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Edited Transcript of HEES earnings conference call or presentation 27-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 H&E Equipment Services Inc Earnings Call

Baton Rouge Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of H&E Equipment Services Inc earnings conference call or presentation Thursday, April 27, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley W. Barber

H&E Equipment Services, Inc. - President and COO

* John M. Engquist

H&E Equipment Services, Inc. - CEO and Director

* Kevin S. Inda

H&E Equipment Services, Inc. - VP of IR

* Leslie S. Magee

H&E Equipment Services, Inc. - CFO, Principal Accounting Officer and Secretary

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Conference Call Participants

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* Joe Gregory Box

KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst

* Neil Andrew Frohnapple

Longbow Research LLC - Senior Analyst

* Nicholas Andrew Coppola

Thompson Research Group, LLC - Senior Equity Analyst

* Sean-M Wondrack

Deutsche Bank AG, Research Division - Research Analyst

* Seth Weber

RBC Capital Markets, LLC, Research Division - Analyst

* Steven Fisher

UBS Investment Bank, Research Division - Executive Director and Senior Analyst

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Presentation

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Operator [1]

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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.

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Kevin S. Inda, H&E Equipment Services, Inc. - VP of IR [2]

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Thank you, Kristi, 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 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 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 and 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.

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John M. Engquist, H&E Equipment Services, Inc. - CEO and Director [3]

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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 will take your questions.

Proceed to Slide 6, 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 most margins holding firmly on a year-over-year basis. While our rental business continues to benefit from increased activity in the Eagle Ford and Permian Basins 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 to 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 7, 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 a 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 8, 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 3 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 that is driving an array of nonresidential projects. The energy markets are also improving as a result of increased shale drilling activity. In both Texas and Louisiana, a solid line up of large industrial projects are either underway, at breaking ground stage or scheduled to commence construction over the next few years. Just recently, there have also been several large industrial projects announced. In February, for most of plastics group, begin 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 projects and in early April, China-based Wanhua Chemical announced the company will develop a $1.1 billion chemical manufacturing complex in Louisiana.

Proceed to Slide 9, 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 in even better perspective, of the 824 total rigs operating domestically on March 31, 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 revenues, down from a high of 13% at peak oil prices. Utilization in our 4 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 will increase demand for new cranes sales in the oil patch.

Proceed to Slide 10, please. The key takeaway from this slide is the outlook for the nonresidential construction market's in general, is positive for 2017 and beyond. Major market indicators, including the Dodge Momentum Index and the ABI, forecast continued growth. Construction employment reached an 8-year high in March. And then, there's 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.

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Leslie S. Magee, H&E Equipment Services, Inc. - CFO, Principal Accounting Officer and Secretary [4]

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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% or $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 needed by the weakness in our 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 anticipated, new equipment sales declined, 40.1% or $22.9 million to $34.3 million. New cranes sales decreased 73.5%, representing $17.3 million of the total $22.9 million decline 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 used earthmoving equipment sales, partially offset by a decline in used 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 a 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 were 44.8% compared to 45.3% last year, with a slight decrease due to higher maintenance and repair cost and depreciation expense. We incurred slightly higher maintenance and repair cost compared to the year ago period, largely as a result of the increased activity in our oil field 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 and resales were 34.7% compared to 36.70% a year ago. Parts and service gross margins 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 a 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 to Slide 15. EBITDA was $68.8 million in the first quarter compared to $69.1 million a year ago, and our 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 costs 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 noncash 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 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 periods presented here on this 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'll turn the call back to John for his conclusion.

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John M. Engquist, H&E Equipment Services, Inc. - CEO and Director [5]

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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 the 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'd like to take your questions.

Operator, please provide instructions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Neil Frohnapple from Longbow Research.

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Neil Andrew Frohnapple, Longbow Research LLC - Senior Analyst [2]

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Regarding new equipment sales, obviously weakness in crane 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 the last few quarters?

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John M. Engquist, H&E Equipment Services, Inc. - CEO and Director [3]

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

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Bradley W. Barber, H&E Equipment Services, Inc. - President and COO [4]

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Neil, we did. I mean, we had a handful of cranes slipped in. I don't think we want to get into a habit of talking about delivery timing and schedules and slippage. Some of our German product was not delivered in time. It still would've been a very difficult quarter, but yes, we certainly had cranes ship that did not make planned delivery dates, and it would've helped some but it would've been a tough comp.

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Neil Andrew Frohnapple, Longbow Research LLC - Senior Analyst [5]

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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 the $60 oil to really help the crane side, but again, just trying to calibrate expectations for the rest of the year. And I understand the business can be very lumpy but any more color you can provide, that will be great.

