H&E Equipment Services Inc (HEES) 2008 Q2 法說會逐字稿

Good day, and welcome to today's H&E Equipment Services second quarter 2008 earnings conference call. This call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to Mr. Kevin Inda. Please go ahead, sir.

Thank you, Matt, and welcome to this H&E Equipment Services conference call to review the Company's results for the second quarter ended June 30, 2008 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'll refer to certain non-GAAP financial measures and we've reconciled these measures to GAAP figures in our earnings release which are 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 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 the forward-looking statement. 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 to publicly update or revise any forward-looking statements after the date of this conference call. With that stated, I'll now turn the call over John Engquist.

Thank you, Kevin, and good morning, everyone. Welcome to H&E Equipment Services second quarter 2008 earnings call. On the call with me today is Leslie Magee, our Chief Financial Officer.

Please proceed to Slide 3. Today I will go over the highlights of the second quarter and discuss our end markets by region. I will also talk about the steps we are taking to ensure we continue to deliver solid results in a more challenging environment. Leslie will then go over our financials in more detail. When Leslie concludes, I will discuss our outlook for the remainder of the year and we will then take questions.

Please proceed to Slide 5. Despite a challenging economy that is starting to pressure the non-residential construction markets, our Company delivered strong year-over-year results. In the second quarter, our total revenue increased 21.2% to $282.6 million, EBITDA increased 12.2% to $64.6 million, and net income increased 5.9% to $16.1 million or $0.45 per diluted share. We believe this is impressive performance when you consider a struggling economy and weakness in several of our major markets.

Please proceed to Slide 6. Our footprint and geographic diversity continue to provide opportunity for our Company. This is due to our strong presence in geographic regions with tremendous exposure to the industrial sector. Demand for our products and services remains strong in our Gulf Coast and Intermountain regions due to the petrochemical, oil patch, energy, and mining sectors. We believe these sectors will continue to show growth for the foreseeable future.

Increased construction costs such as steel, asphalt, plastic, wallboard, and fuel have presented new challenges to the construction markets. In particular, the Florida, Southern California, and Mid-Atlantic regions remain very challenging. We are, however, pleased with the progress we're making in our operations in the Mid-Atlantic region. We continue to develop their rental operations and transition them to our integrated business model, and we are confident they will become a strong contributor to our performance.

Please proceed to Slide 7. To summarize, we delivered a strong second quarter in spite of a struggling economy that is beginning to impact the non-residential construction sector. We believe our performance speaks to the strength of our integrated business model and our strong ties to the high growth industrial sector. Florida, Southern California, and the Mid-Atlantic continue to be our most challenging markets. While we do not anticipate topside improvement in these markets in the near future, we are seeing better financial performance as a result of the steps we've taken to adjust these businesses to current market conditions.

Due to an ongoing credit crisis and skyrocketing construction costs, we believe the non-residential construction markets may be negatively impacted during the second half of this year. We are currently taking steps to adjust our business to prepare for what we believe will be a more challenging environment in the second half. These steps include a measured fleet reduction to adjust to current market demand. This reduction to our fleet is a significant change from our original plan and will affect our guidance for the remainder of the year, which I will address in detail at the end of Leslie's remarks.

We are confident that we are taking the appropriate steps to ensure that we continue to deliver solid results. Our reduced capital spending will generate significant free cash flow, which we will use to pay down debt and/or repurchase shares. We remain committed to enhancing shareholder value.

At this time, I'll turn the call over to Leslie for the financial review.

Thank you, John. Good morning. I'd like to go through our financials providing more detail on our second quarter results beginning on Slide 9. Our total revenue increased to $282.6 million or 21.2% year-over-year with $40.6 million of revenue from the Mid-Atlantic region. Top line revenue growth exclusive of the Mid-Atlantic revenues was 3.8%. In the current quarter, each operating segment reflected growth on an organic basis.

For the second quarter of 2008 on a segment basis, rental revenues increased 8.1% over the prior year on a larger fleet and with growth across all product lines. Rental revenues from the Mid-Atlantic was $3.8 million for the second quarter resulting in a 2.7% increase in rental revenues and also with growth across all product lines on an organic basis.

