Neff Corp. (NYSE:NEFF)
Q1 2016 Earnings Conference Call
April 28, 2016, 10:00 AM ET
Graham Hood - President and Chief Executive Officer
Mark Irion - Chief Financial Officer
George Tong - Piper Jaffray
Justin Ward - Wells Fargo
Justin Jordan - Jefferies
Good day, ladies and gentlemen, and welcome to the First Quarter 2016 Neff Corporation Conference Call. My name is Tracy and I'll be your coordinator for today.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes.
On the call with me today are Graham Hood, President and Chief Executive Officer; and Mark Irion, Chief Financial Officer. Grant and Mark will be reviewing the first quarter results and also providing an update on the Company's strategy and outlook for 2016.
Following our prepared remarks, we will open the call to questions. This call is being webcast and, along with our earnings presentation, can be found on Neff's website at Neffrental.com.
The presentation material can be accessed through the Investor Relations section of our website under the Events and Presentations tab. The website will be posted at the Company's website for replay approximately two hours following the end of this call. The replay will stay on the site for on-demand review over the next several months.
Before we get started, I need to review the Safe Harbor Statement with you. Any statements in this call regarding the business that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and future results could differ materially from the forward-looking statements made today. Statements that include words such as anticipate, expect, believe, intend, and similar statements of a future or forward-looking nature identify forward-looking statements.
Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause the Company's actual results to differ materially from those indicated in these forward-looking statements, including risks and uncertainties identified in our press release, and in Item 1A risk factors in our annual report on Form 10-K and in other SEC filings.
You should not place undue reliance on these statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, except to the extent required by law. The inclusion of any statement on this conference call does not constitute an admission by the Company or any other person that the events or circumstances described in such statements are material.
The Company will also discuss non-U.S. GAAP financial measures on this conference call. Reconciliation of non-U.S. GAAP financial measures and the most directly comparable U.S. GAAP financial measures and other information relating to these measures can be found in the earnings press release and in their earnings presentation.
And, now, I'd like to turn the call over to Graham to begin the discussion.
Thank you, Operator, and good morning, everyone. I want to start by welcoming all of our investors and thanking you for joining our first quarter earnings call. This morning, I'll provide an overview of our first quarter performance and also discuss activity within our regions and current market conditions. Mark will then review our first quarter financial results in more detail. After that, we'll be happy to take your questions.
First quarter of 2016 was another solid quarter for Neff's rental business as we generated record first quarter results for rental revenues and adjusted EBITDA and delivered impressive adjusted EBITDA margins of 46.2%. We grew rental revenues by 9.5% year over year, which is a good result with the headwinds we faced from the slowdown in oil and gas activities, which should now begin to dissipate.
We're pleased to note that our business, outside of oil and gas, is robust and growing at a double-digit rate, which gives us confidence for 2016 as we expect the oil and gas headwinds to ease in the second quarter, which will allow us to highlight the underlying strength of the rest of our business. We had 17.5% growth in rental revenues in our non-oil and-gas branches. Adjusted EBITDA growth, outside of our oil and gas branches, was also strong at 17.6 percent, illustrating the strength of our core business.
Overall rental rates decreased 1.3% year over year. Outside of oil and gas, rental rates were up 0.9% year over year. So the main driver for our drop in rates was the oil and gas slowdown. Time utilization was also up from prior year at 65.1% compared to 63.7% in the first quarter of 2015, due to a relatively mild winter and also the declining impact in the slowdown in oil and gas activity, which we will cover in more detail in the presentation.
We saw strong construction activity and good demand for our rental equipment throughout our network of branches putting approximately 46.7 million more equipment on rent in Q1 of 2016 than we did in the first quarter of 2015. This was accomplished while having 20.3 million less equipment on rent in our oil and gas branches for the quarter. Our markets remain strong with the dollar value of projects under construction that we track through our CRM system up over 24% in 2016 compared to 2015. So we're excited about business conditions and our ability to generate good results over the remainder of 2016.
Page 6, we believe, shows that the macro environment is favorable for us, and we anticipate that it will set the stage for continued growth and strong performance for the rental industry in general as well as for Neff specifically. The construction industry has been in a steady recovery and the latest FMI construction outlook is for 5.6% growth in total U.S. construction spending in 2016. In addition, leading indicators like the ABI and the Dodge Momentum Index point toward an ongoing expansion in construction spending. There are few, if any, negative macro data points regarding U.S. construction for the short to medium term. We continue to see solid construction demand in most of our markets and expect that demand to remain strong throughout 2016.