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John M. Engquist, H&E Equipment Services, Inc. - CEO and Director [6]

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Look, the first quarter is always our softest quarter from a sales' perspective and from a rental's 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're quoting a lot more stuff right now and we're encouraged by that. That is -- that hasn't turned into purchase orders, but we do see more quote activity and yes, you can expect sales to improve as they almost always do as we move into the year.

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Operator [7]

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

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Nicholas Andrew Coppola, Thompson Research Group, LLC - Senior Equity Analyst [8]

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

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John M. Engquist, H&E Equipment Services, Inc. - CEO and Director [9]

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Well, 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 that's not just us, it's everybody in the sector. So we're pretty comfortable only being down 0.5 point, particularly, when you look at the number 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 turn positive and we're still hopeful that we will be positive by year-end on a year-over-year basis. We really need to see the big rental players start being more rational on these big projects. I can tell you, the environment there is really difficult and I think, it's really hurting rates in the entire sector.

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Nicholas Andrew Coppola, Thompson Research Group, LLC - Senior Equity Analyst [10]

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Okay. And then, I just wanted to ask you on a -- just maybe elaborate on demand trends in the oil patch. You certainly made some positive comments about trends there, moving fleet back into the Eagle Ford and Permian. Are you continuing to move fleet there? I mean, what -- I guess, what was -- what is the direction looks like there?

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John M. Engquist, H&E Equipment Services, Inc. - CEO and Director [11]

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Yes. We have continued to move fleet. Demand is strong there, our utilization is running at very high levels from the mid-70s to 80% in our heavy oil field markets. Midland would be a good example. I -- we see that environment very steady and improving so we have continued to move fleet in there, but I'll say, we are doing so cautiously. We're being very careful not to over fleet those markets.

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Operator [12]

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

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Seth Weber, RBC Capital Markets, LLC, Research Division - Analyst [13]

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

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John M. Engquist, H&E Equipment Services, Inc. - CEO and Director [14]

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You are talking about oil field upstream stuff?

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Seth Weber, RBC Capital Markets, LLC, Research Division - Analyst [15]

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That's -- yes, John. Thanks.

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John M. Engquist, H&E Equipment Services, Inc. - CEO and Director [16]

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I am going to defer to Brad on that question. The question is, are we getting lower rates than we were on this equipment? It's going back into the oil patch.

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Bradley W. Barber, H&E Equipment Services, Inc. - President and COO [17]

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The answer is no. We're not. I mean -- I think John spoke to we're moving back in cautiously. Rates are very important to us and are -- the best rates that we generally have on our equipment types are in the oil field and that will continue to be our position. We are not going to forgo rates and add fleet to the oil field. So the answer would be no. We've got quality rates that are improving in the oil field.

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Seth Weber, RBC Capital Markets, LLC, Research Division - Analyst [18]

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

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Bradley W. Barber, H&E Equipment Services, Inc. - President and COO [19]

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I guess, I'd 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 I would have to do an analysis to give you definitive answer. But I strongly suspect they are very similar today to where they were at the peak.

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Seth Weber, RBC Capital Markets, LLC, Research Division - Analyst [20]

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Okay. And then just switching it up a little bit, the parts and service business continues to be kind of frustrating here. I mean, cranes have been soft for a while, but -- and then -- but in your slide deck, you referenced that there is some potential for near-term benefit on the parts and service business. And we've seen some pickup in aftermarket activity from some of the other -- from some OEMs and whatnot. Do you think that parts and service sales turned positive here over the next -- I mean, can they be positive for the year? How are you -- I guess, maybe what's behind the comment on the slide?

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John M. Engquist, H&E Equipment Services, Inc. - CEO and Director [21]

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Look, we're seeing some parts and service opportunity coming from the oil patch and, obviously, from our earthmoving accounts. But crane rebuild, crane remanufacturing is a huge driver of our parts and service business and that is just really down right now. We're just not getting any activity in that area and that is -- that's really hurting us on the parts and service side. So the weakness you are seeing there is almost totally related to the weakness in the crane markets. 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.

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Seth Weber, RBC Capital Markets, LLC, Research Division - Analyst [22]

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Okay. So you think it's kind of flattish this year then? Is that the way you are thinking about it?

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Bradley W. Barber, H&E Equipment Services, Inc. - President and COO [23]

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

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Seth Weber, RBC Capital Markets, LLC, Research Division - Analyst [24]

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Sure. Right. That makes sense. And then maybe just for Leslie a quick one on -- is tax rate now structurally lower or do you think it goes back to that kind of low 40% range?

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Leslie S. Magee, H&E Equipment Services, Inc. - CFO, Principal Accounting Officer and Secretary [25]

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No. For this year, I would say that it is structurally lower. So the 37% is a good range for the remaining quarters with the exception of the third quarter, we are estimating a discrete item, which would substantially lower the tax rate in the third quarter. Down to something like around 11%. So for the year, we would be 28% to 29% on our effective tax rate. Once we take in account -- into account that discrete item in the third quarter.