Our rental business continues to be impacted by weakness in Florida, Southern California, and the Mid-Atlantic, which are all still our most challenging markets. Rental revenues outside of these three markets grew 10.2% from the second quarter of 2007. Our overall dollar return was 37.5% for the second quarter of 2008 as compared to 41.5% for the same period in 2007.

As we've stated on our previous calls, our dollar returns are lowered by the rental operations in the Mid-Atlantic. We continue to make progress on transitioning their rental operations to more of a rent-to-rent focus rather than a rent-to-sell focus. The Mid-Atlantic's performance alone accounted for approximately 160 basis points of the decline in our dollar returns. The remaining decline in dollar utilization is due to lower time utilization and rental rates.

Our average time utilization for the quarter was 67.9% as compared to 69.1% a year ago. Utilization of our aerial fleet increased 100 basis points over the prior year as a result of strength in our aerial markets outside of Florida and Southern California and the positive results from de-fleeting these markets.

Earthmoving time utilization continues to be negatively impacted by our Mid-Atlantic region and our utility lines. Utility equipment has stronger ties to the residential market. Cranes remain highly utilized but continue to be impacted by lower demand for boom trucks.

Rates on average and excluding any impact from the Mid-Atlantic declined 2.9% over the prior year. Our aerial rates declined 3% over the prior year, again driven primarily by Florida and Southern California. Crane rental rates during the quarter declined 2.6% over the prior year due to lower rates on boom trucks. We continue to see positive rate increases on rough terrain cranes, but these increases were offset by rates on new rental contracts for boom trucks. Earthmoving rental rates declined 2%, which is primarily attributable to the utility line or smaller earthmoving equipment.

New equipment sales grew 27.4% over the prior period including $20.4 million of new sales from the Mid-Atlantic region. Also, the demand for cranes remains strong. On an organic basis, new sales of cranes and lift truck equipment increased and were partially offset by a decline in new earthmoving and aerial sales year over year.

Used equipment sales increased approximately $12.5 million or 36% including $9.5 million of used equipment sales from the Mid-Atlantic. On an organic basis, all product lines increased year over year with the exception of used earthmoving equipment.

Our parts and service business continues to show solid growth at 20.3% or $7.9 million on a combined basis due to increased demand in revenues from the Mid-Atlantic of $6 million for the quarter.

Our total gross profit margin decreased to 28.5% as compared to 30.5%. The margin decline is due to a 15.9% gross margin on $40.6 million of revenues from the Mid-Atlantic operations. Our gross profit margin exclusive of the Mid-Atlantic increased to 30.6% in the second quarter as compared to 30.5%.

Next, I would like to discuss gross margin by each segment to better explain the changes. We experienced declines in rental gross margins to 49.3% from 50.9% in the prior year. Rental depreciation has increased $3.7 million or 16.6% resulting from growth of the fleet including fleet associated with the acquisition and the aging fleet.

Depreciation expense was 34.6% of rental revenues in the current quarter as compared to 32.1% in the prior year. As we've mentioned, our rental business has been impacted by the Mid-Atlantic's focus on distribution versus rentals. Rental growth margins for the quarter exclusive of the Mid-Atlantic results were 50.9%, which were consistent with the prior year. Partially offsetting these declines, maintenance and repair expenses improved as a percentage of rental revenues by approximately 40 basis points to 12.6%.

Margins on new equipment sales decreased to 12.8% from 12.9% a year ago. Margins on new sales of $20.4 million in the Mid-Atlantic were 14.3%. Our overall gross margin was impacted by a decline in used equipment gross margins to 22.7% from 24.2%. Used equipment margins declined primarily due to lower margins on fleet sales in the Mid-Atlantic due to the fair value adjustments required by purchase accounting at the time of the acquisition.

Margins on both parts and service revenues remain strong and had little to no impact to our overall gross margin in comparison to the second quarter of 2007. Parts gross margins increased to 29.1% from 28.8%, and service gross margins increased to 64.6% from 62.7% due primarily to revenue mix.

