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Essex Rental Corp. (NASDAQ:ESSX)

Q4 2013 Earnings Conference Call

March 13, 2014 09:00 AM ET

Executives

Patrick Merola - Manager and IR

Ron Schad - President and CEO

Nick Matthews - COO

Kory Glen - CFO

Analyst

Daniel Halpert - Oppenheimer & Company

John Tanwanteng - CJS Securities

Christian Thomas - Sidoti & Company

Operator

Good day everyone and welcome to the Essex Rental Corp Fourth 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 Patrick Merola, Manager, 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, newly appointed President and CEO; Nick Matthews; and Kory Glen, Chief Financial Officer of 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 and Exchange 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 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. Please go ahead Ron.

Ronald Schad

Thank you, Patrick. Good morning and welcome to our fourth quarter 2013 conference call. Before we begin, I would like to speak the recent developments at Essex Rental Corp and then I would like to turn the call over to Nick and Kory to summarize our fourth quarter results.

As you have seen in our public filings I have notified the board of directors of my resignation from Essex Rental Corp. I am proud of what we have accomplished thus far to Essex including the transformation of a private crane rental business into a public company traded on NASDAQ.

Since 2000, Essex has grown significantly expanding both its market position and product offerings in the North American construction industry. We have also installed systems and processes making us a much more efficient and profitable organization. In addition we successfully acquired the assets of Coast Crane Company which has grown and diversified our business.

As a significant shareholder of Essex, I’m very pleased that Nick Matthews was appointed as the new president and CEO. I’ve had the opportunity to work closely with Nick over the past nine months and I’ve observed firsthand his critical thinking skills, his passion for the business, and his desire to continue to build on what we have achieved during my tenure at Essex. I would like to thank all of you for the opportunity to serve you as Chief Executive Officer of Essex Rental Corp.

And with that I would like to turn the call over to Nick.

Nick Matthews

Thanks Ron, and on behalf of all the employees, customers, shareholders, and the Board of Directors of Essex, thank you very much for the tremendous contribution you’ve made to build a small privately held family business into one of the leaders in the heavy lift rental business. My primary priority is to reshape our asset portfolio to improve utilization and return on invested capital.

During the quarter ended December 31, 2013 we sold seven traditional crawler cranes at 110.6% of OLV, and in the beginning of 2014 we have sold three more at 104.9% of OLV; all of the proceeds have been used to pay down debt. As previously disclosed in an effort to accelerate our asset portfolio repositioning strategy we have engaged in Hunyady Auction Company to manage the sale of certain crawler cranes in a sealed bid auction. The assets being offered represent approximately 6% of the value of our rental fleet. We will receive the first set of bids later this month and expect to conclude the process towards the end of the second quarter.

We feel that the sales related to this auction will have no impact on the future earnings power of the company, as many of these assets were not utilized even during peak periods of demand. We will use the proceeds from these asset sales to pay down debt and redeploy capital in the higher yielding assets categories.

Management’s second priority is to drive improved utilization in all of our asset classes. The near-term focus on improving quality and developing customer relationships is key to achieving sustained growth and demand of our assets. In this regard, we have had a positive start to 2014 as measured by utilization of our rental assets. Specifically, since the beginning of the year we have seen the trend of increasing utilization of the rough terrain cranes and boom trucks as measured against units on rent at December 31, 2013.

We anticipate that consistent with our experience, improvements in lighter equipment utilization are indicative of pending improvements in our crawler crane utilization. Additionally, expected revenue from signed crawler crane rental orders has increased by approximately 20% as compared to the same period in the prior year. If this trend continues it should have a positive effect on our crawler utilization in future periods.

Looking ahead to 2014, we anticipate improving trends due to the following. New crawler crane rental orders remained relatively consistent through the second half of 2013. So the decrease in utilization wasn’t due to a lack of new demand but rather due to an increased number of projects ending. We have a strong foothold in the Gulf coast, this region has provided more rapid and sustained economic recovery compared to the 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 to take advantage of the opportunities that this region offers. Our crawler crane backlog as of December 31, 2013 has improved to 18.9% as compared with December 31, 2012. This improvement and our backlog contribute to our optimism as it relates to 2014. I would now like to move on and discuss our results.

We had a disappointing third quarter in 2013 and we have seen the residual impact of that in the fourth quarter. The fourth quarter is typically a soft period for us so the sequential decline was anticipated. As we mentioned in our prior quarterly earnings release we experienced a decline in crawler utilization in the fourth quarter of 2013. Crawler crane utilization decreased to 42.9% for the quarter ended December 31, 2013 compared to 44.8% for the quarter ended December 31, 2012. This marks the first sequential decrease in crawler crane utilization after six quarters of increases. While we are disappoint in this decrease it is not due to a lack of new work but rather due to a greater number of projects ending during this period.

