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H&E Equipment Services, Inc. (NASDAQ:HEES)

Q4 2007 Earnings Call

March 7, 2008 10:00 am ET

Executives

Kevin S. Inda - Corporate Communications

John M. Engquist - President, Chief Executive Officer, Director

Leslie S. Magee - Chief Financial Officer, Secretary

Analysts

Jamie Cook - Credit Suisse

Brandt Sakakeeny - Deutsche Bank

Jason Moss - Goldman Sachs

Seth Weber - Banc of America

Chris Doherty - Oppenheimer

Melinda Newman - Post Advisory Group

Operator

Good day and welcome to today’s H&E Equipment Services fourth quarter 2007 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 S. Inda

Thank you, Matt and welcome to this H&E Equipment Services conference call to review the company’s results for the fourth quarter ended December 31, 2007, which were released earlier this morning.

The format for today’s call includes a 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. We’ve reconciled these measures to GAAP figures in our earnings release, which is also 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 the words may, could, would, should, believe, expect, anticipate, plan, estimate, target, project, intend, 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 any forward-looking statement. These risk factors are included in 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.

Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking statements after the date of this conference call.

With that stated, I will now the call over to John Engquist.

John M. Engquist

Thank you, Kevin and good morning, everyone. Welcome to H&E Equipment Services’ fourth quarter and full year 2007 earnings call. On the call with me today is Leslie Magee, our Chief Financial Officer. Please proceed to slide three.

I will go over the highlights of the quarter and full year 2007, discuss what we are seeing in the marketplace by region, and talk about the key drivers of our business that continue to product strong financial results for our company. I will then turn the call over to Leslie for a more detailed review of our results. When Leslie concludes, I will discuss our outlook for ’08 and we will then be glad to take questions. Please proceed to slide five.

In the fourth quarter, our company continued to deliver solid year-over-year results with all of our business segments, with the exception of used equipment sales showing strong double-digit growth. The growth in used equipment sales has slowed primarily as a result of us de-aging our fleet, which tends to slow the fleet rotation process. Even though we have isolated pockets of weakness in Florida, the Mid-Atlantic, and Southern California, our core business remains very strong.

Our revenue increased 34.4%, or 19.4% on an organic basis, which excludes the revenue from Burress acquired in September. Our new equipment sales remain very strong, showing 68.3% growth, which speaks to the strength in our industrial end markets. Rental revenues grew 18.5% and our high margin parts and service business continued to deliver double-digit growth.

The decline in our gross margins is largely due to the high demand for new equipment. In the fourth quarter and full year ’07, new equipment sales accounted for a higher percentage of our total revenues than in the past. New equipment sales has a lower gross margin than our other business segments and this has had a negative impact on our overall gross margin.

Due to the strength of most of our end markets, time utilization improved year over year. Excluding the impact to our rental results from Burress, we improved our dollar returns in spite of a slight decline in average rental rates. Rental rates in the Gulf Coast and inter-mountain regions have been stable. The rate declines we have seen are primarily in Florida and Southern California markets.

The decrease in net income is due primarily to a higher effective tax rate in the current quarter, with a like effective tax rate in both periods, our EPS increased to $0.45 from $0.44 in the prior period. Please turn to slide six.

We continue to see strong demand from our core end markets which are non-residential construction and the industrial sector. Although residential construction is not a material drive of our overall business, it has impacted Burress’ recent results as they have more exposure to the residential markets than our other region. Burress has also been impacted by the challenges of transitioning from Hitachi to Link-Belt.

The Florida and Southern California markets remain challenging. Even though we don’t see same-store growth in the near-term for these markets, we believe we can improve the financial performance of these regions through aggressive fleet management.

As I stated, the key drives of our business are non-residential construction and the industrial sector. Although the growth rates in non-residential construction have slowed, the current level of work remains at very high levels and affords us plenty of opportunity. Our strong presence in the Gulf Coast and inter-mountain regions gives us a great deal of exposure to the industrial sector, which we view as petrochemical, oil patch, mining, and energy.

There is currently tremendous activity in each of these industries and we believe each one has long-term growth potential. Our strong ties to non-residential construction and the industrial sectors gives us diverse end markets and bodes well for our business today and into the future. Would you please turn to slide seven.

