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

Thank you, Bethany, and welcome to H&E Equipment Services conference call to review the Company's results for the second quarter ended June 30, 2019, 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, Executive Chairman of the Board of Directors; Bradley 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; 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 could cause 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 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.With that said, I’ll now turn the call over to Brad Barber..

Thank you, Kevin and good morning, everyone. Welcome to H&E Equipment Services second 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 second 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 believe our second quarter performance is consistent with the strength we continue to see in the construction markets we serve. As expected, demand has increased in our rental business. This demand is broad-based including all product types we ran, the geographies we served, and across the diverse group of project types.

Our customers remain optimistic with solid expected activity at the end of this year and end of 2020.As a result, total revenues increased approximately 7.5% to $333.6 million in the second quarter. Our rental business continues to perform well with revenues up 20.9% from a year ago. Our gross margin increased 37.4% from 34.8% a year ago.

Adjusted EBITDA grew 16% to $118 million. And margins improved to 35.4% from 32.8% a year ago. In the second quarter net income was $22.6 million or $0.63 per diluted share compared to $20.8 million or $0.58 per diluted share a year ago on an effective tax rate of 26.8% in the second quarter of 2019 versus 25.5% a year ago.Slide 7 please.

Our rental business continued to deliver solid results successfully capitalizing on increased demand in our end user markets. We also achieved a 2.2% increase in rental rates from a year ago and high fees for utilization of 71.2% on a significantly larger fleet. As a result, rental revenues for the second quarter increased 20.9% from a year ago.

In addition, value utilization increased to 36.5% compared to 35.4% a year ago.Slide 8 please. With the July 1st opening of our branch in Prineville, our first store in Oregon, we now have presence in 23 states. Our Prineville branch is representative of our Greenfield strategy. Oregon has one of the fastest growing economies in the nation.

And this branch better positions us with upcoming large projects in the area as well as better provides coverage, service and support to existing customers served by other locations in adjacent states.

We plan to continue our geographic expansion and increase our location density in existing markets by executing on our growth strategy which includes both acquisitions and organic expansion.Slide 9 please. This slide illustrates our mix of revenues and fleet composition both of which we believe are significant advantages in our business.

Demand is solid in all of our end markets, especially non-residential construction which drives over 60% of our revenue. We continue to invest in growing our rental fleet, focused on opportunities that allow us to improve the fleet diversification and assist us in achieving improved rental returns.

We continue to have one of the youngest fleets in the industry of 34.6 months compared to an industry average of 46 months.Slide 10 please. As indicated in my earlier remarks, our performance as well as the rental industry as a whole is consistent with the strength in the non-residential construction markets where we have exposure.

The economy is strong and industry indicators remain positive.

Our most important indicator customer sentiment is solid and currently projected activity -- and current projected activity is robust and we continue to see new project activity announced in breaking ground, supporting our belief that the cycle is still in the growth phase.I’ll now turn the call over to Leslie to discuss our financial results in more detail.

Leslie?.

Good morning everyone and thank you Brad. As a reminder due to changes related to the adoption of fleet there’s a topic 842 last quarter, we have again included a table in the Appendix of this presentation, detailing the components of the equipment rentals and related reclassified rental activities.

We have preserved our historical reporting of rental revenues and also included income statement data on an as adjusted basis to reflect the prior theory comparisons on a consistent basis.So now let’s look at slide 12 please.

We are pleased with the performance of the business for the second quarter and our total revenues increased 7.5% or $23.2 million compared to the same period a year ago to $333.6 million, partially driven by the strength in our rental business. As Brad highlighted, rental revenue, as previously reported, increased 20.9% to $173.8 million.

Our physical utilization remained high with average time utilization based on OEC of 71.2% for the quarter compared to 72% a year ago.We expanded our rental fleet by approximately 15.6% versus a year ago.

Our rental rates improved again this quarter up 2.2% year-over-year, and rates improved in all product lines, rates also increased 0.6% sequentially, increasing in all product lines as well.

With strong utilization in rate expansion, our dollar returns raised 110 basis points to 36.5% versus last year.New equipment sales decreased 21.8% or $14.9 million to $53.6 million compared to $68.5 million last year, and the decrease was primarily driven by lower crane and earthmoving sales which were down 27.7% and 21.3% respectively.

