H&E Equipment Services Inc (HEES) 2010 Q2 法說會逐字稿

Good day, and welcome to today's H&E Equipment Services second-quarter 2010 conference call. Today's call is being recorded. At this time, I would like to turn the call over to Kevin Inda. Please go ahead, sir.

Thank you, Tryn, and welcome to H&E Equipment Services' conference call to review the Company's results for the second quarter ended June 30, 2010, which were released earlier this morning. The format for today's call includes a PowerPoint presentation, which is posted on our website at www.he-equipment.com.

Please proceed to slide one. Conducting the call today will be John Engquist, President and Chief Executive Officer, and Leslie Magee, Chief Financial Officer and Secretary.

Please proceed to slide two. During today's call, we'll refer to certain non-GAAP financial measures, and we've reconciled these measures to GAAP figures in our earnings release, which is available on our website.

Before we start, let me offer the cautionary note that this call contains forward-looking statements within the meaning of the federal securities laws. Statements about our beliefs and expectations and statements containing words such as may, could, believe, expect, anticipate, and similar expressions constitute forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties which could cause actual results to differ materially from those contained in the forward-looking statement. These risk factors are included in the Company's most recent annual report on Form 10-K.

Investors, potential investors, and other listeners are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The Company does not undertake any obligation 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 to John Engquist.

Thank you, Kevin, and good morning, everyone. Welcome to H&E Equipment Services' second-quarter 2010 earnings call. On the call with me today is Leslie Magee, our Chief Financial Officer.

Please proceed to slide three. This morning, I will give an overview of our second-quarter performance, including an update on the specific regions we serve and provide our thoughts on the current market conditions. Leslie will then summarize the quarter's financial results. When Leslie concludes, we'll be happy to take questions.

Please proceed to slide five. While the market challenges persisted during the second quarter, we are encouraged by the increased activity we have begun to see in certain parts of our business. Our second-quarter results reflect substantial sequential gains in our business. Year-over-year comparisons are not yet in positive territory, but the gaps began to narrow during the quarter. Our revenue was down 27.3% to $131 million from $180.2 million a year ago and increased 14.2% from the first quarter with every operating segment delivering sequential increases.

EBITDA decreased $16 million to $18.6 million on a margin of 14.2% versus 19.2% a year ago. Sequentially, EBITDA jumped 69.9% from the first quarter with a margin improvement of almost 500 basis points.

We posted a net loss for the second quarter of $7.1 million or $0.20 per share compared to net income of $300,000 or $0.01 per share a year ago. Our net loss improved 41.3% from a net loss of $12.1 million in the first quarter.

We are encouraged with the continued improvement in our fleet utilization, which increased over 500 basis points to an average of 54.9% as compared to 49.7% in the first quarter. As a result, rental revenue increased 14.3% from the first quarter and rental gross profit increased 63.4%. Further, we were encouraged by the fact that we did see positive year-over-year comps in our rental business for the one month of June. Rental gross margin and dollar utilization in June increased on a year-over-year basis for the first time in more than two years.

Lastly, and Leslie will discuss these points in more detail in her section of the presentation, we began to increase our CapEx spending due to an increase in rental demand. We also successfully amended our asset-based revolving credit facility with a five-year commitment.

Please proceed to slide six. The Gulf Coast continues to be our most productive and profitable region due to our significant exposure to the industrial sector. The Intermountain region is our second most productive region, again due to industrial exposure, specifically mining and oil and gas. Utah, in particular, has seen increased demand in their end markets. Florida, Arizona, Nevada, and Southern California continue to be our most challenging markets, and we expect this will be the case for the remainder of this year. We believe these markets will see increased demand as nonresidential construction begins to recover in 2011.

That leaves the Mid-Atlantic, which is an area we are definitely seeing increased demand, particularly in our earthmoving business. This is also our only region that was flat to up slightly in year-over-year rental rates.

Please proceed to slide seven. As far as the current market outlook, near-term challenges continue. Nonresidential construction is expected to continue to decline in 2010. Most notably, commercial construction is forecasted to shrink over 30% this year. The housing markets also face major headwinds, and although not a big driver of our business, this market continues to be a major drag on the economy.

In terms of market positives, the economy is improving, and we believe we have seen the bottom of the cycle. We saw solid sequential gains in all aspects of our business and believe this is indicative of more than normal seasonality. Our biggest gains were in our rental business where we continue to see our units on rent increase as we move further into the third quarter. In June, we saw year-over-year improvement in returns.

