H&E Equipment Services, Inc.

Thank you, Michelle, and welcome to H&E Equipment Services conference call to review the company’s results for the third quarter ended September 30, 2012, 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 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 that this call contains forward-looking statements within the meaning of the Federal Securities laws. Statements about our beliefs and expectations, and statements containing words such as may, could, believe, expect, anticipate and similar expressions constitute forward-looking statements.

Forward-looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. These 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. The company does not undertake to publicly update or revise any forward-looking statements after the date of this conference call.

I will now turn the call over to John Engquist.

Thank you, Kevin, and good morning, everyone. Welcome to H&E Equipment Services third quarter 2012 earnings call.

On the call with me today is Leslie Magee, our Chief Financial Officer.

This morning I will give an overview of our third quarter performance, including an update on the specific regions we serve in current market conditions. Leslie will then summarize our quarter’s financial results.

When Leslie concludes, I’ll provide our thoughts on the balance of this year and into 2013, and then we’ll be happy to take your questions.

Proceed to Slide 5, please. In summary, the third quarter was another very solid quarter.

We also positioned our business for the secular shift toward rentals recurring in the industry and the continued strength in end-user demand.

Utilization levels of our rental equipment were again strong and as a result we continued to invest in our fleet at record levels during the quarter. Other segments of our business delivered solid results again as well.

We’re very encouraged by the trends in our business, which we believe will continue into 2013.

Lastly, we are pleased to have completed our successful notes offering which allowed us to pay a $246 million dividend to our shareholders, extend our long-term debt maturity profile until 2022, and enhance our liquidity under the senior credit facility to take advantage of future market opportunities.

In terms of the financial highlights, total revenues increased 11% to $204.5 million this quarter on a year-over-year basis with significant growth of 27.2% in our rental business. Adjusted EBITDA increased 38.3% or $15.5 million to $55.9 million, compared to $40.4 million a year ago.

Adjusted net income for the quarter was $10.9 million or $0.31 per share, compared to net income of approximately $4.8 million or $0.14 per share in the third quarter of 2011. I want to make a few comments regarding our rental fleet and business.

We continue to operate at record utilization levels at 72.9% based on OEC versus 71.8% a year ago. Rental revenues grew 27.2%, while rental gross margins grew to 48.9%, compared to 44% a year ago.

Rental rates improved 10.2% from a year ago and more importantly, 2.9% from the second quarter this year. Dollar utilization also increased to 36.7% from 33.7% over the same period last year.

As I mentioned a moment ago, we continued to make heavy investment in our fleet, which is 20% larger than a year ago.

Please proceed to Slide 6. One key and encouraging point I want to make on this slide is that for several consecutive quarters our less industrial focus markets which were hit the hardest during the recession are continuing to see increased demand.

We believe this is indicative of modest improvement in the both the residential and non-residential construction markets. As we've reported in the past, the industrial sector most significantly the oil patch and petrochemical sectors continue to be strong drivers of our revenue and gross profit.

Proceed to Slide 7, please. While there are concerns with the macro-environment domestically and abroad, we believe market indicators are largely positive and market conditions are strong as evidenced by industry performance over the last several quarters.

The significant growth in the rental business, record levels of utilization and continued increases in rates are all very positive trends, and we believe they indicate that our end-user markets are no longer a headwind.

At this time, I’m going to turn the call over to Leslie for the financial overview.

Thank you, John, and good morning. I’ll begin on Slide 9.

We’re pleased with the continued strength in our business, which is demonstrated by our financial results release this morning.

From a summary viewpoint, third quarter total revenues were $204.5 million, an increase of 11% and gross profit was $66.9 million, an increase of 25 - 24.5% in each case compared to the same period last year.

I’ll begin with our rental business and provide more details behind the numbers. First on a revenue basis and then, I’ll provide some highlights on gross profit by segment.

Rental revenues were $77.8 million for the quarter, a 27.2% increase over the same period a year ago. Due to the strength and demand for rental equipment, we have a much larger rental fleet available for rent compared to the third quarter of 2011.

We’ve increased our total fleet by approximately $145 million or 20% based on original equipment cost or OEC over the last 12 months.

Average time utilization based on OEC increased 110 basis points to an average of 72.9% for the quarter. Based on number of units available for rent average time utilization was 68.9%, which was basically flat compared to year ago.

