H&E Equipment Services Inc (HEES) 2006 Q3 法說會逐字稿

Good day and welcome today's H&E Equipment Services third quarter 2006 conference call. [OPERATOR INSTRUCTIONS] At this time I would like to turn the call over to Mr. Kevin Inda. Please go ahead sir.

Thank you Matt, and welcome to H&E Equipment Services' conference call to review the company's results for the third quarter, ended September 30, 2006, which were released yesterday. During today's call, we will refer to certain non-gap financial measures and we've reconciled these measures to gap figures in our earnings release, which is available on our website at HE-Equipment.com. Conducting the call today will be John Engquist, President and Chief Executive Officer, and Leslie Magee, Chief Financial Officer and Secretary.

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 in 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 statements. These risk factors are included in the company's annual report on form 10-K for the year ended December 31, 2005 and our second quarter 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, 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 turn the call over to John Engquist.

Thank you Kevin and good morning everyone. I'm going to start off with a review of our financial performance and key achievements for the third quarter and then discuss the trends in our business and our outlook for '06. I will then turn the call over to Leslie for a detailed review of the third quarter financial results and at that point we'll be glad to take questions.

We're extremely pleased with our third quarter results as the momentum of the business throughout the first half of this year has clearly continued through the third quarter. Non-residential commercial construction activity continues to be extremely active in the markets we serve and we believe spending on the equipment and services we provide will remain strong. We believe we're in the right markets with the right construction equipment and services and the right integrated business model and associated core strategies to continue to perform at a high level.

The third quarter once again resulted in record revenues for our company. While the loss on early extinguishment of debt significantly impacted our earnings this quarter, as we expected, the core fundamentals of our operations remain very strong. Our total revenues increased by 37.4% to $204.1 million. This is the highest level of quarterly revenue in our company's history. Our operating income increased 86.5% to $34.9 million, compared to $18.7 million a year ago. Our adjusted EBITDA increased 66.7% to a record $57.5 million. That is a $23 million increase from a year ago. We also increased our overall gross margin to 33.7% from 31.5% in the third quarter a year ago. Based on our strong third quarter performance we are also increasing our guidance for the remainder of the year. I will review our revised guidance at the end of my remarks.

Our strong performance was and will continue to be driven by several key elements. First, the non-residential construction markets where we operate continue to be very strong. Both our Gulf Coast and Intermountain regions are experiencing tremendous demand for our equipment and services. We're also experiencing strong demand in Southern California. I'm going to point to some specific drivers of our growth in the markets we serve.

In our Gulf Coast states, the Petrochemical sector continues to be very strong, and the clean up and rebuilding efforts associated with last year's hurricanes are certainly driving a substantial amount of construction activity in this region. We anticipate the hurricane related activity to continue for some time, as the majority of the work thus far has been clean up and levy repair, with demolition, reconstruction and more levy work yet to come. Demand for heavy earth moving equipment remains particularly strong in Louisiana and Arkansas, related to road infrastructure work, levy work and other construction projects. Our dirt business is very stable and our margins are holding up well due to our geographic presence in the right markets and our integrated sales and service model.

The mining industry continues to contribute to our growth in our Intermountain region, along with very strong non-residential construction. The mines use every type of equipment we provide to keep their operations up and running around the clock. Our West Coast operations continue to see strong demand from non-residential construction. As we continue to support these operations with our sales and marketing focus, we expect the Eagle operations to continue to generate revenue and earnings growth and provide upside potential.

Second we have a very unique competitive position that clearly differentiates us in the market place. Our integrated platform of products and services, operating experience and well developed infrastructure continue to be a competitive strength for us. Third and very importantly, we continue to focus on several core business strategies that have contributed to the continued success in this business. I'm going to update you on these strategies.

We increased our rental rates again during the third quarter, up 5% on average. As a reminder, we raised rental rates 12% in '05, 16% in the first quarter of '06 and 11% in the second quarter of '06. As we anticipated, the increase was down this quarter as we forecasted rate increases to moderate somewhat the second half of this year. Nonetheless, we still anticipate a near double-digit rate increase for the full year. Rental revenues were up across all product lines during the quarter, resulting in a 33.5% increase in total rental revenues from a year ago.

