H&E Equipment Services' (HEES) CEO John Engquist on Q1 2016 Results - Earnings Call Transcript

| About: H&E Equipment (HEES)

H&E Equipment Services, Inc. (NASDAQ:HEES)

Q1 2016 Results Earnings Conference Call

April 28, 2016 11:00 AM ET

Executives

Kevin Inda - IR, Corporate Communications, Inc.

John Engquist - Chief Executive Officer

Brad Barber - President and COO

Leslie Magee - CFO and Secretary

Analysts

Neil Frohnapple - Longbow Research

Steven Fisher - UBS

Nick Coppola - Thompson Research Group

Larry Pfeffer - Avondale Partners

Seth Weber - RBC Capital Markets

Joe Box - KeyBanc Capital Markets

Sean Wondrack - Deutsche Bank

Operator

Good morning and welcome to the H&E Equipment Services First Quarter 2016 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Mr. Kevin Inda. Please go ahead, sir.

Kevin Inda

Thank you, Travis, and welcome to H&E Equipment Services conference call to review the company’s results for the first quarter ended March 31, 2016, which were released earlier this morning. Format for today’s call includes a slide presentation, which is posted on our website at www.he-equipment.com. Please proceed to slide one. Conducting the call today will be John Engquist, Chief Executive Officer; Brad Barber, President and Chief Operating Officer and Leslie Magee, Chief Financial Officer and Secretary.

Please proceed to slide two. During today’s call, we’ll refer to certain non-GAAP financial measures, and we’ve reconciled these measures to GAAP figure in our earnings release, which is available on our website. Before we start, let me off the cautionary note, this call contains forward-looking statements within the meaning of the federal securities laws. Statements about our beliefs and expectations and statements containing words such as may, could, believe, expect, anticipate and similar expressions constitute forward-looking statements.

Forward-looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. These risks included those described in the risk factors in the company’s most recent Annual Report on Form 10-K. Investors, potential investors and other listeners are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after the date of this conference call.

With that stated, I’ll now turn the call over to John Engquist.

John Engquist

Thank you, Kevin, and good morning, everyone. Welcome to H&E Equipment Services first quarter 2016 earnings call. On the call with me today are Leslie Magee, our Chief Financial Officer and Brad Barber, our President and Chief Operating Officer. I’ll direct my comments this morning to our first quarter highlights, our business and overall market conditions, then Leslie will review our financial results. When Leslie finishes, I will close with a few brief comments, after which we will take your questions.

Please proceed to slide five. Our first quarter results were solid as a result of the continued strength in our rental business, coupled with a surprising increase in demand from our distribution segment. Non-residential construction activity in our end-user markets, especially the industrial sector, remained strong. Beginning with the top-line, total revenues increased 8.6% or $19.6 million to $247 million. We generated $5.6 million in net income or $0.16 per diluted share and EBITDA was comparable to year-ago levels at $69.1 million.

Our rental business, specifically earthmoving equipment and cranes, did face some headwinds during the quarter, resulting from the heavy rains and associated flooding that occurred in Louisiana, Texas and Arkansas and the continued weakness in the oil patch. But despite these challenges, rental revenues increased 1.4% from a year ago. And as we anticipated, rates remained near year-ago levels. We also continued to generate industry-leading utilization at 66.3% based on OEC. Despite the significant decline in earthmoving activity due to weather, and the ongoing weakness in crane demand and the oil patch, our time utilization was only down a little over 1 percentage point compared to a year ago.

Our distribution business delivered surprisingly strong results during the quarter as new equipment sales increased 28.4% and our used equipment sales increased 10%. The primary driver of the increase was higher earthmoving sales. Let me be clear, we expect this segment of our business to remain lumpy throughout this year with limited visibility. We attribute these gains to successful increases in market share rather than an improving market.

Please proceed to slide six. This slide illustrates our nationwide footprint, various regions, branch locations and Greenfield sites that we’ve opened during the last three years. We currently have 77 total branches and have opened 14 Greenfield sites since the beginning of 2013, four in 2013, three in 2014, four in 2015 and to-date three in 2016. All of our Greenfield sites have been rental facilities, and we’ve been very pleased with the performance of our Greenfield locations.