Our starts were consistent through the second half of 2013 but ends were approximately 20% higher than average. Average monthly crawler crane rental rate decreased by $897 or 5% to $17,050 for the quarter ended December 31, 2013 compared to $17,947 for the quarter ended December 31, 2012. This decrease is primarily attributed to the mix of cranes on rent. Utilization of our heavy lifting hydraulic crawler crane class decreased to 56.7% for the quarter ended December 31, 2013 compared to 63% for the quarter ended December 31, 2012. In the fourth quarter we continued to see a lack of power work as compared to 2012 and also decline in transportation work.

Average rental rates however have increased on a model-by-model basis from an average of 4.3% compared to the fourth quarter of 2012. Industrial marine projects in the Gulf coast and Southeast regions of the United States have been particularly strong for our crawler cranes. This area of the country continues to provide the strongest contribution to our crawler crane revenue. Utilization of our rough terrain crane fleet was 54.1% for the quarter ended December 31, 2013 compared to 61.9% for the quarter ended December 31, 2012. The decline in utilization was driven by a decrease in the power end market in the Pacific Northwest which mostly significantly impacted our larger capacity rough terrain cranes.

On a positive note utilization on our rough terrain cranes increased sequentially as compared to 50.5% for the quarter ended September 30, 2013. Boom truck utilization was 51.7% for the quarter ended December 31, 2013 compared to 54% for the quarter ended December 31, 2012. Boom truck utilization was relatively flat as compared sequentially to 52% for the quarter ended September 30, 2013. Like the rough terrain cranes, boom trucks demand was also negatively impacted by the lack of power related projects on the West coast. As we stated last quarter we attribute a portion of the decrease in boom truck utilization calculated on a day’s basis to the shorter duration of the rentals that we have experienced in this particular asset class. Although shorter duration rentals have a negative impact on utilization they result in higher average rental rates. Average rental rates increased 7% in the fourth quarter of 2013 as compared to the fourth quarter of 2012. To put this in perspective the increase in rental revenues related to higher average rental rates has approximately offset the decrease in utilization.

Our boom truck fleet continues to remain very active and achieved 86.6% utilization on a hits basis in the fourth quarter of 2013. Our tower crane fleet experienced a sequential increase in utilization equaling 38.3% for the quarter ended December 31, 2013 as compared to 33.2% for the quarter ended September 30, 2013. Within our tower crane fleet, self-erecting utilization and rental rate is at its highest level since acquiring these assets in late 2010. We expect the utilization of our tower cranes will continue to improve sequentially throughout 2014 based on quoting activity and signed orders in hand.

Our equipment distribution segment continued its trend of year over year improvement, revenues generated in the fourth quarter grew by 334.8% as compared to the same period in 2012. Our year-to-date results reflect a substantial growth in this segment with revenues generated in 2013 nearly tripling those generated in 2012. While we are encouraged by our year-over-year growth in the equipment distribution segment we feel that there’s still significant room for development. We have been positively impacted by the relationships that we have with our new manufacturers which will help us in growing our market share. The recently announced amended credit agreement will also allow us to capitalize on increased customer enquiries.

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

Kory Glen

Thank you, Nick. I would like to briefly discuss the amended to our credit facility that we announced in February. We recently modified the credit agreement at Coast Crane to allow greater flexibility in regards to the purchase of retail equipment inventory. This amended will provide us with greater ability to capitalize on opportunities within our growing retail distribution line which will enhance our earnings’ potential and continue to strengthen the relationships that we have with our manufacturers.

Equipment rental segment revenues were $15.2 million for the quarter ended December 31, 2013, down 8.8% compared to $16.6 million for the quarter ended December 31, 2012. Much of the $1.4 million decrease was driven by a $1.6 million decrease in equipment rental revenues and the $900,000 decrease in transportation revenues driven by the decline in utilization levels and the company pricing transportation services more aggressively to enhance utilization. These declines were partially offset by a $1.1 million increase in used rental equipment sales.

Equipment rental segment gross profit decreased by $1.2 million to $3.3 million for the quarter ended December 31, 2013 compared to $4.5 million for the quarter ended December 31, 2012. This was primarily related to the reduction in equipment rental revenue offset somewhat by the increase in gross profit from used rental equipment sales. However, equipment rental segment gross profit for the year ended December 31, 2013 increased $900,000 as compared to 2012.

We continued our trend of year-over-year improvement in our equipment distribution segment. Revenue generated in this segment which includes the retail distribution of new and used equipment but excludes the proceeds received from the sale of rental equipment was $2.9 million for the quarter ended December 31, 2013 compared to $700,000 for the quarter ended December 31, 2012. The $2.2 million or 334.8% quarterly increase completes the year in which we almost triple our prior year output.

