Kevin Inda – Vice President of Investor Relations John Engquist – Chief Executive Officer Brad Barber – President and Chief Operating Officer Leslie Magee – Chief Financial Officer and Secretary.

Neil Frohnapple – Longbow Research Nick Coppola – Thompson Research Group Seth Weber – RBC Capital Markets Joe Box – KeyBanc Capital Markets Sean Wondrack – Deutsche Bank Steven Fisher – UBS Sean Wondrack – Deutsche Bank.

Good morning and welcome to the H&E Equipment Services First Quarter 2017 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Mr. Kevin Inda, Vice President of Investor Relations. Please go ahead, sir..

Thank you, Christy and welcome to H&E Equipment Services conference call to review the company's results for the first quarter ended March 31, 2017, which we released earlier this morning. The format for today's call includes the slide presentation, which is posted on our website at www.he-equipment.com. Please proceed, to slide two.

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 three.

During today’s call, we’ll refer to certain non-GAAP financial measures, and we’ve 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 risks include 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..

Thank you, Kevin, and good morning, everyone. Welcome to H&E Equipment Services first quarter 2017 earnings call. On the call with me today are Leslie Magee, our Chief Financial Officer; Brad Barber, our President and Chief Operating Officer; and Kevin Inda, our Vice President of Investor Relations.

I'll direct my comments this morning to our first quarter results, our business and overall market conditions. Then Leslie will review our financial results for the quarter. When Leslie finishes, I will close with a few brief comments. After which, we would take your questions. Proceed to slide six, please.

The first quarter was in line with our expectations and the current trends continue to reinforce our outlook for the year. Demand for rental equipment was solid, which resulted in mid single-digit rental revenue growth and margin holding firmly on the year-over-year basis.

While our rental business continues to benefit from increased activity in the Eagle Ford and Permian Basin, as well as other oil field areas, we still believe sustained oil prices around $60 a barrel would increase demand for new cranes. Total revenues decreased 8.2% or $20.2 million to 226.8 million.

The decline was primarily related to new equipment sales, which declined 40.1% to 34.3 million. Given the shift in revenue mix, gross margins were strong up more than 130 basis points from a year ago to 34.2%. EBITDA was 68.8 million, compared to 69.1 million a year ago with margins increased to 30.3% compared to 28%. Slide seven please.

For the first quarter, we generated net income of $5.4 million or $0.15 per diluted share compared to $5.6 million or $0.16 per diluted share a year ago. Demand has been solid with physical utilization at 68.5% for the quarter versus 66.3% a year ago on the OEC basis.

Our rental business performed well with revenues increasing 4.4% to $107.3 million, margins were 44.8%, while rental rates were down only 0.5% from a year ago. Dollar returns were 32.4%. Proceed to slide eight please.

This slide illustrates our nationwide footprint various regions, 78 branch locations and the 15 Greenfield sites that we have opened since the beginning of 2013. We expect to open three more branch locations in 2017, and remain focused on executing our Greenfield strategy to expand our footprint and grow our business.

We believe the environment in our Gulf Coast region remains positive as a result of several factors, Texas, our largest market continues to experience a very healthy economy is driving array of non-residential projects. The energy markets are also improving as a result of increased shale drilling activity.

In both Taxes and Louisiana a solid line of large industrial projects are either underway, at breaking ground stage or scheduled to commence construction over the next few years. Just recently, they have also been several large industrial projects announced.

In February, for most plastics group began to seek permits from the State of Louisiana to invest $9.4 billion to build petrochemical plants in the state. In March, ExxonMobil announced plans to spend $20 billion on refineries, petrochemical plants and other projects in and around the Gulf Coast region including certain previously announced project.

And in early April, China based Wan Hue [ph] chemical announced the company will develop a $1.1 million chemical manufacturing complex in Louisiana. Proceed to slide nine, please. Activity in oil patch continued to accelerate during the first quarter driven primarily by the shale drillers in the Permian and Eagle Ford basins.