Moving on to our end markets, on Page 7, we have a diversified mix of revenues and are focused on the most active segments of the market. We believe we're positioned well in the Sunbelt Region in the highest projected growth areas for rental-industry revenues in the country. Construction growth in the Sunbelt States, where our branches are concentrated, is forecast at 7.6% for 2016, which is a better growth rate than is forecast in the states where we do not have a presence.
As you can see in this chart, on the right-hand side, infrastructure, non-residential construction, municipal and residential construction end markets continue to drive our business. The oil and gas end markets were down to about 7% of rental revenues in the first quarter of 2016, down by almost half from about 12% in the same quarter last year. We've actively managed our fleet and we've been able to mitigate much of the decline by capitalizing on strong demand in our construction end markets. The growth in our main segments of infrastructure, non-residential and residential construction has been sufficient to overcome the headwinds from the shrinking oil and gas markets.
If we turn to Page 8, we can highlight the impact of oil and gas on our Q1 results as we've done in previous quarters. We consider six of our 68 branches to have significant exposure to oil and gas drilling activities and rig maintenance. The impact to the rapid reduction in U.S. drilling activity, while less than it was in Q4, is apparent in the results from these branches during Q1 of 2016. Also apparent is the strong growth in the majority of our business that has no exposure to upstream oil and gas activity. From the chart on the left, you can see that rental revenues from our oil and gas branches were down by $4.1 million or 37.9% in Q1. This includes non-oil and-gas revenue on these branches as they are not all 100% dependent on oil and gas.
The rental revenue growth rate in the majority of the net branches that are not impacted by oil and gas was 17.5%. As we expected, the oil and gas slowdown has impacted our growth rate, but not our ability to grow. We do not expect any further significant decline or improvement in our oil and gas branches in 2016, and there's actually been a slight seasonal increase in dollars on rent in our oil and gas store so far in 2016.
The time utilization chart on the top right of page 8 highlights the year-over-year increase in time utilization for Q1 and the impact of oil and gas. Time utilization in our oil- and gas-focused branches slowed to 61.5% from 65.2% in Q1 last year. Time utilization in our other branches increased to 65.5% from 63.4% in the prior year, once again benefitting from a relatively mild winter and strong construction activity.
Rental rates were also impacted in our oil and gas branches, down by 11.2% year over year, which took our overall rate growth to negative 1.3%. The rest of Neff had rental rate growth of 0.09%. Adjusted EBITDA growth was also delineated by oil and gas in the rest of the business. Adjusted EBITDA growth in our other branches was up by 17.6% year over year with a 52.7% decline in oil-and-gas-branch related adjusted EBITDA slowing our overall growth rate to 6.2%.
We believe the worst in the oil-and-gas slowdown is behind us and believe that our solid Q1 2016 results demonstrate the strength of our core construction-focused business. We remain excited about the construction activity in the markets that we serve for the balance of 2016 and are looking forward to delivering what we believe will be continued growth and good results, especially with the oil-and-gas headwinds abating in terms of year-over-year comparables.
Turning to Page 9, I'll give you a quick overview of our fleet. We've made a significant investment in our fleet of more than $740 million since 2011. This has allowed us to manage the fleet size to meet the steady increase in demand as well as manage the fleet age to our target zone of 40 to 45 months. This also positioned us to significantly reduce our CapEx requirements for 2016 as our focus turns to running a tighter utilization which should set the stage for a better rate environment.
Our earth-moving focus remains clear, with earth moving comprising 54% of our fleet. Earth moving continues to be the least penetrated category of equipment at an estimated penetration rate of 51%. We believe we have the most upside in penetration for our earth-moving fleet going forward. Earth moving provides significant strategic value to our business as it has a liquid after market, drives our highest returns and fits well with the most active market segments that we pursue.
I'll now turn it over to Mark for a more detailed review of the financial results in the quarter. Mark.
Thank you, Graham, and good morning, everyone. If you would turn to page 11 where are some of the highlights of our first quarter results, rental revenues for the first quarter of 2016 were $81.2 million, up 9.5% from the same period last year. This increase was driven by improved rental volume from an increase in fleet size and improved time utilization that was partially offset by a decrease in rental rates. Rental rate growth was negative 1.3% in the quarter with an 11.2% drag from oil and gas branches offsetting a 0.9% increase in the rest of Neff.