Pricing for used equipment continues to improve and demand for earthmoving equipment is increasing, which is an early cycle product. Our parts and service business is also improving, which demonstrates that more equipment is back on the job. Lastly, we expect to see increased demand in the industrial markets we serve for the remainder of the year.

Please proceed to slide eight. In conclusion, we are encouraged by the recent trends in our business, but expect the challenging conditions in our markets to persist for the remainder of the year. In light of this, we are not giving specific guidance. The momentum we gained in our rental business during the second quarter has continued into the third quarter, and we are confident that we will show solid sequential gains in this segment of our business when we report third-quarter results. Other segments of our business, particularly equipment sales, remain very difficult to predict.

We remain very confident and optimistic about our business as we believe we have taken the right steps to adapt our business to a very challenging environment. We have a very good capital structure, a strong balance sheet, and we are well positioned to take advantage of opportunities as our end markets continue to improve.

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

Thank you, John. Our comments this morning will include a more detailed review of our second quarter results. As John noted, our year-over-year comparisons are not yet positive due to the continued difficult operating environment. However, we experienced solid sequential increases in our top line and considerable sequential increases in many profitability metrics.

I'll begin on slide ten and as usual, I'll address the drivers behind changes in revenue for the related periods and then I'll address the changes in gross profit before proceeding to the next slide. On a year-over-year basis, total revenues and gross profit decreased at consistent levels of 27.3% yielding gross margins of 24.7% in both periods. Revenues were $131 million for the quarter, decreasing across all business segments and with the majority of the decline due to lower new equipment sales.

Rental revenues decreased $8.4 million, or 16.8%, compared to a year ago. The decline was largely due to lower aerial and crane rentals with higher earthmoving rentals partially offsetting these declines.

Our dollar returns were 25.3% for the second quarter of this year as compared to 27.1% last year, a decline of 180 basis points. This gap has narrowed, and within the various product lines, we saw higher earthmoving dollar returns of about 300 basis points this quarter. Sequentially, dollar returns improved over the prior two quarters. As you know, dollar returns are affected by the both the results of time utilization and rental rates, so let's just walk through each of those components.

First, time utilization was 54.9% versus 55.3% in the second quarter of '09. On a product line basis, utilization of our earthmoving fleet exceeded year-ago levels by more than 800 basis points. Aerial time utilization was 170 basis points lower and crane utilization declined by 600 basis points over the prior year.

Sequentially, average time utilization increased in excess of 500 basis points from the first quarter and increased in cranes, aerials, and earthmoving equipment. The most significant sequential increase in demand was reflected in our earthmoving fleet of 970 basis points.

As John noted in his remarks, time utilization improved each month of the quarter and also continues to strengthen [to] this point of the third quarter. Our on-rent percent, which is calculated based upon the number of units on rent at any given time, is currently at 62%. We exited the second quarter at a high point for that period of 59%. So, as you can see, we are continuing to gain momentum in our rental business.

Again, our dollar returns were also affected by lower average rental rates. For the quarter, rates were down 9.3% on new contracts compared to a year ago, and sequentially, rates were down 3%.

New equipment sales were $29 million or a 51.2% decline over the prior year period due to lower demand for cranes. Used sales were $17.9 million or a 12.3% decline over the second quarter of 2009 due to lower demand for used aerial equipment.

Business activity in our parts and service segments was also down year over year on a combined basis of $6.5 million or 15.5%. However, sequential results reflected a double-digit increase in parts and service revenues. We are encouraged by this and consider our product support business to be an early cycle indicator.

Now I'll provide some more details on gross profit changes in each of our segments. Total gross profit for the quarter was $32.4 million compared to $44.5 million a year ago. From a gross margin perspective, consolidated margins were 24.7% in both periods. This is the first quarter in over three years that did not reflect negative pressure on year-over-year gross margins. Further, gross margin increased nearly 400 basis points from the first quarter margin of 20.8%.

In our rental segment, margins were 31.1% compared to 32.6% in the prior year and were largely impacted by lower average rental rates. We certainly have plenty of room for continued improvement in light of historical rental rates and rental gross margin, but, again, we are pleased to see the early signs of increased profitability in this segment of our business.