Please proceed to slide seven. The oil and gas market remains very challenging, but the good news is that it has been relatively stable for the last few quarters. At the end of the first quarter, oil and gas accounted for only 5% of our total revenue compared to 6% at the end of the year. For reference, this compares to a high of 13% of our total revenue before the oil and gas market collapsed a little over a year ago. And the majority of our exposure remains in production rather than exploration. Time utilization in our four Texas branches with heavy oil and gas exposure averaged around 68% utilization on a combined basis during the first quarter.

The key take away from this slide is that the Gulf Coast and especially Texas is an extremely beneficial market for our business despite the ongoing weakness in the oil and gas market. 90% of our total revenue in Texas is generated from non-residential construction activity outside the oil patch. And as I indicated earlier, our entire Gulf Coast region continues to experience solid demand for rental equipment.

Continue to slide eight, please. Let me conclude with a few key points on market conditions. Overall, the non-residential construction markets we serve remained solid and are providing significant opportunities for our business. Key industrial indexes, such as Dodge and Global Insight forecast a positive growth trajectory for the non-residential construction markets at least through 2017. The March ABI increased significantly to 51.9 from 50.3 in February and has been above the growth threshold of 50 in 22 of the past 24 months. I just mentioned ongoing strength in our Gulf Coast region, new constructions start to remain solid. We’re experiencing incremental demand from a wide array of the large capital projects breaking ground and new projects have continued to be announced on a regular basis. Lastly and very importantly, our customers’ current sentiment regarding overall market conditions is very favorable.

At this time, I’m going to turn the call over to Leslie.

Leslie Magee

Good morning, everyone, and thank you, John. I’ll begin on slide 10 to discuss our financials in greater detail. Our rental business again performed well delivering solid metrics. We described our distribution business as inconsistent on many occasions and this proved true this quarter, but to the positive side in comparison to a year ago. However, as John discussed, we don’t anticipate this trend to continue throughout the balance of this year. To summarize, total revenues increased 8.6% or 19.6 million over the same period a year ago to 247 million, 12.6 million of this increase was related to higher new equipment sales.

Gross profit increased 6.3% or 4.8 million to 81.8 million compared to a year ago. As for the rental segment, rental revenues increased 1.4% over the same period a year ago to 102.8 million for the quarter. Physical utilization remained healthy during what has historically been the softest time of the year with average time utilization based on OEC of 66.3% for the quarter compared to 67.5% a year ago. Taking a deeper dive into physical utilization by end-market, our utilization in non-oilfield markets were 66.4% this quarter, essentially flat with utilization in non-oilfield markets a year ago. And all of our oilfield markets combined, physical utilization was 65.9% compared to 70.4% a year ago. For a deeper dive based on product line, aerial work platforms, which is approximately 60% of our fleet, increased slightly in the first quarter of this year compared to last year. However, both crane and earthmoving physical utilization declined in the first quarter compared to a year ago. Rental pricing was essentially flat with year ago rates down to 10 basis points and our dollar returns were 32.2% compared to 32.3% a year ago. New equipment sales were surprisingly strong, up 28.4% or 12.6 million to 57.2 million, primarily driven by a 75% or 10.7 million increase in earthmoving equipment. Crane sales were also solid, increasing 12.2% or 2.6 million. Used equipment sales also increased up 10% or 2.5 million to 27.6 million. Sales from our rental fleet comprised 88% of total used equipment sales this quarter compared to 82% in the first quarter a year ago. Our Parts and Service segment delivered 44.3 million in revenue on a combined basis, up 5.3% from a year ago. Total gross profit for the quarter was 81.1 million compared to 76.3 million a year ago, an increase of 6.3% on an 8.6% increase in revenue. Consolidated margins were 32.9% compared to 33.6% a year ago, impacted by the shift in revenue mix to lower margin new equipment sales. To expand on gross margins by segment. Margins either improved or remained comparable to a year ago. Rental growth margins for the quarter were 45.3% compared to 45.2% last year. For the first quarter, margins on new equipment sales were flat at 11.7%. Used equipment sales gross margins were 32.9% compared to 32.6% last year. Margins on pure rental fleet only sales were 36.7% compared to 38.4% a year ago. Parts and Service gross margins were 42.3% compared to 41% a year ago on a combined basis.