Used equipment sales increased 12.4% or $4 million to $36.1 million largely as a result of higher use of aerial and earthmoving sales. And sales from our rental fleet comprise 92% of total used equipment sales this quarter compared to 89% a year ago.

Our parts and service segments delivered $48.6 million in revenue on a combined basis, up 3.2% from a year ago.This time let's move on to gross profit and margin.

Our gross profit increased 15.4% to $124.8 million from a year ago and consolidated margins were 37.4% compared to 34.8% a year ago, an increase of 260 basis points, primarily as a result of a positive mix shift to higher margin rentals combined with strong performance in new and used equipment sales and our service business.For gross margin detail by segment, our rental gross margins as previously reported were 49.1% during the quarter, the same as the year ago period.

Margins on new equipment sales increased to 12.2% for the second quarter compared to 10.7% a year ago, largely due to the mix of equipments sold. Used equipment sales gross margins increased to 35.4% compared to 32.3% last year, and margins on pure rental fleet and lease sales were 37.8% compared with 35.7% a year ago.

Our parts and service gross margins on a combined basis were 41% compared to 41.2% a year ago.Slide 13 please. Income from operations for the second quarter of 2019 increased 10.6% to $47.7 million or 14.3% of revenue compared to $43.1 million or 13.9% of revenue in the year ago quarter.

The net change in margins, a 40 basis point increase, was primarily the result of a shift in revenue mix to higher margin rentals combined with solid margins in new and used equipment sales and service revenues. A decline in gain on sales of property and higher SG&A costs partially offset these results compared to a year ago.Proceed to slide 14.

Net income was $22.6 million or $0.63 per diluted share in the second quarter of 2019 compared to net income of $20.8 million or $0.58 per diluted share in the second quarter of 2018. Our effective income tax rate was 26.8% in the second quarter 2019 versus 25.5% a year ago.Please move to slide 15.

Adjusted EBITDA was $118 million in the second quarter compared to $101.8 million a year ago, an increase of 16%. EBITDA margins expanded 260 basis points to 35.4% this quarter compared to a year ago. And margins increased for the same reasons previously mentioned on the income from operations margin discussions on slide 13.Our next slide, 16.

SG&A expenses for the second quarter of 2019 were $77.8 million compared with $69 million in the prior year, an $8.8 million or 12.7% increase.

SG&A expenses in the second quarter of 2019 as a percentage of total revenues were 23.3% compared to 22.3% a year ago.Employee salaries wages, payroll taxes and related employee benefit and other employee related expenses increased $4.8 million largely due to our acquisitions since June 30, 2018, a larger work force and higher incentive compensation related to improved profitability.

Solely related expenses primarily rent expense increased $1.9 million and depreciation and amortization increased $0.5 million. Expenses related to Greenfield branch expansion increased $0.8 million compared to a year ago.Next on Slide 17 please.

Our gross fleet capital expenditures during the second quarter were $138.5 million including noncash transfers from inventory. And our net rental fleet capital expenditures for the quarter were $105.1 million. Our gross PP&E CapEx for the quarter was $11.4 million and net was $10.1 million.

Our average fleet age as of June 30 was 34.6 months.Our free cash flow for the second quarter was a use of $6.9 million and this compares to a use of free cash flow of $151.3 million a year ago, which was also impacted by an acquisition completed during that period.We've included the GAAP reconciliations to net cash provide about operating activities to free cash flows for the periods presented on the slide in the appendix at the end of this presentation.Next on Slide 18.

At the end of the second quarter the size of our rental fleet based on the OEC was $1.9 million a 15.6% or $260.3 million increased from a year ago. Average dollar utilization was 36.5% compared to 35.4% a year ago.Proceed to Slide 19 please. At the end of the second quarter, the outstanding balance under the amended ABL facilities was $202.7 million.

And we have $459.5 million of availability at quarter end which was net of $7.7 million of outstanding letters of credit.And at this time, I'm going to turn the call back to Brad..

Thank you, Leslie. Please proceed to Slide 21. To conclude we're pleased with our solid results for the year and our outlook remains positive.

The trends in our rental business are encouraging and we continue to achieve positive rates and high physical utilization, remain focused on improving all areas of our business with a continued emphasis on growing the rental business. Lastly, we continue to pay our quarterly cash dividend payment of $0.275 on July 14.

As always, future dividends are subject to Board review and approval each quarter.We'll now take your questions. Operator, please provide instructions..

