H&E Equipment Services Inc (HEES) 2013 Q1 法說會逐字稿

Good day, everyone, and welcome to today's H&E Equipment Services First Quarter 2013 Conference. As a reminder, today's call is being recorded.

At this time, I would like to turn the conference over to your host for today, Mr. Kevin Inda. Please go ahead, sir.

Thank you, Sara, and welcome to H&E Equipment Services Conference Call to review the Company's results for the first quarter of 2013, 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, Chief Executive Officer; Brad Barber, President and Chief Operating 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. 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 -- this call contains forward-looking statements within the meaning of the federal securities laws. Statements about our beliefs and expectations and statements containing words such as may, could, believe, expect, anticipate, and similar expressions constitute forward-looking statements.

Forward-looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement.

These risk factors are included in the Company's most recent annual report on Form 10-K. Investors, potential investors, and other listeners are urged to consider these factors carefully and (inaudible - technical difficulty) and cautioned not to place undue reliance on such forward-looking statements.

The Company does not undertake to publicly update or revise any forward-looking statements after the date of this conference call.

With that stated, I'll turn the call to John Engquist.

Thanks, Kevin, and good morning, everyone. Welcome to H&E Equipment Services' First Quarter 2013 Earnings Call.

On the call with me today, Leslie Magee, our Chief Financial Officer, and Brad Barber, our President and Chief Operating Officer.

Proceed with slide three, please.

This morning, I'll give an overview of our first quarter performance, including an update on the regions we serve and current market conditions. Leslie will then discuss our first quarter financial results in more detail. When Leslie concludes, I'll provide our thoughts on the remainder of 2013, and we'll then take your questions.

Proceed to slide five, please.

In summary, our business is off to a strong start in 2013 as we continued to capitalize on improving market conditions.

Our first quarter performance was strong, as all of our business segments delivered solid growth from a year ago. I believe it's important to note that we delivered these improvements despite challenging weather conditions. Several of our regions were impacted by more severe winter weather conditions than a year ago. Lastly, we believe our results and those of the industry indicate the early stages of a multi-year expansion cycle.

In terms of the financial highlights, total revenues increased 22.3% to $212.4 million this quarter on a year-over-year basis, with significant growth of 26.4% in our rental business.

EBITDA increased 32.6% to $51.3 million.

Net income for the quarter was $4.8 million, or $0.14 per diluted share, compared to net income of approximately $4 million, or $0.11 per diluted share, in the first quarter of 2012.

Our utilization levels remained high, as well, at 67.9% based on OEC versus 69.5% a year ago. Keep in mind that our fleet size a year ago was significantly smaller, and certain of the markets we serve were meaningfully impacted by severe weather, so matching utilization from the first quarter of 2012 was difficult.

Rental revenues grew 26.4%, while rental gross margins improved to 44.6%. Rental rates increased 10.2% from a year ago and 2.1% from the fourth quarter of 2012.

Dollar utilization also increased to 33.9% from 32.3% over the same period last year.

Move to slide six, please.

Our Gulf Coast and intermountain regions, where there's substantial oil and gas and petrochemical activity, continue to be our most productive markets, accounting for 67% of our revenues and 66% of our gross profits.

Also, we're encouraged by the performance of our West Coast region, which is performing at exceptionally high levels compared to year ago and compared to the fourth quarter. Sequential improvements such as this is unusual in the first quarter, which should indicate further opportunity in these markets. As these markets are less industrial in nature and were significantly impacted during the recession, we believe this is an indication that the overall construction markets are improving.

Proceed to slide seven.

Market indicators and conditions remained positive, which we believe signifies the early stages of a multi-year expansion cycle. Sentiment in our end-user market remains upbeat, and the industrial markets we serve continue to have very high levels of activity.

The US Commerce Department recently announced that for the first time since 2008, housing starts for March came in north of one million. The ABI's been above 50 for eight consecutive months. Overall, we believe that business conditions are robust, and we believe 2013 will be a year of growth for our industry and our business.

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

Thank you, John, and good morning. I'll begin on slide nine.

As you can see by the numbers released this morning, we delivered strong results, which we believe are representative of the opportunity that exists in 2013.

First, from a high level, our first quarter total revenues were $212.4 million, an increase of 22.3%, and gross profit was $64.5 million, an increase of 22.5%, compared to the same period last year.