We continue to leverage our integrated model to capture a greater percentage of our customers' total equipment spending, whether it's sales, rentals or parts and service. We continue to take a very measured approach to expanding our rental fleet. The average size of our rental fleet in the third quarter is measured by original equipment cost and including the fleet acquired in the Eagle acquisition, increased by approximately $129.7 million, or 25.7% from the average fleet size in the third quarter of 2005. For the same comparable period, we grew our rental revenues by approximately 33.5%.

Given our returns, we are now positioned to more aggressively pursue market share in some of our territories. Expansion into the high growth market areas continues to be a key strategy for us. The Eagle acquisition is now substantially integrated into our operations and we're beginning to leverage our presence on the West Coast, as we believe there is a significant opportunity to grow our business there. We will continue to evaluate expansion of our business into desirable markets through both greenfield startups and selective accretive acquisitions.

Before I turn the call over to Leslie, let me address our guidance for the remainder of the year. We believe our outlook remains very positive due to the factors I discussed previously. As a result and based upon currently available information, we're increasing our guidance we provided with our second quarter results. Let me briefly summarize our revised guidance as stated in our news release.

We are increasing our 2006 revenue outlook from our previously announced range of $750 million to $780 million to a range of approximately $780 million to $795 million. We are revising our 2006 EBITDA from a previous range of $141 million to $151 million to a revised range of approximately $151 million to $161 million. Our '06 EBITDA guidance includes the impact of these non-recurring charges which are comprised of the $40.8 million loss on early extinguishment of debt related to the company's debt restructuring, which was recorded this quarter, and a one-time charge of $8 million to SG&A expenses associated with the termination of a management services agreement concurrent with our initial public offering recorded in the first quarter of '06. In addition, we expect adjusted EBITDA in the range of $200 to $210 million, which is adjusted to exclude the impact of the aforementioned non-recurring items totaling an estimated $48.8 million. Previously announced adjusted EBITDA guidance was a range of $190 million to $200 million.

We are also increasing our '06 earnings guidance from the previously announced range of $0.55 to $0.65 per share, to a revised range of approximately $0.75 to $0.82 per share, based on 37 million shares outstanding. Our earnings guidance is reflective of the solid strength in our business, but is also offset by the impact of these significant non-recurring items. The impact of these non-recurring items to our annual earnings guidance is an estimated reduction of $1.04 per share after tax. Overall we're very pleased with our third quarter results and hope our investors are as well. Our entire company is focused on generating solid results for our shareholders in '06 and into the future. I'm going to now turn the call over to Leslie and then we'll be glad to take questions.

Thank you John. I'll first review our third quarter highlights as compared to the third quarter of 2005. Our total revenues were $204.1 million compared to $148.5 million for the same period in 2005, an increase of $55.6 million or 37.4%. Our revenues increased for all reportable segments primarily as a result of increased customer demand for both our products and our services.

The primary driver of equipment sales was continued robust demand for both new and used cranes and aerial work platforms. Our revenues from equipment rentals for the quarter increased $16.9 million or 33.5% to $67.3 million from $50.4 million. The increase is primarily a result of higher rental rates and increased volume as a result of maintaining a larger average fleet size. Rental revenues increased for all product lines. Revenues from aerial work platforms increased $13 million, cranes increased $600,000, earthmoving increased $1.2 million, lift trucks increased $1 million and other equipment rentals increased $1.1 million. At the end of the third quarter, the original acquisition cost of the rental fleet was $648.1 million, up $137.5 million from $510.6 million at the end of the third quarter of 2005. I'd also like to remind you that we acquired approximately $71 million as measured by our original equipment costs through the Eagle acquisition in the first quarter of this year.

Our dollar utilization increased to 42.4% from 39.9% a year ago. Our new equipment sales for the quarter increased $24.5 million or 67.7%, to $60.7 million from $36.2 million. Sales of new cranes increased $18.3 million, aerial work platforms increased $3 million, new earthmoving sales increased $3.1 million and new lift trucks increased $1.1 million. Other new equipment sales decreased $1 million.

Our used equipment sales increased $2.9 million or 10.8% to $29.7 million, from $26.8 million a year ago. For the quarter our used equipment sales from the fleet were approximately 148.2% of net book value as compared to 135.8% of net book value last year. Our parts sales increased $4 million or 23.5% to $21 million from $17 million. Our service revenues increased $3.7 million or 35.6% to $14.1 million from $10.4 million last year. We continue to see strong growth in our product support business due to increased customer demand and we also continue to focus on recruiting technicians to meet the service demand.

