Kevin Inda - IR John Engquist - CEO Brad Barber - President and COO Leslie Magee - CFO and Secretary.

Joe Box - KeyBanc Capital Markets Steven Fisher - UBS Nick Coppola - Thompson Research Group Emily McLaughlin - RBC Capital Markets.

Good day everyone, and welcome to the H&E Equipment Services Second Quarter 2015 Earnings Call. Just a reminder today’s call is being recorded. For opening remarks and introduction I'll turn the conference over to Mr. Kevin Inda. Kevin, please go ahead..

Thank you, Debbie and welcome to H&E Equipment Services conference call to review the company’s results for the second quarter ended June 30th, 2015, which were released earlier this morning. The format for today’s call includes a slide presentation, which is posted on our website at www.he-equipment.com. Please proceed to Slide 1.

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 2.

During today’s call, we will refer to certain non-GAAP financial measures and we have reconciled these measures to GAAP figures in our earnings release, which is available on our website. Before we start, let me offer the cautionary note that 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 risk factors are included 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 will now turn the call over to John Engquist..

Thank you Kevin and good morning everyone. Welcome to H&E Equipment Services Second Quarter 2015 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 focus on our comments this morning on the significant impact from the extreme weather we encountered during the second quarter the ongoing oil patch situation and overall market conditions. Then Leslie will review our second quarter results. When Leslie concludes I'll discuss our outlook for 2015, after we will take your questions.

Please proceed to Slide 5. Leslie will go through our financials in more detail but let me summarize by saying that overall the second quarter presented a tremendous challenge primarily as a result of the record setting rainfall and subsequently flooding that occurred from April through June.

The extreme weather hit the bulls-eye on our Gulf Coast region which comprises a majority of our revenue and gross profit and where nearly 50% of our fleet is deployed. I'll discuss the specific impact in a moment. Ongoing softness in the oil patch continued but this was expected.

Both the weather and soft oil patch issues are transitory and hopefully behind us for the most part. But we expect our distribution business specifically new crane sales to be soft in the near term.

Despite these significant headwinds demand for our rental equipment remains strong for the quarter where revenues increasing 9.9% from a year ago and despite a 6.4% decline in total revenue we achieved positive EBITDA growth compared to…continue to maintain industry leading utilization even with the challenges I just mentioned.

More importantly we believe overall market conditions remain strong and our outlook remains positive for the balance of this year and over the long term for the foreseeable future. Please move to Slide 6. As usual we have included our map detailing revenue and gross profit by region.

Our Gulf Coast and Intermountain regions continued to account for the majority of our business. So the wet weather had a material impact on our business. Let's move on to Slide 7 where I will dig deeper into the impact from the extreme weather.

You'll see from the NOAA data on this slide that Texas encountered record setting amounts of rainfall from April through June, most of which occurred in May. To put this in perspective Texas had more precipitation in this three month period than other period since NOAA began tracking the data in 1895.

The rest of our Gulf Coast region as well as our Intermountain region also experienced significantly above average rainfall and as I mentioned earlier nearly 50% [indiscernible] in Texas, Louisiana, Arkansas and Oklahoma. The impacts to our business were significant as construction activity experienced unusual delays. Please proceed to Slide 8.

To further demonstrate the significance of the weather impact we included two graphs comparing our total weekly utilization versus our Texas weekly utilization. You'll see from the chart on the left our total weekly utilization dropped to a lower 65.2% March of this year largely as a result of the weakness in the oil patch.

But since its [indiscernible] March utilization has increased more than 800 basis points to 73.6%. On the right graph at the high point of flooding in May our Texas weekly utilization dropped to a lower 65.6 on the positive side since this low point in May Texas utilization has increased nearly 800 basis points to 73.4%.

Given the scale of our presence in Texas these branches represent approximately one quarter of our total company original equipment costs. I would like to point out that our 73.6% utilization [indiscernible] 721, marks the first time we have seen year-over-year utilization growth this year. Please move to Slide 9.