Moving to slide 11, please. Income from operations for the first quarter decreased 3.9% to 22.4 million compared to 23.3 million last year on a margin of 9.1% compared to 10.3% in the first quarter last year. Income from operations declined as a result of the shift in revenue mix, the lower margin new equipment sales combined with higher SG&A compared to a year ago. Slide 12, please. Net income was 5.6 million or 0.16 per diluted share in the first quarter compared to 6.1 million or 0.17 per diluted share in the same period a year ago. Our effective tax rate was 41% compared to 40.6% a year ago.

Please move to slide 13. EBITDA was 69.1 million in the first quarter compared to 69.3 million a year ago, and EBITDA margins were 28% compared to 30.5% a year ago. The decrease in EBITDA margins was primarily due to a shift in our revenue mix from rentals to lower margin new equipment sales business.

Next, slide 14. SG&A was 59.4 million a 5.9 million or 11.1% increase over the same period last year. SG&A as a percentage of revenue was 24% this quarter compared to 23.5% a year ago, primarily due to higher salaries and wages, benefit cost and facility expenses. Branch expansions contributed 1.9 million of the increase in SG&A during this quarter.

Next on slide 15, our gross fleet capital expenditures during the first quarter was 34.6 million, including non-cash transfers from inventory. Net rental fleet capital expenditures for the quarter were 10.4 million. The size of our rental fleet decreased by 18.4 million or 1.4% since December 31. Gross PP&E CapEx for the quarter was 5.4 million and net was 4.5 million, our average fleet age as of March 31 was 31.5 months. As included on the slide, we had free cash flow of 21.2 million in the first quarter compared to a use of cash of 4.7 million a year ago, the single largest driver of the difference was less cash used in the current quarter for CapEx. We’ve included a free cash flow GAAP reconciliation to net cash provided by operating activities in the appendix at the end of the presentation, reconciling free cash flow for the same periods presented here on the slide.

Proceed to slide 17, please. At the end of the first quarter our outstanding balance under our 602.5 million ABL facility was 171 million and therefore, we had 423.7 million of availability at quarter-end, net of 7.7 million of outstanding letters of credit. Let me just briefly discuss the proposed amendment to our senior note indenture we announced on April 21, 2016, if approved by our bond holders the proposed amendment will among other things provide for a dividend basket in an aggregate amount of 15 million annually as long as the leverage ratio does not exceed 3.5 times.

Under the terms of the indenture, dividends are generally considered restricted payments and the Company may only pay dividends if it meets certain conditions and has availability under the baskets for restricted payments. And currently this generally means paying dividends out of earnings or if there’s availability under one of the general baskets. The proposed amendment will add a new annual basket of 50 million for dividend payments within the amounts actually paid offsetting the amount that would otherwise be added to our existing income grower basket. And the complete terms and conditions of the concerned solicitation are available on the Company’s consent solicitation statement dated April 21. We believe the proposed amendment supports our current intent to continue our quarterly dividend subject to Board approval.

I’ll now turn the call back to John for his conclusion.

John Engquist

Thank you, Leslie. Please proceed to slide 19. Let me quickly conclude so we can take questions. The first quarter represented a solid start to the year for our business and we maintain our belief that our end-user markets will remain strong during 2016 as a result of the positive trends I discussed earlier. Our employees did a tremendous job servicing our customers during another quarter where we faced some challenging weather conditions. I want to emphasize again, even though we experienced a positive benefit from new and used equipment sales during the quarter, we do not expect this level of activity to continue throughout the year in this segment of our business.

Lastly, we paid our seventh consecutive quarterly cash dividend on March 9. As Leslie discussed, we’ve announced a consent solicitation to amend our indenture to support our intent to continue the dividend program. As usual, the dividend is subject to Board review and approval each quarter.

We’ll now take your questions. Operator, please provide instructions.

Question-and-Answer Session

Operator

[Operator Instructions]and we’ll take our first question from Neil Frohnapple with Longbow Research.

Neil Frohnapple

The increase in aftermarket revenue in the quarter was a positive surprise at least versus what we were expecting. Could you just talk a little bit more about what drove that? I think last quarter, parts were down double digits, I think related to crane part sales. So just wondering if the recent increase in oil prices helped drive some activity or any other color you could provide there would be great.

