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Executives

Kevin Inda - Corporate Communications

John Engquist - President and CEO

Leslie Magee - CFO and Secretary

Analysts

Seth Weber - Banc of America

Adrienne Colby - Deutsche Bank

Henry Kirn - UBS

Peter Chan - Credit Suisse

Philip Volpicelli - Cantor Fitzgerald

Michael Terwilliger - Banc of America Securities

Chris Dougherty - Oppenheimer & Company

H&E Equipment Services, Inc. (HEES) Q1 2009 Earnings Call May 6, 2009 10:00 AM ET

Operator

Good day and welcome to today’s H&E Equipment Services First Quarter 2009 Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Mr. Kevin Inda. Please go ahead, sir.

Kevin Inda

Thank you, Michelle, and welcome to H&E Equipment Services conference call to review the company’s results for the first quarter ended March 31, 2009 which we released earlier this morning. The format for today’s call includes the PowerPoint presentation which is posted on our website at www.HE-Equipment.com.

Please proceed to slide 1. Conducting the call today will be John Engquist, President and Chief Executive Officer and Leslie Magee, Chief Financial Officer and Secretary.

Please proceed to slide 2. During today’s call we will 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, 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 that differ materially from those contained in forward-looking statements. These risk factors are included in the company’s most recent annual report on Form 10-K and quarterly report on Form 10-Q. 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 any obligation to publicly update or revise any forward-looking statements after the date of this conference call. With that stated, I will now turn the call over to John Engquist.

John Engquist

Thank you, Kevin and good morning everyone. Welcome to H&E Equipment Services first quarter 2009 earnings call. On the call with me today is Leslie Magee, our Chief Financial Officer. Please proceed to slide 3. This morning I am going to give a high level overview of our first quarter results. More importantly I will discuss what we are seeing in our markets and the things we are doing to scale our business to a very challenging and uncertain environment. Leslie will then go over our financial results in more detail. When Leslie concludes, we will then take questions.

Proceed to slide 5, please. We are pleased with our first quarter results. We were able to remain profitable in our seasonally weakest quarter of the year and then the most challenging environment I have experienced in my 35 years in this industry. The availability of credit remains extremely tight and non-residential construction and the industrial sectors have slowed substantially. As a result our revenue decreased 24.2% to $186.2 million. EBITDA decreased $18.3 million to $38.1 million on a 20.4% margin.

Our net income was $2.2 million or diluted earnings per share of $0.06. We were successfully able to adjust our business to remain profitable during the period and our efforts in this regard are focused and very much on-going. Our primary focus in this economic climate continues to be the protection of our balance sheet and cash generation with less focus on short-term results. We are committed to take in the appropriate steps in our business to maintain our financial strength. We continue to reduce the size of our fleet and incurred very minimal rental CapEx resulting in a negative net CapEx for the quarter. This reduced capital spending will generate free cash flow which we intent to use to pay down debt.

These actions will further protect the strength of our balance sheet which is reinforced by low cost capital structure and debt maturities well into the future. We continue to take numerous steps to reduce our operating cost. During the quarter, we reduced our headcount by 3% and as a result our SG&A expenses were down 16.1% versus a year ago also we have completed another workforce reduction in the second quarter.

Please proceed to slide 6. We continue to believe our focus on the industrial sector and geographic diversity are strength for our company in spite of the worldwide credit crisis and US economy. Our Gulf Coast markets are performing better than most areas in the US. As you can see from the pie charts, these regions account for half of our last 12 months revenue and gross profit, our foot print gives us significant exposure to the industrial sector which is down but still stronger than most sectors in the economy. We believe our first quarter performance validates the power of our integrated business model. We were successfully able to manage our assets and generate positive cash flow and net income despite the answer past economic challenges.

