Good morning and welcome to the H&E Equipment Services First Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference call over to Mr. Kevin Inda, Vice President of Investor Relations. Please go ahead, sir..

Thank you, Cody, and welcome to H&E Equipment Services conference call to review the company's results for the first quarter ended March 31, 2019, which were released earlier this morning The format of 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, Executive Chairman of the Board of Directors; Brad Barber, Chief Executive Officer and President; 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 and in the appendix to this presentation, each of 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, unknown risks and uncertainties, which can cause actual results to differ materially from those contained in any forward-looking statement.

A summary of these uncertainties is included in safe harbor statement contained in the company's slide presentation for today's call and also include the risks described in the risk factors in the company's 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. And with that stated, I'll now turn the call over to Brad Barber..

Thank you, Kevin, and good morning, everyone. Welcome to H&E Equipment Services First Quarter 2019 Earnings Call. On the call with me today are John Engquist, Executive Chairman; Leslie Magee, our Chief Financial Officer; and Kevin Inda, our Vice President of Investor Relations. Slide 4, please.

My comments this morning will focus on our first quarter results, our business and overall market conditions, and then Leslie will review our financial results for the quarter. When Leslie finishes, I will close with a few brief comments. After, we will take your questions. Slide 6, please.

We're pleased with our start to the year as both our rental and distribution segments delivered solid improvement from a year ago. Project activity in our end-user market remained healthy, and our business performed well. Total revenues increased approximately 20.4% to $313.6 million in the first quarter.

Our results reflected a 23.4% increase in rental revenues combined with strong improvement in new and used equipment sales compared to a year ago. Our gross margins increased to 36.3% from 35.5% a year ago, primarily due to performance improvements within the various revenue segments.

Our adjusted EBITDA grew 24.7% to $100.9 million, and margins improved to 32.2% from 31.1% a year ago. In the first quarter, net income was $14.2 million or $0.40 per diluted share compared to $9.5 million or $0.26 per diluted share a year ago, on an effective tax rate of 26.4% in the first quarter of 2019 compared to 27.5% a year ago.

Slide 7, please. The momentum in our rental business continues into the first quarter as expected, achieving strong key metrics.

With broad-based demand across our footprint, we delivered a 2.3% increase in rental rates from a year ago, maintained high physical utilization on a significantly larger fleet and yielded $159.7 million in rental revenues for the first quarter. In addition, dollar utilization increased to 35.2% compared to 34.7% a year ago. Slide 8, please.

As you can see from this slide, we have a very diverse geographic footprint with 96 total branch locations spanning 22 states. Since 2013, we have added 34 branch locations through a combination of Greenfields, warm starts and acquisitions. We like our footprint because we're where the work is occurring.

Nonresidential construction has and continues to be solid throughout all of our regions. Industrial projects show continued opportunity for improvement, and the oilfields we serve remain stable and healthy.

We will continue to expand our geographic presence and increase our location density in existing markets by executing on our growth strategy, which includes both acquisitions and organic expansion. Slide 9, please. We're very pleased with both our mix of revenues and fleet for the markets we serve.

As evidenced by the charts on this slide, we remain consistent with both our revenue mix by end market and our rental fleet composition. We also continue to have one of the youngest fleets in the rental industry at 35.2 months compared to an industry average of 46.5 months, which we believe is another strategic advantage for our business.

Slide 10, please. Market indicators and conditions remain positive. End-user market demand continues to be solid and broad-based. Spending on nonresidential construction projects is forecasted to grow year-over-year. Activity in energy-related markets continues at steady, healthy levels.

State DOTs are increasing spending for transportation and infrastructure-related projects. Lastly, with better visibility in the year, we continue to believe 2019 will be another good year for our business. Now I'll turn the call over to Leslie to discuss our financial results in more detail.

Leslie?.

Good morning, everyone. Thank you, Brad. Before I begin, I would like to explain some of the changes you may have noticed.

The adoption of leases or Topic 842 in our first quarter 2019 financial statement resulted in the prospective-only reclassification of certain revenues and related cost of sales associated with our rental activity such as damage waiver, environmental fees and other recovery fees to equipment rentals and cost of sales that have been historically accounted for in other revenues and other cost of sales.

Given the changes required by Topic 842, we determined it was a more meaningful presentation to include equipment rental hauling and related cost of sales within equipment rentals and cost of sales as opposed to their historical inclusion in other revenues and costs of sales.

