H&E Equipment Services Inc (HEES) 2006 Q4 法說會逐字稿

Good day and welcome to today's H&E Equipment Services fourth-quarter 2006 conference call. Today's call is being recorded. At this time I would like to turn the call over to Mr. Kevin Inda. Please go ahead, sir.

Thank you, Deanna, and welcome to the H&E Equipment Services conference call to review the Company's results for the fourth quarter and year ended December 31, 2006 which were released early this morning. During today's call we will refer to certain non-GAAP financial measures and we reconcile these measures to GAAP figures in our earnings release which are available on our website at h&eequipment.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 and statements containing the words may, could, would, should, believe, expect, anticipate, plan, estimate, target, project, intend and similar expressions constitute forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties which could cause actual results that differ materially from those contained in the 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 the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2006. Investors, potential investors and others 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 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'll 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 fourth quarter and year, then discuss the trends in our business and our outlook for '07. I will then turn the call over to Leslie for a detailed review of the fourth quarter and year '06 financial results and then we will be glad to take questions.

We're extremely pleased with our financial performance in both the fourth quarter and full year as our results demonstrate that the core fundamentals of our operations remain very strong and clearly validate the importance of our integrated business strategy. Our '06 results were especially strong when you consider they include a $40.8 million loss on the early extinguishment of debt we incurred during the third quarter and the $8 million in fees paid in connection with the termination of a management services agreement in the first quarter.

Even though our year-over-year comps were challenging given the tremendous fourth quarter of '05, we closed '06 with excellent growth. The fundamentals of our business are very strong with the level of nonresidential construction activity continuing to expand in the regions we serve.

For the quarter our total revenues increased by 16.2% to $215.5 million and for the year revenues increased 34% to $804.4 million. This is the highest level of quarterly and annual revenue in our Company's history.

Quarterly operating income increased 35.5% to $35.1 million and '06 operating income increased 70.7% to $120 million. Both are also record levels. EBITDA for the quarter increased 37.5% to a record $58.7 million and increased 64% to $214 million for the year. Those are increases of $16 million and $83.5 million respectively.

Our overall gross margin also remained high increasing to 32.5% from 30.1% in the year-ago quarter and increasing to 32.7% for the year from 30.3% a year ago. Net income for the quarter increased 39.5% to $20.5 million. Even with the $48.8 million in non-recurring costs I mentioned above, net income for the year increased 16% to $32.7 million.

We expect 2007 to be a very solid year and I will address our specific guidance at the end of my remarks. Our success for both the quarter and year cannot be attributed to any single factor but rather the same combination of elements that we have emphasized every quarter. Our integrated business model is the right model. By addressing all of our customers' equipment, service and parts needs we are capturing greater market share and thus their equipment and services spending.

Our integrated platform of products and service, operating experience and well developed infrastructure continues to be a significant competitive strength for us. We have focused our operations in high growth markets; nonresidential construction activity where we operate continues to be strong and importantly we expect it to remain strong. All the regions we serve are experiencing solid demand for our equipment and services.

We are also heavily entrenched in several large and growing industries located throughout our operating regions; industries that we believe have long-term growth potential. Significant drivers in our Gulf Coast states include petrochemical sector and oil patch and related businesses. The hurricane protection and rebuilding efforts is another long-term opportunity for us. While we have experienced a lag in activity due to weather and a temporary lack of government funding, the rebuilding will resume and provide opportunities for us for years to come. The mining industry continues to contribute to our growth in the intermountain region along with strong nonresidential construction.

To summarize, we have a proven business model that differentiates us from our competitors, operate in high growth markets and we are heavily embedded in several large and growing industry sectors within our markets. Importantly, I want to emphasize that we see high levels of nonresidential construction activity continuing in the markets we serve.

Combined with the factors above, we continue to focus on several core business strategies that have contributed to our past success and will contribute to our continued success in the future.