We have multiple sources of revenue and gross profit and our higher margin service businesses are performing solidly in the current environment. We also remain optimistic about potential increase, governmental infrastructure spending and the positive impacts it could have on our business. Our strong presence in the Gulf Coast provides an opportunity for our company as a substantial portion of Hurricane protection work is yet to occur. The core engineers are letting $4 billion worth of storm protection work in 2009. The government stimulus package could also prove to be a positive driver in our business as billions of dollars have been earmarked as part of the package for infrastructure work. It should also be noted that more than 50% of the government defined shovel ready projects are within our footprint.

The challenges we spoke about on our last call remained very much present. Lending remains at its stand still which continues to result in project delays or cancellations. The economy remains weak and its forecast to remain weak throughout 2009. As a result non-residential construction and industrial spending has forecasted to decline this year. The weakened demand for construction equipment has resulted in excess availability of certain products in the marketplace, primarily Arial and Earth moving equipment, this scenario is obviously affecting price and utilization as such it is extremely difficult to predict trends in our business.

Please proceed to slide 7. To summarize we are pleased with our first quarter results and profitability given the extreme challenges we faced with the economy. The environment remains very challenging and we do not expect any significant improvement in conditions here in 2009. However, we believe our integrated business model, geographic diversity and exposure to the industrial markets will help to mitigate the impact of the current economic downturn to our business. Our rental fleet is very young and well maintained and these are the type of assets that are conducive to aging when market conditions so dictate. All of these factors combined with our strong balance sheet put us in what we believe is a best position possible to deal with a challenges that lie ahead.

We are continuing to focus on and to take proactive steps to maintain a strong balance sheet, generate cash, control cost and protect our margins during this period of declining activity in the non-residential construction and industrial markets. Our business is well capitalized with our debt carrying a low interest rate, maturity dates well into the future. We significantly reduced rental fleet CapEx during the first quarter to include only some very selective additions such as Cranes were warranted. In addition, we anticipate very little CapEx spending during the remainder of 2009.

We continue to implement additional cost controls including the continue downsizing of our workforce, freezing a management incentive compensation and overall reductions in SG&A, so we can ensure our business delivers the best possible results in the current environment.

To close, I want to emphasize that we remained very confident in our business model and our ability to scale our business to deliver solid performance in a very challenging environment.

This time I am going to turn the call over to Leslie for the financial reviews.

Leslie Magee

Thank you, John. Good morning. I will start by walking through our quarterly results which begin on slide 9. Our total revenue decreased $59.6 million or 24.2% for $186.2 million year-over-year and we see lower demand for our product and services due to the continued decline in construction and industrial activity and the current macroeconomic conditions including very difficult credit market suspecting our end users. Revenues decline in all of our business segment with the largest decline in used equipment sales of $25.3 million or 61.1% in the first quarter of 2009 compared to the first quarter of 2008.

On a more detailed basis our rental revenues decreased $15.7 million or 22.1% over the prior year. Rentals were weaker in all product lines but primarily affected by weaker demand for aerial work platforms, which accounted for more than half of the rental revenue decline. Aerials were down 25% year-over-year.

Our dollar return was 28.7% for the first quarter of 2009 as compared to 35.5% for the same period in 2008. Year-over-year dollar return was impacted by lower time utilization of 340 basis points and 9.9% average rate decline. Our average time utilization for the quarter was 56.1% as compared to 64.5% a year ago with declines in each product lines.

Aerial utilization declined 180 basis points as a result of lower demand across essentially all markets. Utilization of those cranes and earth moving equipment was down less than 300 basis points in each product category. The 9.9% average rental rate decline on a product line basis is as follows. In comparison to the first quarter of '08 aerial rate declined 10.4%, rates on crane decreased 2.2%. Earth moving rental rates declined 12.1% and Lift Trucks rates declined 6.5%.

New equipment sales declined by $12.3 million or 16.1% over the prior period. New crane sales increased over the prior year by approximately 7% while new sales of all other product lines declined. Earth moving and AWP sales, both declined in excess of 60% on a comparative basis.