Absolutely. [Operator Instructions] And our first question will come from Seth Weber of RBC Capital Markets..

Good morning, everybody..

Good morning, Seth..

Good morning. Wanted to ask about the time utilization. Just looking into -- looking at the third quarter, I guess 3Q18 was a softer quarter, you took on a lot of fleet last year.

So, I mean, do you think we're at a setup here where time utilization could actually start to be flat to up here in 3Q19 or in the back half of the year?.

Seth, I do think that's possible. I think, kind of that flat look is a good look to take. We've got a much larger fleet; we have some additional fleet still coming in. we're satisfied with our performance on rates and think that that will continue. But if we were going to be up or down, we were likely to be slightly up.

But I think kind of flattish year-over-year was a good expectation..

Okay, that's helpful. And then anything Brad, you would highlight for energy markets. So, you know, there's obviously a lot of -- kind of a lot of angst out there around some of the markets in Texas and whatnot.

Is there anything you'd highlight from a fleet on the ground that you're seeing or utilization in your fleet in Texas, for example?.

No, it's more of the same, it's very solid, best rate we've got, really within our time footprint, and utilization continues to be solid, and that's our expectation that will remain solid..

Okay. And then just maybe flipping over to distribution business, I think you had previously talked about that business being kind of flattish year-over-year. Is that still the case or is there any -- numbers are a little soft we're looking for in the quarter.

Is there -- are you feeling like that could still be flat or is there some downside to that number do you think? On the new equipment sale, sorry..

Look, I think we could be flattish. Is there potential downside, it could be? I mean, we talked about large crane sales before that they can swing us pretty big in a hurry. And so, they've been a little soft so for year-to-date. I will tell you; we still got some backlog.

We had a few machines that we didn't quite make delivery on for the quarter that would have helped our Q2 new retail numbers, not particularly in cranes. And I just don't think it's impossible that we get back to that flattish number. And if the wind blows our direction, maybe we do a little better.

But to answer your question, we could have some risk in flat year-over-year new sales..

Okay. And that….

Just Seth, one comment I might give. On the last call, we mentioned that if you kind of took the first quarter sales and use that as a run rate that, I think that's pretty good..

Right..

Proxy for what we think we do..

Okay. That's helpful. I appreciate it guys. I'll get back in queue. Thank you..

Thank you..

And our next question will come from Steven Fisher of UBS..

Thanks. Good morning. Just to follow-up on Seth's question there.

Can you just give us a little more color within the cranes on the new sales kind of what -- with any particular types of cranes you are seeing relative strength or relative weakness?.

No, it's really more the same, Steven, there's been no real change. All cranes have been the more popular product, the higher volume sale product that remains, crawlers have been spotty that remains and RT sales have been on the lower end of historic levels.

But there is no change, it's really just been more of the same that we've seen and expect more of the same going forward..

Okay.

And just curious how you would describe sort of the market supply-demand balance out there on the rental fleet? Is it getting tighter, looser overall and are there any regions where you maybe observe something that stands out different than the overall market?.

So, I'll take the last part of question. No, I mean most of our regions are pretty consistent with relative change or improvement year-over-year. As we look at supply and demand balance, it's improving in our favor. I think that's to be expected, based off of the seasonality we typically get with the increased utilization.

As we move forward, our utilization is continuing to increase. We see an opportunity consistently get incremental rate gains that fall within the guidance was given on our expectation for rates. So, it -- has it improved, it absolutely has improved.

Will it continue to improve, I think incrementally? And I think we have a very healthy balance of supply and demand that's going to allow us to perform well..

And so, do you have a base case for the direction of rental rate growth over the second half? Do you think that the market conditions can support the steady kind of low 2 plus percent rate growth or should we assume some deceleration as sort of the cycle progresses?.

I would not assume any deceleration; I would assume more of the same..

Okay. And just, obviously, there was a storm that came through a couple weeks ago. Does that have any noticeable impact? I assume if it did, you would have called it out, but just want to make sure..

No, no impact. We were very fortunate that the timing of the storm and really the magnitude was much lighter. So, it was rainy and may have pauses for half a day, but no impact to the business..

Good to hear. Thanks a lot..

Thank you for questions..

And we'll take a question from Steven Ramsey of Thomas [ph] Research Group..