Managing our rental rates to maximize revenues and profitability while maintaining a very competitive position is a key priority for us. Throughout '06 on average we increased our rental rates 16% in the first quarter, 11% in the second quarter, 5% in the third quarter and nearly 4% in the fourth quarter. This was very consistent with our expectations as we forecasted rate increases to moderate during the second half of this year.

As we as previously discussed, manufacture availability in most product lines has improved significantly. As a result the supply and demand imbalance that existed for most of '06 has changed which we expect will lead to continued to moderation of rate increases. In '07 we expect rental rate increases in the low single digits.

We continue to be successful in leveraging our integrated model to capture a greater percentage of our customers' total equipment spending whether it is sales, rentals or parts and service and every one of these business segments delivered higher revenues for both the quarter and year.

The measured expansion of our rental fleet is also a key strategy for our business. At year end the average size of our rental fleet as measured by original equipment cost and including the fleet acquired in the Eagle acquisition, increased approximately $132.8 million or 25.4% from the average fleet size at the end of 2005. For the same comparable period, we grew our rental revenues by approximately 31.8%.

Lastly we will continue to evaluate the expansion of our business in high-growth markets through both greenfield startups and selective accretive acquisitions.

In terms of our '07 outlook, we are confident that the strong fundamental drivers of our business combined with our footprint which is in some of the fastest-growing regions of the U.S. will provide significant opportunity for growth in '07. We also believe that our exposure to the petrochemical, energy and mining sectors along with the Gulf region hurricane protection and rebuilding efforts will drive increased demand for our products and services for some time to come.

We are however experiencing significant supply constraints from our crane suppliers which are hindering our ability to meet demand and impacting our first quarter expectations. Our '07 outlook reflects these supply constraints although we expect crane availability to improve throughout the year.

We have experienced much more difficult weather conditions in several of our regions in the first quarter of this year than we had in these regions in the prior year. I would also like to point out that the prior year's time utilization and rates were positively impacted by the initial demand for equipment as a result of hurricanes in the Gulf Coast region. As a result of this, we have experienced year-over-year declines in time utilization through February. We are currently seeing steady improvement in time utilization and when we get beyond the effects of weather and the prior year's positive impact of Katrina; we expect time utilization to return to '06 levels.

We expect 2007 revenue in the range of $900 million to $920 million and 2007 EBITDA in the range of $232 million to $245 million. In terms of earnings per share, we expect to generate $1.63 to $1.85 per share based on 38.1 million diluted common shares outstanding and an effective tax rate of 38.5%. I'd like to reiterate the fact that our '07 guidance is based on a significantly higher effective tax rate and an increase in common shares outstanding given the effective date of our initial public offering in February of '06.

Overall we are very pleased with our fourth-quarter and 2006 results. We believe our business is well positioned for continued success and our entire company is focused on generating solid results for our stockholders in '07 and into the future.

I will now turn the call over to Leslie and then we'd be glad to take questions.

Thank you, John, and good morning everyone. I'd like to go through our fourth-quarter and year-end results in a little more detail. Our total revenues were $215.5 million compared to $185.5 million for the same period in 2005, an increase of $30 million or 16.2%. Revenues increased for all segments primarily as a result of increased demand for both our products and services.

Our revenues from equipment rentals for the quarter increased $11.8 million or 21.8% to $66 million from $54.2 million. The increase was primarily due to higher volume as a result of maintaining a larger average fleet size. In addition, we raised our rental rates on average approximately 3.9% during the quarter as compared to the same period in 2005. Rental revenues increased for all core product lines. Revenues from area work platforms increased $10.1 million; earthmoving increased $1.1 million; cranes increased $1 million; lift trucks increased $700,000; and other equipment rentals decreased $1.1 million.

At the end of the fourth quarter, the original acquisition cost of the rental fleet was $655.2 million up $132.8 million from $522.4 million at the end of the fourth quarter of 2005. I would like to remind you that we acquired approximately $71 million as measured by origional equipment costs through the Eagle acquisition in the first quarter of 2006.