As I mentioned at the beginning of my comments, demand was weakest in used equipment segment versus the first quarter of last year with a 61.1% or 25.3 million decline. All of our product lines have a significant contraction in demand.

Our parts and service business also declined although to a lesser degree than our rental and equipment sales segment. On a combined basis, product support revenue declined 4 million or 8.8%.

From here I would like to expand a bit on gross profit and take a look at each of our segment. Our total gross profit margin decreased to 27% as compared to 29.6%, primarily due to a decline in margins on rental and used equipment sales.

For sequential comparison, our gross margins were 28.4% in the fourth quarter of '08. In our rental segment we experienced declines in rental gross margins to 36.7% from 46.3% in the prior year. As we saw in the fourth quarter, our rental revenues declined faster than our costs. Rental depreciation decreased $2.6 million or 10%. Also, the declines in average rental rates and time utilization have affected our rental gross margin.

Maintenance and repair cost decreased approximately 6.4%.

Margins on new equipment sales decreased to 13.6% from 14.2% a year ago due to the mix of lattice boom and hydraulic cranes over the period.

Gross margins on used equipment sales declined to 21.2% and 25.3% in the prior year. This is largely the result of weaker demand for used aerial. Demand for used equipment and as a result pricing on this equipment has been impacted by an increase of used equipment in the marketplace. Rental companies continue to deflate in an effort to better match their current rental demand.

Our margins on the sales on these cranes and earth moving equipment were consistent with the margins achieved a year ago.

Margins on our product support business declined to 41.6% from 42% in the prior year mostly as a result of the mix of product sold. Products gross margins decreased to 28.8% from 29.9% and service gross margins were 63.1% versus 63% a year ago. While revenue from support activity and what we classify as other revenue, declined in line with the change in our rental business. Gross margins on other revenue improved to 5.6% from a negative margin of 5.6% a year ago. This is the result of lower fuel cost in comparison to last year.

Slide 10 please. Income from operations decreased $15.1 million or 57.6% to $11.1 million. The decline in EBIT is due to the gross margin fluctuation that I just discussed in detail combined with a more rapid decline in revenue then our cost.

However, we do continue to make progress to write some of our business as evidenced by 16.1% decline in SG&A, Q1 of '09 versus Q1 of '08.

Slide 11 please. Net income was $2.2 million as compared to net income of $10.2 million in the first quarter of last year. On an EPS level, this calculates to $0.06 per share on a lower share count as compared to $0.28 per share. The effective tax rate was 30.8% as compared to 37.1% in the prior year. For the quarter, interest expense decreased $2 million over the prior year to $8.2 million as a result of lower interest rate, lower outstanding floor plan payables, and average debt under the senior credit facility.

Slide 12 please. EBITDA decreased $18.3 million or 32.5% compared to the first quarter of 2008 with margins decreasing to 20.4% and 22.9%.

Next, slide 13. Our SG&A costs decreased to $7.6 million or 16.1% to $39.1 million. Lower SG&A costs are due primarily to previous headcount reductions of approximately 10% that began in the first quarter of 2008 and were completed by year-end and some impact from an additional lay-offs of 3% of our workforce that occurred throughout the first quarter of 2009. Office costs are lower due to commission paid tax of lower revenue, reduced benefits and other employee costs such as travel, and entertainment and employee education. As a percentage of revenues SG&A costs were 21% compared to 19% a year-ago.

During the first month of the second quarter this year we adjusted our workforce down by another 3% and we continue to monitor the current business environment and our cost structure.

Slide 14. Our gross fleet capital expenditures for the quarter were $5.7 million including non-cash transfers from inventory and net fleet capital expenditures were a negative $7.6 million. Our fleet at the end of the quarter was $763.2 million which is decreased $22.4 million since the beginning of the year. Net PP&E CapEx for the quarter was $7.1 million.

Our fleet age at the end of March was 34.5 months as compared to 31.4 months a year-ago and 33.3 months at the beginning of this year.

