Kevin Inda - VP, IR John Engquist - CEO and Director Leslie Magee - CFO, Principal Accounting Officer and Secretary Bradley Barber - President and COO.

Joe Box - KeyBanc Capital Markets Inc. Seth Weber - RBC Capital Markets Nicholas Coppola - Thompson Research Group.

Good morning, everyone and welcome to the H&E Equipment Services Second 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, Kim and welcome to H&E Equipment Services conference call to review the company's results for the second quarter ended June 30, 2017 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 2.

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 3.

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, including statements related to our pending merger with Neff Corporation.

Forward-looking statements involve known and unknown risks and uncertainties which could cause the actual results to differ materially from those contained in any forward-looking statement.

A summary of these uncertainties is included in the safe harbor statement contained in the company's slide presentation for today's call and also includes the risks described in the Risk Factors in the company's and Neff's respective most recent annual reports on Form 10-K and other periodic reports.

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 Second Quarter 2017 Earnings Call. I'll direct my comments this morning to our second 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 that, we'll take your questions. Proceed to Slide 6, please. Before I discuss our second quarter results, let me again state how excited we're regarding our proposed acquisition of Neff Corporation.

We believe the acquisition will be a transformative event for our business based on the numerous anticipated benefits we discussed on our call last week. Let me now discuss our second quarter results which were also a positive indicator for our business.

The nonresidential construction markets we serve were extremely active during the second quarter and our business delivered solid results. The performance of our rental business was strong from a revenue, margin, utilization and rate perspective.

The new equipment sales component of our distribution business remains challenging due to the ongoing low demand for new cranes. New earthmoving sales were down during the quarter, but it's important to note that we had a record prior year comp as a result of attractive dealer financing programs. Demand for new earthmoving products remains favorable.

Total revenues increased 3% or $7.3 million to $249.4 million, driven primarily by the strength in our rental business and adjusted EBITDA increased 9.1% to $79.1 million compared to $72.5 million a year ago. Margins increased to 31.7% compared to 29.9% a year ago. Slide 7, please.

For the second quarter, we generated net income of $9.9 million or $0.28 per diluted share compared to $7.5 million or $0.21 per share a year ago. Physical utilization increased to 72.2% for the quarter versus 70.1% a year ago.

We recently achieved a record for our company, reaching more than $1 billion OEC on rent last week for the first time in our 56-year operating history. This speaks to the strength of our rental environment. As a result, our rental business performance was strong, with revenues increasing nearly 9% to $118.4 million. Margins increased to 47.6%.

Rental rates turned positive, up 0.3 point from a year ago and 0.3 point on a sequential basis. We were very pleased to see rates turn positive this early in the year. Dollar returns were strong as well, increasing to 34.9% compared to 33.9% last year. Proceed to Slide 8, please.

This slide illustrates our nationwide footprint, various regions, 78 branch locations and the 16 greenfield sites that we have opened since the beginning of 2013. We opened our Fort Collins greenfield branch in late May to support the growing demand in the Denver area.

The nonresidential construction markets in general are the primary driver of our business and demand is solid across our entire footprint.

Our equipment is on projects encompassing nearly every type of project classification, from data and distribution centers, airports, other infrastructure projects and power, corporate campuses, warehouses, hospitals, schools, sports complexes as well as hotel, casino and convention projects and mining and agriculture.

While the industrial sector is important to our business, particularly in the Gulf Coast, megaprojects are not a material driver of our business.

Activity in our Gulf Coast region continues to be strong and is driven by a combination of both solid nonresidential construction activity and industrial projects and we continue to see new projects announced on a regular basis. We believe the future outlook for major project activity along the Gulf Coast is favorable.

The Gulf Coast continues to dominate the new U.S. chemical plant construction as 6 of the 8 new U.S. ethylene projects in progress are located along the Gulf. Louisiana is well positioned to benefit from a future surge in LNG demand.

There are more than $88 billion in LNG projects planned, under construction or in operation in Louisiana and more projects are forecast as the LNG market further matures. Slide 9, please. The oil and gas markets were strong despite the recent fluctuation in the oil prices.

For the second quarter, our total oil patch exposure was just over 5% of our total revenues compared to our total exposure of 13% at our last peak. Of the 952 total rigs operating domestically on July 7, 638 or 67% of these rigs were drilling in our operating regions. This is an increase of 95 rigs drilling in our operating regions from March 31.