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Seth Weber, RBC Capital Markets, LLC, Research Division - Analyst [26]

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Right.

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Leslie S. Magee, H&E Equipment Services, Inc. - CFO, Principal Accounting Officer and Secretary [27]

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It's a little unusual.

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Seth Weber, RBC Capital Markets, LLC, Research Division - Analyst [28]

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Okay. And then -- but sort of going forward, it should be in that high 30s then for the period?

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Leslie S. Magee, H&E Equipment Services, Inc. - CFO, Principal Accounting Officer and Secretary [29]

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So beyond 2017?

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Seth Weber, RBC Capital Markets, LLC, Research Division - Analyst [30]

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Yes. Yes.

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Leslie S. Magee, H&E Equipment Services, Inc. - CFO, Principal Accounting Officer and Secretary [31]

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

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Operator [32]

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

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Joe Gregory Box, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [33]

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So question for you on the dollar utilization. Can you guys just give us a little bit more color on the 100 basis point jump in your dirt equipment and then the 200 basis -- 220 basis point jump in telehandler relative to AWP that was flat year-over-year? I guess it's that just a function of maybe buying more aerial equipment and did the new equipment drag down in dollar utilization? Or -- are you seeing any differences in either time viewed or rental rate for those different buckets?

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John M. Engquist, H&E Equipment Services, Inc. - CEO and Director [34]

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Well, if I understand, I think the increases we saw in dollars were relative to the increase in physical utilization primarily. I am not...

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Bradley W. Barber, H&E Equipment Services, Inc. - President and COO [35]

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To put there -- look, there are puts and takes within the product type, as you say, we lumped telehandler's into the aerial work platform group, and I -- we're not going to comment on product types within, but there are always puts and takes. The broader issue was increased physical time utilization.

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Joe Gregory Box, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [36]

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So I mean, is there anything to read into that if the dirt side has higher dollar utilization? And if it's coming from timing, 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?

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Bradley W. Barber, H&E Equipment Services, Inc. - President and COO [37]

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I think -- look, historically, earthmoving's been among our highest dollar utilization. It's a product that some companies are challenged to manage from a maintenance standpoint. We do a pretty nice job. We've continued to grow our earthmoving component of our business over the last few years, in fact, earthmoving has been taking up a larger percent, meaning, it's growing a little quicker than most of the other product within the broader mix. We've also had some decline when you think about the -- a little bit of a shift or a benefit to dollar utilization. We had a decline with cranes. Cranes carry our lowest dollar utilization historically, even when they are better or more typical, they carry the lowest dollar utilization, so we've had some slight declines there. We basically reinvested those dollars in higher returning products.

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Joe Gregory Box, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [38]

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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 maybe just a sense for where it could shake out as we move through the year?

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Leslie S. Magee, H&E Equipment Services, Inc. - CFO, Principal Accounting Officer and Secretary [39]

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Sure. I would say that for the first quarter, the reason it is below what you would refer to as kind of the norm of 50%, is going to be due to the higher maintenance and repair cost that I was referring to. So throughout the course of year, we would expect that to normalize along with some of the other normal positive drivers. John talked about rate a little bit, physical utilization and then the fleet growth, so I think those will all balance out to give us more normalized rental incremental margin.

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Joe Gregory Box, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [40]

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Got it, Leslie. And then maybe just to take a different angle on your distribution business, I guess, specifically around new sales. We're 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're 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?

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John M. Engquist, H&E Equipment Services, Inc. - CEO and Director [41]

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When you speak to uptick in OEMs, are you speaking of earthmoving manufacturers? I don't -- I assume you are not talking about the cranes...

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Joe Gregory Box, KeyBanc Capital Markets Inc., Research Division - VP and Senior Equity Research Analyst [42]

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Yes, more on the earth side than the crane, I guess, to be specific.

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John M. Engquist, H&E Equipment Services, Inc. - CEO and Director [43]

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Yes. Look, we feel good about our earthmoving end markets, the demand is solid. We've got a lot of activity there. The area that continues to be very weak and challenging for us is on the crane 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 into 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're very pleased with what we're seeing. I mean, there's solid activity and there is just really strong demand in the nonresidential construction markets and that demand is very broad-based, so we feel good about our end markets.

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Bradley W. Barber, H&E Equipment Services, Inc. - President and COO [44]

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Joe, the other thing I would add -- I apologize, 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 really good indicator of what we think we'll continue to accomplish on the distribution side as well. Now keep in context, we're a Komatsu dealer, that's the broadest piece of our earthmoving distribution. We're also a [Duson] distributor. But we are a Komatsu dealer in 2 states, so in the broader mix of distribution revenues, crane is -- it's heavily weighted to cranes and I think you're aware of that.

