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Executives

John Engquist - President & Chief Executive Officer

Leslie Magee - Chief Financial Officer & Secretary

Kevin Inda - Corporate Communications

Analysts

Henry Kirn - UBS

Philip Volpicelli - Cantor Fitzgerald

Adrienne Colby - Deutsche Bank

[Jay Singh - Telemonde Asset Management]

Barry Haimes - Sage Asset Management

[Greg Kinley - Safeworks]

H&E Equipment Services, Inc. (HEES) Q2 2009 Earnings Call August 5, 2009 10:00 AM ET

Operator

Good day and welcome to the H&E Equipment Services second quarter 2009 conference call. Today’s call is being recorded, and at this time I would like to turn the call over to Mr. Kevin Inda. Please go ahead, sir.

Kevin Inda

Thank you, Nicole, and welcome to H&E Equipment Services conference call to review the company’s results for the second quarter ended June 30, 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 one. 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 two. 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 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 that differ materially from those contained in the 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 Second Quarter 2009 Earnings call. On the call with me today is Leslie Magee, our Chief Financial Officer.

Please proceed to slide three. This morning I’ll give an overview of our second quarter results. I’ll also discuss continued actions to manage our business in a very difficult environment. That has resulted in very low demand for our products and services. Leslie will then go over our financial results in more detail. When Leslie concludes, we will be happy to take questions.

Proceed to slide five, please. We mentioned during our last call that we were not benefiting from seasonality at that time. We’re disappointed that we finished the second quarter without seeing any seasonal improvement in our end markets. In fact we saw further softening in our non-residential construction and industrial markets.

As a result, our revenue, EBITDA and net income were down year-over-year and sequentially from the first quarter. Revenue declined 36.2% to $180.2 million from $282.6 million a year ago. EBITDA decreased to $34.6 million from $64.6 million a year ago, and we generated $300,000 of net income compared to $16.1 million a year ago.

We were able to generate positive earnings when most companies in our sector are reporting substantial losses. We’re managing our business by aggressively reducing our operating cost and tightly controlling our capital spending. This has resulted in 21.2% decrease in our SG&A expense, a negative net CapEx for the second consecutive quarter. These actions have and will generate cash, increased liquidity and maintain a very strong balance sheet, which is reinforced by low-cost capital structure and debt maturities well into the future.

Please proceed the side six. We have always said that our geographic diversity as one of the strengths of our company, we still believe that is the case. Although, no region within our footprint has escaped a heavy impact by the recession, our Gulf Coast states continue to outperform our other regions. We believe that this portion of our footprint combined with our product offering in these geographies has significant exposure to the industrial sector.

The industrial sector is down, but still providing us for more opportunity than other sectors in the economy. We also believe that with commodity prices stabilizing, the industrial sector could recover ahead of nonresidential construction. We are still optimistic that the government stimulus package could be a positive driver in our business. Little of the budgeted money has been spent and we are hopeful that stimulus spending will accelerate and eventually benefit the markets we serve.

Proceed to slide seven please. We continue to operate in a very difficult and challenging environment, funding for construction projects remains difficult to access, this is resulting in significant project cancellations and/or delays. As a result, nonresidential construction and industrial spending will continue to decline for the foreseeable future.

The weakened demand for construction equipment is creating excess capacity in the marketplace. This is obviously impacting price and utilization. We continue to see extreme rate pressures throughout our footprint. Many of our competitors are showing little discipline when it comes to pricing. Unfortunately, there is no common method for calculating rate movement within our sector. This makes comparison somewhat meaningless, we believe that our rates are above competitor averages and is varying somewhat by product type.

Despite the challenges we face we are encouraged by recent developments. The banking system appears to have stabilized, and the credit markets have improved. There are expectations that stimulus spending may increase during the second half of the year. The economy appears to be stabilized. We are also encouraged to see our fiscal utilization shows signs of stability.