At the end of the first quarter, 824 rigs were operating in the U.S. up 25% from 658 rigs at the end of the fourth quarter. To put this is even better perspective, of the 824 total rigs operating domestically on March 31st, 543 or 66% of these rigs were drilling in our operating region.

Our oil patch exposure at the end of the first quarter was roughly 5% of our total revenue, down from a high 13% at peak all prices. Utilization in our four Texas branches with heavy exposure to the oil patch averaged 72.1% during the first quarter on a combined basis, up 40 basis points from the fourth quarter.

Our rental business is the near-term beneficiary of the improved energy markets, as I mentioned earlier, we believe $60 oil increased demand for new cranes sales in the oil patch. Proceed to slide 10, please. The key take away from this slide is the outlook for the non-residential construction market in general is positive for 2017 and beyond.

Major market indicators including the Dodge Momentum Index and the ABI forecast continued growth. Construction employment reaching eight year high in March.

And then, there is the infrastructure spending wildcard proposed by the new administration, in addition to significant other potential pro-business initiatives which could help extend the cycle for years to come. At this time, I'm going to turn the call over to Leslie for the financial results..

Good morning, everyone, and thank you, John. I'll begin on slide 12 to discuss our financials in greater detail. As John discussed, our rental business trends were positive. However, the weakness in new equipment sales persisted as we cautioned our listeners on our last call.

To summarize, total revenues decreased 8.2%, $20.2 million in the first quarter compared to the same period a year ago, to $226.8 million with the strength in our rental business with the weakness in areas of our distribution business.

Gross profit decreased 4.3% or $3.5 million to $77.7 million compared to a year ago on higher margins of 34.2% compared to 32.9% a year ago.

As for the rental segment, rental revenues increased 4.4% to $107.3 million physical utilization remained healthy with average time utilization, based on OEC, of 68.5% for the quarter compared to 66.3% a year ago. Demand increased in all product lines compared to a year ago.

As we anticipate new equipment sales declined, 40.1% or $22.9 million to $34.3 million new cranes sales decrease 73.5% representing $17.3 million of the total $22.9 million declined from a year ago.

Used equipment sales increased 4.7% or $1.3 million to $28.9 million, largely as a result of higher used cranes and moving equipment sales, partially offset by a decline in June AWP equipment sales. Sales from our rental fleet comprised of 86% of total used equipment sales this quarter compared to 88% a year ago.

Our parts and service segments delivered $40.4 million in revenue on a combined basis down 8.7% from a year ago. Total gross profit for the quarter was $77.7 million compared to $81.1 million a year ago, a decrease of 4.3% on 8.2% decrease in revenue. Consolidated margins were 34.2% compared to 32.1% a year ago.

For more detail by segment, rental gross margins for the quarter was 44.8% compared to 45.3% last year, with a slight decrease due to higher maintenance and repair cost in depreciation expense. We encourage slightly higher maintenance and repair cost compared to a year ago period, largely as a result of the increase activity in our oil fleet market.

Margins on new equipment sales were 11.4% for the first quarter, compared to 11.7% a year ago, largely due to lower margins on new crane and earthmoving sales. Used equipment sales gross margins were 31.2%, compared to 32.9% last year. Margins on pure rental fleet only sales were 34.7% compared to 36.70% a year ago.

Parts and service gross margin on a combined basis were 42.6%, compared to 42.3% a year ago. Move to slide 13, please. Income from operations for the first quarter decreased 4.9% to $21.3 million compared to $22.4 million last year on a margin of 9.4% compared to 9.1% in the first quarter last year.

The decrease in income from operations is primarily due to lower revenues compared to year ago. Proceed to Slide 14. Net income was $5.4 million or $0.15 per diluted share in the first quarter compared to $5.6 million or $0.16 per diluted share in the same period a year ago. Our effective tax rate was 36.8% compared to 41% a year ago.

Please, move this Slide 15. EBITDA was $68.8 million in the first quarter compared to $69.1 million a year ago, and EBITDA margins were 30.3% compared to 28% a year ago. Next, on Slide 16. SG&A was $57.3 million, a $2.1 million or 3.5% decrease over the same period last year.