To summarize, the fourth quarter was a solid quarter with strong growth across our business segments and we completed another strong year for H&E Equipment Services. Our overall business environment remains strong and we operate in diverse end markets. The industrial sector, which is a key driver of our business, remains very strong. We also continue to see high levels of activity in non-residential construction.

While the Florida and Southern California markets remain challenging, we believe our ability to liquidate and move excess fleet to other high demand regions will improve our performance in our weaker markets going forward.

We are excited about our recent expansion into the mid-Atlantic region and we are confident that we will realize the opportunities presented by the Burress acquisition as we continue to transition them from a distributor to our integrated business model.

I will now turn the call over to Leslie for a more detailed review of our financial results.

Leslie S. Magee

Thank you, John and good morning, everyone. I would like to go through the next several slides and provide more detail on our fourth quarter results. First, just a brief reminder that we completed the J.W. Burress acquisition effective September 1, 2007. You may hear us commonly refer to the stores acquired through this acquisition as our mid-Atlantic region. Our fourth quarter results include a full quarter’s results from this acquisition. I’ll begin on slide nine.

Our total revenue increased to $289.7 million, or 34.4% year over year with $32.3 million of revenue from Burress. Even after excluding fourth quarter revenue growth from the mid-Atlantic region, all business segments reflected double-digit growth with the exception of used equipment sales.

I’d like to spend some time discussing our results by each segment. For the fourth quarter of 2007, rentals increased 18.5% over the prior year on a larger fleet and with growth across all product lines. Burress’ rental revenue was $3.6 million for the quarter.

Overall dollar return was 39.1% for the fourth quarter of 2007, as compared to 40.1% for the same period in 2006. Currently our dollar returns are lower by Burress as they still operate primarily as a distributor with lower dollar utilization than our rental operations. Burress’ rental returns will increase over time as we improve its fleet mix, utilization, and rates. Excluding the impact from Burress, our dollar returns were 40.9% versus 40.1% in the prior year.

Our average time utilization for the quarter was 67.8% as compared to 67.3% a year ago, a 50 basis point increase. Aerial time utilization increased 370 basis points over the prior year, despite a 500-plus basis point decline in time utilization at our Aerial stores in the Florida markets and nearly a 700 basis point decline in our Southern California stores.

Earth-moving time utilization was negatively impacted by our mid-Atlantic region; however, more than 60% of our earth-moving fleet is outside of the mid-Atlantic region, where time utilization for earth-moving equipment increased 300 basis points in comparison to the fourth quarter of 2006. Cranes remained highly utilized but were impacted by lower time utilization in the mid-Atlantic stores, due again primarily to the [inaudible] approach and also a decline in boom truck utilization. Boom trucks are grouped within our crane category and represent only about 3% of our total fleet.

Rates on average declined 1.7% excluding any impact from Burress over the prior year. Crane rental rate increases of 9.7% were offset by a 2.3% average decline in AWP rates due primarily to continued weakness in the Florida and Southern California markets. We also had a 1.7% average decline in earth-moving rental rates. However, higher time utilization more than offset earth-moving rate declines as our dollar returns on earth-moving fleet improved in the fourth quarter of 2007.

New equipment sales continued to reflect tremendous strength with an increase of 68% over the prior period, including $13.2 million of new sales from Burress. For the quarter, new equipment sales represented 39.6% of total revenues as compared to 31.6% of total revenues a year ago.

New crane sales continued to drive the growth in new equipment sales with a 146.6% increase over the prior year. Also, new sales of aerial equipment increased 14.1% and were partially offset by a decline in new earth-moving sales of 6.1%. New lift truck sales were flat year over year.

Used equipment sales increased approximately $2.1 million or 5.5%, which includes $8.1 million of used equipment sales from Burress. All product lines decreased year over year with the exception of earth-moving as a result of sales from our mid-Atlantic region.

Our parts and service business continues to show strong growth at 33.6%, or $11.5 million on a combined basis, due to increased demand and revenues from Burress of $6.8 million for the quarter.

Our total gross profit margin has decreased to 29.4% as compared to 32.5%. The majority of the decrease in gross margins is due to the change in our revenue mix. We estimate that the change in revenue mix negatively impacted our fourth quarter gross margins by 190 basis points.