John Engquist

I think it’s just our focus on that segment of our business, obviously we’ve faced some real headwinds because of the crane markets are so down, and that’s a big driver of our Parts and Service business. But I think Brad and his team have done a good job on focusing on other segment of the market and going after that business. So it was a pleasant surprise.

Brad Barber

Yes. Neil, there was nothing specific to cranes. So, crane service has not come back to historic levels. We continue to maintain contact with our customers. When their opportunities pick up, so will ours. But to John’s comments, it’s more of a broad-based across the Board approach and our groups performed very well.

Neil Frohnapple

Okay, thanks for that color. And then, as a follow-up, could you just talk about the sustainability of this growth and aftermarket as we move through the year?

John Engquist

Look, I think we’re going to continue to perform solidly in the Parts and Service segment of our business. I think we’re doing a good job on the sales and marketing side there. We still face the challenges that we have on the crane side. The crane markets are very weak and that does impact our business. But I think we can continue to show a reasonable growth in that segment of our business.

Neil Frohnapple

Okay, that’s helpful. And then one last one, then I’ll pass it on. Just on the rental business, do you expect, still expect rental rates to be roughly flat this year versus 2015? And could you just talk a little bit more about the competitive environment in your markets and whether you’re starting to experience more pressure on rental rates?

John Engquist

We do still anticipate rates being flat over the course of the year. Look, there are some competitive pressures out there. Obviously, the oil patch came down so hard and there was so much equipment that was moved down of the oil patch into the construction markets, it’s created somewhat of a capacity issue and it’s created some rate pressures. So we expect that to continue. I mean, I think it’s going to be a challenging rate environment, but our expectation for rate hadn’t changed, we think we’ll be flat over the course of the year. And I do believe this capacity situation is resolving itself. When you look at Ralph’s data and the stuff that’s out there, I think people have been pretty conservative with their capital spending and there is solid demand. So we expect the capacity situation to begin to resolve itself.

Operator

We’ll take our next question from Steven Fisher with UBS.

Steven Fisher

Thanks. Nice job in the quarter. I wonder if you could talk about a few related things. Number one, can you give us an update of how you’re thinking about CapEx year-over-year for the full year? How about free cash flow? And then how about the debt reduction you’re expecting for this year?

John Engquist

Sure, glad too. As far as our CapEx, where the money we’re going to be spending on our fleet is going to be maintenance capital by and large. Now look, we’ve said many times, we keep our CapEx decisions relating to fleet on a shorter horizon as possible. And we think we have the ability to step up CapEx a little bit if the demand calls for it or pull it back if we see less demand than expected. But right now, our expectation is to spend maintenance capital and maintain the size of our fleet, but we’re not looking at growing our fleet right now. What was the other part of your question, I apologize?

Steven Fisher

How much cash you could generate and how much is debt reduction?

John Engquist

Well, you saw what we generated. Last year we generated $104 million in free cash. I expect similar cash generation this year, if not a little bit more. And we’ll, the use of cash will be to continue the dividend and pay down debt.

Steven Fisher

Okay. And then on the sale of earthmoving equipment, can you just talk about what market that was going into? And what the pricing year-over-year [indiscernible] earthmoving sales was in the quarter?

John Engquist

Sure. The market was largely Louisiana and Arkansas, that’s the bulk of the earthmoving sales we saw. Brad, you may comment on pricing.

Brad Barber

The pricing is very steady. There is no, pricing is very consistent. As John pointed out, it’s primarily Louisiana and Arkansas with Komatsu products, but there are also some other products, earthmoving products, Doosan, Wirtgen and Bobcat to a lesser degree that we saw some positive growth in as well. So it was broad-based, but heavily concentrated in Dallas to Louisiana and Arkansas.

Steven Fisher

And was that going into energy-related projects or is it more highway activity or combination?

John Engquist

Very broad-based. Not a lot of energy, it’s more the non-res construction markets.

Operator

We’ll take our next question from Nick Coppola with Thompson Research Group.