Slide 15. Before opening the call to questions, I would like to again highlight our current capital structure. The two primary components of our debt structure are the senior secured facility due August 2011 and our 8.38 senior unsecured notes which are due in 2016.

We have no near term debt maturities and more than ample liquidity under our senior credit facility. This is an asset back $320 million facility. After considering debt at quarter end and outstanding rows of credit, our net availability under the APL facility is $244 million compared to $236 million at the end of the year. While we generated positive of free cash flow in first quarter, working capital was a significant use of cash largely due to the timing of payment to our crane manufacturer on inventory received at year-end. As we continue to work through this inventory and control our CapEx, we expect an increase in generation of cash throughout the remainder of the year.

In addition, we have no covenant concerns under our credit facility as our financial covenants springs only as availability drops below $25 million, at that point the minimum fixed charge covenant requirement would be 1.1 to 1. Furthermore, we continue to maintain significant excess collateral value well above $320 million facility size. At quarter end the excess collateral value relative to the size of the facility was approximately $175 million. We are managing our business in very difficult times of extremely low leverage of 1.4 times on a trailing 12 month basis and also benefits from high interest coverage. As we felt this on protecting our balance sheet and cash generation, we will be prepared to take advantage of an economic recovery in our market when the time comes.

With that I have reviewed our financial result, will now take your questions. Operator please provide instructions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we will take our first question from Seth Weber with Banc of America. Please go ahead.

Seth Weber - Banc of America

Hi, good morning. Good morning, everybody. I guess, John, I struck by the used equipment sale number was well below what's been trending for the last couple of years or couple of quarters at least anyway. I know that there is some de-fleeting going on there, but would you prefer to see the number higher or is that kind of a number that you think you are going to settle out at year going forward. And is there some, I mean it sounds like there is a lot of de-fleeting going on across the industry, so it just choosing not to sell equipment at depressed prices or maybe you can just tell us what you are looking there?

John Engquist

Seth, we could accelerate our used equipment sales by the auction prospects but what I am saying in pricing that doesn’t make sense to me. We got our exceptionally strong balance sheet, tremendous liquidity, no covenant issues and I don’t see a need for us to give fleet away. With that said, demand just weak, nobody is making a lot of capital expenditures, so it's impacted our retail sales significantly. We are going to push hard. We are trying to see some margin contraction not probably we will, but you are seeing a lot of the rental players really go to auction route in a big way. That's our game plan at all we are not going to give product away because I don’t think we have to.

Seth Weber - Banc of America

Okay. And if you are looking at a net CapEx number, I don’t think you have given guidance but seeing net CapEx is a negative number or zero for the year. Can you talk about where you think your fleet age would come out?

John Engquist

Sure. We are at 34.5 months. Today, I would think we would approach 40 months by the end of the year. I don’t think it will go past that.

Seth Weber - Banc of America

Okay. And you said you added some cranes to the rental fleet this quarter, was that just stuff you had contractually obligated to do or do you see demand. Is there are other certain projects where you still feel like you have demand for the large cranes.

John Engquist

There is still some demand for cranes. And again we are very selective. With the right customer where we get a 12 month guarantee on the rental and solid dollar returns. We are still selectively putting some crane product in the rental fleet. But we have been very selective there.

Seth Weber - Banc of America

Okay. And then just finally, Leslie do you have a floor plan payable number?

Leslie Magee

Sure, 114 million.

Seth Weber - Banc of America

114 million. Great, thank you very much.

Operator

Thank you. And we will take our next question from Adrienne Colby with Deutsche Bank. Please go ahead.

Adrienne Colby - Deutsche Bank

Hi, thanks for taking my question. From the foot note in your press release, it looks like your location count is about 62, does that mean you have closed a few locations?

John Engquist

We did. We closed two relatively small locations for Fort Pierce, Florida and North Charleston, South Carolina. These are two stores that end in very-very weak markets that we were in close proximity to another location, which like we could maintain a material portion of that revenue and reduce our cost significantly. So, we did close two small stores.