Let me now provide an update on the current trends we're experiencing in the oil patch. When we first detailed our exposure on our fourth quarter call oil and gas accounted for 13% of our total revenue in 2014. Today our exposure is nearly half of that, it's 7% in the second quarter down from 11% in the first quarter.

The decrease is a result of a combination of factors including lower overall demand, fleet reallocation and lower new crane sales which are down 42% year-over-year.

The majority of our oil and gas exposure continues to be an upstream active in what we estimate this was around 6% of total revenue followed by 1% in midstream and less than 1% in downstream activity during the second quarter.

Of the 6% upstream exposure we continue to estimate that 95% is tied to production which is proven to be less sensitive to volatile oil prices and exploration. As I mentioned earlier the weakness in oil and gas has significantly impacted the market for new cranes, and visibility in future demand is limited.

Again we have successfully mitigated this impacts to our rental business by efficiently moving fleet from the oil patch markets, to our high activity non risk construction markets. Year to date we have transferred approximately $51 million of fleet measured in original equipment cost.

Of this we transferred 21 million as stated during our first quarter call and another 30 million was transferred earlier in the second quarter. We believe we have appropriately adjusted our fleets in the oil patch and currently do not anticipate moving significant fleet out of these markets in the future. Please proceed to Slide 10.

As a reminder especially for those that are new to our calls, the majority of our oil and gas exposure's in the Gulf Coast. It's 72% of our total 7% exposure.

We believe the current trends are positive in Texas as well as our entire Gulf Coast region, currently time utilization in our three largest oil patch branches which are located in Texas has improved more than a 1000 basis points on average from their lows in May. These three branches are currently averaging near 75% utilization.

These stores are significant to the overall company and comprise approximately 9% of our total fleet. The fleets were reduced on average by 8% since the low point of demand in the second quarter. Further the majority of our rental fleet in Texas has been the Eagle Ford shale, which is one of the lowest lifted cost for barrel shale plays in the US.

Lastly it is important to note that more than 80% of our total revenue in Texas is tied to construction activity other than oil and gas which remains very strong. Move to Slide 11 please. I just want to reemphasize again the importance of our strong fleet management systems and fleet mix.

None of our fleet is specialized for applications in the oil and gas industry or any other industry for that matter and is a 100% transferrable between our end markets.

Slide 12, the data points on this slide should not be a surprise to anyone on this call with the broader indicators pointing to a positive trajectory in the non residential construction markets through 2017. I'll also point out that the June ABI came in very strong, up to 55.7 from 51.9 in May. At this time I'm going the call over to Leslie..

Good morning everyone and thank you John. I’ll begin on Slide 14. As John mentioned in his comments this morning, the second quarter prevented an unanticipated challenge with the extreme rainfall combined with the ongoing weakness in the oil and gas industry.

To summarize, total revenues decreased 6.4% to $262.4 million and gross profit decreased 3% to $86.4 million compared to the same period last year. The net decline in our top line revenues is directly tied to the weak demand in new equipment sales, more specifically Ukraine due to the continued softness in the oil and gas market.

However, our rental business performed solidly [indiscernible] wages and equipment sales. Rental revenues increased 9.9% to $108.6 million for the quarter over the same period a year ago. Physical utilization levels were impacted by the extreme weather conditions and the decline in oil and gas activity.

We average time utilization based on OEC at 70.3% for the quarter compared to 72.7% a year ago. To further understand these results that maybe helpful to net it in our stores with the most oil and gas exposure, utilization was down from a very high rate of 79.1% a year ago to 68.8% this quarter.

Further it is difficult to separate the 10.3% decline in utilization between weather versus the oil and gas issues since many of these locations sit in the regions with historically had rainfall and flooding this quarter. John provided a good bit of color around weather in his comments to help bridge this gap.

In our non-oilfield markets time utilization was actually up 40 basis points to 70.7% compared to the second quarter of 2014.