Gross margins on other revenue, which is primarily related to equipment support activities such as hauling, freight, and damage waiver decreased to 0.3% from a gross margin of 8.5% in the prior year. The decline relates primarily to increased fuel costs and is also due to increased hauling costs associated with de-fleeting our softer markets.

Slide 10 please. Income from operations increased to $34.9 million from $32.9 million. Our weaker markets continued to impact our overall performance, but we are beginning to realize improved financial performance as a result of de-fleeting and previous cost reductions. The Mid-Atlantic operations improved significantly at the EBIT line since the first quarter. The Mid-Atlantic contributed $2.1 million of income from operations. The EBIT contribution from our Southern California and Florida operations combined declined year over year by approximately $2.5 million. However, despite declining revenue since the first quarter of 2008, operating margins have improved. In addition, rental depreciation increased $3.7 million. Non-rental fleet depreciation and amortization of intangibles increased $1.5 million over the prior year's quarter.

Proceed to Slide 11. Net income was $16.1 million in the current period as compared to $15.2 million in the prior year on a lower effective tax rate of 37% versus 37.6% in the prior year. For the quarter, interest expense increased $600,000 to $9.5 million over the prior year as a result of maintaining higher average borrowings under our senior secured credit facility. We have repurchased a total of 2.9 million shares or $45.8 million of common stock in the open market since the initiation of our buyback program.

Slide 12 please. EBITDA increased to 12.2% as compared to the second quarter of 2007 with margins decreasing to 22.9% from 24.7%. The Mid-Atlantic contributed $4.6 million of EBITDA in the second quarter or an 11.2% margin. These results reduced our consolidated margins by 190 basis points. Our EBITDA margin was 24.8% for the second quarter excluding the Mid-Atlantic results. We continue to generate strong cash-on-cash returns. On an LTM basis, our cash-on-cash return was 31.4%.

Next, Slide 13. Our SG&A costs decreased as a percent of revenues to 16.2% as compared to 16.5%. SG&A dollars increased $7.5 million to $45.9 million with the Mid-Atlantic contributing $4.5 million of this increase and an additional $800,000 amortization of intangible assets acquired in the acquisition. The remaining increase exclusive of the Mid-Atlantic is primarily related to an increase in employees' salaries and wages and other employee expenses and facility-related expenses which are all costs associated with the growth of our Company.

And last, Slide 14. Our gross fleet capital expenditures for the quarter were $55.9 million and net fleet capital expenditures were $20.2 million. Our fleet at the end of the quarter was $803.3 million, which is flat with our original equipment cost at the beginning of the year. Gross PP&E CapEx for the quarter was $8.5 million and net PP&E CapEx was $7.9 million. Our fleet age at the end of June was 31.2 months as compared to 36 months a year ago.

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.

Thank you, Leslie. If you would go to Slide 15. Today we are dealing with tremendous macroeconomic uncertainty. The outlook for the overall economy in the non-residential construction markets has progressively weakened. Due to these factors and a material change to our fleet plan from our original forecast, we are revising our annual guidance as follows.

We now expect revenues in the range of $1.094 billion to $1.108 billion. We expect 2008 EBITDA in the range of $247 million to $255 million, and we expect EPS in the range of $1.57 to $1.71 based on an estimated 35.8 million diluted common shares outstanding, which reflect our stock repurchases through the end of July.

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

Thank you, sir. (OPERATOR INSTRUCTIONS.) We'll go first to Jamie Cook with Credit Suisse.

Hi. Good morning.

Good morning.

Just a couple of questions. Can you guys first give me an update for the full year what you're expecting J.W. Burress to contribute on a revenue and EBIT basis versus where we were before as I think about your new guidance?

Jamie, I think the second quarter they were in the $40 million range on revenue, which was a big increase for them from the first quarter. Their equipment sales and rental purchase conversions were very strong. I don't know that that'll be a run rate for the third and fourth quarter. I would think more somewhere in the middle of that $30 million to $40 million range would be more realistic.

Okay, and then just take the same implied margins or should I see margins are down, as well?

I would -- I don't anticipate margin deterioration there.

Okay, and then just my next question. You mentioned with some of the OEs that you're dealing with that they're having inventory issues. I guess can you give a little more color there? Is it just on the aerial side or are you seeing that in the earthmoving equipment, as well?