Dollar utilization decreased slightly to 40.1% from 41.4% a year ago primarily as a result of a decline in time utilization compared to the fourth quarter of 2005. As John discussed time utilization was negatively impacted by weather conditions across some of our locations. Also the fourth quarter of 2005 is a challenging comp from several perspectives but specifically related to time utilization. We received an immediate and significant boost due to the hurricanes that occurred toward the end of the third quarter of 2005.

In addition, our Eagle locations have historically had lower time utilization and the fourth quarter of 2006 was impacted by this while the fourth quarter of 2005 had no impact from Eagle given the closing of the acquisition in early 2006.

Our new equipment sales for the quarter increased $11.5 million or 20.4% to $68 million from $56.5 million. Sales of new cranes increased $7.3 million; earthmoving increased $1 million; lift trucks increased $800,000; aerials increased $400,000; and other new sales increased $2 million.

Our used equipment sales increased $1.7 million or 4.9% to $36.5 million from $34.8 million a year ago. For the quarter our used equipment sales from the fleet were approximately 147% of net book value as compared to $138.6% of net book value last year. Our parts sales increased $1.6 million or 8.5% to $20.5 million from $18.9 million. Our service revenues increased $1.9 million or 15.8%, $13.9 million from $12 million last year. We continue to see strong growth in our product support business due to increased customer demand.

Our total gross profit was $70.1 million compared to $55.9 million a year ago, a $14.2 million or 25.4% increase. Our total gross profit margin was 32.5% as compared to 30.1% gross profit margin a year ago. Gross margin remains strong as the result of improved margins in rentals, used equipment sales, and our parts of service operations from a year ago. Our gross margins remained essentially flat for new equipment sales in comparison to last year.

Equipment rentals gross profit increased $8.3 million or 30.6% to $35.4 million from $27.1 million last year. New equipment sales gross profit increased to $8.5 million from $7.1 million and used equipment sales gross profit increased to $10 million from $8.1 million. The increase in new equipment sales gross profit is a result of increasing demand and the mix of equipment sold. The increase in used equipment sales gross profit is a result of increased demand, improved margins and also the mix of equipment sold.

Parts gross profit was $6.1 million compared to $5.4 million and service gross profit was $9.1 million compared to $7.6 million from the year-ago period. The increase in both parts and service gross profit is primarily a result of higher sales volume, improved margins and the mix of parts sold.

Our income from operations was $35.1 million or 35.5% or a $9.2 million increase from $25.9 million a year ago, reflecting a 230 basis point improvement in operating margins on higher revenues and improved gross margins. We reported net income for the quarter of $20.5 million or $0.54 per share based on $38.1 million diluted shares outstanding compared to net income of $14.7 million or $0.58 per share based on a much lower share count of $25.5 million in 2005.

Selling, general and administrative expenses were $35.1 million compared to $30.1 million last year, a $5 million or 16.6% increase. The increase was primarily related to costs associated with higher revenues in headcount such as wages and employee related benefit costs.

As a percentage of total revenues, SG&A was 16.3% which is comparable to the fourth quarter of last year at 16.2% of revenues. EBITDA increased $16 million or 37.5% to $58.7 million from $42.7 million in the fourth quarter of 2005. EBITDA as a percentage of total revenues increased to 27.2% compared to 23% in the fourth quarter of 2005.

Our rental fleet CapEx spending in the fourth quarter was $53 million of gross CapEx and $24 million of net CapEx. Nonrental fleet CapEx in the fourth quarter was $3.3 million on a gross basis and $3.1 million on a net basis.

At the end of the fourth quarter the average age of our fleet was 39 months which compares to 41 months both at the end of last quarter and a year ago. As I've stated previously, we've made considerable progress in deaging the fleet assigned to our Eagle operations really in a very short period of time. I'd like to reiterate John's comments that we are very pleased with our fourth-quarter results.