Our total gross profit was $68.7 million compared to $46.8 million a year ago, a $21.9 million or 46.8% increase. Gross margin remained strong as a result of improved margins in rentals, used equipment sales and service operations from a year ago. Gross margins remained essentially flat for both new equipment sales and part sales from a year ago. Our total gross profit margin was 33.7% as compared to 31.5% a year ago.

Equipment rentals gross profit increased $12.3 million or 51.3% to $36.3 million from $24 million last year. New equipment sales gross profit increased to $7.4 million from $4.4 million and used equipment sales gross profit increased to $8 million from $6.4 million. The increase in new equipment sales gross profit is a result of increase in customer demand and the mix of equipment sold, and the increase in used equipment sales gross profit is a result of increased customer demand, improved margins and also the mix of equipment sold.

Parts gross profit was $6.1 million compared to $5 million and service gross profit was $9 million compared to $6.4 million from the year ago period. The increase in both parts and service gross profit is primarily a result of higher sales volume and the mix of parts sold. In addition, our service margins have improved as a result of our continued focus on increasing our charge-out rate. Our income from operations was $34.9 million, an 86.5% or $16.2 million increase, from $18.7 million a year ago, reflecting a 450 basis point improvement in operating margins as a result of improvements in both gross margin and SG&A.

As previously announced on August 4th, 2006, we completed our cash tender offer and consent solicitation for our 11 1/8 Senior Secured Notes due 2012 and 12 1/2 Senior Subordinating Notes due 2013. We also closed on our previously announced private offering of $250 million aggregate principal amount of 8 3/8 senior unsecured notes due 2016.

In connection with these refinancing transactions, we recorded a one-time loss on early extinguishment of debt during the quarter of approximately $40.8 million or approximately $32 million after tax, which reflects payment of tender premiums and other estimated costs in connection with the tender offering consent solicitation, combined with the write-off of unamortized deferred financing costs and unamortized original issue discount on the note. Our earnings results reflect this non-recurring item.

As a result of the loss on early extinguishment of debt, we recorded a net loss for the quarter of $11.5 million or a loss of $0.30 per share, based on 38.1 million shares outstanding for the third quarter, compared to net income of $8.2 million or $0.32 per share, based on the share count of 25.5 million. As John mentioned, if you excluded the loss on the extinguishment of debt, the fundamentals of our business were very strong.

Selling, general and administrative expenses were $34.1 million, compared to $28.2 million last year; a $5.9 million or 21% increase. The increase was primarily related to costs associated with higher revenues and headcount such as wages, incentive compensation and employee related benefit costs. As a percentage of total revenues, SG&A decreased to 16.7% from 19% a year ago, reflecting operating leverage in our business. Adjusted EBITDA increased $23 million or 66.7% to $57.5 million from $34.5 million in the third quarter of 2005. Adjusted EBITDA as a percentage of total revenues increased to 28.2% compared to 23.2% in the third quarter of 2005. Our rental fleet CapEx spending in the third quarter was $71 million of gross CapEx and net CapEx of $49 million. Non-rental fleet CapEx in the third quarter was $3.2 million on a gross basis and $1.8 million on a net basis.

At the end of the third quarter, the average age of our fleet was 41 months, which is slightly younger than our fleet age at the end of June. The majority of the de-aging has occurred by design with the fleet assigned to our Eagle operation. The Eagle fleet has de-aged in excess of one year since our acquisition in early 2006. As you can see we made significant progress in lowering Eagle's fleet age, and we've done this through a combination of disposing of older fleet and adding new fleet.

For a brief balance sheet summary, our total assets were $733 million. The net book value of our rental fleet was $429.2 million. Total debt consisting of aggregate amounts outstanding on the Senior Secured Credit facility, Senior Secured Notes, Senior Unsecured Notes and other notes payables, was $283.1 million. Our total debt to adjusted EBITDA on an annualized basis has declined to an historical low of 1.4 times. As of September 30th, 2006 we had borrowing capacity under our $250 million Senior Secured Credit Facility of $215.5 million after actual borrowings and letters of credit totaling $34.5 million. Since the paydown of our Senior Secured Credit Facility in connection with our IPO in February of this year, we've had no borrowings under our Senior Secured Credit Facility until our recent debt refinancing in early August. Before opening the call to questions, I would like to clarify the details behind both our effective tax rate and our weighted average shares outstanding, which are reflected in our earnings guidance we've provided.