Pursuant to Reg S-X, this reclassification is on a retrospective basis for GAAP. We believe it is important to provide comparative data in light of the variances resulting from retrospective and prospective treatment for certain items.

Therefore, we've included a table in the appendix at the end of the presentation breaking down the equipment rentals line into two components, rentals and rentals other; and reconciling our revenues, cost of sales, gross profit and gross margin for the 3-month period ended March 31, 2018 to the 2019 income statement presentation in our release.

Also, the prior year period results have been recast in accordance with the retrospective treatment of hauling fees. Further, we have included income statement data on an as-adjusted basis to reflect the prior period on a consistent basis for all items with the current year presentation.

You may hear us refer to as-adjusted throughout this transition period when relevant. We have preserved our historical reporting of rental revenues. Likewise, new metrics using rental revenues have changed, and we hope you'll find our additional disclosures helpful. With that explanation behind us, let's now look at Slide 12.

Our business again delivered good results. Our total revenues increased 20.4% or $53.2 million in the first quarter compared to the same period a year ago to $313.6 million, largely driven by the strength in both our rental business and equipment sales. As Brad mentioned, rental revenues, as previously reported, increased 23.4% to $159.7 million.

Physical utilization remained high with average time utilization based on OEC of 70% for the quarter compared to 70.4% a year ago. Including the We-Rent-It acquisition, which we completed on February 1, 2019, we expanded our fleet by approximately 23.4% versus a year ago.

AWPs, which comprise about 65% of our fleet, were at 71.1% of OEC's physical utilization compared to 72.8% a year ago. And consistent with recent trends, both crane and earthmoving utilization increased compared to last year. Rental rates improved again this quarter, up 2.3% year-over-year and rates improved in all product lines.

Rates also increased 0.3% sequentially, increasing in all product lines as well. With strong utilization and rate expansion, our dollar returns were 35.2% versus 34.7% last year. None of these rental metrics were affected by the adoption of Topic 842.

New equipment sales increased 27.1% or $12.6 million to $59.1 million compared to $46.5 million last year. The net improvement in new equipment sales was primarily driven by higher earthmoving and aerial sales, which were up 73.3% and 36.7%, respectively, and was partially offset by an 8.4% decline in new crane sales.

Used equipment sales increased 19.2% or $4.8 million to $29.6 million, largely as a result of higher used crane and earthmoving sales. Sales from our rental fleet comprised 95% of total used equipment sales this quarter compared to 94% a year ago. Our parts and service segment delivered $46 million revenue on a combined basis, up 6.5% from a year ago.

At this time, let me move onto gross profit and margin. Our gross profit increased 22.8% to $113.7 million from a year ago, and our consolidated gross margins were 36.3% compared to 35.5% a year ago, primarily as a result of improved performance in rentals, used equipment sales and service.

Group revenue mix and new equipment sales resulted in a slight unfavorable impact to year-over-year gross margin.

For gross margin detail by segment, rental gross margins, as previously reported, were 48.7% during the quarter compared to 47.6% in the year-ago quarter, primarily due to higher rental revenues and lower rental expense and maintenance and repair cost as a percentage of rental revenues.

Margins on new equipment sales decreased to 11.9% for the first quarter compared to 12.1% a year ago, largely due to the mix of equipment sold. Used equipment sales gross profit increased to 35.8% compared to 31.9% last year. Margins on pure rental fleet only sales were 37.5% compared to 33.1% a year ago.

Parts and service gross margins on a combined basis were 40.7% compared to 40.6% a year ago. Slide 13, please. Income from operations for the first quarter of 2019 increased 30.6% to $35.7 million or 11.4% of revenues compared to $27.3 million or 10.5% of revenues in the year-ago quarter.

The 90 basis point increase in margins was primarily a result of strong margin results in rental, used equipment sales and service revenues combined with modest improvement in our operating leverage. SG&A expenses as a percentage of revenue declined by 20 basis points to 25.1% this quarter. Proceed to Slide 14.

Net income was $14.2 million or $0.40 per diluted share in the first quarter of 2019 compared to net income of $9.5 million or $0.26 per diluted share in the first quarter of 2018. Our effective income tax rate was 26.4% in the first quarter of 2019 versus 27.5% a year ago. Please move to Slide 15.