Next I’d like to discuss gross margin by each segment. Margins on new equipment sales increased 13.3% from 12.5% a year ago. Margins on new equipment improved due to the strength in crane pricing and the mix of equipment sold in the quarter. Our overall gross margin was also impacted by a decline in used equipment gross margins to 22.8% from 27.4%. Used equipment margins declined due to lower margins from Burress fleet sales and the mix of equipment sold.

Burress margins on fleet sales have been negatively impacted by the fair values assigned to the rental fleet through purchase accounting at the time of acquisition and also rental purchase transactions.

We saw declined in rental gross margins to 51.9% from 53.6% in the prior year. As we’ve mentioned, our rental business has been impacted by weakness in Florida, Southern California, and the mid-Atlantic. In addition, the mid-Atlantic division has historically been a lower margin rental business due to their emphasis on distribution.

Our depreciation expense has also increased due to de-aging and growing our rental fleet and other expenses associated with carrying a larger fleet increase.

Gross margins on other revenue, which is primarily related to equipment support activities, such as hauling, freight, and damage waiver, decreased to 3.3% from 10.8%. The decline relates to increased fuel costs, increased hauling costs associated with the movement of our fleet to maximize time utilization, and a lower recovery rate on support activities in our mid-Atlantic region.

Slide 10, please. Income from operations increased 6.3% to $37.3 million from $35.1 million. Margins decreased 340 basis points to 12.9% from 16.3%, with 190 basis points due to the shift in revenue mix. The remaining decline is a result of gross margin declines in certain segments as I just discussed and an increase in SG&A costs as a percent of revenue. SG&A costs increased to 16.5% of revenues as compared to 16.3% in the fourth quarter of 2006, which I’ll discuss in more detail a few slides from now. Please proceed to slide 11.

Net income was $17.1 million in the current period as compared to $20.5 million in the prior year. Interest expense increased $1.8 million or 22%, primarily related to borrowings under our senior secured credit facility to fund the Burress acquisition and our stock repurchase program. We are also carrying higher floor plan balances due to the Burress acquisition.

Pretax earnings increased 500,000, or 1.7%. Earnings per share on a consistent effective income tax rate of 37.6% in both periods increased 2.3% in the quarter.

Burress negatively impacted earnings per share by a penny for the quarter, which were weaker-than-expected results. We have repurchased a total of approximately $1.7 million shares in the open market since the initiation of our buy-back program. Our 2007 stock repurchases had no impact on our earnings in the fourth quarter.

Slide 12, please. EBITDA increased 14.7% as compared to the fourth quarter of 2006, with margins decreasing to 23.2% from 27.2%. We estimate that the change in our revenue mix also negatively impacted our EBITDA margins by 190 basis points in comparison to the prior year.

Next, slide 13. Our SG&A costs increased as a percent of revenues to 16.5% as compared to 16.3%. SG&A dollars increased $12.8 million. We incurred increased costs primarily related to employee salaries, wages, and other employee expenses which are associated with the growth of the company. Our costs have also been impacted by the start-up nature of our most recent greenfields.

Total SG&A expenses for Burress in the fourth quarter were $5.3 million. Also in connection with the acquisition, amortization of intangibles increased $800,000 over the prior year.

Slide 14. I’d like to mention a few financial highlights on the full year 2007. Our revenues increased approximately 25% to just over $1 billion. We finished the year with double-digit growth across all segments, led by a 47% increase in new equipment sales. Due primarily to the tremendous strength in new sales, our gross margins contracted to 30.5%.

New equipment sales which have gross margins in the 12% to 13% range accounted for 35% of annual revenues in 2007 as compared to 30% of revenues in 2006.

Our SG&A ratio adjusted for one-time charges as described in our slides and press release improved to 16.5 as a percentage of revenues from 16.9%.

Pretax earnings on an adjusted basis increased 16%. Adjusted EBITDA increased $33 million, or 15.3%.

The adjustments or non-GAAP measurements mentioned are reconciled to GAAP measurements in today’s slide presentation and also in our press release. Generally, we believe these amounts on an as-adjusted basis are really more meaningful comparisons of our financial performance.