Although retail distribution is a thin margin business, we believe is an important part of our strategy which increases our customer interaction opportunities and also increases our future parts and service business potential. Parts and service revenue equal $4.4 million for the quarter ended December 31, 2013, down 25.1% compared to the same period in 2012. Gross profit was $1.1 million for the quarter ended December 31, 2013 compared to $1.8 million for the quarter ended December 31, 2012.

We continue to monitor and manage our overhead. Selling, general and administrative expenses excluding non-cash compensation and non-recurring expenses decreased by 11.7% or $700,000 to $5.5 million for the quarter ended December 31, 2013 compared to $6.2 million for the quarter ended December 31, 2012. The decrease is primarily related to a reduction in wages and salaries, temporary labor, legal expenses and business taxes. There was approximately $700,000 of non-cash compensation for the quarter ended December 31, 2013 and $400,000 for the quarter ended December 31, 2012.

Adjusted EBITDA before non-cash compensation and non-recurring expenses for the quarter ended December 31, 2013 was $3.9 million as compared to $5million for the quarter ended December 31, 2012. While we’re disappointed with how 2013 ended, we have achieved full year improvement compared to 2012. Adjusted EBITDA before non-cash compensation and non-recurring expenses for the year ended December 31, 2013 was $18.3 million, a 6.5% increase compared to $17.2 million for the year ended December 31, 2012. Furthermore, adjusted EBITDA as a percentage of total revenue was 19.2% for the year ended December 31, 2013 compared to 17.5% for the year ended December 31, 2012.

We continue to focus on the sale of rental fleet assets to both debt and rebalance our fleet mix. During the year ended December 31, 2013, we sold $12.4 million of rental equipment at 113.2% of orderly liquidation value. Consistent with our objective to reduce leverage the proceeds received from the sale of these assets were used to pay down debt and replenish rental assets. Total debt decreased by $8.1 million during the year ended December 31, 2013 and has decreased $19.1 million or 8.3% over the past two years.

I will now turn the call back over to Nick.

Nicholas Matthews

Thanks, Kory. In the near term, I look forward to working with the Essex management team and focusing on the following; reshaping our asset portfolio and repositioning the fleet, improving utilization and return on invested capital, improving quality of our products and services, developing a more customer centric service oriented culture throughout the company and improve customer relationships. We are coming of the lower basis when we started from the beginning of 2013; early indicators in 2014 are encouraging. That being said, until we recognize some concrete developments in our end markets and customer base, we will not be projecting any significant revenue increases in our 2014 guidance, a conservative growth throughout the year albeit from a lower basis than we started in the beginning of 2013.

We anticipate that 2014 EBITDA before non-cash compensation and non-recurring items will be in the range of $18 million to $22 million. Our blended cost of debt is approximately 4.41% and we expect consolidated interest expense in 2014 to be approximately $11 million. We are not projecting any significant net capital expenditures in excess of anticipated equipment sales in 2014. We would now like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. At this time we will be conducting a question-and-answer session. (Operator Instructions) Our first question today is coming from Scott Schneeberger from Oppenheimer. Please proceed with your question.

Daniel Halpert - Oppenheimer & Company

As far as your revenue guidance, can you take us little bit deeper on the end markets that driving the trends you seen so far and how you think about this going forward in ‘14?

Kory Glen

Sure, Daniel, this is Kory. So, we anticipate that the end markets that will drive the revenue growth is really the industrial marine end market. We expect to also see some increases as compared to 2013 in the power end market.

Daniel Halpert - Oppenheimer & Company

Okay. And I understand you all will be conservative at this point but can you take us around the horn on some of the big swing factors that could enable you to see more revenue growth and potentially exceed your EBITDA guidance?

Nick Matthews

This is Nick. I think if there are significant highway spending bills, new projects related to large construction and continued improvement in areas outside of the Southeast Gulf area that we would find that beneficial.

Daniel Halpert - Oppenheimer & Company

Okay. Go ahead.

Nick Matthews

And we think that the activity in the Gulf Coast region particularly related to liquid natural gas and some of the projects that are, is creating construction demand at the product facilities like will also contribute to growth in 2014.

Daniel Halpert - Oppenheimer & Company

Okay, sounds good. As far as the cost integration, any updates there and anything you see on the cross-selling opportunities you like to highlight?

Nick Matthews

This is Nick. We have continued through integration of back office and all those items are complete. We have started cross-selling and bundling rental packages throughout the products in both the Coast brand and Essex brand portfolio. We continue to be successful in that and have a large number of opportunities quoted; most of them have been capitalized either in the Southern California area or in the Gulf Coast at this time.

Operator

Thank you. Our next question is coming from John Tanwanteng from CJS Securities. Please proceed with your question.