453 of the total rigs drilling in our operating regions were located in the Permian Basin in West Texas and the Eagle Ford in South Texas. Utilization in our 4 Texas branches with heavy exposure to the oil patch averaged 75.9% during the second quarter on a combined basis, up 380 basis points from the first quarter. Proceed to Slide 10, please.

All the major indicators continue to suggest that the nonresidential and construction markets in general have solid runway ahead throughout the balance of this year and into 2018. And just as important, customer sentiment is extremely high. 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 more detail. We're pleased to announce our second quarter results which were strong from many aspects compared to a year ago and we capitalized on the strength in our end user market.

To summarize, total revenues increased 3% or $7.3 million in the second quarter compared to the same period a year ago to $249.4 million, driven primarily by the strength in our rental business. Gross profit increased 6.9% or $5.6 million to $87.3 million compared to a year ago on higher margins of 35% compared to 33.8% a year ago.

As for the rental segment, strong demand in the nonresidential construction markets we serve resulted in rental revenues increasing 8.9% to $118.4 million. Physical utilization was up 210 basis points, with average time utilization based on OEC of 72.2% for the quarter compared to 70.1% a year ago.

Demand increased in all product lines, except cranes, compared to a year ago. Also, rental rates improved 0.3% both year-over-year and sequentially in the second quarter. New equipment sales were down 8.5% or $4.2 million to $45.7 million.

The decline in new equipment sales was primarily due to lower earthmoving sales which decreased 36.6% or $8.6 million to $14.9 million. This was due to a challenging comparable in the year-ago period and demand for new earthmoving equipment remains good, as John indicated previously.

Used equipment sales increased 1.4% or $0.3 million to $24.1 million, largely as a result of higher used AWP equipment sales, partially offset by a decline in used crane sales. Sales from our rental fleet comprised 88% of total used equipment sales this quarter compared to 85% a year ago.

Our parts and service segments delivered $43.9 million in revenue on a combined basis, up 0.7% from a year ago. Total gross profit for the quarter was $87.3 million compared to $81.7 million a year ago, an increase of 6.9% on a 3% increase in revenue.

Consolidated margins were 35% compared to 33.8% a year ago, driven by revenue mix and strong performance. All segments of our business reflected higher gross margins, except parts sales which remain solid.

For a little more gross margin detail by segment, rental gross margins for the quarter were 47.6% compared to 46.9% last year primarily due to higher utilization and rates. Margins on new equipment sales were 11.4% for the second quarter compared to 10.7% a year ago and largely due to higher margins on new crane and AWP sales.

Used equipment sales gross margins were 29.5% compared to 29% last year. Margins on pure rental-fleet-only sales were 31.8% compared to 32.4% a year ago. Parts and service gross margins on a combined basis were 41.5% compared to 42.2% a year ago as a result of lower margins on parts sales due to revenue mix. Slide 13, please.

Income from operations for the second quarter increased 13% to $28.7 million compared to $25.4 million last year on a margin of 11.5% compared to 10.5% in the second quarter last year. The increase in income from operations is primarily a result of higher revenues and gross profit compared to a year ago. Proceed to Slide 14, please.

Net income was $9.9 million or $0.28 per diluted share in the second quarter compared to $7.5 million or $0.29 per diluted share in the same period a year ago. Our effective tax rate was 37% compared to 41% a year ago and the decrease was due primarily to an increase in favorable permanent differences and lower state income taxes.

Please move to Slide 15. Adjusted EBITDA was $79.1 million in the second quarter compared to $72.5 million a year ago. Margins were 31.7% compared to 29.9% a year ago, an increase of 180 basis points due to revenue mix and improved profitability.

EBITDA was adjusted for $2.2 million of costs incurred during the quarter related to the proposed acquisition of Neff. Next, Slide 16. SG&A was $59.8 million, a $2.8 million or 4.8% increase over the same period last year. SG&A as a percentage of revenue was 24% this quarter compared to 23.6% a year ago.

But excluding the $2.2 million of costs related to the Neff acquisition, SG&A increased less than 1% compared to a year ago. As a percentage of revenue, SG&A was 23.1%, excluding the transaction costs, compared to 23.6% a year ago. Also, branch expansion costs increased $0.8 million compared to a year ago. Next, on Slide 17.