Despite pressuring rates from the wet weather in oil and gas markets, we obtained positive year-over-year rental pricing but average rental rates increasing nearly 1% with the rates flat to positive rate trends in all product lines over year ago. Our dollar returns were 34.2% compared to 36.3% in year ago.

Once again we anticipated a decline in new equipment sales, specifically cranes used in oil and gas activities displayed out again in the second quarter new equipment sales were $64.4 million down 28.9% from $90.6 million a year ago almost entirely to new crane sales.

Also the second quarter of 2014 presented the most challenging new equipment sales comp of the year. Used equipment sales were 28.9 million, down 7.9% from the second quarter of 2014. As a reminder to our listeners, this decline is mainly a result of our young fleet age.

Sales from our rental fleet comprise 82% of total used equipment sales for this quarter compared to 88% in the second quarter a year ago. Our parts and service segment delivered $44.1 million revenue on a combined basis, basically flat with the year ago.

Total gross profit for the quarter was $86.4 million compared to $89.1 million a year ago, a decrease of 3% on a 6.4% decrease in revenue. Consolidated margins expanded to 32.9% compared to 31.8% a year ago and were primarily driven by shift in revenue mix to rentals.

Rental gross margins for the quarter were 46.7% compared to 48.4% last year, which resulted from higher rental and depreciation expense due to fleet growth since the year ago combined with lower physical utilization. Margins on new equipment sales were 11.8% in this quarter compared to 12.3% a year ago.

And used equipment sales gross margin were 32.2% compared to 32.9% last year. Total used equipment sales down further, margins on rental fleet sales were 37.2% compared to 35.4% a year ago. You may recall that used equipment sales are primarily comprised of sales from our rental fleet.

We’re pleased that margins on our fleet sales continue to be strong and even exceeded the prior year’s margins. Parts and service gross margins were 41.6% compared to 42% a year ago on a combined basis. Move to Slide 15 please.

Income from operations for the second quarter decreased 13.1% to $33 million compared to $37.9 million last year on a margin of 12.6% compared to 13.5% in the second quarter last year. Income from operations declined on lower revenues and higher SG&A. Please move to Slide 16.

Net income was $11.5 million or $0.33 per diluted share compared to $15.7 million or $0.45 per diluted share in the same period a year ago. Our effective tax rate increased to 40.9% compared to 38% a year ago due to a decrease in favorable permanent differences in the current quarter. Please move to Slide 17.

Despite a 6.4% decrease in revenues, EBITDA was $79.4 million or a 1% increase over the same period last year and EBITDA margins were 30.3% compared to 28.1% a year ago, a 220 basis point increase. Our revenue mix shifted to the rental business positively impacting margins. Next, Slide 18.

SG&A was $54.4 million, a $2.5 million or 4.9% increase over the same period last year and driven primarily by travel training, professional and other service fees and promotional marketing expense. Branch expansions contributed 800,000 in SG&A during the quarter.

SG&A as a percentage of revenue was 20.7% this quarter compared to 18.5% a year ago largely as a result of the current year decrease in total revenues driven by lower demand for new equipment sales.

Slides 19 and 20 include our rental fleet statistics, during the second quarter we increased the size of our fleet by 22.6 million and 1.8% based on original equipment costs. We ended the quarter with an original equipment cost of our fleet of 1.3 billion.

Our gross fleet capital expenditures during the second quarter were 69.2 million including noncash transfers from inventory. In fact rental fleet capital expenditure for the quarter was 39.1 million. Our gross PPE CapEx was 6.4 million and net was 4.9 million. Our average fleet age as of June 30th was 32.3 months.

As you recall we discussed in our first quarter call our intent to decrease 2015 gross CapEx by 40 to 50%, from 2014 level. While we'll now end close to the top of the range this level of spending remains our plan.

You may also recall that our original 2015 plan announced in our 2014 year end call was a reduction of 25 to 30% based solely on the three consecutive years of significant reinvestment in the fleet. Very early in 2015 we adjusted this further based on a weakness in the oil and gas markets and the fleet reallocations that have taken place.