In addition, rental revenues were higher as a result of a 10.2% increase in average rental rates in comparison to the third quarter a year ago and 2.9% compared to the second quarter of this year, the improvements have also been broad based across all product lines.

Our dollar returns improved to 36.7%, compared to 33.7% a year ago. This 300 basis point improvement was due to the strength in both rental pricing and time utilization.

New equipment sales were $49 million, a $2.5 million or 5.3% increase over the prior year period. The net increase was due primarily to higher crane sales.

Used equipment sales were $25 million, a $2.2 million or 8% decrease over the third quarter of 2011. The net decrease was primarily due to lower earth moving sales.

Business activity in our parts and service segments improved as revenues increased 4.3% on a combined basis to $40.5 million with both segments up from a year ago.

Moving on to gross profit by segment. Our total gross profit for the quarter was $66.9 million, compared to $53.7 million a year ago, an increase of 24.5% on a 11% increase in revenue.

From a gross margin perspective consolidated margins were 32.7%, compared to 29.2% a year ago. Expansion of our gross margins was largely driven by improved performance from our rental business, better recovery rates on other revenues and higher used equipment margins.

Our rental business delivered margins of 48.9% compared to 44% last year. Strong demand which is driving higher volume and rate, combined with tight control of rental expenses continues to result in rental gross margin expansion.

Margins on new equipment sales were 11.5%, essentially flat compared to last year. Gross margins on used equipment sales increased to 26.4% from 23.4% in the same period last year.

Parts gross margins were 26.7%, the same as a year ago and services gross margins were 61.1% versus 61.6% a year ago. Margins on other revenues such as equipment hauling and parts freight revenue were 6.7%, compared to a negative 2.6% in the third quarter of last year.

Slide 10, please. I have only a few comments related to the next couple of slides, as the key drivers of our financial results have been covered at this point.

Our results again reflect significant operating cost leverage. The improvement in profitability is reflected and an increase in income from operations for the third quarter of 2012 to $25 million, or a 12.2% margin, compared to $15.1 million or an 8.2% margin a year ago.

Proceed to Slide 11, please. Net income was $3.7 million or $0.11 per share, compared to $4.8 million or $0.14 per share in the same period a year ago.

Our net profits for the third quarter on a GAAP basis were negatively impacted by $10.2 million or $7.2 million after-tax loss on the early extinguishment of debt. Net income as adjusted for the loss on early extinguishment of debt was $10.9 million or $0.31 per share.

Please move to Slide 12. Adjusted EBITDA was $55.9 million, a 38.3% increase over the same period last year, which again outpaced our revenue growth of 11%.

Adjusted EBITDA margins were 27.3%, compared to 21.9% in the same period a year ago and expansion of 540 basis points.

Next, Slide 13, please. SG&A was $42.4 million, an 8.6% increase at the same period last year.

However, SG&A declined as a percentage of revenue to 20.7% this quarter compared to 21.2% a year ago.

Slide 14 and 15 include our rental fleet statistics. Our fleet based on our original equipment cost at the end of the third quarter was $871 million versus $726 million a year ago.

During the third quarter, we increased the size roughly by $61.7 million based on original equipment cost.

Our gross fleet capital expenditures for the quarter were $94.6 million, including non-cash transfers from inventory. Net rental fleet capital expenditures for the quarter were $74.2 million.

For the quarter, our gross PP&E CapEx was $7.6 million and net was $7 million. Our average fleet age at the end of June was - I mean, I’m sorry at the end of September was 38.6 months, which was declining as a result of fleet spending.

Next, Slide 16. I’ll spend a bit more time on this slide as our capital structure has changed as a result of our recent notes offerings, which closed in August 2012, where we issued $530 million of new senior 7%, senior unsecured notes.

Proceeds from the offering were used to repurchase or redeem of an outstanding 8 3/8% senior unsecured notes to fund the dividend to shareholders of approximately $246 million and for other corporate purposes. We also upsized our existing ABL credit facility by approximately $83 million to $402.5 million by exercising as accordion feature.

At the end of the quarter, our outstanding balance under the ABL facility was $130.7 million, and accordingly we had $265.3 million of availability at quarter end under our ABL facility net of our $6.5 million of outstanding letters of credit.

In summary, our business delivered strong results during the third quarter and we’re focused on continuing to capitalize on the market improvement.

I’ll now turn the call over to John to discuss our current outlook, and then we’ll open the call for questions.

Thank you, Leslie. Please proceed to Slide 18.

