on, on ongoing basis, so there may be some CapEx, but it won’t be incremental, it will be replacement of things we sell. And so that utilization gets much higher.

Ted Grace – Susquehanna

And now I found it -- you note down the percentage of asset by towers, boom trucks, crawlers, RTs. Could you give us a sense for the trailing 12 month EBITDA generation by asset class or what that was like in 2012?

Ronald Schad

No we haven’t done that before and we don’t have that in front of us.

Ted Grace – Susquehanna

Is there any reason you would look materially different from how you are able to break down on percent of assets?

Ronald Schad

It would be materially different, because some of the assets particularly it just jumps to mind that boom trucks would probably have a higher EBITDA contribution than the 4% of the asset values they represent, because they rent at higher rates albeit they also have a faster depreciation and shorter rental life. So when you look at our assets and compare us to other parental fleets, we always ask the investor to realize that most of our assets particularly crawler cranes and towers, but even rough terrain are long-lived assets with almost no depreciation, real depreciation. And so therefore they have lower rental rates and dollar rental rates for the assets value.

Ted Grace – Susquehanna

Would it be fair to – do you think crawlers are even half of your EBITDA, to ballpark?

Ronald Schad

Yes, yes, ballpark, yes.

Ted Grace – Susquehanna

Okay. Great thanks a lot guys. Good luck this quarter.

Ronald Schad

Thank you.

Kory Glen

Thank you.

Operator

And your next question comes from the line of Matthew Campbell with [indiscernible] Capital. Please proceed with your questions.

Unidentified Analyst

Good morning gentleman I’ll just ask two questions. My first question goes to Nick. I was wondering if you could expand on what we’re going to do to drive the parts and service business and what should we expected see a rebound there?

Nicholas Matthews

Sure thanks Matt. In terms of our parts and services Ron highlighted really moving from a catcher mentality to fetcher mentality, there are – there is a difference in the crane dealer installed base that we have and so we don’t have as many of those opportunities just coming to us, where we have the opportunity to catch them. So we are having to transition and change the selling of our parts and service that includes, providing additional services, as well as getting people into the field and more and even really close with our customers. And I so I think it is going to take us a little bit of time to change that model for us. But I think we would be helpful on the first half of 2014 to see some real benefits there.

Unidentified Analyst

Okay. And just you know bigger picture the U.S. Government saw a chart U.S. Government infrastructure spending non-defense. In 2008 $320 billion it looks like it’s bottomed out here around $200 billion just in the last nine months. Are you starting to see indications from government spending that there may be a pick up there?

Ronald Schad

Yes. I think the government is going to switch from a defense economy back to focusing on making America stronger, which is much needed. And we can hardly not take up a periodical newspaper and not see some comment about the weakness of the nation’s infrastructure. Bridges that are falling apart, and highway systems that aren’t working, sewer and water facilities that are breaking down. And I do believe that the slowing of the defense spending will allow us to put more of the real Federal dollars back to work and what really makes sense and that’s invest in our country, with that I think you will see the overall strengthening of the state and local governments and I cant say enough about states like Texas where they have shown some leadership and strengthening and they are taking those federal dollar matching them and putting them to work in all sorts of infrastructure projects which is creating great work for all of our crane types.

Unidentified Analyst

Great thank you very much.

Operator

And our next question comes from the line of Ivan Sacks please proceed with your question.

Unidentified Analyst

Good morning this is Mill Harris calling from Ivan’s office. I just wanted to ask a question. Earlier in the call we were discussing a pick up in crane sales from other companies and we also discussed our own Essex own sales getting rid some of the fleets. Do you have any indications or any numbers that can give us an idea on how these sales are affecting the rental markets?

Ronald Schad

You know I think as it relates to RTs there was a strong crane sales by the manufacturers of RTs and I think that its possible that some of the rental competitors of ours got a little over ahead of themselves and bought more fleet, so that created – and the demand didn’t quite keep up particularly on the West Coast and Northwest.

So that could have impacted and soften – our softer rentals in the third quarter, going forward I don’t think the fleet will – rental fleet of cranes will need to expand and more cranes will be added, I think classes that we will see the most sales from our boom truck and RTs, crawler crane are still at low dollars in the rental fleets and the rental rates are low, so its going to be hard for people to justify many of the mainstream crawlers, there might be some opportunity to sell some of the very larger crawler cranes where there is not as many of them in existence and there maybe demand for those. Those often times are larger than we have in our bare crawler crane rental fleet, but in general I don’t think crane sales are going to negatively in anyway impact our rental business, if that’s your question.

Unidentified Analyst

Can you give me an idea of where those cranes are being sold to?

Ronald Schad

Which the…

Unidentified Analyst

Crawler, the crawlers.

Ronald Schad

Yes, the larger crawlers could be – are typically sold to rental companies that focus on maintenance projects in the petrochemical, the very larger crawlers tend to be manned rentals and those cranes are several – usually 800 ton or larger, so they would be probably sold to rental companies who focus and contractors who focus on maintenance and petrochemical.

Unidentified Analyst

Okay. Could you just give us your annual interest rate and the capital expenditure?

Kory Glen

Sure, the weighted average interest rate is 4.5% approximately as of September 30, 2013 and for the nine months ended September 30, 2013 we’ve actually sold about $4 million more than we’ve purchased in rental equipment. So we think our maintenance CapEx is somewhere between $2 million and $ million annually and then as far discretionary CapEx we are [indiscernible] net seller.

Unidentified Analyst

All right thank you guys so much for answering those questions.

Ronald Schad

You are welcome.

Operator

And it seems we have no further questions at this time, I would like to turn the floor back over for closing comments.

Patrick Merola

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

Operator

This does conclude today’s conference. You may disconnect your lines at this time and we thank you all for your participation.

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