Digging into the numbers at a more detailed level, I'll begin with our rental business and provide more color behind the results, first on a revenue basis, and then I'll provide gross profit highlights by segment.

Rental revenues were $75.4 million for the quarter, a 26.4% increase over the same period a year ago. We've talked about our continued investment in our rental fleet based on demand, and as a result, we've increased our total fleet by $151.9 million, or 20.4%, based on original equipment costs, or OEC, over the last 12 months.

Average time utilization based on OEC was 67.9% for the quarter compared to 69.5% a year ago. Based on number of units available for rent, average time utilization was 53.6% compared to 65.8% last year. It was difficult to match our utilization numbers from the first quarter of last year given not only our significantly larger fleet compared to a year ago but also the more challenging weather that we experienced this year as compared to last year.

In addition, rental revenues were higher as a result of the 10.2% increase in average rental rates over a year ago and a 2.1% increase compared to the fourth quarter of last year. The [improvements] are broad based across all product lines.

Our [dollar] returns improved to 33.9% compared to 32.3% a year ago. This improvement was driven primarily by higher average rental rates.

New equipment sales were $53.3 million, a 30.1% increase over $41 million a year ago. Cranes, earthmoving, and aerials delivered strong increases over the prior year.

Used equipment sales were $32.1 million, a $5.6 million, or 21.2%, increase over the first quarter of 2012. The increase was primarily due to strong crane and aerial sales.

Business activity in our parts and service segments improved as revenues increased 7.7% on a combined basis to $39.5 million, with both segments up from a year ago.

Let's move to a discussion of gross profit by segment.

Total gross profit for the quarter was $54.5 million, compared to $52.7 million a year ago, an increase of 22.5% on a 22.3% increase in revenue.

From a gross margin perspective, consolidated margins were 30.4% compared to 30.3% a year ago.

Improved margins on rental and improved margins on other revenues offset the negative effects of revenue mix in other segments.

Our rental business delivered margins of 44.6% compared to 42.4% a year ago. Strong demand on a much larger fleet is driving higher volume and [range], which combined with control of rental expenses, continues to result in rental gross margin expansion.

Margins on new equipment sales were 10.5%, compared to 12.3% in the same period last year due to the mix of cranes sold.

Gross margins on used equipment sales were 29.2% compared to 29.8% in the same period last year due to lower margins on used cranes. However, it's worth noting that the margins on used cranes were lower due primarily to the mix of equipment sold and the impact of some past-due crane sales on customer trade-ins with (inaudible) profit.

Margins on the sales from our rental fleet alone were 38% compared to 31.7% in the same period last year, which reflects a continued strong used equipment market.

Parts gross margins were 26.6% compared to 27.6% a year ago, and service gross margins were 60.5% versus 61.5% a year ago.

Margins on other revenues were 3.4%, compared to negative 2% in the first quarter of last year. This improvement is largely the result of improved freight recovery and increased damage waiver income, which has a higher return.

Slide 10, please.

Once again, we delivered results reflecting significant operating cost leverage. The improvement in profitability is reflected in a 62.5% increase in income from operations for the first quarter of 2013 to $18.7 million, or an 8.8% margin, compared to $12.3 million, or 7.1% margin, a year ago.

Proceed to slide 11.

Net income was $4.8 million, or $0.14 per diluted share, compared to $4 million, or $0.11 per diluted share, in the same period a year ago.

Our effective tax rate was 31.3% in both periods.

Please move to slide 12.

EBITDA was $51.3 million, or a 32.6% increase over the same period last year, which again outpaced our revenue growth of 22.3%. EBITDA margins were 24.2% compared to 22.3% in the same period a year ago.

Next slide, 13.

SG&A was $46.3 million, a 13.7% increase over the same period last year, yet SG&A as a percentage of revenue declined 21.8% this quarter compared to 23.4% a year ago.

To speak to the increase in SG&A dollars, our green field initiative added approximately $1 million, or nearly 20%, of the year-over-year spend.

In addition, commission and incentive pay increased by [some] volume.

We've also increased our workforce over the last year, and as a result, we have more healthcare plan participants, leading to more claims, while at the same time, we experienced a general increase in healthcare costs this quarter.

Slides 14 and 15 include our rental fleet statistics.

Our fleet, based on original equipment cost, at the end of the first quarter was $897.6 million versus $745.7 million a year ago, an increase of 20.4%, or $151.9 million.