Rental depreciation and other rental expense decreased 14.9% on a 16.8% decline in rental revenues. Margins on new equipment sales were 9.9% this quarter compared to 12.8% in the prior year due principally to lower margins on cranes.

Gross margins on total used equipment sales increased to 22.7% from 18.3% in the prior year. Included in these results were margins of 27.9% versus 23.4% last year on rental fleet sales. Parts gross margins were 26.1% compared to 28.4% and service gross margins were 66.2% versus 63.1% a year ago due primarily to revenue mix.

Margins on other revenues, which are equipment support activities, declined due to lower equipment hauling and freight income in conjunction with lower demand in our primary business activities.

Slide 11. We reported a loss from operations of $4.3 million compared to income from operations of $8.6 million a year ago. Margins were a negative 3.2% compared to 4.8%. These results reflect the impact of the declines in our top line due to lower demand as we've continued to discuss for some time. Although our margins were negative, our results reflected an improvement of 720 basis points from the first quarter of this year.

Please proceed to Slide 12. In this morning's discussion, I've outlined the revenue and profitability changes resulting in a net loss. For the quarter, our net loss was $7.1 million, or a loss of $0.20 per share, compared to net income of $300,000, or $0.01 per share.

Please move to Slide 13. EBITDA was $18.6 million, or a 46.2% decline, with margins up 14.2% compared to 19.2% a year ago. Our operating segments taken as a whole contributed positively to EBITDA margins with the largest contribution from our rental business.

Lower year-over-year EBITDA margins are the result of the fixed cost nature of certain SG&A expenses and a decline in comparative total revenues as previously outlined. Sequentially, EBITDA grew 69.6% and EBITDA margin increased 460 basis points.

Next, Slide 14. Our SG&A expenses increased $700,000, or $1.8%, to $36.8 million, primarily due to an increase in depreciation and amortization of $800,000.

Slide 15. As we stated earlier, improved market conditions are leading to increased rental CapEx spending. Our gross fleet capital expenditures for the quarter were $19 million including noncash transfers from inventory, and net fleet capital expenditures were $6.9 million. For the quarter, gross PP&E CapEx was $500,000, and net PP&E CapEx was $300,000. Our fleet age at the end of June was 43.2 months as compared to 40 months at the beginning of this year.

Slide 16. Our fleet, based on original equipment costs, at the end of the quarter was $658 million versus $733 million a year ago and $660 million at the end of the first quarter.

Please move to Slide 17. As we've stated many times, our capital structure is very solid with ample flexibility and liquidity. We are pleased to have announced an amendment to our ABL credit facility. The amended agreement remains a $320 million facility, but now includes a five-year commitment with a maturity date of July 2015.

I'll briefly touch on a few other principal changes. First, you may recall that our prior agreement was very inexpensive relative to the market. As a result, [our] pricing grid on any outstanding loans under the ABL has been modified. The grid is still priced based upon our leverage ratio. With the revised pricing, our interest costs would increase by 100 basis points at today's leverage ratio if there were obligations owed under this line. Also, our unused commitment fee increased from 25 basis points to 50 basis points.

Secondly, I'll touch on the changes to our covenants, which you'll note on Slide 18. The amended agreement includes the addition of a maximum springing total leverage covenant of 5 to 1 triggered if availability drops below $40 million. Further, our amended agreement maintain the minimum springing fixed charge coverage ratio of 1.1 to 1, and a trigger point was modified to availability of less than $40 million.

Availability under the facility is still subject to eligible borrowing-based collateral and the eligibles are designed substantially similar to the previous agreement. Today, our availability is unchanged and is $312 million, which is the full facility net of outstanding letters of credit of $8 million. We believe our amended ABL facility supports future growth of our company, and we're excited to have completed this well in advance of the maturity of the prior agreement. Our long-term relationships have proven to be fruitful throughout the ups and downs of our business cycles.

In closing, we're pleased with the improvement in trends during the second quarter, and we believe that we are well prepared to take advantage of improved market conditions and opportunities.

So, with that, Pperator, we'll move to our Q&A session if you'll please provide instructions.

Thank you. (Operator instructions.) And we'll go to -- first with Henry Kirn with UBS.

Hey, good morning, guys.

Good morning, Henry.

Hey. Could you talk a little bit about what you expect for CapEx in the second half, and are you increasing for other categories or is it mainly earthmoving?