Please proceed the slide eight. To summarize, we expect the market to remain challenging for the reminder of ‘09. However, we believe our integrated business model, geographic diversity and exposure to the industrial markets will continue to soften the impact of the current economic downturn to our business.

Our product support business continues to perform well in this difficult environment, and is generating blended gross margins north of 40%. Our rental fleet is young, extremely well maintained, and comprised of the type assets that are conducive to aging when necessary.

Our business is very well capitalized with low cost debt and no short-term maturity dates. Our strong balance sheet allows us to walk away from unprofitable rental business and eliminates the need for us to the auction process. Although, utilization has been weak and new sales have declined, we are still able to maintain strong margins on fleet sales. This is evidenced by 23% gross margins on sales from our fleet in the second quarter. Our primary focus during this recession continues to be maintaining low leverage, ample liquidity and a very strong balance sheet.

To close, I want to emphasize that we remain very confident in our business model, our management team and our ability to scale our business to this difficult environment. Our business will be very well positioned to take full advantage of the upturn when it occurs.

At this time, I will turn the call over to Leslie and then we’ll take questions.

Leslie Magee

Thank you, John. Good morning. I will continue this morning’s presentation with a more detailed review of our second quarter results beginning on slide 10.

In general, our second quarter results looked similar to our first quarter. We did not experience any seasonal up tick in demand, and to the contrary, we saw further pressure on year-over-year rental rates and slightly softer utilization of our rental fleet during the second quarter as compared to the first quarter of the year.

On a year-over-year basis, total revenues decreased a $102.4 million, or 36.2% to $180.2 million, as we continued to see significant contraction in demand. Revenues declined in our business segment but with our parts and service segments holding up [barriers] and equipment sales and rentals as compared to the second quarter of ‘08.

By segment, our rental revenues decreased $25.1 million or 33.4% over the prior year. Rentals were weaker in all product lines and were mostly effected by weaker demand for aerial work platforms.

Year-over-year, aerials were down 38%, earth-moving rentals declined 27.1% and cranes were down 21.2%. Our dollar return was 27.1% for the second quarter of ‘09 as compared to 37.5% for the same period in ‘08. Dollar returns were effected by lower time utilization of 1260 basis points, and a 15.8% decline in average rental rates.

While we are disappointed in the year-over-year rate decline, I think it is important to point out that this comparison only applies to newly open contracts in the quarter compared to new contracts in last year’s second quarter. New contracts typically average about 25% to 30% of our total revenue billings in the given period.

Our average time utilization for the quarter was 55.3%, as compared to 67.9% a year ago with declines in each product line. Aerials and cranes were each down over 1000 basis points and earth moving time utilization was down 650 basis points.

Sequentially, we also saw declines in the utilization of best cranes and aerials, but the declines were partially offset by an improvement in earth moving demand in the second quarter compared to the first quarter of the year. The first quarter time utilization was 56.2%.

New equipment sales declined by $40.8 million or 40.7% over the prior year period; approximately half of the total decline occurred in new crane sales. Used sales were down 56.5% or $26.7 million over the second quarter of 2008. All of our product lines decreased with used cranes and used aerials accounting for almost three fourths of the total decline. Similar to the first quarter, parts and service performed better than our other operating segment. On a combined basis, product support revenues declined $5.1 million or 10.9%.

From here, I’ll discuss the performance of each segment at the gross profit line. Our total gross profit margin decreased to 24.7% as compared to 28.5% primarily due to a decline in margins on rentals and used equipment sales. For sequential comparison, our gross margins were 27% in the first quarter of ‘09.

In our rental segment, margins declined to 32.5% from 49.3% in the prior year. Following the same trend we’ve seen for a few consecutive quarters, rental revenues declined faster than our rental cost of sales. Rental depreciation decreased $3.2 million or 12.1% with a 33.4% decline in revenue.