During the first quarter, we increased the size of our fleet by $14.6 million based on original equipment costs.

Our gross fleet capital expenditures for the quarter were $53.9 million, including non-cash transfers from inventory. Net rental fleet capital expenditures for the quarter were $31.5 million.

For the quarter, growth PP&E CapEx was $6.3 million, and net was $5.8 million.

Our average fleet age as of March 31, 2013 was 37.6 months.

Next, slide 16.

At the end of the first quarter, our outstanding balance under the ABL facility was $53.8 million, and accordingly, we had $342.2 million of availability at quarter end under our ABL facility net of $6.5 million of outstanding letters of credit.

Let me conclude by saying that we're very pleased with our first quarter results and the current trends in our business and industry.

I'll now turn the call back over to John for further discussion about our 2013 outlook, and then we'll open the call for questions.

Thank you, Leslie.

Please proceed to slide 18.

In summary, the first quarter was positive from many viewpoints as all of our business segments delivered year-over-year top-line growth.

All market indicators point toward continuing growth and improving results as the year progresses. We expect further fleet investments as rental volume continues to accelerate throughout the balance of this year and continuing strength in this segment.

Our distribution business also performed well in the first quarter, and demand for equipment has increased significantly.

We are expanding our geographic footprint to leverage additional high-growth markets. The industrial markets we serve remained very strong, and our less industrial markets are showing significantly improved activity.

Lastly, our balance sheet is strong and provides the necessary liquidity to leverage growth and expansion opportunities.

In closing, we're committed to our goals. We're focused on solid execution, operating leverage, and capitalizing on marketplace trends which we believe will deliver strong results and enhance shareholder value.

At this time, we'll take your questions. Operator, please provide instructions.

Thank you. (Operator instructions)

Nick Coppola, Thompson Research Group

First question -- on the mix of new sales, kind of drilling in on cranes, was there any increase in crawler sales, or was it really more on the hydraulic side?

On the mix of new sales, it was two things. We sold a couple of large mining machines in the earthmoving category that carried a low margin, and we also had a very large crawler crane sale in the quarter, which carried around a 5% margin. So it was the mix of new product which drove that margin down.

Okay. And has your expectation for crawler sales for the year changed at all, say, over the last quarter?

I think it's the same thing we stated on the last quarter. Our expectation -- we're seeing a lot more inquiries right now. We're getting more activity. We sold an 18000 in the first quarter. We very recently sold a 2250 Manitowoc, both very large crawler cranes. So we're seeing increased inquiries, and our expectation is that the second half will be better for crawler crane sales.

Okay. And last question -- on SG&A, how should we think about a run rate there? I certainly understand a couple components that you guys talked about, but should we -- what kind of impact should we expect from branch additions throughout the year, and then those higher costs from increased revenue [we entirely] expected? Should we expect to see increased costs going forward?

Look, I think as a percentage of revenue, we're going to be flat to down a little bit compared to last year. I think in absolute dollars, that's a reasonable run rate to use, what you saw in the first quarter. I mean it's going to be a top-line issue for us, but we're encouraged by what we're seeing on the distribution side of our business.

Okay, that makes sense. Thank you.

Thank you.

(Operator instructions)

Joe Box, KeyBanc Capital Markets.

Just a question for you on the fleet growth. On your last call, I think you guys alluded to a moderation in the overall fleet growth from 2012 levels. Obviously, good growth this year, but this quarter, fleet growth was up about 20%. So I'm just kind of curious, is this a timing of orders kind of coming in and maybe we'll see the growth rates moderate throughout the course of the year, or are you actually seeing something in the market right now that suggests maybe you need some more equipment?

You know, Joe, the reason -- there's a reason we don't give CapEx guidance, and again, I've said many times in the past, we try to make very short-term decisions on our spending. And we have recently upped our spending, particularly on the crane side, based on demand. I mean we're running at exceedingly high utilization levels. Demand is there, so we've ordered some additional cranes. So, yes, we have increased our capital spending forecast a little bit, and we'll continue to look at it as the year progresses, but the demand there is very strong.

And, Joe, let me just clarify. The 20% was a year-over-year comparison. For the quarter, we only grew our fleet on an OEC basis. It was slightly less than 2%.

Understood. Thanks for the clarification.