Next Slide 21. At the end of the second quarter our outstanding balance under our 602.5 million ABL facility was 257.1 million and therefore we had 338.1 million of availability at quarter end under our ABL facility. Net of 7.2 million of outstanding letters of credit.

I'll now turn the call back to John to discuss our current outlook and then we'll open the call for questions..

Thank you, Leslie. Please proceed to Slide 23. Before we open the call to questions let me quickly close by reiterating our belief that solid growth opportunities will persist throughout the remainder of 2015 and over the long term for the foreseeable future. Activity increased significantly in June and this momentum is continuing into July.

Overall momentum in the non-residential construction markets remains strong despite the ongoing softness in the oil patch. The major industrial expanse along the Gulf Coast presents a significant opportunity for our business as evidenced by several additional multibillion dollar projects announced in Louisiana during the quarter.

Unfortunately much of our footprint experienced historic rainfall and flooding during the second quarter. Due to this and ongoing softness in the oil and gas markets we're adjusting our annual guidance. For 2015 we now expect our revenues to range from 1.30 billion to 1.052 billion and EBITDA in the range of 319 million to 335 million.

As a note we do not currently intend to provide guidance for periods beyond 2015. Lastly, as we announced in our press release this morning, our Board of Directors has declared a regular quarterly cash dividend of $0.275 per share of common stock, an increase of 10% from the first quarter and our fifth consecutive quarter paying a dividend.

The dividend will be paid on September 9th, 2015 to stockholders of record as of the close of business on August 24, 2015. We intend to continue the quarterly dividend going forward subject to board review and approval each quarter.

Our company remains focused on solid execution, greater productivity and returns for our shareholders, we are pleased with the overall trends in our business and opportunities as we move further into this year. We'll now take questions. Operator, please provide instructions..

Thank you, [Operator Instructions], and we'll go first to David Joe Box with KeyBanc Capital Markets..

So you know Slides 7 and 8 really helpful in terms of our understanding and just the trajectory and utilization. Can you maybe help us parse out how much impact there ultimately was to the incremental gross profit margins within the rental business? I think it came in at 30%. Any help on that number..

I would say Joe that really it was direct impact from the lower utilization that really if utilization had been at, at least where it was last year then we probably wouldn't be having this conversation. It'd be at more normal incremental closer [indiscernible]..

So, it'd be more in the 50% plus range..

I think so, yes..

Yes, all of that was tied to utilization..

Understood completely. So maybe [indiscernible] if you're talking about you know utilization trending up year over year here in July, can you maybe just give us a feel for how volume of fleet on rent has trended post quarter..

Joe, maybe look. We've had a tremendous increase in utilization since those low points we showed you in May I mean as of this morning we were running north… 74% utilization we’ve been north of 74% for a week.

The real demand is just strong and we’re actually running a little higher utilization today than we were a year ago at this time on a much larger fleet. So, very-very positive trends there..

And then maybe just one on pricing and I’ll hop back in queue. I mean, you’ve got the industry leader out there implying that rental rates could be negative in the back half of the year. Obviously, your utilization is healthy so far in July.

I am curious aside from that high utilization, what type of levers do you had where you can pull those levers you keep rates positive when you’ve got the industry leader out there pointing toward negative..

Well, Joe number one and less we spoke to about [indiscernible] farther on CapEx. We last quarter told you we were going to cut our gross CapEx 40% to 50% we’re going to be at that [indiscernible] so we’re pulling our CapEx in a little bit being pretty conservative there.

We saw what United report I can tell you we do not expect to see negative rates in the second half of this year. We think our rates will be positive..

We’ll go next to Steven Fisher with UBS..

What is your opinion about the level of supply in the overall market? And if you believe it’s oversupplied, kind of where is it -- is it more oversupplied today.

Is it the Gulf Coast or is it other regions?.

One, I don’t think there is any significant oversupply in the market. I think when everybody started reallocating fleet out of the oil patch into the construction market, it gave the market some indigestion and there was a lag that hit utilization a little bit and it hit rates and then we had weather on top of that.