Time utilization increased by 1.4 percentage points to 65.1% from the first quarter of 2015. As you heard from Graham, this increase included the negative impact from the oil and gas stores with the time utilization in the rest of Neff increasing to 65.5% from 63.4% in the prior year. In terms of our cost performance for the quarter, rental depreciation increased 2.7 million to 22.2 million for the first quarter of 2016, compared to 19.5 million for the first quarter of 2015. The increase in rental depreciation was primarily due to the purchase of new equipment and the increase in fleet size.
Cost of rental revenues increased 11.6% to 19.9 million for the first quarter of 2016 compared to the prior year quarter, primarily due to increased payroll and payroll-related expenses, repair costs and insurance expenses, partially offset by decreases in fuel and rental split expenses. SG&A for the first quarter of 2016 increased by 2.2 million or 10% to 24.5 million, SG&A increased primarily due to increases in head count, employee salaries, benefits and related employee expenses, which increased 1.3 million. Rent and software licensing expenses also increased. Public company expenses were basically flat year over year.
Adjusted EBITDA was 41.4 million in the first quarter of 2016, an increase of 2.4 million or 6.2% compared to the first quarter of 2015. Adjusted EIBTDA margin was still very strong at 46.2%, although down slightly compared to 46.4% a year ago. Our return on invested capital also remains healthy at 10.7% for the 12 months ended March 31, 2016. In terms of our rental fleet, the average fleet size in terms of original equipment costs or OEC for the quarter increased 7.8% over 2015 to 778.2 million.
The average age of our rental fleet at March 31, 2016, increased slightly to 45 months from 44 months at March 31, 2015. Our growth CapEx in Q1 of 2016 for rental fleet and PP&E was 41.1 million and net CapEx was 36 million. With regards to our ABL, the balance outstanding on our revolving credit facility at the end of Q1 was 268.1 million and, as noted on page 12, availability under the borrowing base was approximately 202.7 million as of March 31, 2016. Our total leverage was 3.9 times at the end of the quarter.
In the first quarter we had an unrealized loss on the interest rate swap max to max at a 4.6 million, so there is a net unrealized loss of 6.5 million on the balance sheet at the end of March. Also in the first quarter, we booked an increase to the payable due under the Tax Receivable Agreement of 0.4 million. This was primarily due to an adjustment to the TRA due to the sale of used equipment that was purchased before the date of the IPO, but was partially offset by the impact of the shares repurchased during the quarter.
This adjustment has amounted to an increase in the TRA liability of approximately 0.1 million to 0.5 million in each of the quarters since the IPO. During the quarter, we repurchased approximately 887 shares for a cost of $5.3 million under our previously-announced share repurchase program. With CapEx being reduced for 2016, we consider this program to be a favorable use of our capital that will enhance returns and deliver value to our shareholders.
On page 14, we have reaffirmed our four-year guidance. Our first quarter results were in line with their expectations and our four-year guidance remains unchanged. We remain cautiously optimistic about most of our markets for 2016. We continue to see robust construction activity in our footprint, and this should result in strong demand for our rental equipment. We continue to take a conservative approach to CapEx and expect to generate free cash flow which we expect to continue applying to our share repurchase program and paying down debt during the year, depending on market conditions, in what we believe is the most effective use of our cash flow.
Thank you for your time today. Let me hand you back to Graham before we take questions.
Thanks Mark. Before we open the call to questions, let me close by saying we continue to manage our business well and we remain excited about the strength we see in construction activity and in rental demand. Our outlook for 2016 and beyond remains positive as we believe our company will continue to benefit from the significant growth expected in the U.S. construction markets, especially in our Sunbelt States. Thank you for your support and time today.
At this time, we'd like to take your questions. Operator, please provide instructions.
[Operator Instructions] Your first question comes from the line of George Tong with Piper Jaffray. Your line is open.
Can you discuss how your rental rates would need to perform sequentially over the remainder of the year in order to achieve your fully your rate guidance?
It's not really a metric that you can sort of model forward and especially in terms of the way that average calculation in ARI metric. We're kind of looking at it that we've got a 1% rate growth outside of oil and gas for Q4 and Q1 of 2016 and that drag is going to diminish significantly as we get through Q2 and definitely into Q3. So we see the positive rate growth in the non-oil and gas markets getting freed up from this drag that we've been going through in the oil and gas markets.
And, then, can you describe the rental rate growth progression over the course of the first quarter and perhaps through April in your non-oil and -gas branches?