SG&A as a percentage of revenue was 25.3% this quarter compared to 24% a year ago. Branch expansion cost increased $0.5 million compared to a year ago. Next, on Slide 17. Our gross fleet capital expenditures during the first quarter were $40.8 million including non-cash transfers from inventory.

Net rental fleet capital expenditures for the quarter were $16 million. Gross PP&E CapEx for the quarter was $5.8 million and net was $4 million. Our average, average fleet age as of March 31, was 34.1 months. And we generated $17.5 million of cash in the first quarter compared to $21.2 million a year ago.

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 period is presented here on the slide.

Next on Slide 18, at the end of the first quarter, the size of our rental fleet based on OEC was $1.3 billion, a 4.6% or $58 million increase from a year ago. Average dollar utilization was 32.4% compared to 32.2% a year ago. Proceed to Slide 19, please.

At the end of the first quarter, our outstanding balance under our $602.5 million ABL facility was $152.4 million and therefore, we had $442.4 million of availability at quarter end, which is net of $7.7 million of outstanding letters of credit. At this time, I would turn the call back over to John for conclusion..

Thank you, Leslie. I think I've addressed all of these points in my previous comments. But to conclude, I want to say that we believe the current trends in our business and industry are very encouraging as we move further into 2017. Lastly, we paid our 11th consecutive quarterly cash dividend on March 10.

At this time, we would like to take your questions. Operator, please provide instructions..

Thank you. [Operator Instructions] And we'll take our first question from Neil Frohnapple from Longbow Research..

Regarding new equipment sales, obviously, we weakness in current demand continues, but was there something from a timing standpoint such as a few cranes shipped right after the quarter-end, which caused the step down in revenue from kind of where you guys have been trending in the last few quarters?.

I think we did have a few machine slip, I don't know how much that move the needle, but Brad you may….

Neil, we did. I mean we had a handful of cranes looked in. I don't think we want to get into habit of talking about delivery timing and schedules and slippage. Some of our German products was not delivered in time.

It still would've been a very difficult quarter, but we certainly had cranes ship that did not make point of delivery dates and it would've helped some but still it would have been a tough comp..

Okay. But generally you would still expect new equipment sales to sort of bounce back from Q1 levels just directionally and I understand we're still waiting on $60 oil.

So really how big the crane size, but again just trying to calibrate expectations for the rest of the year, I understand the business can be very lumpy but anymore color you can provide there will be great..

Look, the first quarter is always our softness quarter from the sales perspective and from rental perspective, utilization or rate or anything else. So yes, we would expect things to improve on the sales side as we move through the year. And I can tell you we are quoting a lot more stuff right now and we are encouraged by that.

That had turned into purchase orders, but we do see more code activity and yes, you can expect sales to improve as they almost always do as we move into the year..

Okay, great. That’s helpful. I’ll jump back in queue..

Thank you..

And we will take our next question from Nick Coppola from Thompson Research Group..

Hey, good morning..

Good morning, Nick..

So strong performance in terms of utilization improvement a larger fleet, so I just wanted to talk about the rate environment and what would it take to see an improvement in rates on the year-over-year basis? To what scale is seasonality and what do you think kind of the rate trajectory looks like from here?.

Look as I just stated, the first quarter is always a tough quarter. It's your low point in utilization, you have a lot of fleet sitting and it's a tough environment to drive rates and it's not just us, it's everybody in the sector.

So we are pretty comfortable only being down 0.5 point, particularly when to look at the numbers of big projects that we participate in. That's a pretty tough rate environment. Our view is still that as we move into the year, rates will return positive and we would still hopeful that we will be positive by year-end on a year-over-year basis.

We're really need to see the big rental players start being more rational in the big projects. I can tell you the rate environment there is really difficult and I think it’s really hurting rates in the entire sector..

Okay. And then, I just wanted to ask you – just maybe elaborate on demand trends in the oil patch.

You certainly mentioned some positive comments about trends there, moving fleet back into the yield per Permian or are you continuing to move fleet there? I mean, I guess, what is the direction look like there?.