Adrienne Colby - Deutsche Bank

Can you give us any guidance if you are thinking about closing any more, I know you have considerable footprint in Louisiana, North Carolina, Virginia, have you considered any other branch locations to close?

John Engquist

We have no further plans for branch closures right now but that’s something we continue to monitor on a monthly basis but right now we have no further plans to close any locations.

Adrienne Colby - Deutsche Bank

Okay, great. And if I could ask one more, the tax rate was a lot lower this quarter, just wondering if we should be using that going forward in our modeling?

Leslie Magee

Well there were some permanent differences that affected that but kind of following the logic that trends in our overall business are difficult to predict that does trickle down to the tax rate given that I would say that what you saw in the first quarter is a fairly reasonable rate this year.

Adrienne Colby - Deutsche Bank

Okay, thank you very much

Operator

And it looks like we will take our next question from Mr. Henry Kirn with UBS. Please go ahead.

Henry Kirn - UBS

Hi, good morning guys.

John Engquist

Good morning, Henry

Henry Kirn - UBS

Wondering if you could talk about the tailwinds from the headcount reductions and maybe how much runway you have to further cut SG&A?

John Engquist

Henry, I don’t see anymore major headcount reductions to the tune of 3% or 4% at a given point. We have a hiring freeze in place and I think just through attrition our headcount will continue to come down somewhat throughout the year, but again we don’t have any plan for any significant reductions. I think you are just going to see a trend down through attrition. Look we are watching our SG&A every component of it on a monthly basis. We are seeing travel and entertainment come down dramatically. We are managing every aspect of that. We will continue to pair our costs down throughout the year.

Henry Kirn - UBS

Is it possible to quantify that in anyway just how much less labor costs you have as a whole today or going forward than you would have in the fourth quarter?

Leslie Magee

You are looking at considering the reductions that we gave last year.

Henry Kirn - UBS

Well the reductions you did in the first quarter and so far in the second, trying to figure our how to model that going forward?

Leslie Magee

If you annualize that it would be north of about $4 million of cost, now a piece of that will effect gross profit and protect margins and the piece of that would flow through the SG&A line.

Henry Kirn - UBS

Well that’s helpful, thanks. Is there any color on how the rental rates trended during the quarter, they were down a lot more this quarter. Did it get worse at the end of the quarter or did it start to improvement?

John Engquist

I don’t think we are seeing any improvement right now, it is a really-really tough rate environment by the toughest I have seen and I would anticipate to the future continues right pressures. Hopefully, they are going to bottom out but we are not seeing that yet, it’s a very difficult rate environment right now.

Henry Kirn - UBS

And one final one if I can squeeze it in, the crane backlog, how long does that stretch out and how much of you have seen in terms of cancellations, how sticky are those orders?

John Engquist

Today we have about a $67 million or $68 million backlog, we have seen some cancellations and we have cancelled a lot of product with our crane manufacturer, a lot of product. The bigger machines the highly technical machines, crawlers cranes above 300 ton and the big altering crane's, the German product those are, that demand is holding is up reasonably well, smaller crane RT’s under 60 tons, crawlers are under 300 tons, that market has softened considerably but we are carrying about $68 million back order.

Henry Kirn - UBS

Thank you very much.

John Engquist

You bet.

Operator

Thank you so much. (Operator Instructions). We will take our next question from Mr. Seth Weber.

Seth Weber - Banc of America

Hi, thanks. Just a quick follow-up to Henry's rate question. Is most of that pressure coming from local mom-and-pops or is it from the national guys as well?

John Engquist

This is pretty broad based, some of the big national players and some are more disciplined than others. It's some of your regional players have got in extremely aggressive and some of it's coming from local players pretty broad-based. I mean no one is immune from this I can tell you that. It's a tough rate environment.

Seth Weber - Banc of America

Okay. Thanks very much.