Adjusted EBITDA was $100.9 million in the first quarter compared to $80.9 million a year ago, an increase of 24.7%. Margins expanded 110 basis points to 32.2% this quarter compared to 31.1% a year ago. And margins increased for the reasons previously mentioned on the income from operation's margin discussion on Slide 13. Next to Slide 16.

SG&A expenses for the first quarter of 2019 were $78.6 million compared with $65.9 million for the prior year, a $12.8 million or 19.4% increase. SG&A expenses in the first quarter of 2019 as a percentage of total revenues were 25.1% compared to 25.3% a year ago, a 20 basis point improvement.

Employee salaries, wages, payroll taxes and related employee benefit and other employee-related expenses increased $7.9 million largely due to our acquisitions since March 31, 2018, a larger workforce and higher incentive compensation related to improved profitability. Legal and professional fees increased $0.7 million.

Facility-related expenses, primarily rent expense, increased $1.4 million. And liability insurance cost increased $0.8 million. Expenses related to Greenfield branch expansion increased $7 million -- $0.7 million compared to a year ago. Next on Slide 17.

Our gross fleet capital expenditures during the first quarter, $69.8 million, including noncash transfers from inventory. Net rental fleet capital expenditures for the quarter were $41.5 million. Gross PP&E CapEx for the quarter was $7.2 million, and net was $6.3 million. Our average fleet age as of March 31 was 35.2 months.

Free cash flow for the first quarter was a use of $94.3 million and was impacted by the acquisition completed this period. This compares to a use of free cash flow of $117.8 million a year ago, and we've included our normal GAAP reconciliation at the end of the slide deck in the presentation. Next on Slide 18.

At the end of the first quarter, the size of our rental fleet, based on OEC, was $1.9 billion, a 23.4% or $351.1 million increase from a year ago and includes $74 million of fleet related to the first quarter 2019 We-Rent-It acquisition. Average dollar utilization was 35.2% compared to 34.7% a year ago. Proceed to Slide 19, please.

At the end of the first quarter, the outstanding balance under the amended ABL was $265.6 million. We had $476.7 million of availability at quarter end, net of $7.7 million of outstanding letters of credit. Our strong balance sheet and ample liquidity support our growth strategies. At this time, I'm going to turn the call back to Brad..

Slide 21, please. Thank you, Leslie. In summary, we believe our business performed well during the first quarter, and we're off to a solid start for the year. With clear visibility into the year and the return of normal seasonal conditions, project activity in our end-user markets is accelerating, physical utilization is increasing.

Current market conditions are encouraging and we believe 2019 will be another good year for our business. We remain focused on additional growth through acquisition, warm starts and same-store opportunities. Lastly, we paid our 19th consecutive quarterly cash dividend of $0.275 on March 8.

As always, future dividends are subject to board approval each quarter. Operator, please provide instructions for Q&A..

[Operator Instructions]. We'll take our first question from Steven Ramsey with Thompson Research Group..

This is actually Brian Biros on for Steven.

With the bolt-on acquisitions you've done the last, say, 12 to 18 months, could you provide some details around how those branches are performing now? And kind of whether they're running more efficiently as new fleet is added? And if you can get those, or have gotten those utilization rates similar to the core business?.

Yes, absolutely, Brian. This is Brad Barber. Thank you for your question. The detail that I will provide is that all of the acquisitions we have done to date have performed better than our anticipation.

Some -- one of them, specifically, in Florida certainly was the beneficiary of a hurricane on the heels of an acquisition, and that business has grown tremendously. But broad-based and to your question, all of these have exceeded our expectations, gone well. Fleet growth is there.

And their performance metrics, otherwise, are very similar to the positive performance metrics in other portions of our business..

Good to hear. And one more regarding rates. So demand in Q1 was good, driving rates 2%.

If that demand continues to build sequentially and kind of increase, do you expect rates to show greater year-over-year rate increase in Q2 and Q3? Or maybe consider increasing CapEx? Or how would you react to, I guess, a building momentum in demand?.

Yes, sure. So we stated before, we believe that rates for the year would be low single digits. We still have that sentiment and view. It was nice to see the 0.3% sequential increase, which was greater than Q1 last year sequential increase. So really nothing's changed with rates.

We're well focused on balancing our physical utilization with our rate opportunity. We will get rate improvements for the remainder of the year. As it pertains to CapEx, we don't give a lot of really specific guidance on CapEx.

But we're expecting fleet growth within the business this year to be in the high single digits as compared to the same level of growth. Now keep in mind that we're going to get a lot of full year benefit from the investments we've made last year.