Yes, I think the aerial manufacturers businesses have definitely slowed. There's no question about that, and I think the [dirt] manufacturers have seen the same thing. And I think if you listen to Caterpillar's reports, their domestic business has softened and they're really being carried by offshore business right now. The one area that demand is just phenomenal is on the crane side. Crane manufacturers really aren't meeting the demand right now. So, it's basically aerial and dirt manufacturers.

And any idea when you think these inventory issues sort of work themselves through?

I don't think it's going to take long because I think the aerial manufacturers are being very disciplined in their approach right now. I don't see them doing anything to try and force equipment into the marketplace and keep the factories running. I think they're taking a disciplined approach, and I think they'll deal with their inventory situation rather quickly.

All right, and then just my last question and I'll get back in queue. I think you mentioned that your rental rates were down 2.9% and just from hearing what some of the other competitors are saying, I think URS -- I'm sorry, United Rentals is more 1.5. I think Triple R is more like down 0.5, so just your rental rates seem to be declining more than your peers. Do you have any idea why or is it concentrated within one geographic area that's really pulling down the rental rates?

Well, no question the bulk of our rate pressure is coming out of Florida, Southern California, and the Mid-Atlantic. I mean, those are the toughest markets. And I would also point to -- it's product specific. We've seen a lot of rate pressure on our boom trucks. If you look at our crane rates, we're quoting crane rates being down, but that's all in boom trucks. Our rough terrain crane rates are up around 6%. So the pressure we're seeing there is in boom trucks, and that's because the drivers of the boom truck business are residential markets and commercial construction markets. The drivers of our other crane business is the industrial sector. So, it's somewhat product specific and it's also regional. Our mix is so different from what other people are reporting I don't know that that's a real meaningful comparison.

All righty. Thank you. I'll get back in queue.

We go next to Henry Kirn with UBS.

Good morning, guys.

Good morning.

Quick question on the crane market. How far out do the orders extend to and how much longer do you think the cycle can last? I mean, it's already -- it sounds like it's now past the peak on the boom truck side, but how much longer do you see for rough terrains and some of the other categories?

Well, just don't try and relate the boom truck markets to the rough terrain and lattice boom markets because they're totally different drivers. I think Manitowoc is looking for growth in their crane business through '010 and we concur with that. The drivers of our hydraulic crane business, rough terrains, ATs, and lattice boom cranes -- it's petrochemical, it's oil patch, it's energy, and I just don't see anything that's going to change that environment in the near future. So we think that's going to stay very strong for the foreseeable future.

Okay. And as you look at your overall fleet today and toward where you're looking to go by the end of the year, where are you looking to go for fleet age and original equipment costs by the end of the year and can you give a little color around where you'd be looking to de-fleet?

Sure. Obviously, we won't be de-fleeting in cranes. If anything, subject to availability we'll grow our crane fleet somewhat, but we will be significantly reducing our capital spending on our aerial fleet and earthmoving fleets, so our original plan called for some modest fleet growth to the tune of $25 million or $30 million this year and now we're looking at maybe bringing our fleet down $25 million or $30 million, and that's primarily in the area of aerials and earthmoving equipment.

Okay. Thanks a lot, guys.

We go next to Seth Weber with Bank of America Securities.

Thanks. Good morning, everybody. Couple of clarifications. Just on the rental fleet, how much of the crane fleet is actually boom trucks versus rough terrains or crawlers? Can you give us that number? And how much of the total rental fleet is aerials?

The total rental fleet is something north of 60% aerials.

About 59% aerials. Right.

Yes, right. Our boom trucks, I'd have to break it out. Unit-wise I think we have about 150 units of boom trucks in our fleet now. Those are obviously smaller dollars than our other crane products. I'd have to get that for you. I don't have it on front of me.

Okay.

We can probably get that for you.

But it's enough to skew the -- I mean, it's surprising that it's enough to skew the overall crane rate -- rental rate bucket to be negative?