John Engquist

You bet.

Operator

And we will now hear from Peter Chan with Credit Suisse. Please go ahead.

Peter Chan - Credit Suisse

How is it going, guys?

John Engquist

Good.

Peter Chan - Credit Suisse

I had a question on your industrial markets comments being a little bit better than general non-res. So could you give us sort of your forecast and breakout between the two of those for the remainder of the year?

John Engquist

Well, I think the industrial sector will continue to probably drive in the range of 50% of the revenue that's where it has been doing and I will see that changing. We don’t have a lot of residential exposure probably less than 10% of our revenue. And it's probably less than that today because it's falling off so much. And the rest is the various components of non-residential construction.

Peter Chan - Credit Suisse

Got you. And the parts revenue was down about 10% in the quarter and I was sort of curious as to if that was just customers trying to push back any type of purchasing and if you could expand upon that?

John Engquist

I think that is the situation. People are just putting off expenditures everywhere they can, I think a lot of our end users have their own fleets parked right now, the demand is that weak and they are not spending money unless they have to. Typically, our parts and service businesses is somewhat counter cyclical to downturn and I think again we are seeing that segment of our business hold up considerably better than other areas. As Leslie commented we are down like 8.8% in our products support component and in this environment, that’s pretty good.

Peter Chan - Credit Suisse

And do you foresee that like a high single-digit decline, mid-to-high decline going forward?

John Engquist

I anticipate that holding up pretty well going forward and I think when this market turn, there is going to be a real pent-up demand and we will take real advantage of it.

Peter Chan - Credit Suisse

Great. Thanks guys.

John Engquist

Thank you.

Operator

And we will take our next question from Philip Volpicelli with Cantor Fitzgerald. Please go ahead.

Philip Volpicelli - Cantor Fitzgerald

Good morning. With regard to the floor plan financing, any discussions with the providers there, obviously the credit environment is difficult. Have they expressed any concern or are they pulling back? Are there any covenants in the facility that we need to be aware of?

Leslie Magee

Hi, Phil. This is Leslie. No covenant, no pushback whatsoever. So, just really no concerns that relates to our providers there.

Philip Volpicelli - Cantor Fitzgerald

Great. And then in terns of CapEx for the year, it's been fully and PP&E, do you guys have a sense of what you are targeting, are you targeting free cash flow neutral maybe on the fleet side and small use on the PP&E side.

John Engquist

We don’t give CapEx guidance as you know but I would anticipate our fleet spending to be negative for the year.

Philip Volpicelli - Cantor Fitzgerald

Okay.

Leslie Magee

And then on the PP&E side your assumption is reasonable.

Philip Volpicelli - Cantor Fitzgerald

Okay. And the 2Q workforce reduction I think I heard you say that there was an additional workforce in the second quarter, but it was smaller than the magnitude in the first quarter. Is that aggregate, can you give us a number of how many percentage for the lay-off?

Leslie Magee

It was another 3% in April.

Philip Volpicelli - Cantor Fitzgerald

Okay, great. And then in terms of regional outlook, I know you guys have exposure to Las Vegas, there has been a lot of disruption there with MTM and the CityCenter project and Cosmopolitan and Fontainebleau. Can you give us some color on what you are seeing currently in Vegas, are you guys being affected by those negotiations?

John Engquist

Absolutely, I mean anybody with Vegas exposures fail on it right now and I think you pretty much on the raft, you’ve got CityCenter coming down towards the end of this year. You know the Farm Blue project has been put on hold. We do think that project will be completed but that could be maybe a 60 day delay there. So, Las Vegas is going to be a challenging market for the remainder of the year in our estimation.

Philip Volpicelli - Cantor Fitzgerald

Now is that an opportunity for you or is it something you would back away from it in terms of should some other competitors have farms, would you look to expand or are you looking to get out of that market?