First, our third quarter effective tax rate was 21.6%. Our effective tax rates for the first and second quarter were also approximately 21%. We expect that our full year effective tax rate will be consistent at approximately 21.5%. Our 2005 effective tax rate was 0% as a result of evaluation allowance on our deferred tax assets. Due to an increase in our estimated 2006 taxable income resulting in higher state income tax and federal alternative minimum tax, the valuation allowance was no longer appropriate and the valuation allowance was reversed in the first quarter of 2006. Our estimated full-year effective tax rate for 2006 is less than statutory rates as a result of the reversal of our valuation allowance in Q1 and the one-time charge associated with our debt refinancing in Q3.

Secondly, our weighted average share count differs significantly based on a quarterly weighted average and on an annual weighted average. Our estimated annual weighted average share count is impacted by the date of our IPO in early 2006. As a result, our estimated share count used for our annual earnings guidance is $37 million, which is reflective of the partial year that our 12.6 million shares issued in connection with our IPO are outstanding. Our quarterly weighted average share count for quarters beyond the first quarter are not impacted by the timing of the IPO and based on a weighted average calculation, we have approximately 38.1 shares outstanding for the subsequent reported quarterly period.

In summary we're very pleased with our third quarter results and outlook for our business that we discussed today. With that Operator, we'll now move to the Q&A session if you please provide the instructions.

[OPERATOR INSTRUCTIONS] We'll go first to Phil Gresh with JP Morgan.

Hi guys, how are you doing?

Just fine how are you?

Good morning.

Good. First, real quick, can you give us the impact of Eagle on rental revenues and gross profits and overall revenues and gross profits?

Sure. The Eagle revenue contribution - did you specifically ask for rental contri - revenues?

Both rental and overall.

Okay. Rental revenue for Eagle was $8.2 million. Total revenues was $10.5 million.

Okay, and gross profit?

Total gross profit was $5.1 million and rental gross profit was $4.8 million.

Okay, thanks. And then, my question is, the mid point of your full-year guidance seems to imply only a 7% increase in fourth quarter revenues, which would be a substantial slow down from previous quarters. Granted, you have tougher comps relative to last year, but looking at Eagle, that should add probably about $10 million in revenues for the quarter, which would be a 5% increase. So are you expecting any kind of slowdown otherwise?

No we're not. I mean, I think the drivers of our business are very strong and we're not anticipating a slow down. I think that you're taking a look at this sequentially?

No, this is year-over-year.

No. I mean, as you said, we are going up against much more difficult comps, so I don't think we can continue to show the kind of growth we have, but the drivers of our business are very solid and we are not looking for any kind of a slowdown.

Okay. I mean I guess I'm just still a bit confused with only a 7% increase year-over-year in revenues. I mean, I understand that historically you guys have been pretty conservative with your guidance, when there was nine months left in the year or six months left in the year. But I guess I just expected it to be, kind of -- the guidance to be more in line with what you've been seeing for the past couple of quarters. Are you there?

Yes, I'm here. We're just looking at something.

So I'll be happy to walk through the numbers with you and see exactly where your calculations are coming from after the call if you'd like to do that.

Okay. That's fine. Thanks.

Okay.

We'll go next to David Bluestein with UBS.

Good morning.

Good morning.

A couple of quick questions. First - with the CapEx number in the quarter - did you accelerate it a little bit? And what are you now expecting for the full-year for purchases of rental equipment?

Our gross CapEx did accelerate a little bit in the third quarter. Our gross CapEx was $34 million and maintenance CapEx was $37 million for the quarter.

David, we did accelerate our CapEx somewhat in the third quarter just based on availability. I mean, we needed the equipment and availability has improved somewhat and we were able to get it. But we've certainly been putting that to work and maintaining our time utilization as we do so.

Got you. And so for the fourth quarter we should expect a down year year-over-year in terms of CapEx? A down --?

Well David, we have not been giving CapEx guidance. That's not an area we give guidance on.