Well, let me explain why that is. We calculate rate increases or decreases only on new contracts that are opened in a period. So, during the second quarter, we had very high utilization, extremely high utilization on our rough terrain cranes. And we just in that time period had much more new contracts on boom trucks than we did on our rough terrain cranes, and that's why it skewed that. We only calculate rate increases on newly-opened contracts.

Okay. Some of your competitors have talked about trying to lock up equipment for longer periods of time, and I think you've actually talked about this, as well on past calls. Is that still your strategy and how does that affect rates? Are you trying to lock in equipment at lower rates or when you're lock in these longer term contracts, is that at a higher rate and lower rate? Can you talk about that a little bit, just in general?

Sure. Typically, when you go on a big project that's going to last a long time and you lock equipment up you can afford to take a lower rental rate. I mean, there's no question about that. You end up for a given period of time with 100% time utilization. You handle the equipment a lot less, so you're maintenance cost goes down. So, you can afford to take a lesser rate on a long-term project. Our position has always been that we like long-term projects, so our approach has not changed there. Typically, today the average length of a rental contract for us is about 45 days. So, our business is weighted to longer-term contracts. That also varies a lot by product type. Cranes typically stay out in longer duration than some of our other products do. But, we like long-term contracts. No question.

Okay. And just two quick follow-ups. Are you planning to close any stores as part of this strategic review of your business at this point?

We're not looking at store closures. We might be looking at some store consolidations down the line. We've got some markets where we have stores in close proximity so there may be some consolidation, but we're certainly not looking at exiting any markets.

Okay. And then last question. Can you try and strip out for us how much of your business is actually industrial? I don't know how you would define it, but do you have an industrial bucket versus pure construction?

I'm very comfortable, Seth, that the industrial sector drives at least half of our revenue and industrial being petrochemical, oil patch, mining, and energy sectors.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS.) We'll go next to Philip Volpicelli with Goldman Sachs.

Thank you. This is actually Jason [Mulick] in for Phil. How are you doing?

Fine. How are you?

Good. Just one quick housekeeping question. The floor plan financing, what was the balance at the end of the quarter?

$153 million.

Okay. Great. And as far as the used equipment market, have you guys still been seeing pretty good strength on that side, and are there any areas -- I know earthmoving has kind of been a little bit weaker in the past -- any areas that are still showing strength versus weakness?

We're pretty much saying strength across all of our used equipment product lines. We're very pleased with the residual values and the way pricing is holding up.

Okay. Great. And then as far as just kind of CapEx, I know you mentioned a little bit that you're probably planning to grow parts of the fleet and shrink parts of the fleet. Specifically cranes, should we expect a good portion of the CapEx to go to the crane segment?

Yes. Any growth CapEx that you see from us will be on the crane side. Again, looking at aerials and looking at earthmoving equipment, we intend to reduce our capital spending there significantly.

Okay. And then it sounds like you spent about $45 million total on the share repurchase plan so far. The press release mentioned that you could use free cash flow to continue that or also to pay back debt. How are you thinking about that decision, and I guess the debt you paid back, should we just assume that would be the revolver or would you think about going to the open market for the bonds?

Yes, I think at this point, and we'll be looking at our options there, but at this point we would be paying down our revolver and/or repurchasing shares. So, we're going to get with our board and make those decisions and do what we think is in the best interest of our shareholders.

Okay, and then just the last question as far as from your guys' standpoint, are there -- when clients -- if they end up canceling orders, is there a system in place where they get penalized for that or is it -- they just have to give you a certain notice? And then on the other end, when you guys are ordering, like cranes for example, how much notice to you have to give them and is there a penalty if you decide the demand isn't there let's say next year or something like that and you just want to cancel the order?

I don't know that there's anything written or any really policy on that. That has not been an issue for us. We have not been getting orders canceled that are in place, and I don't anticipate that happening. The bulk of our equipment sales to date, 60-plus % of our new equipment sales are on cranes, and I can tell you nobody's canceling cranes because they can't get enough of them. So, I really don't see that being a major issue. And other than cranes, we have very little new product on order right now.

Okay. And then just following up with that, as far as in the last downturn, do you have a sense that that became an issue as far as ordering -- canceling of orders or was there enough visibility that it wasn't an issue?