Our gross fleet capital expenditures during the second quarter were $81.2 million, including noncash transfers from inventory and our net rental fleet capital expenditures for the quarter were $60 million. Gross PP&E CapEx for the quarter was $6.3 million and net was $5 million. Our average fleet age as of June 30 was 33.8 months.

Cash flow for the second quarter was a use of $0.7 million compared to free cash flow of $12 million a year ago. And we've included a free cash flow GAAP reconciliation to net cash provided by operating activities for the periods presented on the slide in the appendix at the end of the presentation. Next, on Slide 18.

At the end of the second quarter, the size of our rental fleet based on OEC was $1.4 billion, a 5.7% or $73.8 million increase from a year ago. Average dollar utilization was 34.9% compared to 33.9% a year ago. Proceed to Slide 19.

At the end of the second quarter, our outstanding balance under our $602.5 million ABL facility was $164.9 million and therefore, we had $429.9 million of availability at quarter end, net of $7.7 million of outstanding letters of credit. At this time, I'm going to turn the call back to John..

Thank you, Leslie. Please proceed to Slide 21. To conclude, our solid performance in the second quarter and current trends further reinforce our positive outlook for the year.

We expect the proposed acquisition of Neff to accelerate our stated strategy to expand and increase our footprint across the United States, grow our business through higher penetration in the nonresidential construction market and expand our exposure to new regional and local customers in the overall construction markets.

Additionally, assuming the successful completion of the proposed transaction, with the addition of Neff's earthmoving assets, we will increase our rental fleet's exposure to a category that is under-penetrated as well as be well positioned to benefit from new infrastructure projects and governmental spending initiatives.

As we also discussed last week, we believe the financial aspects of the Neff deal are very attractive and transformational as well. Lastly, we paid our 12th consecutive quarterly cash dividend on June 16. As always, future dividends are subject to board review and approval each quarter. At this time, we'd like to take your questions.

Operator, please provide instructions..

[Operator Instructions]. Our first question today comes from Joe Box from KeyBanc Capital Markets..

So first uptick in rental rates since 4Q '15. I know you guys obviously calculate your rates differently.

So I want to ask, how sustainable do you think the 30 basis point increase is? Is it positive from here and it grows? Or do we maybe bounce around flattish rates for a while?.

Joe, I think that's -- I think what I would say to your question is that we expect that over periods of time, we will continue to get sequential improvement. How that impacts some of the year-over-year comps, being that we're just right above the line, I don't know that we're going to give a whole lot of comment to that.

We have said and obviously, now we've reached the anticipation we gave for the year of positive rates, but we expect sequential improvement going forward, modest but positive..

And I guess then just a clarification, Brad.

So if you do get sequential improvement in 3Q from 2Q, would the year-over-year change in 3Q be greater than the 30 basis points that you got this quarter?.

We would have to go back and make some multiple assumptions. And so again, I'm sorry I don't think I can help you on that part. But directionally, we still believe we will be positive for the year. I don't want to make you think that we think this is a fluke. We think it's a product of a lot of hard work and focus. We think it's sustainable.

How that math works on a year-over-year basis is not something that we're prepared to comment on specifically..

Yes. Joe, I mean, at the utilization levels we're running right now, our expectation is to continue to see positive year-over-year rate..

Got it. Really nice sequential step-up in incremental gross profit margins, specifically within rental. Looks like the R&M that you had last quarter didn't repeat and then obviously, some nice operating leverage.

Anything else to the step-up that you had this quarter? And then maybe how should we think about the range of incremental gross profit margin from rental going forward?.

I would say that the incremental margin related to rentals was pretty normal. There wasn't anything unusual in there. It came from fleet size, utilization and rates and then the other things that you mentioned. So looking forward into the balance of the year, I would expect normal incremental margins, so we expect them to be strong..

Okay, great. And then one last one, changing gears.

Looking at the Neff deal, if you were to isolate it on a like-for-like product basis, how do you compare your rates versus theirs?.

Joe, I think their rates are probably slightly better than ours on average and I think that relates to the type of end user they predominantly deal with. We've got more of a presence on bigger projects than Neff does and they have more presence with the smaller end users and smaller projects.

So I would say their rates are probably slightly better than ours..

Does that mean then that because there's a mix difference, maybe there's not an opportunity to harmonize those 2 rates? Or is there actually an opportunity?.

No, I think there is an opportunity. And one of the things we love about this transaction is that we do have different customer bases and we don't run into each other a whole lot in the marketplace. We think we're significantly expanding our customer base through this transaction..