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Operator [45]

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(Operator Instructions) We'll take our next question from Sean Wondrack with Deutsche Bank.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - Research Analyst [46]

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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 we can get an update, how have you seen the competitive environment down there in terms of operators who're still servicing and operators who've basically gone insolvent and are basically out of the industry now? Especially at this point in time, what you're seeing out there?

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John M. Engquist, H&E Equipment Services, Inc. - CEO and Director [47]

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From a competitive environment standpoint, I think, just relative to the oil patch, I think we're probably seeing pretty good discipline there. I think people are being fairly cautious. These oil prices bounced around a little bit, I mean, they've been staying in the 50s, but I think everybody is cautiously optimistic and being fairly disciplined from a competitive standpoint. Where we're seeing the crazy competition and crazy rate pressure is on a big petrochemical projects, the more downstream stuff. The rate environment there is brutal right now.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - Research Analyst [48]

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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 shirk that revenue or do you continue to compete for it?

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John M. Engquist, H&E Equipment Services, Inc. - CEO and Director [49]

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We do some of both. I mean, we get to a point, we'll 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 are on a lot of those big projects and, obviously, we have to -- it impacts our overall rate performance, but we do on a regular basis walk away from deals because of rates on those big projects.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - Research Analyst [50]

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

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Leslie S. Magee, H&E Equipment Services, Inc. - CFO, Principal Accounting Officer and Secretary [51]

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Yes. We are still in the NOL position. It's really not a significant cash tax payer at all.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - Research Analyst [52]

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And do you think that will continue into 2018? Or will you have mostly exhausted them in 2017?

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Leslie S. Magee, H&E Equipment Services, Inc. - CFO, Principal Accounting Officer and Secretary [53]

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They will run into 2018, yes.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - Research Analyst [54]

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Okay, great. And then just lastly, as I look at the Bloomberg right now, your bonds are trading at roughly 3%. They are, obviously, callable in September, and you have some rate hikes going on this year, are you considering refinancing these bonds?

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John M. Engquist, H&E Equipment Services, Inc. - CEO and Director [55]

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

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Operator [56]

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We'll take our next question from Steven Fisher with UBS.

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [57]

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Wondering if you guys could talk -- wondering if you could about your experience at CONEXPO related to cranes? Because 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? Just maybe if you could talk about your experience at CONEXPO?

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Bradley W. Barber, H&E Equipment Services, Inc. - President and COO [58]

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Sure. So the experience was good, it was very positive. We did place orders, we did take some orders. The order intake was not as robust at this CONEXPO as it was a few years ago, but it was certainly a positive event where we had an outstanding turnout of our largest most loyal customers. So good event, positive things happened because of the event. That being said, we're still overshadowed by the broader issue and that's cheap oil and weak energy markets.

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [59]

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Was there a -- that's helpful. Was there a sort of a waning towards where are the orders, what kind of products you are taking orders on?

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Bradley W. Barber, H&E Equipment Services, Inc. - President and COO [60]

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It's a mix of products. There was no particular product type that stands out that's worth noting on (inaudible).

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [61]

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

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Bradley W. Barber, H&E Equipment Services, Inc. - President and COO [62]

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It's broad-based and the drivers -- lower physical utilization and substantially lower rental rates. Our largest rate decreases have come in the crane segment as you might can imagine.

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [63]

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Okay, so no particular geography. Let's see, just Leslie to clarify your expectation on rental gross margin, do expect that to be flat for the rest of the year or up on a year-over-year basis?

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Leslie S. Magee, H&E Equipment Services, Inc. - CFO, Principal Accounting Officer and Secretary [64]

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

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [65]

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Okay, and then just lastly. What's the utilization of the Texas branches that you opened in the latter 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?

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Bradley W. Barber, H&E Equipment Services, Inc. - President and COO [66]

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Yes. We don't quote utilization at a 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.

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Operator [67]

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Our next question comes from Sean Wondrack with Deutsche Bank.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - Research Analyst [68]

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Just a 1 follow-up here. On a Slide 9, you list your end markets and, clearly, you have industrial, nonres 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? What does that represent exactly? Are there any bigger buckets in that? Is that heavily oil and gas in it?

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Bradley W. Barber, H&E Equipment Services, Inc. - President and COO [69]

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No. Sean, it's more of a catch all 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 (inaudible).

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Operator [70]

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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.

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John M. Engquist, H&E Equipment Services, Inc. - CEO and Director [71]

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I want to thank everybody for participating today. Obviously, we feel very good about our end markets. We think we've got some runway in front of us and I think we're going to have a nice year, and hopefully, a nice several years in front of us. So thanks for participating and we look forward to talking to you on the next call.

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Operator [72]

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