And last, slide 15. Our gross fleet capital expenditures for the quarter were $70.6 million and net fleet capital expenditures were $39.6 million. We grew our fleet by $23.3 million in the fourth quarter. A significant portion of our fleet investment in the fourth quarter was allocated to our recent greenfield stores in addition to cranes and aerial equipment for markets other than Florida and Southern California.

Gross PP&E capital expenditures for the quarter were $5.7 million and net PP&E capital expenditures were $5.5 million.

Our fleet age at the end of December was 31.8 months as compared to a year ago of 39.4 months.

With that overview of our financial results, I would like to turn the call back to John so that he can discuss our 2008 outlook.

John M. Engquist

Thank you, Leslie. Before I get into our ’08 guidance, I want to take a moment to emphasize how strong our core business is. In the fourth quarter, we were able to grow our revenue ex-Burress approximately 20% despite revenue from our Florida and Southern California markets declining 25%. We were also able to increase earnings, assuming a like effective tax rate, in spite of a 74% decline in operating income from these two markets. Clearly the drivers of our business in the Gulf Coast and inter-mountain regions remain strong and we believe that will continue in ’08. The industrial sector, which I have said is a key driver of our business, has long-term growth potential and we are well-positioned to benefit from that. With our ability to leverage our integrated business model and grow faster than the industry averages, we believe ’08 will be another solid growth year for H&E.

As in the past, we expect the first quarter to be our softest quarter of the year. We estimate the first quarter’s earnings contribution to be only 10% to 15% of our annual earnings. We anticipate that our year-over-year earnings growth will occur from the second quarter on. This is due to the timing of our improvements in our mid-Atlantic rental operation and the timing of the impact of our fleet management efforts in Florida and Southern California.

Our annual guidance for 2008 is as follows: we expect revenues in the range of $1.13 billion to $1.16 billion; we expect 2008 EBITDA in the range of $264 million to $279 million; and we expect EPS in the range of $1.84 to $2.09, based on an estimated $36.5 million diluted common shares outstanding, which reflect our stock repurchases to date and a 35% estimated effective income tax rate.

With that, Operator, we would now like to move to the Q&A session. Please provide instructions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Jamie Cook with Credit Suisse.

Jamie Cook - Credit Suisse

Good morning. I guess first, just when I think about your outlook for 2008, can you help me with what you are assuming for H&E's core business versus what you are assuming, how much J.W. Burress is contributing to 2008?

John M. Engquist

Jamie, on a top side basis, we’re assuming mid-single-digit growth in our core business, 5%, 6%.

Jamie Cook - Credit Suisse

Okay, and then what about for when we think about J.W. Burress, what are you assuming it contributes on an operating profit basis? Is there any way you can help us with that? And I think the margins you said in the quarter were 4.3% or four and change. Just sort of how we see that progressing throughout 2008.

John M. Engquist

Jamie, we see improvement in the Burress operations as we transition them and really focus on their rental operations. We’ve got a lot of work to do there but they will progress. We don’t anticipate them being accretive in ’08 at this point. There is some softness in the mid-Atlantic region and some challenges from transitioning from Hitachi to Link-Belt, but we see steady improvement there.

Jamie Cook - Credit Suisse

Okay, so it won’t be accretive. And I guess my other question is I’m just -- you know, on slide 16 you talk about strength in the non-residential commercial construction markets. That’s sort of I guess a contrary view right now. What’s embedded in your guidance for 2008? Do you assume -- are you assuming any weakness or things deteriorating in the back half of the year? And I guess what gives you that confidence given what we are hearing on the macro side and issues with potential financing of commercial construction projects going forward?

John M. Engquist

Jamie, we have not been seeing any projects cancelled to this point. I know there’s a tremendous credit crunch going on but we have just not seen that to this point. Without question, the growth rates in non-residential construction have slowed considerably. I think if you take a consensus of the projections out there, they are probably calling for low single digit growth but with that said, the activity still remains at very high levels. I mean, there is a lot of work out there right now. Growth rates are definitely slowing and I think it’s going to provide ample opportunity for us.

Jamie Cook - Credit Suisse

And what are you assuming in terms of the Hurricane Katrina area? Any change in the funding down there? Do you assume things sort of improve in ’08?