Now I will move on to our full-year results. Total revenues increased $204.2 million to $804.4 million from $600.2 million in 2005; equipment rental revenues were $251.4 million compared to $190.8 million for 2005 reflecting an increase of $60.6 million or 31.8%. The majority of the increase was a due to a $45 million increase in aerial work platform rental revenue which reflects solid organic growth in our aerial business in addition to growth related to the Eagle acquisition.

Equipment rentals also increased across all other product lines. Dollar utilization for 2006 increased to 41.1% from 38.6% in 2005. On average original acquisition cost of the rental fleet increased 24.5% over a year ago while rental revenues for 2006 increased 31.8%.

New equipment sales were $241.3 million compared to $156.3 million for 2005 reflecting an increase of $85 million or 54.4%. New crane sales contributed the majority of the increase but all other product lines also reflected very solid growth year over year. Used equipment sales were $133.9 million representing a $22.8 million or 20.5% increase from $111.1 million in 2005. Used equipment sales increased across all product lines except for a $1.1 million decrease in sales of used earthmoving equipment.

Parts sales were $82.1 million representing a $12 million or 17.1% increase compared to $70.1 million in 2005. Service revenues were $53.7 million representing a 12.2 million or 29.4% increase compared to $41.5 million in 2005. Total gross profit was $263.2 million compared to $181.6 million for 2005 reflecting an increase of $81.6 million or 44.9% on higher sales volume and improved margins across all business segments.

Gross profit margin increased to 32.7% from 30.3% for 2005; gross profit from equipment rentals was $132.7 million compared to $89.3 million for 2005 reflecting an increase of $43.4 million or 48.6%. The increase is primarily a result of $60.6 million more in rental revenues on a larger average fleet size with only a $17.2 million increase in rental cost of sales. A portion of this is a result of eliminating operating lease expenses on the fleet that we purchased in February and March of 2006 with IPO proceeds. In addition, we continue to lower our maintenance and repair costs as a percentage of rental revenues.

New equipment sales gross profit increased to $30.1 million from $19.1 million in 2005; used equipment sales gross profit increased to $36.1 million from $26.4 million for 2005. Gross profit improved for every product line. The improvement in both new and used equipment sales gross profit is a result of increasing demand and a mix of equipment sold.

Parts gross profit for 2006 was $24.2 million compared to $20.5 million. Service gross profit for 2006 was $34.5 million compared to $26.1 million. The increase in both parts and service gross profit is also a result of higher sales volume, improved margins and the mix of parts sold.

Income from operations increased $49.7 million or 70.7% to $120 million from $70.3 million in 2005 on higher revenues and gross margins. Income from operations as a percentage of total revenues increased to 14.9% compared to 11.7% as a result of improvements in both gross margin and SG&A.

We reported net income for the year of $32.7 million or $0.88 per diluted share based on $37 million diluted shares outstanding compared to net income of $28.2 million or $1.10 per share based on a much lower share count of $25.5 in 2005. Keep in mind that our 2006 results include the $48.8 million or $1.02 per share after tax of nonrecurring items recorded during 2006.

Selling, general and administrative expenses were $143.6 million compared to $111.4 million last year, a $32.2 million or 28.9% increase. Approximately $14.9 million of the total increase was related to increased headcount, higher sales commissions, performance incentives and benefits. As mentioned earlier, another $8 million of the increase in SG&A is attributable to fees paid to terminate a management services agreement in connection with the IPO in the first quarter of 2006.

As a percentage of total revenues, SG&A decreased to 17.9% from 18.6% for 2005. The 2006 percentage drops to 16.9% of total revenues excluding this onetime charge.

EBITDA increased $34.7 million or 26.6% to $165.2 million from $135 million in 2005. Adjusted EBITDA increased $83.5 million or 64% to $214 million from $130.5 million in 2005. Adjusted EBITDA as a percentage of total revenues increased to 26.6% compared with 21.7% in 2005.