Good morning. I guess, I wanted to think about kind of your areas of density looking at your map locations. There are certain areas, where it seems like you have a real concentration of branches like the Denver area, Gulf Coast areas in Louisiana, certain regions of Texas.

Can you discuss, if the areas of density are outperforming areas that you only have one branch and maybe kind of discuss the rates and utilization factors of that?.

So, in some case -- generally yes. I mean, we're denser in larger markets. We have continued to focus on adding density. That's a really good part of our growth strategy. That being said, we have some individual markets are performing at very high level. So, it's difficult to kind of call out and segregate them in the way the question was asked.

Because the truth is, we have both. But generally, the larger markets, you can look at market data and see that they are the hotter and more robust markets, faster growth rates. But we're in some markets where we have singular locations that have tremendous growth as well and we're benefiting the same way..

Great. And kind of thinking about that theme.

I mean as you add locations and add fleets incrementally going forward, is there an intention to open more branches in those densified areas or is the investment case better to -- like you did in Oregon, launch new branches and add fleet into areas where you only have one branch?.

Right, good question. It's both. In the case of Oregon, we've got a handful of good customers, long term relationships, and some project activities that spurred our interest of moving into that market.

It certainly helps our geographic presence, we find in many cases, as we add locations, we exponentially grow our revenue, not only with new customers, but existing customers who were running in and out of existing -- of our existing footprint.So, the answer is both. I will tell you that we like improving the density.

If we were to think about a magnitude of priorities, the density play is outstanding. That being said, we're also going to be smart and opportunistic, and look into new markets where it makes sense..

Excellent.

And then, I guess, how do you balance then, the quicker payback of putting fleet, in adding branches into those densified areas, and then establishing new regions, maybe for kind of a longer term growth? I mean, is it -- and as you kind of way that decision and implement the growth strategy, are you having -- are you transferring much fleet into these branches or is it pretty much new fresh fleet going into them?.

Let me touch on that one. It's typically new fleet going into those locations, so in some cases.

We're always moving assets, but I think as a general rule, when we enter new markets, new geographies where we don't have a presence that will more likely than not be done through an acquisition.From a warm start standpoint, in these big markets, where we can increase density that'll be done through new store openings. That's a general rule.

There's exceptions to that like Prineville where we are on some big projects there, we had a customer base there. So, we went in there with a Greenfield, but as a general, when we enter new markets, it'll be done through an acquisition..

Great, thank you..

And our next question will come from Ross Gilardi of Bank of America..

Hey, good morning, guys..

Hey, good morning..

Good morning..

I was just curious, relative to the beginning of the year, how do you feel on, capital spending and what you're intending to spend this year, are you lowering, are you adding to it or is it more or less same?.

It's the same Ross. If we were to do anything, maybe we would incrementally add currently, but our view is it's going to be more of the same, we talked about that high single digit growth plan..

Got it? Do you think United Rentals CapEx adjustment will further tighten the market? And are you seeing any other larger national or more regional players taking a similar tact here?.

Look, I prefer not to comment on any particular competitor. But I can say that I see our largest competitors acting very responsibly, whether it would be adjusting their capital, being focused on rates.

And, again, that's really what fuels my commentary about, we're going to continue to get the incremental gains and physical utilization and my confidence that we continue to incrementally improve our rental rate sequentially.So, I hope that's helpful to you.

But I think the dynamics exists for a variety of reasons and certainly, people's buying habits are part of that equation. But we feel everyone's being pretty disciplined in the view of what we see in the market..

Your gross margins on your used equipment were up like 300 basis points year-on-year, is that a reflection of strength in used equipment prices or is that just differences in mix or depreciation schedule or just general calling of fleet tied to some recent acquisition or anything like that?.

It's both, but I will tell you that the used equipment market and our ability to push pricing is a large piece of that improvement, but there's some mix as well..

And just across the different types of fleet, are you seeing relative strength or weakness in used equipment prices?.

No -- I think -- no change. Really, it's been good for quite some time and remains the same..

So, what do you -- you guys sound obviously very bullish on non-residential construction and the outlook? Why does -- why don't metrics and numbers like the architectural billings index and some of the other non-res data points that are out there concern you right now? I mean, obviously, you're seeing a lot something much different than what a lot of these numbers are saying?.