Nick Coppola

Can you talk a bit about your utilization expectations through the remainder of the year? I guess, some fleet transfers have wrapped up at this point, energy exposures at a lower levels. Would you be looking for really positive rate growth through the remainder of the year?

John Engquist

Rate growth or utilization growth?

Nick Coppola

I’m sorry, utilization?

John Engquist

Yes. Look, we expect utilization to continue to improve as we go in, move more into the season. Obviously, the first quarter is a soft quarter for us from a utilization standpoint. Our utilization in the first quarter was really impacted on the earthmoving side by some really bad weather. I mean, we just had unusual historic rainfall and that hurt our earthmoving utilization, and our crane utilization was down year-over-year, primarily due to the energy markets, the oil patch. But other segments of our business are showing strong utilization. And we expect utilization to increase as we move into the year, like it always does.

Nick Coppola

Okay, that’s helpful and then, I guess, excluding the flooding that occurred, did you see improvement in utilization through the quarter and into April, is there any commentary on the trajectory there?

Brad Barber

Yes, Nick, we have. As John said, we look for to trend very similar with our historic. Cranes will likely be a little more challenging on a year-over-year basis when it comes to utilization. But as we’ve said today, our AWP products are running about 220 basis points ahead of where they were a year ago, same time. Lift trucks are running at about 380 basis points ahead and our general rental products about 140 basis points ahead. So earth and crane are still pulling this down a little bit. Earth, our view is that, it will improve itself as it drives up. And I think we’ll see our typical utilizations. Cranes will likely be a little lower on a year-over-year basis. But we’ll trend very similarly and may get weighted a little bit with the crane product.

Operator

We’ll take our next question from Larry Pfeffer with Avondale Partners.

Larry Pfeffer

Good morning, guys. Congrats on the quarter. So, looking at oil and gas specifically, how would you expect that to trend sequentially into second quarter?

John Engquist

That’s a good question. The oil and gas markets are extremely weak right now. And we’ve really not seen much benefit from oil getting back in the 40s. It got down in the upper 20s and then it made a pretty aggressive move back into the 40s. But we really haven’t seen a lot of benefit from that. I think there is a pretty widespread belief that that could be a head [indiscernible] and not sustainable. So the oil markets, we expect, will remain very, very soft for the near term anyway. And a lot of it just depends on whether this $40 to $50 oil can be sustainable, and I think that’s a big question mark.

Larry Pfeffer

Okay and then, could you talk about some of the geographies that you’re seeing outside of oil and gas regions that have been improving lately?

Brad Barber

Sure. We’ve seen relative improvement across the country, where we operate, but our largest improvements have probably come in the Mid-Atlantic and Florida, speaking of a year-over-year improvement. Otherwise, we’re operating very similarly to where we were operating this same last year, utilizations.

John Engquist

I think just some color to that, I think it’s interesting that five of our seven regions had positive rates year-over-year. And the two regions that were negative on rate were regions with heavy oilfield exposure and that were heavily impacted by weather in the Gulf Coast. So I think that tells you something about our overall markets.

Larry Pfeffer

Yes. And I don’t know if there is a way for you to quantify it in terms of branch days that were out, but is there a new miracle way you’d think about the impact from weather in the quarter?

John Engquist

There really isn’t. I mean, the issue as I see particularly as it relates to our earthmoving business, it wasn’t just the amount of rain, I mean, we had some historic rainfalls that really created some flooding, but it was more the way we received the rainfall. I mean, it would rain then we’d get sunshine for two days and it rain again. It dried up for three days and it rain again. So it was just the spacing of the rain plus the amount of rainfall and it’s just made for situation, nothing dried up during the quarter and it really impacted our earthmoving business. But that will run its course, it always does.

Larry Pfeffer

Got you and then, just last thing was, I know it’s tough to provide guidance on this, but just the new equipment sales number. I mean, is there a sustainable bogey that you would look at there for the out quarters?

John Engquist

Well, look, I just don’t want people to take what we did in the first quarter and use that as a run rate that would not be reasonable. The market was not up. Our market share was up significantly during the quarter. And I just don’t know that that level of activity is sustainable. We don’t think it is. So just -- when you do your modeling, don’t use that level of sales as a run rate, we don’t think that’s sustainable.