All right. Then I suppose looking into 2007 you wouldn't want to comment on whether or not you expect your fleet to continue to grow in '07? I mean, you mentioned you'd said revenue's higher and earning's higher. Are you anticipating fleet growth as well?

Yes. We will have some fleet growth in '07.

But at the pace of '06 or a slower pace?

Certainly no more than the pace we've seen in '06 and it could moderate a little bit.

Okay. And then, hitting that last question, is it possible that we've hit a point in your business where good means flat? In other words, your new equipment sales are running at a pace where '07 might be flat. The dollar utilization might be flat-ish. The price increases might be small and most of the growth comes from the service and parts component of your business. Are the comps that difficult now?

I don't think so David. I tell you, the one that's tough to call is equipment sales and I think at some point in time, demand is going to catch up. We will continue to grow rental revenue. I think we'll continue to see improvement in dollar utilization and I think we'll continue to grow our parts and service business. We've seen phenomenal growth from the standpoint of new and used equipment sales and that might moderate somewhat, but we're going to continue to grow the other aspects of our business. I don't think we've plateaued.

Okay. And at this point last year, I think you had a pretty good sense for what your pricing was going to look like in '06. I remember the number was somewhere around 6%, I think was your original expectation. Do you have a thought on pricing in '07?

David, from a rental rate standpoint, we're going to continue to get price improvements, but it's going to moderate. I mean, it's not going to be 9 or 10%, I can tell you that. It would probably be more like 4 or 5%. But we will see pricing improvement.

Terrific. Thanks a bunch.

You bet.

We'll go next to Jamie Cook with Credit Suisse.

Hi, this is Chase Becker in for Jamie today. Just more of a 30,000-foot view on the commercial construction market. There's been a lot of conflicting reports in terms of '07 and I don't really want to get into your guidance, but when you look at the over all markets in general, you have the benefit of being in the Southern part of the United States. What do you see for '07 in terms of the commercial construction market relative to '06? I mean, do you think that we've hit a peak leading into the mid part of the year?

I do not. I mean, I think we're going to see growth in the commercial construction segment or sector in '07. Most of the forecasts I've seen are, if you average them out, are calling for 6 or 7% growth. And I tell you, if we were to get 6 or 7% growth over what we experienced in '06, things would be pretty good. Again, I think we operate in the South around the Sun Belt and I think the drivers of our business are going to be very strong in '07.

Okay. And then following up on that, I mean, is there any reason to believe, obviously your rental rates have been very strong and you're saying they're going to be double digits for the full year. Is there any reason to expect that you can't at least get high single-digits into next year?

Again, we've pushed rates real hard. I mean, I think we've created a price discipline. That's an area we will never let up on. But those rate increases have got to moderate and I certainly think we can get mid single digit rate increases next year. We're going to try and do better than that and we're going to stay very focused on it. But the rate increases we've seen have to moderate somewhat.

Right, that makes sense. And then finally, if you look at overall, your margins have been fantastic. But if you do get some sort of a slowdown in terms of rental rates and pricing, are you predicting that SG&A, you could potentially leverage that line? Because it looks like right now you've done a really great job year-over-year. Any way that that comes down even more heading into '07?

I think we're pretty - I mean, when you look at our SG&A as a percentage of revenue, I think we've done a pretty good job in that area and I think it's going to stay in the ranges where it is.

Okay. Thank you.

We'll go next to Seth Weber with Bank of America.

Thanks. Good morning everybody.

Hey Seth.

Good morning.

John, could you just extrapolate a little bit on - you made a comment on your prepared remarks, you're going to be more aggressive pursuing market share. I mean, what does that mean exactly? Is that going into new markets and growing share new markets? Is it using pricing more aggressively in your existing markets? Is it just kind of, increasing your presence in existing markets? Thank you.

Yes. Seth, that's a good question. We have really been very focused on rental rates and we've worked very hard to develop a price discipline and we've been successful in that. And in doing so, we've been able to walk away from a lot of business. To get where we've gotten our rates, you have to be willing to do that.

Our rates - our returns are very strong today and we think we're at a point that we can take a very much a rifle approach. We're not going to anything to damage the price discipline that we've developed, but we think we can go out on a specific project basis, be a little more aggressive and we think we can gain some market share. And in doing so, we think the incremental margins we'll get there will be very, very strong. So again, we're not going to change our overall approach, but I think we're at a point where we can be a little more aggressive in gaining some market share.