As a result, depreciation expense increased to 45.7% of revenue as compared to 34.6% year ago. Also the declines in average rental rates and time utilization have effected our rental gross margins. Auto rental expenses primarily comprised of maintenance and repair cost decreased 10.4%. Margins on new equipment sales were 12.8% in best period.

Gross margins on used equipment sales declined to 18.3% from 22.7% in the prior year. The used equipment sales lined item includes, both facilities in inventory and sale of our rental fee. The combined margin was largely impacted by pass throughs of trade and inventory.

Carving out rental fleets sales only, we were pleased that margins on the sale of our rental assets were less volatile, or down 290 basis points to 23.4% in the current quarter as compared to 26.3% a year ago and flat compared to the first quarter of this year. As our rental fleet sales pricing was weakest in aerial work platform.

Margins in our parts and service business declined to 41.2% from 42.5% in the prior year. Parts gross margins decreased to 28.4%, from 29.1% and service gross margin were 62.1% versus 64.6% a year ago.

As for other revenue, gross margins declined to a negative 4.2% in the current quarter compared to a breakeven of the gross profit line a year ago. The decline in margins is due to lower revenues from higher margin support activities such as, damaged labors on rental equipments.

Slide 11, please. Income from operations decreased $26.2 million or 75.3% to $8.6 million. We have made additional progress in reducing costs, however, SG&A cost have not declined at the same rate as revenues and gross profit. SG&A declined 21.2% compared to the second quarter of ‘08.

Proceeding to slide 12. Net income was $300,000 as compared to $16.1 million in the second quarter of last year. On an EPS level, this calculates to $0.01 per share as compared to $0.45 per share a year ago. The effective tax rate was 65.1% versus 37% in the prior to your due to the effect of timing and differences on lower pre-tax income.

For the quarter, interest expense decreased $1.5 million over the prior year to $8 million as a result of lower interest rate, lower outstanding floor premium payables and average debt under the senior credit facility. Slide 13 please, EBITDA decreased $30 million or 46.5% to $34.6 million with margins decreasing to 19.2% from 22.9% compared to a year ago.

Next slide 14, our SG&A cost decreased $9.7 million or 21.2% to $36.1 million. Lower SG&A cost are due primarily to headcount reductions and related employee cost made throughout the course of 2008, combined with an additional 8.7% headcount reduction in the first half of 2009.

As a percentage of revenues, SG&A cost were 20% as compared to 16.2% a year ago. For more relevant trend, SG&A improved as a percentage of revenues from the first quarter of the year reflecting continued progress on cost-reduction, on lower sequential revenue.

Slide 15, our gross fleet capital expenditures for the quarter were $5.6 million, including non-cash transfers from inventory and net fleet capital expenditures were a negative $9.5 million.

Our fleet at the end of the quarter was $732.9 million, which has decreased $52.7 million since the beginning of the year or another $30.3 million since the end of the first quarter. For the quarter, gross and net PP&E CapEx was $5.3 million and $5 million respectively. Our fleet age at the end of June with 35.9 months as compared to 31.2 months a year ago and 33.3 months at the end beginning of this year.

Slide 16. This last slide of 16 continues to be our key area of focus in today’s environment. I will point out a few items worth highlighting. Our debt consisted of the senior secured facility which did not mature until August 2011, and our 8.38 senior unsecured notes, which are due in 2016. Our leverage remains low at 1.5 times on a debt-to-EBITDA basis.

We reduced our senior credit facility by $23 million and ended the quarter with $45 million drawn on the line. After considering debt drawn on quarter end and outstanding letters of credit, our net availability is $267 million on a $320 million facility.

Another key point is that, we continue to operator our business without covenant concerns. Our financial covenant comes into play only if availability drops below $25 million. At that point, the minimum fixed charged covenant requirement would be 1.1 to 1. Eligible asset supporting this credit facility exceeds the $320 million facility by more than $200 million.

In closing, the strength of our balance sheet and capital structure provide us to carry in today’s environment which we expect will translate into opportunity and flexibility during better times in our industry.