The last downturn, frankly, I didn't see a lot of orders canceled. And if you go back to '01, '02, '03, I just think we're in a whole lot better position today than we were there. Again, I think the manufacturers are really taking a disciplined, prudent approach to this. I don't see them trying to force equipment into the marketplace. I think they're cutting back their production to deal with this. As you know, the rental companies are taking a disciplined approach. Everybody that's reported is reducing their capital spending and I think paying real close attention to what's going on here, so I don't think we're going to develop any kind of capacity issue this go around.

Okay. Great. All right. Good luck.

(OPERATOR INSTRUCTIONS.) We'll go next to Chris Daugherty with Oppenheimer & Co.

Good morning. I was just wondering, as you sort of maybe adjust your fleet in terms of mix, what is the -- is there any big discrepancy with dollar utilization between pieces of equipment?

Oh, absolutely. Our lowest dollar returns or dollar utilization is in our crane business. Now, it carries a high gross margin. It's a very long life asset. It has very low maintenance costs, and it has outstanding residual value. So, on a life cycle basis, it's a very profitable asset for us, but the dollar returns are lower. Aerials and earthmoving have very strong dollar returns for us. Lower residual values than the cranes have, but still, it all sorts out. But, yes, you have significant differences between product lines.

And going to sort of the Mid-Atlantic, I know you sort of called out that the gross margins there were much less, almost half of what they were for the rest of the business, but how much of that business is new sales versus rental? I know some of it I think they were doing more of rent to own. But, if I look at their gross margin of 15.9% and look at what you're getting on a new equipment sale basis, it actually looks a little bit better. So, I was just wondering if you could -- how much improvement is really there?

Oh, I think we have huge opportunity there on the rental side of their business. Their rental business is a much lower percentage of their overall revenue than the rest of our company and that's why their margins are lower. Rentals has a 50% gross margin. Equipment sales, I think they reported a 14% gross margin. So, their revenue mix is very different from ours and we're working very hard to develop their rental business and get them in a rental profile and to replicate our revenue mix. And when we do that, their margins will replicate ours.

And that's what I'm trying to get an understanding. It's not as much about efficiencies. It's more about changing their model?

Changing their business model. They're a distribution model right now as opposed to a rental business.

Their new equipment sales were about 50% of their revenues for the second quarter and their rental business was less than 10% of their total revenue. So --.

All right.

It's a revenue mix issue.

And then lastly, just looking at your inventory, it's been running high and it seems as if cranes are such a high percentage of your new sales and seemingly if they're on allocation, you would think that as soon as one comes in it goes right out the door. What's the ability to adjust your inventory as the markets close down?

Could you repeat the question again? I'm sorry.

I'm just sort of wondering -- I mean, you guys carry relatively high inventory relative to other companies in the sector, and I think part of that is because you have a very high new sale business or a relatively high new sale business. I'm just wondering what your ability to adjust that is as that market might be coming down as we see a slowdown?

Well, I think we can adjust very quickly to that. And you're exactly right. Our inventories are a function of our new equipment sales. We have to carry a certain level of dirt inventory. We have to carry a certain level of crane inventory. Right now a big impact to our inventories is new cranes, but it's a timing issue because all of that stuff is sold. I mean, we may show $25 million or $30 million of crane inventory that shows in our inventory on a snapshot basis, but it's all sold. It's just a timing issue.

All right. That's it. Thank you.

We go next to Jeff Lignelli with Stonebrook.

For free cash flow purposes, what are you guys expecting your net CapEx to be for this year?

We don't give CapEx guidance. I can tell you when we slow our capital spending like we're going to do, we're going to generate significant free cash flow, but we've never given CapEx guidance.

Well, then what was the net CapEx that you kind of viewed last year and order of magnitude, do you think it could be down in this year?

Our net CapEx last year was $136 million.

And then just order of magnitude, I mean, I'm just trying to get a sense for how dramatically you can cut net CapEx through the rental CapEx for the first part of the year. You guys have on the slide it's $34 million. How dramatically can you slow it from the $136 million and still maintain the service quality of your machinery?