Yes. We have continue to move fleet demand is strong, our utilization running at very high level from the mid-70s to 80% in our heavy oil field markets, Midland would be a good example. We see that environment very steady and improving so we have continue to move fleet in there, but I'll say we are doing so cautiously.

We are being very careful not to over fleet those markets..

Yeah. That really makes lot of sense. Thanks for answering my questions..

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

Hey, good morning everybody..

Good morning, Seth..

A few questions here just sticking on the energy patch discussion. We have heard elsewhere that, that projects that are coming back on in the energy patch or coming back at lower rate versus prior, where we were at the peak is that, is that accurate or are you guys are seeing that as well? I guess is the first question..

You are talking about oil field upstream stuff?.

Yes John, thanks..

I am going to refer Brad on that question.

The question is are we getting lower rates than we were on this equipment as going back in the oil patch?.

The answer is no. We are not. I think John spoke to we're moving back in cautiously. Rates are very important to us and the best rates that we generally have on of equipment types are in the oilfield and that will continue to be our position. We are not going to forgo rates in add fleet to the oilfield.

So the answer would be no, we have got quality rates that are improving in the oilfield..

Okay, thanks.

So just to clarify, it was relative to where it was at the peak not relative to the rest?.

I guess, I'll have to Seth take a -- do a quick analysis. I suspect our rates are very similar today to where they were at the peak, but you know I would have to do an analysis to give you the definitive answer. But I strongly suspect there are very similar today to where they were at the peak..

Okay, thanks. And just switching it up little bit, the parts and services business continues to be kind of frustrating here. I mean cranes have been software while, but then a new slide deck you referenced this in potential for near-term benefits on the parts and service business.

And we have seen some pick up and that aftermarket pickup from some of the other OEMs and whatnot.

Do you think the parts and service sales turned positive here, over the next -- I mean can may be positive for the year? How are you -- I guess, may be what's behind the comment on slide?.

Look, we are seeing some parts and service opportunities come from the oil patch and obviously, from our earthmoving account. But crane rebuild, crane remanufacturing is a huge driver of our parts and service business and that is just really down right now.

We are just not getting any activity in that area and that's really hurting us on the parts and service side. So the weakness you are seeing is almost totally related to the weakness in the crane market. And when that starts to rebound, and it will, it's a question of time, you'll see our parts and service business rebound with it..

Okay.

So you see you think it's kind of flattish this year then? Is that – is that the way you think about it?.

Seth, yes. Flatfish would be probably a good way to think about it. And the only additional color I would add would be that, an increase and parts and service, particularly around cranes needs a substantial piece will be the indicator that sales would quickly follow..

Sure. All right. That makes sense. Thanks.

And then maybe just for Leslie, a quick one, it's tax rate now structurally lower or do you think it goes back to that kind of low 40% range?.

No, for this year I would say that it is structurally lower. So the 37% is a good range for the remaining quarter with the exception of the third quarter we are estimating a discrete item which would substantially over the tax rate end of third quarter. This is something like around 11%.

So for the year, we would be 28% to 29% on our effective tax rate. Once we take into account the discrete item in the third quarter..

Right. Okay..

It’s a little unusual..

Okay.

And then sort of going forward, it should be in the high 30s then? Is it for when you think about it?.

So beyond 2017?.

Yes. Yes..

It’s a little early to say. I would say at least 37% going forward, but again it is a little early to commit to that..

Okay. All right. Thank you very much everybody..

Thanks..

We will take our next question from Joe Box from KeyBanc Capital Markets..

Yes. Hey, guys..

Hi, Joe..

Question for you on the dollar utilization, can you guys give up little bit more color on 100 basis point jump in your dirt equipment and the 200 basis – 220 basis point jump in the Telehandler relative to AWP that was flat year-over-year? I guess is that just a function of maybe buying more aerial equipment and the new equipment dragging down dollar utilization? Are you seeing any differences in either time out or rental rates for those different buckets?.

Well, if I understand. I think the increase as we saw in dollar out or relative to the increase in physical utilization primarily. I am not – look, there are puts and takes within the product as you said. We lump Telehandlers into the aerial work platform group and we're not going to comment on product types within, but there are always puts and takes.