For a brief balance sheet summary, total assets were $760 million; the net book value of our rental fleet was $440.5 million; total debt consisting of aggregate amounts outstanding on the senior secured credit facility, senior secured notes, senior unsecured notes and other notes payable was $266 million. Our totaled debt to adjusted EBITDA has declined to 1.2 times.

As of December 31, 2006, we had borrowing capacity under our $250 million senior secured credit facility of $232.6 million after actual borrowings and letters of credit totaling $17.4 million. Our full-year effective tax rate came in at 22.9% due to higher taxable income as compared to our guidance of approximately 21.5% and is also less than statutory rates primarily as a result of the reversal of our valuation allowance in Q1. As we stated in our release, we expect a significantly higher and more normalized effective tax rate of 38.5% for 2007.

We are still in the process of evaluating the potential impact of implementing FIN-48 which is accounting for uncertainty in income taxes. But we do not expect a material impact to our financial statement.

So in summary, we are very pleased with our fourth-quarter and full-year results and the outlook for our business. And I believe we are ready to move onto the Q&A session if the operator would please provide the instruction.

(OPERATOR INSTRUCTIONS) Jamie Cook, Credit Suisse.

Good morning. Congratulations on a nice quarter. I guess my first question when you look at your rental rates for the fourth quarter it was about 4%. I guess the only other public comp we can look at is United Rentals, I think they had about 4% in the fourth quarter or so. I guess my confusion is or if you could just elaborate -- when I'm thinking of you guys I would think you are in higher growth markets than a United Rentals would be. They are all across the United States. So I guess I was expecting your rental rates to be a little higher given the markets that you are in. So can you speak to that? Are the markets more competitive than you thought? Is it tough comps?

Definitely tough comps, Jamie. We have pushed rates as you know really hard the last couple of years not just in '06. And we've come a long way. So I think in some areas we are starting to bump our heads a little bit on rate increases. On top of that as I've stated before, we're seeing improved availability from manufacturers which kind of changes the supply and demand imbalance that existed for a significant portion of '06. And you combine all these things we expect rate increases to moderate somewhat.

I can tell you we are not changing our focus there. It is something we watch every day. It is something we push on and we're going to do everything we can do to get better rate increases than the low single digits. But with that said, we expect rate increases to moderate.

Okay. I guess my second question -- I think there has been a lot of concern about the impact of Hurricane Katrina and where we are in that buildout phase. So can you sort of speak to that? You mentioned a slowdown but things should be picking up. But I guess when should things pick up and what inning of the ballgame are we in terms of finishing the construction down there? And how long is that a benefit to you guys?

Sure. What is completed at this point is clean up work. It's not totally complete but it is largely complete. What we saw in the last few months, three to four months I guess is funding has just stopped and it has really brought the hurricane protection work to a halt. Now that is not -- that's going to change, funding is going to pick up again and I think we are going to see some really long-term benefit from that.

There has been little reconstruction started yet. They are starting to do some demolition and what not but the reconstruction phase will start and I think it is going to last for a significant period of time. There is no question that we are not nearly complete on hurricane protection issues for that area. There is a lot of core work left to do. The funding will resume and it's going to be at long-term benefit to us.

When you think about your guidance, when are you assuming that that business starts to pick up again?

in a matter of months.

Okay. And then can you just talk a little bit finally and then I will get back in queue. On the crane side of the business you mentioned supply constraints. Is that across the board? Is it one OE in particular? And I mean when should we expect that to improve?

I can't give you a real good answer there. Our biggest crane supplier is the Manitowoc Crane Group, both with the Manitowoc and Grove products. They are struggling to meet demand I can tell you. We've had some fairly significant slippage of sales out of the first quarter into the second quarter. I know they are very focused on improving their deliveries and they tell us that as the year goes on their deliveries will improve. And I believe that. But we are just going to have to wait and see.

We are going to have a tremendous crane year. The demand is unbelievable but we have seen some slippage on deliveries but I do expect to see improvement there as the year goes on.