It's primarily earthmoving and large booms on the aerial side. Those are products that we have very strong utilization on. Obviously, smaller aerials, scissor lifts, we're not spending anything there. And the only activity we have on the crane side would be some transfers from new inventory in the rental business -- into the rental fleet where it makes sense. But it's primarily earthmoving equipment and large booms.

And is there any way to gauge how much you're going to move up CapEx for the back half of the year?

We're going to increase our gross spending a little bit, but by year end, I think our net CapEx will be relatively neutral. It could be up slightly, down slightly, but it'll be close to neutral on the net CapEx side.

That's helpful. And how did aerial and crane utilizations trend sequentially within the quarter and maybe sort of some color around how that would gauge versus normal seasonality?

Both sides increased nicely sequentially, and Henry, there's no question there is some seasonality at play. I mean, our second quarter's always stronger than our first, but we're also convinced that there's more than seasonality at play here. We think there's some -- the beginnings of cyclical improvement here, particularly on the industrial side. If you look at the construction side, it's probably more seasonal in nature.

And is it fair to say that that continued through July, as well?

Absolutely. We've had significant improvement in our on-rent during the course of July. I think -- I looked as of yesterday. Since June 30, our units on rent increased about 5% as of yesterday, so we're seeing nice increases in on-rent.

That's helpful. I'll hop back into the queue.

Thank you.

We'll go next to David Wells with Thompson Research Group.

Good morning, everyone.

Hi, David.

First off, just trying to get a sense of the margin improvement in the rental business in the quarter on a sequential basis. I mean, really, kind of, what, $5 million in top line growth but almost 10 basis points on the margin standpoint. Are there some drivers in that business that have changed as we start thinking about the back half of the year and into 2011 where -- I mean, do you think you can exceed prior peak margins in that business? And how should we think about the sustainability of what we saw in the quarter on that line?

Well, our margin increase is strictly related to utilization. I mean, we've had a dramatic increase in on-rent, so I don't think there's anything unusual going on there. Can we get to prior levels of gross margin? I think we can. That's a ways off, but we're certainly trending in the right direction right now.

That's helpful. And then jumping back to your comment about the Mid-Atlantic being the only region that saw kind of flat to up slightly year-over-year rental rates, I mean, can we -- any additional color on that? I mean, is the mix of business different there? Is it more construction versus industrial? And what type of projects are you seeing that would allow that to happen because, I guess, my understanding is that's been a pretty competitive market up to this point in the year, so I'm a little surprised to hear that.

It is a competitive market and it's a market I think we're getting some benefit from stimulus spending. There's quite a bit of infrastructure going on. There's a lot of hospital and school type activity. Commercial construction is still very, very weak there, but we're seeing some stimulus spending. Even the housing markets have improved somewhat. It's minimal, but it's enough that we're feeling it. So, the real improvement there -- we're seeing there is on the earthmoving side of our business, and I do think we're getting some stimulus and infrastructure spending benefit there.

Okay. And then on the stimulus work that you're seeing, have you started to see any nonhighway work come out yet, be it associated with government buildings or some of the other different categories that received monies but perhaps were slower to get out in the market?

We're seeing some of that. I mean, I think we're seeing some of that in the Carolinas. I think we're seeing some of it in Utah. It's a little bit hard to quantify stimulus spending and how much of a benefit it is, but we're definitely seeing more right now than we've seen at any point to this date.

Okay. And then lastly, just trying to get a sense of -- I know you're increasing rental CapEx. At what point do you feel like you would need to add new inventory for new sales on that front? And are you seeing any changes on -- in that business and any acceleration here or is it still 2011 before we see new sales really appreciate meaningfully?

I think it's -- that's a 2011 event. We're definitely quoting more equipment on the earthmoving side of our business and we're probably seeing a little more activity on the crane side. But I think it's going to be a 2011 event before it becomes meaningful to us. People are still hesitant to make those large capital expenditures, and credit's still an issue on that side, also. So, I think it's going to be 2011 before we really see improvement in the sales side of our business.

Okay. Then last question then I'll get back in the queue, but you had made some comments about you feel like you're seeing more than a seasonal uptick in your industrial business and seeing a cyclical return. What kind of gives you confidence in that view on things? And any additional color on that would be helpful in trying to understand that.