The broader issue was increase physical time utilization..

So, I mean, is there anything to read into that if the dirt site has higher dollar utilization and if it's coming from time is that a function of some projects ramping up? Is that pads are being created on the oil patch side? Anything to read into that?.

I think, looked historically, earthmoving is been among our higher dollar utilization. So it's a product that some companies are challenged to manage from a maintenance standpoint, we do a pretty nice job. We continue to grow our earthmoving component of our business over the last few years, in fact, earthmoving has been taking a larger percent.

I mean, its growing a little quicker than most of the other products within the broader mix. We’ve also had some decline when you think about a little bit of a shift toward a benefit value utilization we had a decline with cranes.

Cranes carry our lowest dollar utilization historically; even when they are better or more difficult they carried the lowest dollar utilization. So we have got some slight declines there. We basically reinvest those dollars in higher returning product..

Maybe switching gears then, incremental rental gross profit margins came in at about 33%, looks like it's below the more typical 50% plus range.

Can you maybe put some color around that margin and may be just a sense for where it could shake out as we move to the year?.

Sure. I would say that for the first quarter, even it’s below what you would prefer to it’s kind of norm of 60%, it is going to be due to a higher maintenance and repair cost the that I refer too. So throughout the course of the year, we would expect that to normalize along with some of the other positive drivers.

John talked about rate a little bit, physical utilization and then the fleet growth. So I think those were all balanced out to get a more normalized rental incremental margin..

Got it. Thanks, Leslie.

And maybe just to take a different angle on your distribution business, I guess specifically around new sales, we are starting to see some signs of life out of the OEMs, do you expect similar benefits to eventually kind of filter into the new equipment sales or do you think you are too crane heavy to see that type of benefit, any sort of change maybe in the relationships with your customers? Just any sort of color around the relationship and how we should think about that uptick in OEMs relative to what you guys could see?.

When you speak to uptick in OEMs, are you speaking of earthmoving manufacturers?.

More on the earth side than the crane, I guess to be specific?.

Yes. Look we feel good about our earthmoving end market. The demand is solid. We have got a lot of activity there. The area continues to be very weak and challenging for us is on the cranes side. This demand is about as weak as I've seen it. With that said, we are quoting a lot more equipment and I mean a lot more equipment than we have been.

That is not translated in the purchase orders as of yet, but we’re cautiously optimistic that we're going to start seeing some pickup in demand there. But on the earthmoving side, we are very pleased with what we’re seeing.

I mean there is solid activity and is just really strong demand in the non-residential construction market and that demand is very broad-based, so we feel good about our end markets..

Joe, the other thing I would add, I know you're talking about distribution, but as a leading indicator our largest increase as we sit here today year-over-year has been in earthmoving utilization. It's up about 530 basis points year-over-year. So that's a good indicator of what we think will continue to accomplish on the distribution side as well.

Now keeping context, we are commodity dealer. That's the broadest piece of our earthmoving distribution. We’re also a distributor, but we are a commodity dealer in two states. So in the broader mix of distribution revenues, cranes is heavily weighted to cranes and I think you’re aware of that..

Got it. That’s good color. Thank you, guys..

You bet..

[Operator Instructions] We will take our next question from Sean Wondrack with Deutsche Bank..

Hi, John and Leslie.

How are you?.

Good.

How are you?.

Very good.

So just going back to the oil and gas basins again, I know we talked about this a little bit last quarter but just wanted to see if you can give us update, how have you seen the competitive environment down there in terms of operators who are still servicing and operators, who are basically gone insolvent and basically out of the industry now.

Especially at this point in time, what you are seeing out there?.

You know from a competitive environment standpoint, just relative to the oil patch, I think we're probably seeing pretty good discipline. I think people are being fairly cautious. You know these oil prices bounce around a little bit.

I mean, they have been staying in the 50s but I think everybody is cautiously optimistic and being fairly disciplined from a competitive standpoint. We are seeing the crazy competition, crazy rate pressures on a big petrochemical projects, the more downstream stuff, the rate environment there is brutal right now..