Well, we could shut CapEx off in total and maintain our service quality. Our fleet age is 31 months and you look at the type of assets we have in our fleet, we can age that fleet significantly without it causing us any problems. So, we could shut it off and still provide service.

On the aerial business, you have 34.8 months on the aerial business. Obviously, it sounds like you're shutting that down on the spending side. How long can you really shut the spending down until you -- where you really need to maintain some sort of service quality and in addition to machines not breaking out in the field?

Well, we -- our aerial fleet age in certain regions has been north of 60 months in the past and it didn't create problems for us. And I think you've got to look at our product support capabilities and this integrated model with this big service and parts component that we have. We can age these type products a long way and without it causing us problems. If we needed to, I'm very comfortable we could take our fleet age to 50 months in total and not create problems for ourselves.

Is that your expectation, though?

No, absolutely not. I'm not saying that at all. I'm just telling you what we could do. Our fleet will age some as we slow our capital spending, but nothing like that.

All right. I'm just trying to get a sense for how much -- what your plan is now to age the fleet because that's pretty significant on the free cash flow side.

Repeat that, Jeff. I'm sorry?

I'm just saying I'm trying to get a sense for this 31 months that you're fleet age is now, what's your goal given the current environment? What's your goal to take it to realistically because that has implications for how much free cash flow this business is going to generate.

Well, again, we're going to generate very significant free cash flow in '08. We're not going -- our fleet may age a few months in the second half of the year. It's not going to be a lot, and I don't know what to tell you. We're going to look at the environment for '09 and then make some decisions what we do there. But, there's so much uncertainty, the macroeconomic uncertainty, I can't tell you what we're going to do in '09.

Sure. And then just lastly, on the share buyback issue, obviously you're stock, if you use this $250 million of EBITDA, you're trading around three times EBITDA currently, which is obviously a very low valuation and one of your competitors just did a pretty significant buyback and their debt to EBITDA is now over three times and your EBITDA is in the 1.4 range now. What are your thoughts now on actually buying a significant amount of stock given the free cash flow this business is going to generate with the CapEx decline relative to maybe a less certain outlook for the economy now?

Well, we certainly still have an appetite for stock repurchases. And as I stated, we're going to get with our board and evaluate the options, and the two options are paying down debt and/or repurchasing shares. So, we have a share repurchase plan in place and we're going to be looking at that going forward.

Great, but I know you guys are buying shares back, but you're not really buying it back in any kind of significant way so far relative to your competitors and the diluted share count's not really going down that much. So, I'm just saying is now the time when you would consider doing something significant given the future cash flow or are you going to say well, that's offset by the economic uncertainty now?

Well, one, we're limited by our indentures on how much we can do in a given timeframe, and I think we've been buying as much as we can. And again, going forward, we're going to weigh our options versus what's going on from a macroeconomic standpoint and we're going to make decisions that we think are in the best interests of our shareholders.

Thank you.

We'll go to a follow-up from Chris Daugherty with Oppenheimer & Co.

I'm following-up to the prior call. Leslie, what is the [RP] basket currently?

We have about approximately $35 million after the second quarter in the basket.

All right. And then in terms of the -- your decision to start maybe possibly reducing the fleet, when did you see that? If your original thought was maybe growing the fleet $20 million to $30 million, now it's down $20 million to $30 million, when did you see this coming and how quickly can you pull back your fleet? I mean, what's the lead time between orders and deliveries?

Well, again, I think that we've seen a general softening in the overall macro environment since the beginning of the year. I mean, there hadn't been a whole lot of good news out there. We're very fortunate with our heavy exposure to the industrial sector and that's a big driver of our business and it's certainly been very good for us. But, we can make those decisions and we can adjust very quickly. And what we've really been doing is just not continuing to order equipment. So, we have very little equipment coming right now. And our new inventories are coming down, so I think we have the ability to change our fleet and grow it or reduce it on a very short-term basis.

All right. Thank you.

And with no other questions, I'd like to turn the call back to management for any additional or closing comments.

Well, I appreciate everybody being on the call. Without question, we are in a more difficult environment, and I think we're doing the appropriate things to make sure that we continue to deliver positive results and we're going to do just that. So, I look forward to talking to you on our next call. Thank you.

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