John M. Engquist

We are starting to see increased activity in that area. About two weeks ago there was a front-page article in the Baton Rouge and New Orleans papers outlining the proposed levy work to increase the levy capacity to withstand a hundred-year storm or a level five hurricane. The consensus is that’s going to happen, the work is going to be done. That’s going to run in the billions of dollars. They have not started letting major portions of that work yet. It’s really small work going on. We’re seeing increased activity. I do believe that’s going to happen. It’s a question of timing and I can’t give you a real good answer on when that’s going to happen.

And the other thing for our business going forward, Jamie, is the strength of the industrial sector. I mean, when you look at petrochemical, I mean, all of these plants are running at near capacity. They are spending a lot of money on expansion, they are spending a lot of money on maintenance because they are running at such high capacity levels. When you look at commodity prices, you look at the price of oil, exploration and production is going to continue, mining is going to remain strong. We’ve got some real key drivers of our business that we are very confident are going to remain very solid.

Jamie Cook - Credit Suisse

All right, and then just last, what are your assumptions for rental rates and dollar utilization in ’08? And I’ll get back in queue.

John M. Engquist

I think on rental rates, they are going to basically be flat for the year and dollar utilization, the same thing. Where we’ll see improved dollar utilization is in the Burress rental operations or the mid-Atlantic as we transition them to a rent-to-rent philosophy.

Jamie Cook - Credit Suisse

But why would rental rates be flat when they’ve been trending down the past couple of quarters?

John M. Engquist

I just think that the Florida/Southern California markets have basically bottomed out. We’re not seeing rates trend down in the Gulf Coast and in the inter-mountain region. They’ve been stable and I just don’t see further deterioration in those markets.

We are de-fleeting those areas. We are transitioning fleet to other high-demand areas and aggressively selling off the bottom end of the fleets in Florida and Southern California and as we do that and right-size those fleets, we’re going to be able to be more aggressive on the rate side and improve our rates.

Jamie Cook - Credit Suisse

All right, thanks. I’ll get back in queue. Thanks.

Operator

We’ll go next to Brandt Sakakeeny with Deutsche Bank.

Brandt Sakakeeny - Deutsche Bank

A couple of questions; first, you did a good job of explaining the growth in the equipment -- I’m sorry, in the new equipment sales versus used equipment sales. Can you just provide a little more color as to why that new equipment number is so strong relative to the used number? Is it a function of relative pricing between the two products or financing or anything else?

John M. Engquist

It’s simply the strength in our crane markets. The demand for new cranes is just phenomenal. It’s really unprecedented and that’s what’s driving the big increases in new equipment sales. I think crane sales year over year have increased for the quarter like 140%, so that’s what’s driving those strong increases.

Brandt Sakakeeny - Deutsche Bank

Okay, great and let’s see, with respect to quick balance sheet data, do you have ending cash and ending debt as of 12/31?

Leslie S. Magee

Sure. Ending debt was $375 million and ending cash was $14 million.

Brandt Sakakeeny - Deutsche Bank

Okay, perfect. And then your CapEx for equipment purchases in ’08?

John M. Engquist

I don’t know if you know or not, we don’t give CapEx guidance but I can tell you our capital spending is going to slow. We expect to keep our fleet size pretty much constant. We don’t see fleet growth so lower capital spending, pretty much stable fleet size, and we expect to generate pretty strong cash in ’08.

Brandt Sakakeeny - Deutsche Bank

Okay, great. Thank you.

Operator

We’ll go next to Philip [Popacelli] with Goldman Sachs.

Jason Moss - Goldman Sachs

Good morning. It’s actually Jason [Moss] in for Phil. Just a couple of quick questions; as far as the new equipment sales, obviously that grew a lot because of the cranes -- what kind of is the breakdown of that at this point in terms of the different kinds of equipment?

Leslie S. Magee

North of 60% of total new equipment sales is related to cranes.

Jason Moss - Goldman Sachs

Okay, and I know on the last call I think you had mentioned that kind of the backlog for cranes was pretty strong through ’09. Is that still strong through ’09? And how much visibility do you have on that?