Sure. Listen, we certainly watch all of those reports. And they do way on how we view the markets and shape our thoughts about how we grow the business. You take the ABI, it's one report that has shown some volatility from time to time and not proven to be accurate in a shorter window of time.

So, if we were to continue to see, more negative type numbers out of ABI over a period of time, it would weigh on us. We've got a really good handle with our customers, with reporting, with discussing opportunities, and of course we can look at our current environment.I think another thing we have in our favor is the geographies we serve.

Regionally, we can have a location in a region that makes sure a little more softness in one of the types of reporting you're talking about. But generally, we're such a small piece of those overall markets that we can perform well within them. And I think we've proven that over multiple cycles now..

Just on that lastly Brad, I mean you've kind of answered this with elements of your other answers. But, clearly right now markets are worried that we're going into this real soft patch, if not industrial recession, like we did in 2015 and 2016.

And if you look out the window from where you sit, do you see any similarities to the way that market conditions are evolving to what you saw a few years ago in ‘15, and ‘16. For you guys rates just kind of flattened out, maybe you had a couple of down quarters, it wasn't that big of a deal.

But you did have maybe a little bit of a mini correction in the rental market.

Are you able to compare and contrast what you're seeing now to like a few years ago at all, in that context?.

Not really. Listen, I mean obviously, we try to pay attention, we want to be critical with our thoughts. But when we stack everything that's available to us, it looks like more of the same, it's going to continue to be positive.

We will continue to watch, but what we're seeing in the marketplace, the feedback we're getting from our customers and quite frankly, the job starts in the bidding activity, do not support with a few of these more recent term reports have had to say, but we're going to continue to watch them..

Okay, thanks very much..

Thank you..

[Operator Instructions] We will now hear from Stanley Elliott of Stifel..

Good morning, everybody. Thank you for taking the question. I apologize if you touched on this earlier. Is there a way to talk about utilization kind of as how attractive the quarter? I'd be curious to see if the weather that we saw at the central parts of the U.S. had much of an impact on the quarter's results..

Generally, the utilization as expected and what's typical, incrementally improved throughout the quarter. You can have events like a holiday or particular, when the holiday fall, that you can get a, kind of an anomaly within a trend line.

But in general, it's improved incrementally throughout the quarter and it continues to improve as we sit here today..

And Brad, you talked about that there seems to be more discipline in the marketplace in terms of fleet, in terms of rate.

Do you have any ideas or thoughts kind of overarching what maybe driving that, I'd just be curious because it does feel like that there's a lot more data and things of that nature, but maybe we're looking at, maybe a marginally structurally improved marketplace?.

Yeah. So, look, I believe I'm not going to talk about the marketplace, I think I've made clear that. What we see is good, positive and future opportunity in the market.

I would say that ourselves, our larger competitors and other regional players who have subs in the fleets, all use information to drive their business much more today than they have in previous cycles and the disciplines that I have confidence in is because there is a lot of smart people out there using good information and making good decisions.

And there is not a void of that type of information within the management decisions in our company or other companies that we compete with. And so that what give me the highest degree of confidence.I would also add that I don’t see manufacturers building inventory.

In previous cycles there have been select manufacturers within certain product types specifically who may have been more aggressive and build inventory of speculation and then kind of stuff the channel through create financing or extra discount that in tight that behavior.

I just don't see any of that happening with any of our manufacturers in any of the product type. So, lot discipline within the fundamentals or the folks who were making the equipment as well as the folks who are making this equipment..

Perfect.

And then last for me, leverage kind of tackling or should be towards that the bottom end of your co-targeted range, should we expect that to change, do you want to run the business at lower leverage? How are you thinking about that in the caveat kind of how that relates to the thoughts run acquisitions?.

Well, I would just say that our leverage is coming down, we expect that will continue to, as far as change in our leverage target we have traditionally got through, there is no change at this point in time..

So that would mean that your M&A certainly would be strong opportunity or possibility for you on the back half of the year, depending upon kind of market conditions?.

Absolutely..

Great. Thanks guys. Appreciate it. Best of luck..

Thank you..

And there are no further questions. I would like to turn the call back over to Mr. Brad Barber for closing remarks..

Sure, I would like to thank everyone for their time and attending the call today and we look forward to speaking to you on our next quarterly call. Thank you, operator..

And ladies and gentleman this does conclude today's conference. We thank you for your participation. You may now disconnect..