Our next question today is from Seth Weber from RBC Capital Markets..

So second quarter, the gross CapEx -- rental CapEx was a little bit higher than we -- what we were thinking.

I guess, did you pull anything forward there? And also, I know you don't like to give CapEx guidance, but are you still sort of thinking about a flattish year-over-year change? Or are things kind of getting a little better and you bumped up your CapEx a little bit more than what you were thinking previously?.

I think we're pretty much running to plan on CapEx right now. We said many times, we try to keep our capital spending on a shorter horizon as possible. I can tell you demand is really, really strong right now in the construction markets, but we've made no material change to our plan..

No, look, I would support, obviously, that communication here. I'd also add some color that -- John talked about in the prepared statement that we reached $1 billion on rent. Our utilization this week was north of 76% on AWPs. And so the question could be, is there more opportunity? We think there is. Are we focused on rates? You bet.

And we're going to continue to balance our opportunity to grow with positive rate improvement. And to our overall comment, we're comfortable with our stated plan for the year with CapEx..

And Seth, I would just add, from a timing standpoint, that our CapEx was slowed down towards the back end of the year, as normal..

Right, okay. But is third quarter, do you think, kind of flattish than year-over-year or flat to down, I guess, a little bit? Is that the right way to think about it? Just to sort of get into your full year kind of flattish range because second quarter was up a little bit..

Yes. My expectation, it would be probably flat year-over-year. You're not going to see an increase. It may be even down slightly, third quarter..

Right, okay. And then can we just flip to the distribution business for a minute? The new equipment sales were down, I think you said $4 million, but earthmoving was down $8.5 million.

So can you just plug what was up in the quarter?.

Crane sales were actually up in the quarter..

I mean, Seth, I wouldn't put a whole lot into that. We sold a couple of big ATs, all-terrain machines and I don't think that's indicative that the crane market is improving in any material way. But due to a couple of large sales, we were up year-over-year on the crane side..

Okay. And then just one last one for Leslie. I think you had previously talked about third quarter tax rate was going to be unusually low. I think you said something like a low double-digit number.

Is that still the case?.

Yes, we do expect the third quarter to be unusually low because of a discrete item. And then whether or not you want to model that in or strip it out, I'll leave that up to you. But we're expecting it to be single digit -- high single digit to 10%, something like that, for the third quarter..

[Operator Instructions]. Moving on, we'll hear from Nick Coppola from Thompson Research Group..

So I want to follow up on rates. So what were some of the key drivers in the improvement? To what extent are you seeing competitors' capacity filling up based on the demand environment versus maybe internal initiatives or anything else? So just any color around kind of the rate performance..

Yes. I mean, look, I think the supply and demand is very much in balance. Some of the oversupply issues we dealt with when the oil patch turned down, that's gone. I mean, I think supply and demand is in balance. Everyone is running high utilization levels.

We're just in an environment right now where we should be able to drive rate and I think we're seeing rational behavior in the marketplace. Nothing's changed as it relates to these big megaprojects. They're still very competitive and you got people chasing those hard and there's some rate pressures on those products.

But even with that said, people are running high utilization levels and we're in an environment that we can push rates right now..

Nick, I would add that, it may be helpful to you, that it was broad-based across our entire footprint. Year-over-year, Q2, all products were positive, with the exception of cranes. Crane was the only product line that was still down year-over-year. But it's also worth mentioning that sequentially, in Q2, all products, including cranes, were up.

So broad across all product type and across our entire geography..

All right. That's good to hear. And then I just wanted to ask a question about used sales. So I think we talked about down used sales for the year, previously were up during the first half.

What [indiscernible] in the back half?.

It's going to normalize at some level. We continue to take out a few additional cranes. That crane rental fleet's down about $18-ish million year-over-year. And that's just a supply-demand issue, right? We're trying to look for opportunities to sell some additional cranes that we did not have planned, but that's around the softness.

Otherwise, we think it's going to normalize..

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

And I appreciate everybody being on the call. We're in a good environment right now. We feel really good about the construction markets going forward and we could not be more excited about the Neff acquisition. This is going to be really good for us. We're going to create a lot of shareholder value with this acquisition.

So look forward to talking to you on our next call. Thank you..

And that concludes our conference today. Thank you all for your participation. You may now disconnect..