Based on our strong third quarter results and our view of ongoing business trends, our outlook for the balance of this year and end of 2013 is positive. While there is still some uncertainty on a macro level, demand in our end-user markets is strong and we believe indicative of a secular shift towards rentals in the industry.

Leslie and I’ve already discussed the strength in our rental business, but we expect the trends to continue for the foreseeable future. Utilization in rates continued to hover around year long highs.

Through the end of the third quarter, we have invested $240 million in our fleet of which a little bit more than 1/2 has been dedicated to growth CapEx. The industrial markets we serve, particularly petrochemical and oil and gas sector, are very strong as a result of increased exploration in production.

Even our less industrial focused markets are improving as a result of the increased construction activity. We are also pleased with the performance of our distribution business.

Albeit difficult to predict, it has delivered solid results throughout the year on the whole.

In closing, we’re very pleased with our third quarter performance, the positive market environment and our ability to deliver solid results. We undertook several significant steps during the quarter to better position our company for future growth opportunities, and remain focused on solid execution, operating leverage, cost control and marketplace trends.

Once again, I congratulate our employees for their excellent performance as we pursue profitable growth opportunities.

At this time, we will be happy to take questions. Operator, please provide instructions.

Can you maybe talk to the fleet growth in the quarter? I’m just curious, how the market absorbed it and maybe how utilization trended throughout the quarter, and so far into October?

Well, obviously that was heavy investment in the fleet for us. It’s kind of a historical investment for us.

Throughout the quarter, we’ve increased utilization. We’ve increased rate.

All of the trends continued to be very, very positive which I think speaks to the strength of our rental business when we make that kind of investment increase rate and utilization at the same time. During October, we’ll probably average around 74.5% utilization.

Okay. Great.

John, correct me if I’m wrong, but I think that your prior view was focused more on fleet growth at the expense of free cash flow. With your leverage ratio now being higher and your fleet about 8% above the prior peak, does that change the way or at least start to change the way that you are thinking about fleet growth versus free cash flow?

No. It doesn’t change the way I’m looking at things.

We’re comfortable with the use of cash this year and potentially use of cash next year. We have not completed our fleet planning yet.

It’s in process.

I think next year you’ll probably see on our base fleet more replacement spending as opposed to growth. And I think you’ll see the growth spending related to greenfield start-ups next year.

But I would expect we will bring our leverage down during the course of next year.

Okay. Great.

And can you give us maybe a target in terms of what you’re expecting from greenfields?

Look, we’re doing market research on a lot of different markets. The key driver to us entering any market is finding the right manager.

We do not go in the market until we have the right person.

Look I would hope, we could open 6 plus stores next year. We’ve opened Midland and Mesquite very recently as you know.

We’re very, very pleased with the result we’re getting there. We’re close to opening a store in Fort Worth.

We’re close to opening a store in Seattle, but I think the 6 stores opening is reasonable for us next year.

Okay. Great.

And last question and then I’ll turn it over. I guess what gives you the confidence that customers are going to show up and place equipment orders in 4Q.

Are you seeing elevated entry levels or customers tell you that they’re going to push their order into 4Q?

Well, look we get feedback from obviously, a very large sales force out there that are staying at constant contact with customers. There are still some pretty significant tax incentives for year-end buying.

Our expectation is we’ll see some increased activity from that, will it be to the level we saw last year with 100% bonus depreciation. I don’t know, I can’t answer that question.

But our expectation is we will see some increased activity in the fourth quarter.

Got it. Yes.

It’s clearly a tough hurdle. Okay.

I’ll hop back in queue.

I was particularly struck with the sequential change in rate, the strength there in the quarter up, I guess, 2.9. I mean can you give us some sort of cadence monthly through the quarter how that trended and you gave us a utilization number for October to date.

I mean have rates continued to improve sequentially here into October?

Yes. I mean we’re continuing -- look the cadence was positive throughout the quarter.

Each month was better obviously sequentially it was to have a 2.9% sequential increase from the second course. The cadence was very positive.

We’re still seeing positive rate increases and our expectation is that’s going to continue. Everybody is running at very strong utilization levels.

Now, that’s probably going to moderate in the fourth quarter when utilization comes down due to typical seasonality. But our outlook for rates is very positive.

And I think that our management team, Brad Barber and the divisional managers that work on him are doing a really fine job of pushing rates and making sure our people are focused on that. We’re very pleased with our rate performance.