Well, I think commodity prices are at a level that is just -- it's definitely spurring activity. We've seen a big uptick in the oil patch, particularly in gas exploration and production. If you look at the Haynesville Shale, the Fayetteville Shale, I mean, those areas are wide open right now. A lot of activity, and that had come way, way down when this recession started. Oil at $80 right now, that certainly creates activity. Copper prices have been somewhat volatile. They've been a little bit up and down, but generally, commodity prices are strong and it's creating activity for us and we think that's going to continue for the foreseeable future.

Okay. That's very helpful. Thank you so much.

We'll go to Adrienne Colby with Deutsche Bank.

Thanks. It looked like you opened an additional branch in the quarter. I was wondering if you could talk about where that was geographically and what your plans are for the back half of the year.

We did open a branch in Chattanooga. We like the market. There's considerable activity there, and it just fits in with the footprint of these new openings that we've done in the Midwest.

As far as the back half of the year, we're going to probably sit back and get our arms around what we've done in these six or seven stores that we've opened and get comfortable with where we are with them and then we'll reevaluate going forward. But, we'll be sitting tight with what we've done until we're comfortable with those stores' performance.

Okay. And I'm wondering, now that you're starting to see a pickup in demand on the rental side and it just sounds like the overall business trends are starting to improve, if you're looking at adding to headcount at your existing branches.

Yes. We have -- during the course of the second quarter, we probably added 25 or 30 people. The bulk of that was sales personnel, and a little bit of sales management. I think the next thing you'll see us probably start adding to a little bit would be our technician workforce because we anticipate some increased demand on the product support side of our business.

Okay. And I guess I'm wondering -- you mentioned in the release, and also in your comments, that you're still seeing some -- a lot of weakness in the new and the used sales categories. And I'm just wondering if you're noticing with any of your customers who might typically be purchasers of equipment, whether it's new or used, shifting more towards your rental vertical?

Yes. I think that's probably accurate. I think until people really have confidence that this recovery has legs and that it's here to stay, I think there's a lot of people will rent in the early stages of this recovery until they're real certain that it's real. But, I don't think their long-term habits are going to change. I mean, all of our customer base owns a certain amount of equipment and they all rent a certain amount of equipment. And short-term, they may lean more to rentals, but long-term, I don't see their overall habits changing.

Thanks. And a couple of just quick -- I wasn't sure I got some of these numbers. Leslie, could you tell me, again, what the number of transfer equipment was in the quarter?

In the quarter, it was $7.6 million.

$7.6 million? And I got that your PPE gross was $500,000 and net was $300,000. Is that correct?

Correct.

Okay. And could you tell me, again, what your average fleet age was?

43.2 months.

43.2. Terrific. Thank you very much.

Sure.

And we'll go to [Seth Vulkaseen] with Deutsche Bank.

Leslie, can you give us the floor plan payables number?

Sure, $77 million.

Okay. Great. And as you look at the amount of equipment that you took possibly out of the West and into the Southeast, is all of that movement done? In other words, are you still moving equipment around or have you guys pretty much settled on where things should be?

I think you'll see our fleet movement slow down because we're -- our utilization levels are getting to the point that we don't -- we won't need to be moving equipment as much as we were. So I would think that will slow down significantly.

And in terms of the rental rates, definitely you've had improvement from -- down 18, down 13, and now down 9.3 in the second quarter. Now that you've moved all that equipment, are you starting to see an ability to raise prices where the equipment is now sitting?

I think we will. I mean, we're confident that we will start seeing sequential rate improvement. We've seen a slight improvement in July. We think that's going to continue. Our tough rate markets are Florida, Nevada, Arizona, and Southern California. Those markets continue to be very rate sensitive. As we stated earlier, the Mid-Atlantic -- we're actually flat to up a little bit year over year there. Pricing in the Gulf Coast is better than these other areas. We also have product-specific group classes that are really rate sensitive, like 19-foot scissors. That's a real tough group code from a rate standpoint. We've got plenty of earthmoving group codes that are showing improvement, we expect will continue to do so. We're showing improvement in our bigger aerial stuff that's highly utilized. So all said and all done, I think we're to the point on utilization where we're going to have some price power, and we expect to see sequential improvements moving forward.

Great, and last question from me. Your balance sheet is, obviously, in very good shape. Any thoughts of making acquisitions or is that something you just don't feel is appropriate at this point?