Operator

We’ll take our next question from Seth Weber with RBC Capital Markets.

Seth Weber

Good morning. So, going back to the energy patch, I mean, do you feel like that we’re close to anniversarying at least the decline in rates? I mean, should we start to see the year-over-year rate comps for your oil and gas business or oil and gas markets at least start to lap themselves here? Or is it still going to be another couple of quarters, yet?

John Engquist

No, I think that’s fair. I think we should start seeing some stability there. I mean there’s been a lot of fleet move down there. And I think as we said in our comments, there’s been some stability the last couple of quarters. We’re not continuing to move a tremendous amount of equipment out of there, nor is United or anyone else. I think the fleets are pretty much been right sized, so I would expect to see some rate stability come into play.

Brad Barber

Yes, let me add. We’ve not had a tremendous amount of rate degradation in the oilfield markets. What we’ve done is move inventory to areas of better opportunity to make sure we did not have to reduce our rental rate. So we’re not really fighting a rate battle per se, and I don’t want to give a view that there’s -- that rates aren’t an issue at all. But the rates are not dissimilar by changing in the oilfield markets compared to our other markets, we are just -- we’re simply -- when we can achieve utilization with the fleet, instead of flexing the rate as hard as you may think we would, we move the assets to better opportunities and just basically displays what would have been CapEx.

Seth Weber

And I assume that crane rental rates are lagging. Is that -- I mean, is that -- are they plus or minus to your Company average at this point, can you just tell us that?

John Engquist

So for a few years, they’ve been lagging. And in smaller windows of time they’ll actually show positive movement. But in general, crane rates relative to what our expectations would be to -- our returns have been disappointing for a number of years and they continue to be. We’re not seeing additional degradation necessarily in rates it’s just more of the same. So they didn’t -- they never got to where we expected and (ph) disappoint.

Seth Weber

And then just lastly, from a bigger picture perspective, can you talk about any more of the industrial or petrochem project activity? Do you feel like are you hearing anything on the ground as far as projects going forward, projects not going forward? Is there any kind of update on how your -- what your folks are telling you about some of these really big projects that are down in the Gulf Coast?

John Engquist

Basically things are just moving along as expected, and as we said in our comments, we continue to see projects announced and it all relate to the extremely low natural gas prices. If we’ve seen any negative in the market, it’s the big Sasol ethylene project in Lake Charles they’ve slowed that project down some. They have not stopped anything it’s moving forward it’s going to move forward, but they’ve slowed the project down to conserve some cash, and that was a move Sasol made. But other than that, there’s a lot of activity in this chemical manufacturing, and we think there will be for the foreseeable future.

Operator

[Operator Instructions] We will take our next question from Joe Box with KeyBanc Capital Markets.

Joe Box

So I can appreciate the comments that you gave earlier on utilization and some of the outlook for the rest of the year. And I can certainly appreciate that you guys don’t want to give individual month-by-month data. But it would be helpful to know if you saw any particular trends, either within the utilization numbers or within the rental rate numbers, did it trend better or worse on a year-over-year basis as you went through the quarter and got into April?

John Engquist

I think it’s been trending at historical patterns pretty much. Brad?

Brad Barber

Yes, it’s been pretty similar. We’ve had some product lines. I referenced AWP a while ago that just this week we’re 220 basis points ahead in OEC utilization, (ph) utilization as compared to last year. So I think there’s been an acceleration in some of the products and then we spoke more specifically to earth and crane. And I don’t know that we could give a whole lot of additional data that would be helpful, Cranes, we’re just not likely to achieve the same physical utilizations we did last year. Rates have been somewhat disappointing. We don’t see them declining further, we just don’t see them improving much. Earthmoving, we think the utilization will come right on track. They are a little behind where they were last year, but I think our utilizations will be very similar. And then AWP being our largest single investment of all of our products, it’s about 60% of our invested OEC, it’s actually today running the top of 200 basis points ahead and so we think that’s very positive.

Joe Box

Is that flowing through in terms of rental rate trajectory or is it right now just utilization improving? And I’m not talking about sequential, I’m talking year-over-year rate.