And are you planning to target new regions, new markets? Or is it just more kind of like building out?

It's building out and it's within our existing footprint.

Okay. And just to follow up, to kind of follow up on the question that David Bluestein was asking, do you have a target age for the rental fleet that you're working towards?

We're comfortable with our fleet age where it is. As Leslie said we have de-aged that fleet somewhat. A lot of that has to do with Eagle. Their fleet had gotten over 60 months, which is older than we wanted and we brought their fleet age down, something in excess of 12 months since we've owned them.

41, 43 months, we're very comfortable with that fleet age. That fleet's got enough age on it where it's attractive to the secondary markets, it's easy for us to sell and yet it's young enough with the type of assets we have in our rental fleet that if we need to at some point, we can age that fleet a long way. So 41 to 43 or 44 months, that's a good fleet age for us. It may drop down to 40 or 39, but it's going to stay in that range.

Okay. Thanks very much.

We'll take our next question from Nigel Coe with Deutsche Bank.

Good morning.

Good morning Nigel.

I just want to attack the rental rate issue from a different, slightly different perspective. If we look at 2Q rental rates and compare those to 3Q, did we see an increase Q-on-Q?

From quarter -- ?

From 2Q '06? I mean, did we see a sequential increase in rental rates?

I have not looked at it from that perspective Nigel.

It's a quarter-over-quarter. I understand now.

Yes.

Yes, we've looked at it quarter-over-quarter. We could take a look at that, but we have not looked at it from that perspective.

Yes. And, obviously, we see a deceleration in growth because the comp's again much tougher. I'm just trying to get a sense of what your seeing for 4Q in terms of rental rate inflation?

Got you. I mean, we can take a look at that.

Okay. And secondly, on the rental margins, your gross margins are above 50% -- comfortably over 50% now. That's pretty close to 'best in class.' Do you think there's scope for that margin to move any higher from here?

I think we've probably got some room. I mean, that's something we're going to stay focused on and we're going to continue to push rates and we're going to continue to negotiate aggressively on our acquisition prices. So, yes, I think we've probably got some room there.

Okay. And just finally, just URI were talking about two things. One, a little bit of weakness on used equipment prices and secondly a little bit of weakness in res. markets service on the construction in California. Have you seen any of that as well and is it impacting you at all?

Well, there's no question that there's some softness in residential markets. That's just not a significant driver of our business at all. If - we have one product that is impacted somewhat by residential and that's telehandlers or reach forklifts --

Right.

-- and we've seen a little softening there. Maybe our time utilization is down a little bit. But if you look at our overall business, it's just not a significant driver and it's had little impact on us.

Okay. And the used equipment prices? Any --?

Our used prices are very stable. I mean our margins are holding up very well. If anything, we've seen a little bit of a shift from used sales or fleet sales to new equipment as we've seen availability improve. For some time now, we've had end users buying good late model equipment out of our fleet because they could not access new equipment. So we've seen a little bit of a shift there as the availability of new stuff has improved, we've seen a shift to new equipment from rental fleet equipment. But that was to be expected. Our pricing, our margins are holding up very well.

Okay, great. And if Leslie, just finally - I missed the net CapEx. The net minimum CapEx. I got the gross but not the net.

Okay, net is $49 million.

Great. Thank you very much.

You're welcome.

[OPERATOR INSTRUCTIONS] We'll go next to Philip Volpicelli with Goldman Sachs.

Thank you very much. With regard to rental rates, United Rentals mentioned that some regions had double-digit rental increase rates increases and others were flat to modest. Can you give us a sense regionally how your rates have performed?

Yes. I think so. We have - the Intermountain region has been very strong for us. The Gulf Coast region has been very strong for us in rates. That's driven a lot by demand and we've got a lot of work left to do in California, with the Eagle acquisition. Their rates are lower than our average rates. We're very focused on that and I think there's a lot of up side for us there. We're very focused on that and working on it. But we've gotten really strong rate increases in the Intermountain region and the Gulf Coast.

And in terms of the moderation, how much of that do you think is attributable to harder comps versus possibly too much equipment versus demand growing at a slower pace in terms of non-residential construction?