Look, we're not out actively looking for acquisitions. I can tell you we would be opportunistic. If something came along that made a lot of sense for us, we would certainly take a look at it. I think we'd be foolish not to. I think there's going to probably be some opportunities arise out of this. So we're just going to sit back and watch things and be opportunistic, but we're not out actively looking for acquisitions.

Great. Thank you.

We'll go to Seth Weber with RBC Capital Markets.

Hey, good morning, everybody.

Good morning.

Following up on a couple of the questions. Is it possible to quantify how much of your fleet is in some of these weaker markets, Southern California, Florida, Arizona, just on a dollar -- percentage on a dollar basis?

Yes, we can do that, Seth. I don't have it in front of me. I mean, we can get that for you.

Okay.

I just don't have it sitting here in front of us.

I mean, is it -- it's -- is it proportional to the revenue that comes out of that? I mean, I would guess it's less than --

Let me -- just looking. Seth, why don't you let us look at that? I mean, we can get that data for you. I just don't have it sitting here in front of me.

Okay. Fair enough. I'll circle up with Leslie after the call.

Yes.

And then just following up on your -- the comments about the stimulus. I mean, is there -- it's hard to know, I know, but in your opinion, is there a -- are we -- have the awards been kind of top peaked out here and they're going to start to decelerate? Or do you feel like that there's still -- we're still on the upswing in the amount of allocation and the awards that are occurring?

I think there's more to come, and I think we're probably going to see fairly significant stimulus spending well into '11. I think there's more to come.

Okay. And as far as the quarter goes, is it possible to quantify -- do you feel like you got any benefit from the Gulf -- the spill down in the Gulf? Is there any dollar number you could put to that?

The spill itself has probably not been a big factor to us one way or the other. I mean, most of the cleanup and the activity was marine in nature. It was offshore. We really don't benefit from that. I'm sure we rented some equipment down there relative to it, but it's not been big one way or the other for us.

A bigger issue for us, and we hope it's relatively short-term in nature, is this drilling moratorium. That really is a -- has a major impact to Texas and Louisiana, and that's been a negative for us. I think it's impacted our product support business. It's impacted some rebuild activity. I mean, some of the shipyards and offshore supply companies and whatnot are being heavily, heavily impacted by that moratorium. So, that's been a negative. I hope it's going to be short term in nature, and at this point, we have no reason to think it won't be. I don't think we can stop deep water drilling. It's -- I don't think that's a long-term option.

Okay. Just a couple others. On the improved used equipment margin, is there any change in the age of the fleet that was sold or did you change the channel? Are you selling less through auction, or is there anything -- any color there or it's just used prices are getting better?

No, I think used prices are getting better. I mean, the average age of what we sold was around 57 months, which is what it's been running. There's no material difference there. So I think it's the function of probably used pricing continuing to firm up.

Any color on used crane pricing in particular?

It's held up pretty well. I -- used crane pricing has held up a whole lot better than rental rates have. We've seen rental rates come down hard across the board, but used crane pricing has held up pretty good.

Okay, and then just lastly, is it possible to strip out or give us some detail on the new equipment sales? How much of that is cranes versus aerials versus anything else?

Sure. Obviously, that crane number has come down, but for the quarter, it was about 65% of total new equipment sales.

Is cranes?

Cranes, right.

And is that primarily -- is there one type of crane? They're typically not -- I mean, crawlers are a couple. You tend to sell a few crawlers, but is there a --

Yes, I mean, it's a mix from RTs to crawlers to ATs, the Krupp-type products. I think it's -- and that mix will change month to month, but it's generally all of the above.

Okay. And do you sense -- sorry, lastly, but do you sense that there are any big orders out there for large infrastructure type projects or large energy projects that are kind of just on the back burner that are waiting for something to hit in order for big crane orders to come through or do you think it's just business as usual?

I think it's pretty much business as usual right now. I mean, again, I said earlier on the call, we seem to feel a little bit of improvement in the crane market domestically right now. I think Manitowoc would tell you the same thing. Most of their demand is emerging markets right now, but generally, this market is starting to feel better. And I think it's energy related and hopefully we keep feeling that way going forward.

Okay. Thanks very much, guys.

Thank you.

(Operator instructions.) We'll go to Chris Doherty with Oppenheimer & Company.

Just wanted to clarify a comment on rates. Did you say that rates were down sequentially 3%?

That's correct.

For the quarter.