So, you think fourth quarter could be like a high single-digit year-over-year type of number?

That’s really reasonable.

Okay. And then I guess on the new sales commentary.

Can you give us a little bit more color I mean, it sounds like you think the crane business has potential to be pretty strong fourth quarter here, obviously tough comp. But I mean on an absolute basis, it sounds like crane sales could be pretty good.

Is that across all product lines or is that really skewed towards the smaller stuff still at this point?

Still skewed to the hydraulic side. I mean we’re having some conversations on some crawler cranes, some big crawler cranes.

But those markets are still pretty soft by historical standards. So, we do expect strong crane sales and again, let’s go back to the prior year, that’s a very difficult comp.

I think we sold $50 million worth of cranes in December of last year. So, pretty tough comps there, but we do anticipate strong crane sales in the fourth quarter.

Okay. If I could just ask one follow-up, so, the rental margin this quarter obviously very strong on the gross margin high 48, almost 49%.

That’s still pretty well below the mid-50s that you’re running back. I think it was ‘06, ‘07 for the third quarter.

Is there any reason why you couldn’t get back to that kind of number or exceed that?

No reason. We can’t get back or exceed that.

We still have some ground to make up on rate. And we’re paying more for equipment today than we were back then, which is somewhat of an offset.

But no, there is no reason we can’t get back to prior peak levels or exceed them.

As a follow-up to Seth’s question, the rental revenue growth rate of 27% in the quarter was very strong, would you expect rental revenue on a dollar basis to decline in the fourth quarter from the third quarter, understanding that it's seasonally weaker period, but looking back to the last couple of years, you guys have still been able to drive rental revenue a bit higher and just kind of wanted your thoughts there?

I would not expect a decline in the fourth quarter. I think it will probably be similar to up slightly from the third quarter.

Great. And then given that a lot of the OEMs are cutting construction equipment production due to weaker than expected demand.

Are you heavy on any new equipment inventory categories versus where you like to be maybe earth moving or outside of crane?

We’re pretty comfortable with where we are. I am definitely comfortable with our crane inventory right now.

And if we're heavy anywhere it would probably be earth but that’s not a concern. If we are heavy it’s by a small amount.

And then wondering…

Go ahead.

Okay. Yes.

And then I guess just finally. I wonder if you guys appetite is changed regarding acquisitions with the recent financing action - the recent financing actions raising your leverage and or you just going to continue to focus on greenfield from here?

Yes. Look, we looked at acquisition.

We looked at stock buybacks. And we settle on that dividend is the right thing to do to create shareholder value.

I think before our shareholders, so obviously that is increased or leveraged for a period of time for those foreseeable future until, we bring our leverage back down we will be focusing on greenfield’s.

What are you seeing in terms of your used sales pricing. I mean [indiscernible] is showing monthly declines.

So, I mean can you see your sales margins are down sequentially from the prior quarter. Is that function softening on pricing or is there a mix impact, any comments around that?

No. I don’t think our sales margins are down from the prior quarter.

Are they - I am missing something.

Well, year-over-year they are, but there were…

Actually from the prior quarter, no, I think that’s a mix issue. Now, look we’re not seeing any softening in the prices we’re getting for our used fleet right now.

Again, we sell on a retail basis as opposed to taking the stuff to auctions. The residual values have been ramping up so strong for so long, they had to level off.

So, I don’t see anything in used equipment pricing that concerns me at all right now.

Okay. And then kind of in talking to folks across the industry, we hear a lot about a pause that’s been occurring because of the Presidential election and the fiscal cliff.

Is that something you are seeing? I guess maybe particularly on distribution side of business, any thoughts about kind of getting over those hurdles and then anywhere construction goes in ‘13, I mean philosophically?

I think most people have to believe that this fiscal cliff will be resolved. I’m sure there is some concern about.

But I think the election obviously, creates a lot of uncertainty and it’s kind of a coin toss right now. So I’m sure that it has had some impact and I think the impact is probably on the distribution side of our business, probably favors the rental side, when there is uncertainty people tend to rent as opposed to buy.

So the impact -- whatever impact we’re saying I’m sure is on the distribution side of our business.

Most of my questions have been answered at this point. Appreciate the color on new equipment sales and cranes but could you speak a little bit as to the - I think someone asked about it, about the order activity specifically for cranes, the enquiries, what you’re seeing for 4Q now that we're a month in?