And then, John, sorry, just last question. On the aerial work platform side there has been a lot of concern that that market would be impacted by residential construction yet when you hear from Terex or Oshkosh Trucks, their outlook for 2007 was fairly optimistic on the aerial work platform side. Can you just talk about what you are seeing in that area of the business?

Our difficulty) aerial business is a strong and our outlook for '07 is very strong. The one portion of the aerial business that I believe has been impacted by residential markets is tele handlers or reach lifts. I think the manufacturers have felt that. As far as scissors and booms, I think it has had a little impact there. So we are very bullish on our aerial business for '07.

Great, thanks. I will get back in queue.

David Bluestein, UBS.

Good morning. Just want to confirm a couple of things. Leslie, you said ending fleet age 41 months?

39 months.

39 months, right. John, do have a sense for equipment's CapEx in 2007 versus '06?

David, we don't CapEx guidance. But I can tell you we are going to grow our fleet in '07 but we are going to grow it at a more moderate rate than we did in '06. Our fleet growth will slow a little bit but we are going to grow our fleet.

All right. And do you have a target for free cash flow?

That is not an area that we've given guidance in the past, Dave.

Let's just say it is around 100 -- if it ends up being about $100 million, what would you do with $100 million?

David, I think we are going to be opportunistic. We are looking at acquisitions. I think as I have stated in the past that is a fragmented sector and there are some opportunities out there; fleet growth. We are going to be opportunistic there. Certainly greenfields is a part of our plan. Some of that money will be used there. I would hope to do maybe four new greenfield startups this year. We are just going to look at our opportunities there and act accordingly.

On the crane side, is there any -- they didn't give you a reason for the slippage? It's not that there was downtime in a facility or they are missing a gear or nothing specific?

I think some of it is vendor issues. They are having trouble getting tires and components. There is no question that has been a significant problem for them. I think that as their demand has ramped up they've just had a tough time keeping pace with it. But a lot of their issues are vendor issues.

Terrific. Thanks a bunch.

Philip Volpicelli, Goldman Sachs.

Thank you very much. With regard to rental rates are you seeing different regions with different kind of performance? In other words, is the western part of the country a little bit slower? Are you seeing rates down anywhere?

No, we're seeing rate increases moderate as I've said. I think our biggest two opportunities for rate increases in '07 are in our crane business and that is just a supply and demand issue. And we have been pushing rates real hard there. Another area I think we are going to see better rate increases than our other regions is in Southern California in our Eagle operations. That is an area we are very focused on. Their rates historically have been lower than our other regions and we see more opportunity there for rate increases.

In your opinion how close are we to having too much equipment in the marketplace with everyone having spent a lot of CapEx in 2006?

I don't see that as being a concern right now. We are certainly not there yet. I mean I think most people still see opportunity to grow their fleets in '07. We certainly do.

Great. And then on the crane side, what end markets are demanding all of the cranes that you guys can't supply at this point? Is it petrochemical, is it multi-family residential?

It is not residential. It is a mix of stuff but petrochemical in the energy sector are the largest consumers of cranes particularly the energy sector. Highway construction, infrastructure construction but from our perspective in our markets it is petrochemical, it is energy, it is oil patch, exploration and production, those are the key drivers.

Okay and last question on acquisitions. Historically you've targeted tuck-in acquisitions the size of Eagle. Is that still the plan or would you look at something bigger in the region?

We would look at something bigger. Now let me define bigger. I'm not talking about one of the big rental companies or something. But sure, we would do something larger than Eagle. But as I've said in the past, we are not out elephant hunting trying to buy one of the major rental companies, that is not in our plan at all. But we would certainly do something larger than Eagle.

Okay, so something not bigger than you guys probably the next 20 to 30 in terms of the RER top 100?

That is fair.

Great, thanks.

Steve Volkmann of JPMorgan.

Good morning. Just wondering if you guys have any color with respect to the specific businesses in '07 anything we should know? Any of the businesses stronger or weaker within the guidance that you've given us?