But more of the same, healthy industry-leading utilizations along with consistent positive rate increases..

We will now take our next question from Faheem Sabeiha with Longbow Research..

A question for Leslie. I guess would you be able to comment on the rental revenue performance in the quarter, excluding the benefits from the acquisitions? I know that it maybe a little difficult, given the integrations, but any color there would be helpful..

Sure. Once they are integrated, yes, it does become a little bit more difficult. But I would just say, roughly, that ex the acquisitions, so that would be Rental Inc. and then the two months of WRI, or We-Rent-It, that the rental business is up approximately 15% ex those acquisitions..

Okay, great. And your time utilization was pretty impressive in the quarter.

I mean -- but could you guys provide a little more color around a 40 basis point year-over-year decline? Was that primarily the absorption from the larger fleet? Or was there maybe an impact from weather there?.

I think it was a little bit of both..

Yes, I think that it was a little bit of both. February, late February into early March was a little tougher, maybe, than normal seasonality. Certainly, growing the fleet at that level year-over-year has had some impact. But I got to tell you, we're pretty proud of our physical utilization that we did achieve, when we consider the growth.

Our view previously had been and it's still the same is that we expect to perform at last year's level of physical utilization and possibly higher. I would tell you that our opportunity still exist for us to potentially improve utilization year-over-year.

But at this point in time, I think our view is that we perform similar to last year's physical utilization and probably relatively flat on a much larger fleet with some consistent positive rate improvements..

Okay. And now just final question for John on M&A. I guess a 2-part question.

Can you provide us an update on the pipeline? And also can you comment on the trend in selling price that you're seeing now? Are sellers maybe asking more -- for more of a premium given the strength in the market? Just wondering if 2 to 3 tuck-ins a year is still achievable given the strength of the market and H&E's discipline on price..

Yes, look, 2 to 3 acquisitions a year is achievable. There's a lot of small, mid-sized players out there. And I think we have ample opportunity to achieve that expectation of 2 or 3 acquisitions a year. We've seen no change in valuation expectations or multiple expectations.

And I will tell you, we're going to be disciplined in what we pay for these assets, and we don't expect anything to change there. So good pipeline, plenty of opportunities and I think you can expect us to do 2 or 3 of these acquisitions a year..

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

I'm trying to just square up or gauge your level of confidence in the outlook for this year. I mean some of the industry metrics like the ABI and things like that have been a little bit squishy lately. And you guys are, obviously, talking pretty positively.

But I guess, maybe, just give us -- I understand you've provided pretty good visibility here near term, but how do you get comfortable longer term through the balance of the year? Maybe what are your guys telling you in the field? And what areas of non-res construction particularly are you seeing strength? That's my first question..

Sure, Seth. It's broad-based. It's been -- there's been absolutely no change in the opportunities we see within the mix of non-res construction. As it pertains -- I've personally visited about 20 of our locations in the last few weeks. We're talking to our region VPs and other sales managers consistently. And I tell you it's really more of the same.

And now how that ties out to the ABI, that's not a direct correlation. We certainly pay attention to the ABI as well as other metrics. And I appreciate that question. But I will tell you that the recent ABI number is not reflective of what we're hearing or seeing.

And we base a lot of our confidence on direct feedback from customers who have specific projects, and that is unchanged at this point in time nor do I expect it to change..

Okay, that's super helpful, Brad. Maybe just a couple for Leslie. Do you think, Leslie -- so SG&A was up on dollar basis here in the quarter.

But do you think it could be down for the year on a percentage of revenue year-over -- just do you think it will decline this year versus last year as a percentage?.

Not really, Seth. Always focus your attention on SG&A as a percentage of revenues really rather than the run rate of SG&A dollars. And we really are still comfortable with the discussions that we had on our fourth quarter earnings call, which were that SG&A would increase slightly as percentage of revenue as we continue to grow our rental business.

And as we've talked several times that the rental segment just really requires more people to run than other segments of our business. For the full year of 2018, SG&A as a percentage of revenues was 22.5%, and we expect that percentage to undergo slight pressure for the full year of 2019..

Okay, that's helpful.

And then just lastly, was there anything that really juiced the used sale margin in the quarter? Or was it a younger fleet? Or is it mix issue? Or just kind of channel? Anything that was extraordinary in the quarter?.