No, we don't. I don't have that broken out here. I mean Q1 sort of runs as you'd expect. It's a seasonally-impacted quarter with momentum sort of picking up with time utilization. So there's a steady improvement in rate typically from the beginning of the quarter to the end of the quarter.
Your next question comes from the line of Justin Ward from Wells Fargo. Your line is open.
Your rental rate growth in the quarter was up I think in non-oil and -gas 17.5%. Yet, you mentioned that dollar volume of product in your CRM system is up 24% year over year, does that indicate we might expect acceleration in that rental rate growth or is it usually not a one-for-one with what's in your CRM system?
It was rental-revenue growth, Justin, up 17.5%. The rate growth was only up 0.9% outside of oil and gas. I mean, we track all the jobs coming through out of Dodge and also in the Pick Reports through our CRM system, which is what the activity that's in the zip codes that we're marketing to. But they can get skewed with the mega projects coming and going. So it's not necessarily a straight-line correlation between our rental revenues, but we always, it's been I think consistently double-digit growth quarter over quarter for this cycle, and it continues to be strong, so we look at that as being a positive environment for construction activity and for rental demand.
Okay. And then there's been some indication that maybe the Miami condo market is starting to slow and contractors are shelving some projects there. If that market does enter a bit of a downturn here, would that have a meaningful impact on you guys?
I don't think so. I mean, we don't really deal in that segment of the market, I mean, once they get past a certain level. I mean, we're really earth-moving focused, so we're, you know, we're clearing the land. We're involved in the utilities, things like that, but when that building starts going straight up, we're less impactful on those jobs from a fleet standpoint. So I don't really anticipate that it will have any meaningful effect on our business.
Okay. And, then, are you seeing any other of your regional markets showing similar characteristics of overheating as you see in that Miami condo market? Are any of the non-resi markets showing any signs of overheating? You know, maybe office or hotel anywhere?
Not really. I mean the activity that we're seeing and the growth in the activity is pretty broad based for us, so we're not really seeing any signs of any slowdown in the near future.
It's been, yes, it's been a pretty slow cycle to get going in that non-resi segment, so it's been pretty modest, the growth over the last couple of years, outside of, you know, a couple of hot markets.
[Operator Instructions] Your next question comes from the line of Justin Jordan from Jefferies. Your line is now open.
I just want to go to the 90 basis points of non-oil and-gas branches rental rate increases you've enjoyed in Q1. Can you just remind me what the equivalent number was in Q4 of 2015?
Yes, it was 1%.
Yes, yes, yes, it was 1% exactly.
Thank you. Just within are there any particular geographies, West Coast or East Coast or Florida, whatever that particularly stand out strong or weak?
Yes, we really haven't reported, you know, geographically as far as activity. I mean we're certainly - certainly the strength is pretty broad based. If you wanted to, you know, clarify that further, I guess, Eastern part of the United States has been stronger than the Western part of the United States.
Just one thing, I know, you haven't got much replacement going on in 2016 for appropriate reasons on the fleet some of you fleet just in where you want it, but just on the residuals that you're and the disposals that you're making, could you just give us some color of sort of what you're seeing in terms of residual values year on year out? There's been lots of concern from people like Ralph's as to what the decline in residuals might be and just trying to get some color as to how that's impacted Neff.
Yes, I think we're still running some strong numbers. Obviously, we watch the Ralph's data as well and we've seen the decline, but if you look at the values, I mean, they're still above previous peak, and we're still getting a strong, strong return on the equipment that we're selling, you know, in the 40% to 45% range from proceeds to OEC, and in a 40% range for margin, so we're still relatively happy with the used-equipment sales.
Okay. And just one final thing, just on the buy-back, it's about personal responses, just how much of stock you've bought back in Q1, can you just remind us sort of the interplay between how you think about buy-back versus your own leverage targets by the end of 2016?
I mean, the sort of and it's the amount of stock that comes and goes is, there's a maximum what amount we can buy each day, but there's also opportunities with block trades that might come up. So it's kind of hard to model. We're kind of looking at the $25 million program over two years as taking two years to transpire, depending on the pricing of the stock. So, you know, we're looking at maybe at a $10 million to $15 million spend in 2016.
There are no further questions at this time. Mr. Graham, I turn the call over to you.
Okay. Thanks, operator. Once again, I want to say thanks to everyone for joining our call today as well as your continued support and interest in Neff, and we'll look forward to talking to you again next quarter. Have a great day. Thanks.
This concludes today's conference call. You may now disconnect.
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