Business segments by product line or are you referring to sales, rentals, product support?

Yes, the latter.

Okay. No, we see continued strength I think across all of our business segments. I think areas that we see a lot of opportunity for growth is in the product support business, parts and service. We're continuing to add technicians. We're continuing to get increases in our charge out rates there. So we've got a heavy focus on our product support business. The demand for equipment remains very strong. We're going to have a good sales year and our rental business is just very, very solid that is why we are going to be increasing our fleet this year.

Are you seeing any trends in used equipment? Is the pricing kind of softening up there a little bit?

No, we see pricing remaining pretty solid. I think that in our business you may see some slight softening in our margins on fleet sales but that is strictly related to our fleet age. We have brought our fleet age down in '06. We're going to bring it down some more in '07. With that younger fleet age typically your margins will shrink just a little bit because the stuff hasn't been depreciated us much. But we are not seeing a softening in used equipment values.

Okay, great. That's helpful. And when we were visiting with you all I noticed a few what looked like kind of new maybe new mom and pop type competitors springing up a little bit. I don't know if that was just anecdotal. Are you seeing - is there anything about that that might impact the outlook for rental rates?

I don't think so. We are seeing some of that. I think one of the things we are seeing is some noncompetes have run out, people that were acquired in the past and had noncompetes and we're seeing some of those run out and some of those guys get back in business. It might have an impact on rates in a given market but across our footprint I don't think it's going to be significant.

Great, thank you very much.

Sarah Burns, Henderson Global.

Sorry, my questions have been answered. Thanks.

Seth Weber, Banc of America.

Good morning, guys. John, I just want to go back to something you said last quarter when you talked about the possibility of using pricing to go after and capture market share. How much of this low single-digit pricing you're talking for about for '07 is a self-inflicted and how much of it is really market dictated?

Seth, it is some of both. As I've said on the last call as we've had a very strong rate initiative in place and we've been trying to establish a rate discipline, we have walked away from a lot of business and I think we have walked away from some major projects because of pricing. I think we've established a rate discipline. It is in place, our people are very focused in that area.

And I think we are to the point that we can start to take a look at major projects where you can put a significant amount of equipment, tie it up for an extended period of time. When you do that you get 100% time utilization for a year. You handle it less so your maintenance expense goes down and even though you've got lower rates on that site, your dollar returns remain very strong. So we are starting to look at that business.

I think it is some of both. Some of it we are bumping our heads just because of the tremendous rate increases we've had, availability has improved and then with our focus on -- or stronger focus I should say on major projects, it is some of both.

Okay, thanks. Moving to your guidance. Is there any -- we're almost through the March quarter here. Can you give us any clarity on what you mean by when you talk about the first quarter being the softest quarter can you give us some magnitude for what you think the quarter may look like versus the year-ago period? Is there any sort of -- can you frame that for us a little bit?

Well I can tell you, our first quarter in '07 is going to show growth over last year, no question about it. I would hope that it is low double-digit growth. Our quarter is coming in a little bit softer than we forecast. Again, because of weather issues, because of some sales sliding into the second quarter but we will show growth year-over-year.

Okay, thanks. And just last question. Leslie, I didn't catch the CapEx in the quarter. Could you just remind me of that?

Sure. CapEx for the quarter was $53 million gross -- fleet CapEx.

Okay.

And $24 million net.

Great. Thanks very much, guys.

Nigel Coe, Deutsche Bank.

Good morning. Question on the EBITDA margin for next year. The implied midpoint margin is a bit lower than what I expected, considering what you've done in 2Q to 4Q '06. How much of that is due to the deaging of the fleet which you just referred to? And is there anything on the mix side between the equipments and rentals that we should consider?

Yes, mix is part of it. When you look at EBITDA margins going forward I think there is a couple issues there. One, we are seeing moderating rate increases that we've discussed at length. Leslie mentioned earlier the fact that we bought out operating leases last year that gave us a -- had positive impact on our margins. And then the mix issue you talked about we are seeing new equipment sales account for a little larger percentage of our overall sales than it has in the past and that will impact our margins a little bit. So you put all that stuff together I think that is where it is at.