Brad Barber

Yes, so right now it’s just basically we’re seeing the benefit in utilization and our hope is the big marketplace, a lot of competitors. And my view is still and our view is still that everyone is being pretty disciplined, and as John said, we’re not seeing unnecessary CapEx and that hopefully rates can start to participate in an increasing level. But at this time our view is flat rates and improving utilization in some products that I just outlined.

Joe Box

And maybe in that same vein, can you talk to what you’re seeing on a same store basis? I’m curious if there is maybe any differences between utilization and rental rates at existing locations versus some of your newer branches that you’ve opened?

Brad Barber

Yes. There is not. Our strategy, when we open a new location, does not utilize in any fashion lower rental rates to penetrate the market. We expect those operations to go in and participate at the average rates of that individual market. And if we look at a market and we think that rates are depressed in some kind of regional or national basis, we just go to a different market. So there is no real delineation between the average rates of a new market or an existing mature market.

Joe Box

Got it. And then lastly, just nice job on the rental incremental gross profit margin, that kind of bumped back up to 50%. Was there anything that pushed that number up in the quarter, because I would have thought that with the new store openings, it would have maybe been a little bit lower.

Leslie Magee

The only thing that would be different that I would make note of it is that, in the first quarter we did have an extra day billing with leap year. So that was a positive.

Joe Box

And how much do you think that would have mattered?

Leslie Magee

Well, how are you looking at this on a basis point or revenue? I mean, I’ve got a couple of different analysis in front of me. So I’m not sure.

Joe Box

Well, I mean, it’d be helpful on a revenue basis, but I guess, the question would pertain to the incremental rental gross profit margin to basis points.

Leslie Magee

Okay. So I haven’t carved it out on a basis point basis. So I would say that it probably contributed at least $1 million in top line revenue for the extra day.

Joe Box

Okay, got it.

Leslie Magee

Does that help?

Joe Box

Yes, that does help. And then, maybe just a follow up for that on the incremental margin. Is 50% a reasonable target for the rest of the year or would you expect to see that pull in a little bit?

Leslie Magee

Well, I think where our benefit is going to be, our flow-through as far as on the positive side, is going to be more so on managing the cost. Because we’re not going to expect the same volume-related benefits as far as on a positive flow-through. Because of the fleet growth that John talked about, we’re not going to expect the same fleet growth. And so our opportunities on incremental flow-through are going to be more so on managing the cost side of the business, so for example, maintenance and repair. So I still expect, we still expect solid incremental margins.

Joe Box

I guess, maybe to that point then, what would the opportunity be within the maintenance and repair line? Where has it been trending? And are there any other kind of big buckets where you couldn’t take out some cost?

Brad Barber

Look, as it pertains to maintenance and repair, we’ve got some internal initiatives around timing and inspection process as we’re using systems more robustly to help monitor and manage. And we think we can get incremental gains. Now, we’ve got a very young fleet and so that’s been a benefit, but I think if you’re talking about how we’re likely to run, it’s going to be similar to other periods. I think our opportunity to improve is greater than the opportunity for us to not perform at the same level. So it’s incremental, but can we do better with repair and maintenance? Yes. Is it a huge number? Not necessarily, but I think we can continue to get, gain efficiencies over a period of time, and that will show up in a positive way.

John Engquist

But Joe, as Leslie said, we expect solid incremental margins going forward on the rental side of our business.

Operator

We’ll take our next question from Sean Wondrack with Deutsche Bank.

Sean Wondrack

I’m looking at -- as I look at slide seven, when you talk about time utilization in your four Texas stores averaging 68%, can you talk about how the rental rates looked in a year-over-year basis there, in those four Texas stores?

John Engquist

Sean, again our rental rates are very similar. We’re not selecting rates in individual markets to a point that allows any one location to be dissimilar to the overall company average. So there’s probably not any additional context I can give you other than to say, the locations that you’re targeting are focused on, would be very similar to the other locations on average. Where we’ve been impacted more on utilization in the oil patch markets than we have on rate. Rates are probably fairly flat in those markets, but utilization is down on a smaller fleet.

Sean Wondrack

Ladies and gentlemen is down. On a as small. And the reason I asked the question is actually because I think there has so much discussion about oil and gas that people are kind of missing what’s going on with non-res in this country. So can you talk about like when you talk about non-res construction activity in Texas, what is basically being done there? What is being built? What are you seeing on the ground?