John M. Engquist

We’re on an allocation -- all of the distributors are on allocation through ’09 and I would not be a bit surprised to see an allocation into ’10. The demand is very strong and the crane manufacturers are really struggling to meet that demand.

Jason Moss - Goldman Sachs

Okay, and then out of the other 40%, how would you characterize that backlog?

John M. Engquist

Of other products? No, the other products, the availability is pretty good. Earth-moving, aerials, you know, you may have some availability issues in a certain model but by and large, availability of other products is pretty good.

Jason Moss - Goldman Sachs

Okay, and then just a couple more questions; as far as rates, obviously you said they were holding in pretty well in the Gulf Coast and the mountain regions. I mean, do you see any increase in competition coming into those areas just because there is a little bit stronger presence of work?

John M. Engquist

I really don’t. I mean, everybody’s here. I mean, these are big markets. Everybody knows what’s here so I think we pretty much have all the competitors in these markets now.

Jason Moss - Goldman Sachs

Okay, and then -- I don’t know if you already mentioned this but the [floor plan] financing balance, did you give that for the end of quarter?

Leslie S. Magee

No, I haven’t but it’s $163 million at the end of the year.

Jason Moss - Goldman Sachs

Okay, and then the fleet size -- again, sorry if you mentioned this, but the fleet size on an original cost basis?

Leslie S. Magee

$803 million.

Jason Moss - Goldman Sachs

Okay, and then just one last question, and I apologize if you had said this; you mentioned the time utilization in Florida and Southern California for aerial was down. Was that 500 and 700 basis points year over year?

Leslie S. Magee

That’s correct.

Jason Moss - Goldman Sachs

Okay, and then so -- you mentioning that that’s kind of an area -- those are both areas you see as bottoming out. As far as going forward for time utilization in those areas, do you expect that to keep trending down? Because obviously those are pretty big drops in aerial, which we thought were a little stronger.

John M. Engquist

No, actually we would anticipate our time utilization as we right-size our fleets there improving.

Jason Moss - Goldman Sachs

Okay. All right, great. Thank you.

Operator

We’ll go next to Seth Weber with Banc of America.

Seth Weber - Banc of America

Thanks. Good morning, everybody. Can you just expand a little bit on the used equipment margins? They were lower than what we were looking for and can you comment on used equipment pricing? And I think a couple of quarters ago you had some success selling equipment overseas. Maybe if you can just talk about the appetite in the marketplace for used equipment.

John M. Engquist

I think the biggest issue on our fleet sales margins is Burress. They are being impacted by purchase accounting and fair market values assigned to that fleet, so there’s been some pressure on their margins and that has impacted our fleet sales margins. Pricing is holding up very well, Seth, on used equipment. Aerial, if you look on a national basis, there’s been some softening in pricing on earth-moving in equipment. We really haven’t seen that in the Gulf Coast. Our pricing has held up pretty well.

There was a recent auction in Florida that had a lot of earth-moving equipment in it and the pricing in that auction was phenomenal. I mean, it was exceptionally strong. I think some of that has to do with the fact that there was a lot of foreign buyers. A lot of that equipment was exiting the country but by and large, the pricing is holding up well and we’ve been negatively impacted by Burress' margins.

Seth Weber - Banc of America

Okay. John, you mentioned in your remarks a greenfield. Is there one sight that’s opening this year or do you have plans to open up several, a couple of different stores?

John M. Engquist

We don’t have anything in process right now. We’re looking at a couple of markets but have made no decisions there. The greenfields we mentioned, we recently opened and they are in that greater Miami, Pompano Beach area. So that’s what I was referring to on greenfields and you know, they’ve impacted our SG&A because revenue on those start-ups just hasn’t caught up with the cost yet.

Seth Weber - Banc of America

Last question; your EPS guidance for ’08 does not include any additional share repurchase. Maybe if you could talk about that.

John M. Engquist

Seth, I’m not going to guide to what we are going to do on a share repurchase basis. We’re going to evaluate that as we go into the year. I mean, we are going to generate strong cash this year and obviously we are going to look at buying shares back. We’re going to look at paying down debt and evaluate our options with our board and make decisions as we move into the year, and we’ll certainly update everybody as required quarterly on what we are doing there.

Seth Weber - Banc of America

Would you say that you are still in the market for smaller acquisitions?