And when you basically approach something like that, when you know they are basically fighting for the lowest rates, what's your take on that? How do you respond to that situation? Do you share that revenue, or do you continue to compete for it?.

We do some of both. I mean we get to a point where we walk away from the deal based on rate. We do participate on those projects. And they are not the biggest driver of our business, but we own a lot of those big projects and obviously, we have to. It impacts our overall rate performance.

But, you know, we do on a regular basis walk away from deals because of rates on those big projects..

Right. Thank you for that.

And then just a quick remainder, what is your cash tax position currently? Do you still have NOLs, or do you expect that to continue for the future?.

We're still in the NOL position, so really not a significant cash taxpayer at all..

And do you think that'll continue into 2018 or will you mostly exhausted them in 2017?.

They will run into 2018, yes..

Okay, great. And then just lastly, you know, as I look at Bloomberg right now, your bonds are trading at roughly 3%. They're obviously callable in September. You know you have some rate hikes going on this year.

Are you considering refinancing these bonds?.

We're always looking are our options as it relates to our bonds. So that's just an ongoing situation for us. And you know we'll watch that and you know watch what rates are doing and we'll make that decision at the appropriate time and with that's something I think we certainly stay on top of..

Great. Thank you answering my questions..

Sure..

We will take our next question from Steven Fisher with UBS..

Thanks. Good morning. Wondering if you guys….

Good morning..

Morning. What if you could about your experience at CONEXPO related to cranes. Clearly, there was a lot of optimism at the show. In general, it still seems like things are a little soft in the crane market, were you guys placing orders, taking orders or just maybe if you could talk about your experience at CONEXPO.

Sure. Steve, so the experience was good, it was very positive. We just placed orders, we did take some orders. The order intake was not as robust the kind of Expo was a few years ago, but it was certainly a positive event and we had an outstanding turnout of our largest most loyal customers. So good event, positive things happen because of the event.

That being said, we are still overshadowed by the broader issue and that's cheap oil and weak energy markets..

Was there a -- that was helpful.

Was there sort of a waiting towards where the orders, what kind of products you are taking orders on?.

It's a mix of products. There was no particular product type that stands out. That's worth noting..

Okay.

Just looking at the dollar utilization on cranes coming down, I'm not sure Brad if you mention what driving that decline in utilization? Was that the Gulf Coast in particular?.

It's broad-based and the drivers lower physical utilization and substantially lower rental rates. Our largest the decreases have come in the cranes segments as you may can imagine..

I mean so no particular geography. That's features.

And just Leslie to clarify your expectation on rental gross margin, do you expect that to be flat for the rest of the year or up on a year-over-year basis?.

Yeah. We would expect it to be up on a year-over-year basis..

Okay. And then just lastly.

What the utilization of the Texas branches that you open in the later part of last year, either on a Q1 basis or a kind of a current run rate, just curious how quickly those branches have ramped up utilization?.

Yeah. We don't quote utilization at the per branch level, but I will say that the utilization of those locations is very similar to the utilization of the locations within the region..

Okay. Terrific. Thanks a lot..

Thank you..

Our next question comes from Sean Wondrack with Deutsche Bank..

Hey. Just one follow-up here. On slide nine, you list your end markets and clearly your industrial non-res and res, but then you also have 24% for this other category.

Is there any way you could break that down a little more for us? Like what does that represent exactly? Are there any bigger buckets in that? Does that have any oil and gas in it?.

No. Sean, it's more of a catch off for things that are not squarely in one of the other buckets and we typically don't break it out in further detail, but it's running pretty consistently..

Okay. All right. Fair enough. Thank you..

Thank you..

That concludes our question-and-answer session. I would now like to turn the call back to Mr. John Engquist for closing comments and remarks. I want to thank everybody for participating today. Obviously, we feel very good about our end markets.

We think we got some runway in front of us, and I think we're going to have a nice year and hopefully a nice a several years in front of us. So thanks for participating, look forward to talking to you on the next call..

This concludes today's conference. Thank you for your participation, and you may now disconnect..