John Engquist

Well we are not looking to get out of the market. I mean look various varieties phenomenal market and it will be again. We're certainly not looking to get down of it but we’ll be doing what we're doing everywhere and that’s adjusting our business to fit the environment but we have no intention of exiting that market.

Philip Volpicelli - Cantor Fitzgerald

Great. And my last question, you mentioned or if I guess you have disclosed that you have sold less product in the quarter on the used selves. How sort down oil prices for used equipment?

John Engquist

Leslie could give you some margin overview but the sales they were making out of our normal retail sources of margins are holding up pretty well, particularly on the crane margins are holding, our earth moving margins have held pretty stable, Ariel margins were down definitely, I mean there is a tremendous over capacity situation. Leslie anymore color you can give there?

Leslie Magee

No, the margins were 21.2% for the quarter compared to 25.3% and as John said that was impacted really by the Ariel side.

Philip Volpicelli - Cantor Fitzgerald

Okay, all that was Ariel?

John Engquist

Primarily.

Philip Volpicelli - Cantor Fitzgerald

Great, thank you guy’s, good luck.

John Engquist

Thank you.

Operator

And we will now go to Adrienne Colby with Deutsche Bank.

Adrienne Colby - Deutsche Bank

Just a quick follow-up, I am wondering how much seasonal recovery we could expect in terms of time utilization for the rental fleet?

John Engquist

Adrienne, that’s a real good question. If you look at our business historically, and you go back a lot of years, we almost always seen seasonal improvement in the second and third quarter over the first quarter of the year. The first quarter is normally a seasonally weakest quarter. I don’t know the, history is going to apply here, this is a very difficult environment with these credit markets frozen and what we are seeing, I hope to get some seasonal pick up but that’s the question to mark right now.

Adrienne Colby - Deutsche Bank

Thank you.

John Engquist

You bet.

Operator

(Operator Instructions). We will now go with Michael Terwilliger from Banc of America Securities.

Michael Terwilliger - Banc of America Securities

Hello, it's Mike Terwilliker. Just some quick clarification and I jumped out late, so I apologize if I miss this. The excess availability the 244 that you mentioned on your ABL, I assume that’s based on recent appraisal. When is your most recent appraisal done and when can we expect the next one?

Leslie Magee

We have two appraisals a year. The last appraisal was done at 12/31. Now that appraisal is really what values the assets that support the collateral base, and so we got assets above the $320 million total facility size. So indirectly the $244 million does reflect the appraisal, although, because we got suppressed asset it didn’t really come into play too much. And so our next appraisal will be mid year June.

Michael Terwilliger - Banc of America Securities

Mid-year, okay. And regarding the rate environment, hearing from your competitors in the last couple of weeks, it sounds as though rates are definitely under fair amount of pressure. Sort of trying to get to a sense of how bad things really are and how bad it could get. How would you compare this rate environment, see the downturn in the 2001 to 2003 context sort of a last big downturn in the rental space. I mean we hear a lot of about how does the industry is much more disciplined just go around. How do you feel like were does it shaking out compared to the last downturn?

John Engquist

Well, I still believe the industry is more disciplined as evidenced by everybody trying to reduce their fleet sizes, bringing their fleets down and that was not the case back in '01, '02,'03, I mean I think the opposite was happening. I think the manufacturers today are much more disciplined. They are shutting down their plant to oppose to trying to continue to find ways to pump capacity into the marketplace. So, I do believe we have a much more discipline sector. We are dealing with some challenges we didn’t have the last go around. This situation of frozen credit markets and the impact it's having to new projects and current projects with cancellations and delays it's a whole different scenario. I would say the price pressure is similar to last go around. It's been difficult and we are think it's going to be difficult for '09.

Michael Terwilliger - Banc of America Securities

Okay. Now, there seems to be some degree of trade-off between rate utilization rates and price, are you seeing your trading way a fair amount of business, based upon just the price not being attractive, and therefore that’s hurting your utilization and going forward, how do you feel about that tradeoff. I mean, there seems to be a degree where everyone is cutting price, everyone is looking at profitability. I am just curious about how you guys look at that.