John M. Engquist

No, we’re not. I’m not going to say -- you know, never say never. If the right opportunity presented itself, we would take a look at it but our intent right now is to complete the integration of Burress and this transition to a more of an integrated model from a distribution model. We are going to really get our arms around that before we start looking at acquisitions.

Seth Weber - Banc of America

Okay. Thanks very much.

Operator

We’ll go next to Chris Doherty with Oppenheimer & Company.

Chris Doherty - Oppenheimer

John, a question on the fleet size. I know you said basically you expect it to stay constant. Does that include the build-out of Burress?

John M. Engquist

Yes. You know, until we get the infrastructure in place in the rental sales group and inside coordinators in place there, we don’t see growing their fleet. I don’t think you’ll see any real fleet growth there in ’08. I think you’ll see a lot of improvement in their rental operations but we have areas of high demand that need fleet. We are going to be de-fleeting Florida and Southern California and our other aerial groups are running at exceptionally high utilization and need fleet, so we’ll be feeding them and we are certainly going to grow our crane fleet.

Chris Doherty - Oppenheimer

And then, talking about Burress, how long do you think it will take to actually get that up to your core business metrics?

John M. Engquist

We’ve got some fleet mix issues we’ve got to deal with there. Their market has changed a little bit and they’ve got some mix issues. They’ve got more of the larger excavators than they need right now and probably not enough of the smaller product, so we are aggressively dealing with that. And to get them up to a 40% dollar return, that’s going to take a little while. It’s not going to happen in a quarter or two but we will certainly get there and you’ll see steady improvement as we go through the year.

Chris Doherty - Oppenheimer

Do you think by the end of ’08 you could be there on a run-rate basis or is it going to extend into ’09?

John M. Engquist

It could extend into ’09 but by the end of ’08, you will see dramatic improvement. Not a little bit of improvement -- I mean, it will be dramatic.

Chris Doherty - Oppenheimer

And then lastly, can you just talk about the percentage -- and maybe this is a question for Leslie, but the percentage of your business that’s industrial versus non-res?

John M. Engquist

That’s a good question and it’s something we’ve been looking at. We find that some of our competitors quote very specific numbers on that. We find -- you know, we use SIC codes to track that, like I guess everybody does, and we find that a lot of our customers operate under five, six, seven different SIC codes, so that’s a little bit challenging to give you a real firm number and I don’t like giving a real firm number, but I think the industrial sector -- and this is not something I want to be held to the penny, but I suspect it drives close to half of our business. And the industrial sector, again I define that as petrochemical, mining, oil patch, and energy.

Chris Doherty - Oppenheimer

And then I guess just lastly, in terms of the demand for cranes and the supply, are we now at a point where the supply is actually held constant and you are probably not going to be able to see continued growth in that, that you’ve hit that run-rate just due to supply?

John M. Engquist

Well, the -- absolutely our growth rates in crane sales are going to slow down. I mean, we can’t continue to show 40%, 50%, 60% growth rates but the sales level is going to be extremely high. You just won’t see the same growth rates.

Chris Doherty - Oppenheimer

All right. Thank you.

Operator

(Operator Instructions) We’ll go next to Melinda Newman with Post Advisory Group.

Melinda Newman - Post Advisory Group

Just had a couple of questions; can you -- you haven’t -- I don’t think we’ve gotten this in a while, a breakdown of fleet by original equipment costs in terms of type of fleet.

John M. Engquist

Sure. I think Leslie can get that for you.

Leslie S. Magee

Okay. Of the total $803 million, it breaks down like this; AWP, $477 million; cranes, $97 million; earth-moving, $156 million; support trucks, $42 million; and other, $32 million.

Melinda Newman - Post Advisory Group

And of the AWP, how much is reach, forklifts?

John M. Engquist

You know, we include that in our AWP -- I’d have to break that out for you and we can certainly do that.

Melinda Newman - Post Advisory Group

But just roughly, I mean --

John M. Engquist

It’s a relatively small piece.

Melinda Newman - Post Advisory Group

Okay, and then how much of the fleet is leased right now?

Leslie S. Magee

None.

Melinda Newman - Post Advisory Group

No, so you did -- did you do considerable lease buying?