But those issues will transit Orion and if there are -- our utilization is north of 74% I mean that’s we’re approaching about as high as we can run. So, I do not view there being an excess capacity in the marketplace right now. There might have been for a short period of time due to transitory issues but those have I think run their course.

And I think you’re going to see most people running high utilization levels I don’t view there being an excess capacity today..

And then you’re pulling back on the CapEx.

What was your free cash flow in the first half of the year and how are you thinking about free cash flow for the full year at this point?.

We are running about $17 million in free cash flow and are directly tied obviously to our CapEx spending and it very much -- it’s typically back half is more of a free cash flow generator than the first is not an unusual pattern. So I would expect that to increase relative to the first time..

Well, that just given you a -- an exact number we’re going to have significant free cash flow on the [indiscernible]..

But I mean, am I thinking about it correctly that if you’re taking $100 million to $200 million of CapEx out this year, I mean that in itself should translate to that amount of free cash flow?.

I would say more to the lower end of what you just said, but yes..

And then it’s a little early.

But given how you’re viewing the market, how you’re thinking about CapEx in 2016?.

Well, I’d say that you’re right, it’s a little early. I mean when we get into our budgets and what -- and look we’re always thinking about it but I am not prepared to give you a number, it’s a little bit early and we’ll see how the fall plays out in here.

But feel good about our end markets right now and we are -- we're confident that this cycle has it I mean we think we’ve got some multiyear runway in front of us here..

We’ll go next to Nick Coppola with Thompson Research Group..

So if I look at the taxes utilization charge you guys provided which was really helpful.

Can you just talk a little bit more about the drivers of the region improvement? And so anyway to talk about how much of that your view is, the results that you’re getting through the rain the ground drying out versus seasonality or any change in end market demand?.

I think -- and Brad might want to add some color on this I think it’s certainly heavily weighted to think just drying up I mean the rainfall in Texas was just brutal and it really impacted our business. But we’ve also right sized our fleets in the oilfield markets in Texas.

We’ve cut those fleets back about 8% and today as a result of that I mean the utilization levels are very strong. We’ve got branches in the oilfield markets approaching 80% utilization today. So, I think it’s a combination of rainfall and rightsizing those fleets..

And then my second question here. We've been hearing about used equipment prices, turning lower recently, through your used sales margins particularly for your rental fleet were actually up year-over-year so I guess, we're not sure how much of that the result of mix.

But if you could just talk a little more about the used equipment price environment for your team and if there's any reserve for the broader rental industry. .

In fact the used equipment markets are very healthy. I don't think our margin improvement was necessarily a mix issue, I think it's just you know a healthy used equipment market. I don't think we're continuing to see used prices increase.

You may have a category here or there that softened a little bit but overall it's just a strong healthy used equipment market and we expect that'll continue for the foreseeable future..

[Operator Instructions] We'll go next to Emily McLaughlin with RBC Capital Markets..

Hi, good morning. Just want to talk a little more about CapEx. What do you consider a maintenance CapEx level..

Could you repeat that, you weren't coming across real good..

Sorry, can you hear me..

Yes, now I can and thank you..

Wondering what you guys consider a maintenance CapEx level?.

That's going to be directly related to how much is coming out of the fleet as far as sales and age of what's coming out of the fleet.

If you just looked over the history of the last couple years that's ranged probably from 150 to 180 something like that, 150, 180 million, so that's probably a fair range to look at and so I would probably leave it at that. It's directly tied, I started by saying it’s directly tied to volume of fleet coming out, just remember that..

And then can you just comment how rental rates were in July versus June..

You know I really don't like to give monthly guidance but you know we feel and we're closing the month out right now but we feel they'll be positive, slightly positive..

Thanks very much, guys..

We'll go next to a follow up from Joe Box with KeyBanc Capital Markets..

Yes, just one quick follow up, relative to capital allocation. The stock already has, dividend yield that's north on 6%, can you maybe just put some color around why you guys decided to go out and raise the dividend further..