Well, I don't - I mean, we don't see demand diminishing in our markets at all, I don't think that's the case. I think it's primarily comps. And we do not think we have too much equipment. I mean, we grew our fleet significantly in the third quarter, but we certainly need the equipment. We've put it to work and we've maintained our time utilization, our physical utilization, so we don't think we have too much equipment.

Great. And in terms of CapEx and the outlook for next year, are there certain fleet types that are lagging or that you may reduce your exposure to? Or increase conversely?

No. I don't see anywhere that I've - if we're over-fleeted anywhere, it would probably be telehandlers. If we reduce spending, that would be the area. Cranes - we couldn't get enough. Cranes are on allocation, they're going to stay on allocation through '07. I would not be surprised if they're not on allocation into '08. Aerials - the availability has improved, but we have a lot of demand there. So if any one product line has any kind of weakness for us, it would be telehandlers.

Great. Thanks guys. Good luck.

You bet.

[OPERATOR INSTRUCTIONS] We'll go next to [Carreau Bertensen] with CIBC World Markets.

Good morning. In terms of commercial construction that's somewhat related to residential construction, like shopping malls, big box retailers, things of that nature - are we seeing any weakness on that front?

You know, we're really not. I guess if commercial - or residential, stays down long enough, at some point in time it's going to impact. We're certainly not seeing that as an issue in our marketplace at this time.

And in terms of the used equipment, some of the auction folks have talked about there's more supply coming into the market -- prices while they're still up a little bit, those prices have moderated considerably and that potentially on earth moving equipment, we might even be seeing some price decreases from elevated levels. Is that something that you're experiencing in your markets?

We are not and I know that URI commented on their call that they've been de-fleeting earthmoving equipment and seeing some price degradation there. Our margins on earthmoving equipment have held up very well. As you know, we have no exposure to the Northeast or the Mid-West -- some of the markets that might have softened a little bit. Our exposure to the earthmoving business is primarily Louisiana and Arkansas and our demand is holding up and our pricing is holding up. Our margins year-over-year on used fleet, I think, have held up very well. We're not seeing degradation there.

In terms of time utilization, perhaps I missed it. Did you give that number?

Excuse me. On what?

Time utilization.

On time utilization.

We're staying right at 70%.

70%. And just in terms of housekeeping, the split between the revolver and letters of credit, the $34.5 million that you had outstanding at quarter end? How does that break down?

There's about $8.3 million in letters of credit.

Thank you very much.

Sure.

We'll go next to Eric Ribner, with Northstar Capital.

Hi. Can you guys discuss within your fleet where you see the strongest pricing opportunities are?

Cranes. And it's just supply and demand. Again cranes are on allocation today, they're going to be on allocation from our manufacturers through '07 and possibly into '08. So we have a lot of leverage there.

How much more pricing do you think you can get out of that.

I don't know. I mean, we have really pushed crane rates hard. I mean, we've had tremendous increases there. It's led any other product that we have. But as long as the demand is like it is and the supply constraints exist, we will continue to push pricing there.

And in terms of the other equipment, what are you seeing for lead times in that equipment? And what are you seeing in pricing from those suppliers?

On the aerial side, availability has improved dramatically, and I will include telehandlers in the aerials sector. I think some of the manufacturers have probably even built a little inventory on the telehandlers side. Most of the aerial products have improved in availability, with a few exceptions in big booms that are still strung out pretty good. But by and large, their availabilities have improved a lot.

As I said, crane availabilities are pushed way out. I mean, you just - if you don't have it on order now for '07, you're not going to get it. And the earthmoving side has by and large improved. That was a very difficult situation a year ago on availability on the dirt side. It's improved quite a bit. We can pretty much get what we need there within a reasonable time frame.

Thank you.

And pricing - for manufacturers; I think it's going to be low single digit price increases by and large. And with the exception of the crane manufacturers, with their supply constraints they may be able to push that a little more.

Thank you.

At this time we have no further questions. I'd like to turn the call back over to Mr. Engquist for any additional or closing remarks.

No. I appreciate everybody being on the call. We look forward to taking to you on the next one. When we sit back and we look at the drivers of our business, we feel real good about what we are, and I think we're going to continue to perform at a high level. Thank you.

That does conclude today's conference call. Thank you for your participation. You may disconnect at this time.