I think the only -- no, I mean, used equipment pricing remains very strong, and certain segments have improved, others have leveled off. But the net result has been positive. If there's something I would reference from the quarter, we sold a decent amount of crane rental fleet and did so at nice margins.

But I would tell you that, that margin contribution is very consistent across all product types..

That's a really, really healthy used equipment market, Seth..

And we'll now move on to Stanley Elliott with Stifel..

As it relates to the comments on the crane used sales, can you talk about the new used sales biz? I think that, that was the one part of the distribution business that was actually down. Do you think that's more timing? People buying more of used equipment? Anything to help out there would be great..

Sure. So we had a really nice quarter, generally speaking, in the new equipment sales. It was led by earthmoving. Leslie spoke about in her prepared comments that we had some slight margin pressures due to mix. And those were a couple larger road-building packages we sold at slightly reduced margins, but still healthy typical margins for sales.

Crane -- new crane sales were down slightly in the quarter. And our view for the full year, maybe specific to your question, is really more of the same. We would expect at this point that our 2019 new sales would be similar to 2018. And it's early on. The crane market has got limited visibility. And it's still choppy. It's still lumpy.

But I think cranes could level out as we go forward..

Yes, and look, when you look at that growth rate year-over-year in the first quarter, that was against an easy comp. That's part of it. And I think going forward, if you use the first quarter kind of as a run rate for the rest of the year, the next 3 quarters, I think that's going to give you a pretty good guideline..

Okay, great. Yes, because there's been lots of moving parts with new product introductions, et cetera. Brad, you mentioned kind of the opportunity to improve utilization, which has, frankly, been very, very good.

What are you all doing internally to drive that? Is that mix of products that you're talking about? Just anything to help out there in terms of how you're looking at that..

Sure. Well, it we can always be mix of products. I mean that's a key fundamental of fleet management. We don't want to be employing underutilized assets, but that's an ongoing everyday event.

Probably, a little deeper than that, we've spent a lot of time and resources around systems and efficiencies within systems and delivering better information as well as some yard automation and kind of how we lay things out to continue to gain efficiency. That being stated, I think our team does a really good job responding to our customers' needs.

When we get questions about what's the confidence in our forward visibility, I appreciate those questions. Those are very good questions. That being stated, we're touching our customers, and we're really direct with how we're receiving that feedback. And that's probably the single biggest area that we continue to improve through use of technology.

That allows us to run industry-leading utilization and will continue to..

Great. And then lastly, in terms of the balance sheet, obviously, lots of flexibility and capacity there. In the past, I think you guys talked about, maybe, up to 3.5x for some sort of -- for deals. I mean is that still the right way to think about it? Or are you dialing that back? I'd just be curious to see what's your metrics were there..

No, our view on leverage hasn't changed. Look, we can do these tuck-in acquisitions 2 to 3, 4 a year and really have no material effect on our leverage. If we were to have an opportunity for a transformational acquisition, a really big one, I think we'd be comfortable taking our leverage as high as 4 turns. We would not go beyond that.

But that's kind of our view on leverage, and that has not changed..

[Operator Instructions]. We'll take our next question from Neil Frohnapple from Buckingham Research..

This is Joe Nolan on for Neil.

So most of my questions have been answered already, but correct me if I'm wrong, I think you said that you expect rate improvements for the remainder of the year?.

We do..

Okay.

And I was just wondering if you could provide any commentary on what you're seeing for rental-rate performance so far in the second quarter?.

Well, let me -- Leslie had talked about it in her prepared comments that we saw rate improvement across all of the different product types. I think that's probably the best indicator we could offer. As we move out of Q1, which is seasonally our slowest quarter of the year, we're going to continue to see opportunity.

We spoke about that we're going to be a little more disciplined in our spending this year on capital and moderate our growth rates. Because we want to make sure we do our part to keep the supply and demand in balance. We see our competitors operating in a very disciplined way.

So simply stated, while we won't pick a number and we won't forecast individual quarters, it is strongly our view that we have the opportunity to continue to raise rates sequentially and certainly year-over-year as the year unfolds..

Thank you. And at this time, there are no further questions in the queue. I'd like to turn the conference back over to management for any additional or closing remarks..

Sure. We appreciate everyone taking the time to get on the first quarter call and look forward to talking to everyone again the end of Q2. Thank you..

Thank you. That does conclude today's conference. Thank you all for participation. You may now disconnect..