John Engquist

Yes. I mean, look, we walk away from business everyday and we will continue to do so and it is just what you say, it is a balancing act and you got to try and balance price versus utilization and to maximize your dollar returns and that’s what we are doing and that’s what we are going continue to do.

Michael Terwilliger - Banc of America Securities

Okay. And then exit question, it seems as though based upon your negative net CapEx and your networking capital trajectory it should be solidly free cash flow positive. Any thoughts about buying back bonds in this marketplace in the open market?

John Engquist

Anything we do along those lines require the bank consent, and you go for bank consent today, they are going to re-price your facility. We have exceptionally favorable pricing on our ABL facility, and I am not too interested in re-pricing that right now.

Michael Terwilliger - Banc of America Securities

Alright. Great. Thanks very much. Great quarter.

John Engquist

Thank you.

Operator

And we will now go to Chris Dougherty from Oppenheimer. Please go ahead

Chris Dougherty - Oppenheimer & Company

Good morning John and Leslie.

John Engquist

Hi Chris.

Chris Dougherty - Oppenheimer & Company

John, can you just talk a little bit, I mean clearly, in the sounds that you’re saying as the market’s down I think everybody understands that but yet when you look at the non-residential numbers that are being posted, it doesn’t seem to be as debt, can you sort of talk about the mismatch there and then also we're using the trajectory for volume for non-residential construction is throughout the year given that some people are expecting it to be down 20% plus.

John Engquist

Yeah, and I'm not sure what’s you are referring to Chris when you say that numbers down a period to be bad debt from our perspective they look pretty bad and again projections all they could be down 20%, I don’t know, I'm not an accountant but I can tell you the workload in the non-residential sector is down significantly and everybody is feeling it in a big way.

Chris Dougherty - Oppenheimer & Company

Yeah, I am referring to the government numbers and residential construction numbers but again the post to their showing fiscal still year-over-year improvement and I guess in terms of the cycle where do you think, have we just started to see the downturn and if we can get clearly worst through the year or when should you expect some sort of leveling off?

John Engquist

Well, again I wish I could have answered that. We anticipate for the remainder of this year and the way we're planning our business is more the same, we think is going to be a difficult year for the remainder of '09. There is some forecast to that they’re calling for somewhat of a turnaround in the second-half or towards the end of the year. Bernanke thinks this thing is bottom and out and I hope he is right. We're managing our business and planning for a difficult '09 for the remainder of this year.

Chris Dougherty - Oppenheimer & Company

And lastly, just one last question in terms of your recent appraisals, can you tell us what the NOL the percentage was as a percentage of your OVC?

Leslie Magee

Since, the percentage of OVC, I don’t have that right in front of me but I mean, I can tell you that our appraisal value decreased about 10%-12% over the previous appraisal.

Chris Dougherty - Oppenheimer & Company

Alright, thank you.

Operator

And we will take our final question from Mr. Philip Volpicelli from Cantor Fitzgerald.

Philip Volpicelli - Cantor Fitzgerald

Just a follow-up on the suppressed availability on the credit facility, you have that number, Leslie?

Leslie Magee

$175 million at the end of the quarter.

Philip Volpicelli - Cantor Fitzgerald

Great, thank you.

Operator

Thank you and I will now turn the conference back over to Mr. Engquist for any final remarks or closing remarks. Please go ahead sir.

John Engquist

Thank you, I appreciate everybody being on the call. Again it’s a difficult environment, we are going to measure our success this year by our ability to maintain our financial strength, maintain a strong balance sheet, lots of liquidity and be ready to really take advantage of things when this market turns and it will and we are going be pass it to really perform when that happen. So look forward to talking to you on the next call.

Operator

That concludes today’s conference. Thank you for your participation ladies and gentlemen.

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Source: H&E Equipment Services, Inc., Q1 2009 Earnings Call Transcript
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