I think it's a function of you know, we're going into a period of time when we're going to be generating significant cash flow and we view returning cash to our shareholders right now very positively and we got the capacity to do it and it's just the right time..

So clearly enough visibility in the business to do it, I mean do you expect to do a blend of debt paydown as well or is it primarily going to be geared toward dividend increases and modest fleet growth..

No Joe, we'll definitely be paying down. I've stated earlier we are confident and it's our belief that the cycle still has legs and multiple years in front of us of a really good environment and we may take a different approach if we thought the same was, the cycle had run its course but we don’t think that's the case at all.

We've got runway in front of us here..

Appreciate it, thank you..

We'll go back to a follow up from Nick Coppola with Thompson Research Group..

Hi guys, and so just as a follow up here can you talk a bit more about the multiyear expansion you're expecting in Gulf as far as kind of downstream, downstream work and have you run into any delays there and maybe just an update on expectations..

I'm going to let Brad take that..

Nick, our view remains the same, I mean we've had, we've had some delays, we’ve also had some additional announcements, for example recently Shintech announced a 1.4 big spend right here in Naperville parish, within 50 miles of our corporate headquarter so, our view has not changed on that front.

You know there have been some minor delays but there're all within the normal course of business and there've also been some announcements as John mentioned earlier..

Okay and then, is there any additional color you can add just about new branches in the year, maybe how recently added branches are performing and where we could expect new roll outs. .

Sure, so I'll stay away from revenue rollouts will likely be but I will say they certainly won't be in the oilfield heavy markets. You know in 2012 we started this expansion with two locations, in '13 we added four locations, in 2014 we only opened three locations and this year we expect to have five or six.

We have announced one open in Charlotte, excuse, Charleston, South Carolina.

We've got a second that's opening literally you know next week in Freeport, Texas and then we've got at least three others that are in process and again I prefer not to disclose locations and those guys have chance to get out to run as a collective group whether it’s taken by your class or in aggregate of all the locations I just mentioned across those years, we have continued to exceed our internal expectations for both growth and return on capital..

And a follow-up from Steve Fisher with UBS..

Still just trying to reconcile the difference in message on rate growth and oversupply between you and some of the others, maybe can you just talk about how is your rate growth in the Gulf Coast compared to the rest of your markets?.

Steve this is Brad. It’s very similar look out there you -- it's a supply demand market. So first of all I think everyone should pay attention to the fundamentals of the business, a little shock that anyone is projecting rate decreases in environment we’re in, in the more recent improvements.

Through yesterday our non-oilfield locations were running almost 75% utilization as John stated collectively all of our locations this week have been running north of 74% utilization. And he said earlier that we expect slightly positive rates for the remainder of the year.

So, those are excellent dynamics I can’t speak to why other folks have a different view of the business. But at these utilization levels everyone should be focused on the quality of revenue. And we are, we’re going to accomplish positive rates for the year, that’s our view. And we think that our utilization can maintain the current stress.

As for why others and how you reconcile that, honestly I am not sure what they’re considering..

I don’t think I’ve ever seen a point in time when our utilization was running where it is today that we couldn’t get some positive rate traction. So, we’re pretty confident we’ll be positive for the rest of the year..

I was almost wondering if perhaps the industrial side of the Gulf Coast is actually a better place to be exposed today than some of our general non-res markets where you have perhaps some of the smaller independent rental companies being a little bit more aggressive. I don’t know if you have a view on that.

But it sounds like your rate growth is kind of similar across your business?.

It’s pretty consistent..

And with no other questions in queue at this time, Mr. Engquist I’ll turn it back to you for closing remarks..

Look, we had a challenging quarter due to some transitory issues. We think those have run their chorus. I think that shows in our current utilization which is very strong. We’re going to have a better second half of the year and we look forward to talking to you on our next call. Thanks for joining us..

Ladies and gentlemen, thank you for your participation. This does conclude today’s conference..