I would say, enquiries are solid, I mean, pretty strong. And our expectation again, I’m repeating myself, is that we’re going to see increased activity in the fourth quarter.

I would be careful comparing it to the prior year because that was so exceptionally strong. That’s a very tough hurdle.

But on an absolute basis, we think that crane sales are going to be quite strong in the fourth quarter.

Up sequentially, but perhaps not year-over-year?

That’s correct.

I was intrigued by one of your prepared remarks, one of your - another player in your industry reported yesterday and spoke about a little bit of a pause in industry had occurred. But basically, the demand had since picked up and is still accelerating.

I know that you guys had said that your end user markets are no longer a headwind. I was curious that if you could elaborate on that remark a little bit please?

I think it’s just that our demand is very broad based. We’re seeing really solid year-over-year improvement in Florida and Southern California and even in Nevada which is arguably one of the toughest markets in the country.

Arizona has gone from being a real headwind tough, tough market to one of our absolutely best markets. So generally, we’re seeing very positive trends across the board.

Okay. Great.

And then not to say that this is by any means any kind of a threshold that you can't break through. But can you comment on what your rates are relative to the prior peak?

Yes. That’s difficult to quantify.

But if you look at our monthly rates, I think we’re probably between 5% and 8% from prior peak rates. And I can’t really break down the daily and weekly, but on a monthly rate.

We still have ways to go. We’ve got some runway in front of us to get back to prior peak.

Okay. Great.

And then my last question, I know you gave a lot of good color regarding free cash flow. But would there be a ceiling on the degree of negative free cash flow you’d be wanting to observe in that 2013, maybe $100 million, $50 million?

In ‘13, it would certainly be I mean significantly less than $100 million. And again I think our spending is going to change particularly our base fleet is going to be more replacement spending as opposed to growth and the growth that we will have will be related to Greenfield.

So our intent is to bring our leverage down in 2013.

Okay. Great.

And then if I could, with your fleet age being so young right now, so you think at all kind of revolve around that 38 months level or do you think it has further ways to go in terms of decreasing?

I think we’re continuing -- what we have continued to spend on our fleet through October. So my expectation is the fleet age will come down another month or so by year end and it will probably level off there.

Can you kind of help us understand in your Mid Atlantic region with Hurricane Sandy just hitting and how that’s going to affect your utilization and your ability to push rates?

We did not have a big negative impact from the storm. We didn’t have a bunch of stores get shut down for any extended period.

I think we had 3 stores that closed for 2 days out of our Mid Atlantic region, so fairly minimal loss time from the storm. There’s going to be some benefit to us obviously.

There is a lot of destruction there and people are going to be looking for rental equipment.

So I think from this point forward there is going to be a benefit to our business. It’s difficult to quantify.

But it’s going to be a lot of clean-up work, lot of reconstruction work and we should benefit from that. And the negative impact was fairly minimal.

I understand that, I was looking more for the positive. Will you actually move equipment up to that region to meet the demand?

Absolutely, if necessary, we move equipment all the time.

Just one quick follow-up for you. Your incremental gross profit margins have obviously been solid over the last couple of quarters.

I’m just curious, if you’re successful in opening up those 6 new stores next year, is that high 60%, low 70% number still a decent target, or could we be looking at something lower?

If the stores perform like Midland and Mesquite, I think we will maintain that type of incremental margin.

Okay. And actually maybe I’ll sneak another one in.

John, just in your past experience kind of dealing with major natural disasters kind of down in the Gulf Coast, can you maybe just talk to what type of demand the equipment rental market typically sees, when it starts and how long it lasts?

Obviously, every storm is different and we’ve got a lot of experience with storms. The most recent storm we had was probably a negative to our business.

I don’t think we got much of anything. There is very little structural damage, most of the damage was water related.

We just really don’t benefit from that. This storm on the East Coast is different, lots of structural damage.

So I think it’s going to impact pretty much all classes of equipment as you are going to get some crane activity in the clean-up. You’re going to get aerial activity in the clean-up and the reconstruction, lot of dirt activity in the clean up.

And again, the clean-up is one thing. That’s fairly short duration, the reconstruction lasts a long time.

So there’s going to be some benefit from this storm, not just us, but everybody in that region in our line of work.

Thanks, everybody. Again I think you can tell we’re very positive on our business.

The trend is really good and we expect good things going forward and we’re confident that 2013 is going to be a solid year for us. So we look forward to speaking with you on a next call.

Thank you for attending.