That concludes my comments on our financial results, and we will take your questions. Operator please provide instructions for our Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Henry Kirn - UBS.

Henry Kirn - UBS

Wondering if you are seeing the sequential improvement in earth moving as anytime an early indicator of demand or was that more of just the seasonal improvement?

John Engquist

I think earth moving is a early cycle product and when things start to improve and that’s an area that we will probably see some improvement in first. I think it’s stabilized, I don’t think we’re seeing decline, but I don’t think we’re seeing a whole lot of improvement there either.

Henry Kirn - UBS

Okay. And pricing sequentially, could you talk about the pricing across the rental fleet sequentially, and then maybe also what you’re seeing in cranes?

John Engquist

We’re seeing cranes are holding up better in other areas Leslie’s, do you have some specifics by product line Leslie?

Leslie Magee

Yes. Sequentially, in the quarter obviously we are most impacted at the AWP product line on average our sequential rate decline was 7.5% and cranes were down about 4% and AWPs were down almost 90% on a sequential basis.

Henry Kirn - UBS

Okay. Are there any targets or goals for the second half of the year that you want to share at this point?

John Engquist

Henry our focuses going to continue to be our balance sheet, it’s a tough environment, these rate pressures are going to continue to for a while I don’t think there is any question about that, we are starting to see some sequential stabilization, year-over-year comparisons are going to continue to look bad for a while. So, our focus is very much on our balance sheet, our liquidity and being ready to take advantage of the upturn when it comes us that will remain our focus.

Operator

(Operator Instructions) Your next question comes from Philip Volpicelli - Cantor Fitzgerald.

Philip Volpicelli - Cantor Fitzgerald

I was just wondering with the floor plan financing was at the end of the quarter, and then the second question because that’s an easy one, with regard to crane backlog in terms of new sales, are you seeing cancellations, give us a little color on that?

Leslie Magee

Sure, the floor plan table balance was a $105 million at the end of the quarter.

John Engquist

As far as cancellations, I think that we have received the cancellations that we expect to, we think the order backlog that we have now is firm. Now, that could change the bulk of what we have on backlog now of the larger product cranes above 300 tons, the big German all terrain cranes and we believe those orders are firm right now.

Philip Volpicelli - Cantor Fitzgerald

And are most of those going into oil and gas chemical that kind of world, or is it more construction related?

John Engquist

Its energy related, yes primarily energy related.

Philip Volpicelli - Cantor Fitzgerald

Okay. That’s great. And then in terms of the target leverage or I guess may be debt levels you guys want to get to by the end of the year. Is the goal to pay down the entire credit facility or you’re playing down the floor plan financing first, which is the I guess the more expensive piece.

John Engquist

We’ll pay down the senior credit facility first.

Philip Volpicelli - Cantor Fitzgerald

Great, and then in terms of you could generate some cash, any thoughts to buying back stock or buying back any of the existing notes.

John Engquist

We have no plans for that right now. We like our capital structure, we like the pricing on our senior credit facility to go out and do anything that requires bank consent that would reprice our facility. We wouldn’t be real interested in that right now.

Operator

(Operator Instructions) Your next question comes from Adrienne Colby - Deutsche Bank.

Adrienne Colby - Deutsche Bank

I’m wondering if you closed any branches in the quarter, and if you see room for additional branch closures and also headcount reductions in the second half.

John Engquist

We have one small branch that we will be closing in the third quarter, and it’s a satellite branch to our Salt Lake City branch it’s in very close proximity, it’s Ogden, Utah that’s the only thing we are looking at closing right now, and that’s the third quarter closing.

Adrienne Colby - Deutsche Bank

Okay, and then what about additional headcount reduction since as we go into the second half.

John Engquist

There will be some headcount reductions going forward. Some of it will be just through hiring phrases but we are looking at debt on a daily basis and looking at it by region.

Adrienne Colby - Deutsche Bank

And I was wondering if you could just provide a little bit more color around the tax rate for this quarter and again what we should be modeling going forward.