Okay. And you mentioned the four new greenfield planned for 2007. How much top-line growth is that providing and how much CapEx would you imagine would you go into those four new sites?

That can vary depending on the markets we enter. We are currently looking at some major markets and we are looking at some mid markets. I think mid market we put $5 million worth of fleet in there -- a bigger market maybe that doubles. So you get some pretty good variances depending on the market.

So it could be at $23 million CapEx for the four sites?

Okay. And finally, Leslie, on the taxes. What are your thoughts on cash taxes for 2007 and perhaps in 2008?

2007 will grow just a little bit over 2006. It will begin to increase in '07 but when that really becomes meaningful is in 2008, as we expect our NOLs to expire in 2008.

Okay, thanks a lot.

Melinda Newman, Post Advisory Group.

I think you might have actually gone over all this but just wanted to go into more detail. In terms of product lines that you are seeing the most weakness in, it sounds like it must be earthmoving versus aerial or cranes are really tight we know.

No, I don't think we are seeing weakness in earthmoving. That business is remaining strong for us. I think the one product line that we handle that's showing any weakness and it is because there is some ties there to residential construction, would be in tele handlers or reach forklifts. We consider that part of our aerial group. But we are not seeing weakness in earthmoving. That business is remaining strong for us.

Okay. When you talk about next year, your outlook for next year it sounds like you said you expect because of what you are seeing in equipment manufacturers you expect more balanced supply and demand. Your view is basically balanced supply and demand and time utilization for the industry you think time utilization will be flat or what is your view?

I think that our time utilization will be similar to '06. Now again we've experienced some softness in time utilization in the first quarter but that is just weather-related and that will normalize. We've also got a comp because of the impact of the hurricanes a year ago. But when we get past that we expect time utilization to return to '06 levels.

Okay. And then can you tell me then by product line where you expect -- how you expect that works out by product?

Time utilization?

Yes.

If you looked at us today, our time utilization on our crane fleet is ridiculously high. It is probably north of 90%, maybe running 95%. On our aerial fleet, we are in the upper 60s right now. Our earth fleet, Leslie, do have something handy on that? Mid-50s on earthmoving. We are in the winter. It is wet, it is cold. That impacts our earthmoving fleet. How about lift trucks?

High 60s, close to 70 --

Close to 70% on lift trucks.

Okay. And then in terms of acquisitions, can you maybe give us a little more detail on -- I know Philip asked about size -- but some other parameters? I mean are you willing to pay the kind of public multiples that things are trading at? Or when you are looking at things are you looking at the fleet that you'd be getting or if you did something of substantial size, what kind of metrics are you looking at when you are assessing? And what is the sort of trigger that makes you be willing to pay above a certain amount or not for each particular asset?

Well, that is a good question. There is a lot of stuff involved. Clearly we look at the fleet, we look at their position in the marketplace. We look at their reputation, we look at whether they are a pure rental business or a distribution business. I think our ideal target is an equipment distribution business that has a rental component to it that we think we can grow significantly and really improve the rental operations there. That is our ideal target.

But there is a lot of things that go into evaluating a multiple that we are willing to pay. I can tell you in the past we have been paying around 4.5 times trailing EBITDA. We think that price level makes sense but there is a lot of factors that go into it -- fleet being a big one, I mean obviously that is a big issue.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS) Sarah Thompson, Lehman Brothers.

Thank you, guys. Our questions have been answered.

(OPERATOR INSTRUCTIONS) And with no further questions, I'd like to turn the conference back over to Mr. John Engquist for any additional or closing remarks.

No, I appreciate everybody being on the call today. We are very excited about our business. We are very bullish on '07. It's going to be a great year for us and we look forward to talking to you on our next scheduled conference call. Thanks for joining us.

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