For the quarter. I mean, it's just -- if I sort of look, that just -- it seems like if I look at the rental revenue, both rental revenue and related stuff and the implied volumes quarter over quarter, it was actually the opposite. Is there a mix issue in there?

I think there is, and I think you've got to look at the way we calculate rates. We use a unit-weighted calculation, and it calculates the number of contracts. If you look at our fleet with 19-foot scissors, which is a group code I told you has a lot of rate pressure. It's a real, real tough group code from a rate standpoint. That comprises about 20% of the units in our fleet, but only about 4% or 4.5% of the OEC of our fleet. Those rates are under a lot of pressure right now. There's a lot of units that generate a lot of contracts, and by the way we calculate rates, that moves the needle for us. We've got other group codes that are doing very well from a rate standpoint and moving in the right direction sequentially. We've got some group codes out there that are up year over year in rates, but I think it's a function of the way we calculate rates.

And then can you talk about -- I mean, just from an industry perspective where you see rates going and how fast the pickup might be? I mean, if you look and listen to what some of your competitors are talking about or what they reported, utilization seemed to be getting into that historic, normalized level. And I think some guys are probably down 15% to 20% over the last two years. I mean, do you expect a substantial increase in rates over the sort of what I would call the short term or medium term?

I expect nice sequential increases in rates. I think we're a little ways off from year-over-year improvement in rates, but I think, sequentially, they're going to continue to increase. And as people get into the mid 60s, upper 60s on utilization, that's going to create pricing power, and at that point, I think you're going to see some fairly nice improvement in rates.

And then can you tell us how much fleet you've moved from the weak areas, I guess, the West Coast to the East?

I don't have that in front of me, but, I mean, it's significant. We moved a lot of fleet out of Las Vegas. We've moved a lot of fleet out of Southern California. I don't have that in front of me. It can certainly be -- that information can be put together, but I don't have it in front of me.

And is the cost of moving that a significant cost that you've incurred the last couple of quarters?

Yes. I mean, it's a fairly significant cost. And obviously, we do a lot of analysis relating to that to make sure moving this equipment makes sense. And what we've moved makes plenty of sense. But yes, there's a cost in there.

Any thought of what that number would be? I mean, just to understand sort of what normalized profitability could be going forward or what costs aren't going to be there going forward?

I would have to do some research to give you a good number.

I would say it tapered off in the second quarter.

Right.

And it's in our -- it's [all about] in our other margins, but we've certainly seen some of that throughout the last several quarters.

Okay. Thank you.

We'll go to Barry Haimes with Sage Asset Management.

Good morning. Had a couple questions. First, as you pointed out, the Gulf region is a big region for you. And I wonder if you could just characterize how much is your business -- would be oil and gas production related? How much of it would be sort of to the refinery, chemical, petrochemical complex? And then how much of it would be general industrial, just to get a flavor?

Well, I think our revenue mix would be more heavily weighted to petrochem and oil patch, and then the next driver would be general industrial. I don't have a percentage breakdown I could give you, but petrochemical and oil patch are very significant drivers of our business, and the next would be general industrial.

Got it. Okay. And then just my other question is if you look at the sequential improvement you've seen between the first and second quarter and then into July as you've noted, and again, I know it's hard to pin it down, but if you had to say how much of it was seasonal, how much of it was stimulus, and how much of it was general economic improvement? Any gut feel for that? Thank you.

I don't know how to break out stimulus for sure. I mean, I think we benefitted in some markets, and I think we'll continue. I don't think it's a huge piece of our business. If you look at the construction side, there's no question that that's -- a lot of that is seasonality. The industrial side, I think, is more cyclical in nature. We're comfortable with that. So, I think you have to look at the segment we're talking about. Construction, more seasonal. Industrial, more weighted to cyclicality, and very hard for me to give you a number on stimulus.

Great. Thanks. Appreciate it.

(Operator instructions.) And we have no further questions in queue. At this time, I would like to turn the conference back over to the presenters for any closing remarks.

And I appreciate everybody being on the call. Obviously, we feel a lot better about our business than we did even a few months ago. We expect to continue to get sequential improvement in our rental business, and as we get into '11 and -- I think we're going to see some real improvement in other aspects of our business. So, we feel good about where we are and the direction our business is heading. Look forward to talking to you on our next call. Thank you.

This concludes today's conference call. Thank you for your participation.