Leslie Magee

Yes. The effective tax rate is just more sensitive given the lower pretax income and then the effect of the prominent differences. So based on what we see today, I’d look more towards the year-to-date rate than what you saw in the quarter.

Operator

Your next question comes from Philip Volpicelli - Cantor Fitzgerald.

Philip Volpicelli - Cantor Fitzgerald

Thanks. I was just wondering with regard to the overall capacity in the industry, there’s too much equipment out there, are we starting to feel that that’s getting better or how far along are we in that process of people selling fleets down to the right size.

John Engquist

That’s a good question Philip, I mean, I think that progress has been made, I think all of the big rental companies have de-fleeted. I expect to see some more de-fleeting, I mean utilization rates are pretty low right now, physical utilizations are pretty low. So I would anticipate some further de-fleeting.

We are going to continue to de-fleet through our retail sales organization, where we can maintain strong margins. We are not going to dump fleet through the auction process, and I don’t think we have to, we’ve got a balance sheet to where we can carry this for a while, and not give away our rental power. But I think you’ll see some continued de-fleeting.

Philip Volpicelli - Cantor Fitzgerald

And is it too soon to think about adding tuck in acquisitions or making a strategic acquisition?

John Engquist

We’re not really looking at acquisitions, we’re evaluating possibly some Greenfield starts to de-fleet some areas that are really depressed right now. But as far as acquisitions, that’s not something that we’re pursuing.

Operator

Your next question comes from [Jay Singh - Telemonde Asset Management].

Jay Singh - Telemonde Asset Management

Am I correct in remembering that you guys had another appraisal done in June?

Leslie Magee

That appraisal is in process it is done as of the June 30 evaluation date. We don’t have those results quite yet.

Jay Singh - Telemonde Asset Management

Okay, but when should we expect that then.

Leslie Magee

Typically, that will come in about 45 to 60 days after the close of that period, so we should be seeing it fairly soon.

Jay Singh - Telemonde Asset Management

Okay. And then I guess to follow up then. What was your comment then about value in excess of collateral for the revolver over $200 million, because if I remember right, I think the last quarter that was something like $175 million?

Leslie Magee

Yes, it did increase and it increased as a result of some asset that were not previously included and the borrowing base certificate back to ‘07 acquisition we did, and it was just a matter of our lenders going through their process to include those assets in the borrowing base. So, it did increase and so the number I gave over $200 million is basically the surpassed availability at June 30.

Operator

Your next question comes from Barry Haimes - Sage Asset Management.

Barry Haimes - Sage Asset Management

Had a question, if you look at average rental rates for the quarter, and then compare those to either where you exited the quarter or perhaps what you are seeing in July. Any feel for whether there has been more movement?

John Engquist

I can tell you that if you look at July, sequentially the rate of decline that we’ve seen has slowed down, I think it’s stabilizing a little bit, again year-over-year I think the comparisons are going to continue to be difficult for a while but we anticipate sequential declines to moderate.

Operator

Your next question comes from [Greg Kinley – Safeworks].

Greg Kinley - Safeworks

Good morning. When do you see aerial work platforms turning around, I assume that’s late cycles is that a 2010 event turning around?

John Engquist

I certainly hope so. I think aerials are tied more to commercial construction than some of our other products are and that’s a very depressed sector right now. There’s no question about it. But I think, it certainly is, we anticipate it remaining very difficult for the remainder of this year and probably end of ‘10 and hopefully, get some of recovery at some point in ‘10.

Operator

(Operator Instructions) At this time there are no more questions in a queue. I’d like to turn back over to our speakers for any additional or closing remarks.

John Engquist

Thanks everybody, appreciate you attending the call. Now we’re going to continue to focus on our balance sheet and maintain liquidity and be ready to take advantage of this upturn when it comes, and have a good day. We look forward to talking to you on our next call. Thank you.

Operator

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

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