John M. Engquist

You mean how much of our fleet is out rented?

Melinda Newman - Post Advisory Group

No, no, no -- how much of your fleet is owned versus leased?

John M. Engquist

It’s all owned.

Leslie S. Magee

No, it’s all owned.

Melinda Newman - Post Advisory Group

All owned -- so over the last two quarters, you’ve bought in some leases?

Leslie S. Magee

No, that was -- we bought all leases out in early ’06.

Melinda Newman - Post Advisory Group

Okay.

John M. Engquist

We have no off-balance sheet in the way of -- in our fleet.

Melinda Newman - Post Advisory Group

Okay, great. Thank you.

Operator

(Operator Instructions) We have a follow-up question from Seth Weber with Banc of America.

Seth Weber - Banc of America

Thanks. I mean, I guess relative to your -- you mentioned that Burress was performing below expectations. I mean, relative to what you thought things were going to be doing, can you just maybe give us a couple of suggestions as to where things are different than where you might have thought? Is it just the macro environment or is there something more specific? Thank you.

John M. Engquist

Seth, is it he macro environment. I mean, there’s no question their market has softened. I mean, it’s off. They’ve got a little more exposure to the residential sector than the rest of our regions do. We’ve seen -- they had some pretty significant ties to some big contractors that did residential and resort type development infrastructure work, streets and drainages, and that work has really slowed down there. So it’s a macro environment issue and as I stated in my discussion, the transition from Hitachi to Link-Belt has been challenging, as we knew it would be, and we’re getting there. But you don’t get there in a quarter or two. So we’re making progress and a lot of it’s a macro issue.

Seth Weber - Banc of America

Okay. Thank you.

Operator

We’ll go to another follow-up question from Chris Doherty with Oppenheimer and Company.

Chris Doherty - Oppenheimer

John, just to follow-up on my industrial question; when you say 50%, is it evenly split between new sales and rental, or is there a difference in terms of how you --

John M. Engquist

Probably more weighted to new sales. I mean, it’s the industrial sector that drives the crane business. Petrochemical, oil patch, that’s really what -- and the energy sector, too, power plants and stuff like that. That’s really what drives the crane business, so it would be weighted to new equipment sales.

Chris Doherty - Oppenheimer

All right. Thank you.

Operator

We’ll go to another follow-up from Melinda Newman with Post Advisory Group.

Melinda Newman - Post Advisory Group

I don’t know if you gave this already but can you give both organic and then split out for organic and including Burress what the breakdown was for time utilization and pricing on a year-over-year basis?

Leslie S. Magee

For the quarter, our time utilization including Burress was 67.8% compared to 67.3%.

Melinda Newman - Post Advisory Group

Okay, and then -- so 67.8 versus 67.3. Would it have been better without Burress?

Leslie S. Magee

Right, without Burress, our time utilization was 68.4%.

Melinda Newman - Post Advisory Group

Okay, so you were up 110 bps. What about pricing?

Leslie S. Magee

Pricing, we gave our pricing information without Burress, which was on average, including all product lines, was a 1.7% decline.

Melinda Newman - Post Advisory Group

Okay, and it was worse with Burress?

Leslie S. Magee

Exactly.

Melinda Newman - Post Advisory Group

But you think -- over what time frame do you think you are going to be able to normalize them to get their pricing in line?

John M. Engquist

I think we’ll get their pricing in line quickly. I mean, that’s something we can push hard on and we are.

Melinda Newman - Post Advisory Group

Okay, great. Thanks.

Operator

At this time, we have no other questions. I would like to turn the call back to management for any additional or closing comments.

John M. Engquist

We’ll just conclude the call. We appreciate everybody attending the call. I think we completed a strong year and we feel good about ’08. We’ve got some real key drivers of our business like this industrial sector that are going to be exceptionally strong in ’08 and although the growth rates in non-res have certainly slowed down, there’s still a lot of activity there and we continue to operate in a good environment and think Florida and Southern California have bottomed out and the fleet management efforts we’re making there will show improved financial performance in both of those regions. So thank you for being on the call.

Operator

That does conclude today’s call. Again, thank you for your participation. Have a good day.

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Source: H&E Equipment Services Q4 2007 Earnings Call Transcript
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