John Engquist

Well, the non-res construction markets, even in markets like Houston, I mean, there is still a lot of activity. I mean, we’re very busy in Houston, and you get away from anything to do with the oil patch. There’s still a lot going on there. I mean, from the infrastructure to schools, medical facilities, I mean, you name it. There’s plenty of activity going on in Texas. And as I’ve said in our comment, 90% of our revenue derived in Texas comes from non-res activity outside of the oil patch and I think that speaks volumes about what’s going on there.

Sean Wondrack

Okay, fair enough and then, also I’ve been hearing that California has been very strong. When you look at it in terms of your mix, I think your gross profit is a little bit higher than your revenue there now. Are you seeing good demand out there as well?

Brad Barber

So we are seeing good demand. And what you would see in California is, we’re really not into distribution business. We’re not the crane -- we’re not the [indiscernible] distributing in the state of California, we don’t represent any earthmoving manufacturers. So, primarily that margin being higher is because it’s a heavier rental mix. But to answer your question, California is a good market. You’ve seen we’ve opened three locations in the Greater Bay area recently in the last year and half or so. And we think California is going to be a good market for us for some time.

Sean Wondrack

And then just -- and my last question, we’ve seen probably about a year now, we’ve seen used equipment margins come down a little bit. I’ve heard a couple of things. I’ve heard there’s been less international buyers. I’ve also heard the influx of other similar equipment is hurt the margins. But do you expect that to continue to trend a little bit lower as we move through the year?

Brad Barber

So if you look at our margins have maintained very healthy levels. And we get the same questions from a variety of folks. Look, there’s certain products, cranes, you wouldn’t want to auction a bunch of cranes right now. You wouldn’t want to have to auction large mining equipment and certain road building-type equipment. But the average type of products that we utilize in our rental fleets and our largest competitors utilize in their rental fleets, have fairly stable used pricing and all -- generally speaking all of its collectively have young fleets that are in really good condition. So, our results don’t mimic the sentiment over these periods of time. And in fact, our margins remain strong, and we think they’ll stay similar.

John Engquist

Yes, we think the used equipment markets are still very healthy. Outside of cranes and mining equipment, anything tied to commodities right now is getting beat up pretty good, but the general construction type equipment that we use, those secondary markets are very healthy.

Operator

We’ll take our next question from Steven Fisher with UBS.

Steven Fisher

Clearly, the commentary on cranes is cautious in the quarter. But can you talk about the quoting activity that you’re seeing on cranes in the first quarter compared to what you saw in the fourth quarter of 2015?

John Engquist

Look, there is no way to sugarcoat the crane market, right now it’s tough. It’s really soft and at some point in time, there is going to be a recovery there and it’s going to be impressive because there is going to be real pent-up demand. I mean, these crane fleets are really aging and it’s coming, but right now the crane markets are really, really soft.

Steven Fisher

I think just given the strength of activity that you’re talking about in the Gulf Coast, why don’t you think there is more crane demand than there is?

Brad Barber

There is an outstanding crane demand on those projects. The offset is, there’ve been a tremendous amount of cranes come out of the oilfield and that’s the largest single lever that’s impacted, to your question.

John Engquist

The energy markets are just huge drivers of the crane business and there was so much product come out of the oil patch and out of Canada into the U.S., it’s been problematic for the crane market.

Steven Fisher

What about the impact of the highway bill? Are you anticipating a pickup in the crane side of the business there, and are you seeing any signs of that yet?

John Engquist

Yes, we anticipate benefit from that both on the crane side of our business and our earthmoving side and really all aspects of our business, we probably have not seen a lot of it yet, but we think it’s going to definitely be beneficial to our business going forward.

Operator

That concludes today’s question-and-answer session. And Mr. Engquist, at this time, I’ll turn the conference back to you for any additional or closing remarks.

John Engquist

I appreciate everybody being on the call. Look, we’re in a positive environment here, particularly for the rental side of our business and we think that’s going to continue. And we look forward to a solid year this year and look forward to talking to you guys on our next call. Thanks for participating.

Operator

That concludes today’s presentation. Thank you for your participation.

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