John Tanwanteng - CJS Securities

Aside from the accelerated sale of assets, are there any other specific steps that you are taking to improve utilization going forward, can you give us more detail on that?

Nick Matthews

Sure. So, one of the items we just talked about with the previous question related to selling of the assets together. There is a large percentage of time in which a customer rents a crawler crane from us but there is also an opportunity to rent the RT. So, that’s an area in which we have been able to improve our utilization on our key assets by offering them some packages with customers as part of our crawler crane offering. And then also we have been a lot more aggressive especially in the RT side go into the end markets directly and trying to increase utilization through those revenue channels.

John Tanwanteng - CJS Securities

Okay, great. And then you said you expect conservative growth through the year yet you have seen there is 20% increase in rental revenues I guess in Q1. Help us to reconcile this to how do you quantify conservative growth?

Nick Matthews

Well, I think it’s important to keep in mind as we said in the script that we’re starting from a lower point in 2014 than we did in 2013. So that’s one thing to keep in mind when you think about the full year guidance that we’re providing. As we talked about on the last call we have a larger backlog and lot of that is due to the large attachments that we have on rent for the majority of 2014, so that gives us some confidence that 2014 will be an improvement over 2013, but taking those things into consideration is where we’re cautiously optimistic 2014 will be an improvement over 2013, however as you can see from our guidance that we provided.

We didn’t increase our guidance range very much from our actual results from 2013. And just to clarify that 20% that we referenced was a 20% increase in expected revenue from rental agreements on crawler cranes orders received in hand, so I don’t want that to be misinterpreted as an expected 20% increase in rental revenues Q1 2014 over Q1 2013.

John Tanwanteng - CJS Securities

Okay, go it. And then with regards to the distribution business, are you seeing that increased demand justified the modification of the revolver and if so how quickly can that grow in, do you expect to expand margins in that business at all.

Nick Matthews

Sure, we made the amendment because we think there is opportunity in that business and we wanted to have more inventory on hand. Our experience has been with customers that in that side of the business unless you have the inventory on hand you are disadvantaged to try to capitalize on those opportunities. We have seen fairly strong demand especially in boom trucks and our key equipment in the first quarter. And I think we’ll continue to see that through the second quarter.

I think there is some growth opportunity there but we’re also a little bit cautiously optimistic so to speak, because there were some tax incentives that were in place at the fourth quarter which have ended and those we think allowed people to have a strong incentive to purchase items in the fourth quarter of last year.

John Tanwanteng - CJS Securities

Okay, great. One final one just and we’ve asked as a company this question. Have you seen any impact from adverse weather at all in Q1?

Nick Matthews

We have seen both favorable and unfavorable, there were some projects that we thought would start that were either ended early due to the weather or pushed out but then by the same side there have been some jobs that we’ve had cranes on rent that the duration has went longer to complete those projects, because they have had shutdowns due to the harsh winter. So I don’t think we’ve really put the pluses and minuses together to see if there was a significant impact but we have seen it on both sides with the spectrum.

Operator

Thank you. (Operator Instructions). Our next question is coming from Christian Thomas from Sidoti & Company. Please proceed with your question.

Christian Thomas - Sidoti & Company

Just one quick question, could you comment on rental duration during the quarter and how you expect this to trend in 2014?

Nick Matthews

Our rental durations are typically between six to nine months particularly for the crawler crane assets. And we really haven’t seen a significant variance in those durations and aren’t expecting to see a significant variance.

Operator

Thank you. (Operator Instructions) There are no further questions -- I am sorry we do have a question coming from Ben Cobbler a private investor. Please proceed with your question.

Unidentified Analyst

Hi Nick, thanks and congratulations just with all the changes and the announcement two weeks or so. Can you just remind me who’s on the board and what does that look like?

Nick Matthews

Sure, so our Board of Directors currently is Ron Schad, Bill Fox, Laurence Levy, Dan Blumenthal, John Nestor, Ed Levy and then with my announcement effective today myself.

Operator

Thank you. Our next question is a follow up from John Tanwanteng from CJS Securities. Please proceed with your question.

John Tanwanteng - CJS Securities, Inc.

Hi guys, just one quick one. Last quarter there was a large focus on I guess government contract headwinds on the West Coast. Has any of those issues been resolved or has that business picked back up at all?

Nick Matthews

Last quarter we talked about how the government issues were creating delays in our customers and your confidence in construction projects in the future. I think we talked about how we have seen an increase in rental orders particularly in our boom trucks and rough terrain crane fleets throughout the beginning of 2014. And so I would say that that’s an indication that some of those issues have gone away.

Operator

Thank you. There are no further questions at this time I would like to turn the floor back over to management for any further or closing comments.

Nick Matthews

Thank you, this is Nick. 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

Thank you. That does conclude our conference for today. You may disconnect at this time and have a wonderful day. We thank you for your participation today.

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