Question for you then on the rental incremental gross profit margins. My model has it at about 53%. I guess given it's the seasonally slowest quarter and there was probably some weather impact, how should we be thinking about that incremental margin kind of going through the rest of the year? Is it kind of a 50% number, or should we see it back into the 60% to 70% range, where it's been?

You know, Joe, probably more closer to that 50% number. I think a year ago, we were getting a lot of our revenue increased through utilization improvement, as opposed to fleet growth, and obviously, that drives a huge incremental margin.

Right now, more of the revenue growth is coming from more investment in the fleet, so I think you're going to see our incremental margin moderate a little bit but still remain at very strong levels.

Okay. Last question, and then I'll turn it over.

You guys mentioned kind of the mix changing a little bit for your used equipment sales, obviously moving a little bit more through trade-ins. How should we be thinking about the margin in that business with new equipment kind of picking up and potentially more trade-in activity? Should we think about in the high 20s now, or are we going to see a pick-up as we go?

Well, I think you need to separate fleet sales and used equipment sales. Now, we report them in a combined manner, but margins on fleet sales in the first quarter were 38%, very, very strong. We did take some trade-ins during the quarter that we just flushed out. I mean it was a pass-through with little to no margin. That's not something that's necessarily typical. It's a case-by-case basis. So you won't necessarily see that going forward.

Okay, yes, it'd be great if you could put it in your presentation or something just to kind of net it out so we could see the difference.

Okay, (inaudible).

Thank you, guys.

Sure.

Eric Crawford, UBS.

First off, my line dropped during the call, so apologies if I touch on an item you may have covered.

The improvement in dollar utilization was particularly encouraging, but optically, the tick-down in time utilization, even with the growth in fleet size, I think, may get some people nervous. So could you just talk about how you see utilization levels trending, the time utilization you'd be comfortable achieving given the growth in fleet and improvement in end market conditions you envision?

Yes, well, I mean I absolutely would not be nervous about that tick-down. One, we've got a very significantly larger fleet, 20% larger fleet, and we had a lot of weather impact this year. Last year, we had no winter. The first quarter was warm. It was dry. It was a great construction environment. And we had a lot of winter weather this year. In certain markets, unbelievable rainfall, and other markets, it was ice and snow. So we had a material impact.

Our utilization has come back today. We're running around 71%. It's tracking where we think it should be. We peaked out last year at probably around 74% or 75%, which tells me that we needed to add equipment, so I would not be concerned about what we are, and if anything, compare us to our competitors. We're still running significantly higher utilization rates than our competitors are.

That's great. I appreciate that.

Then I guess staying on dollar utilization, saw a slight tick-down at cranes. Is that weather? Could you just speak to what led to the decline there and how we should think about the year-on-year comparison going forward?

So this is Brad Barber. Yes, I'd be happy to reply to that.

I think you should expect to see similar dollar returns throughout the year in '13 as compared to 2012. Cranes, likewise, were impacted not as heavily as earthmoving products for maybe some of the obvious reasons because of the types and the nature of the projects that they participate on, but nonetheless, they were impacted, and physical utilization suffered a little bit more than typical, but our utilization again is increasing.

We've recently purchased -- placed purchase orders for about $20 million in additional cranes that just a month ago we were considering, but we see plenty of opportunity, particularly in industrial sector, and cranes will perform at similar dollar utilizations in '13.

That's great. Thank you.

And, lastly, on the prior call, you mentioned that the sequential progression in rates that you were seeing thus far this year was a very strong indicator. Could you just quantify for us how rates trended in the quarter and what the year-on-year comp with 2012 would be if rates just stayed flat with where they are today?

Yes, I think I stated on last quarter if rates just stayed flat, we'd probably be looking at a 2% to 3% increase in rates if we did nothing.

Right.

Look, we're going to continue to get solid year-over-year rates increases. I would not want you to expect double-digit rate increases. That's not reasonable. Our competitors aren't getting anywhere near that, and we got it in the first quarter, but that's got to moderate somewhat. So still, we will have very solid rate increases this year. I think Brad does a great job of focusing his people in that area, and we're in a very good environment.

No, that's great. Thanks a lot. Good quarter.

Thank you.

Thank you.

Seth Weber, RBC.

Apology -- my phone line dropped, as well, so apologies if some of this might be redundant.

Well, so let's start. You've mentioned weather a couple times here in the Q&A. Is it possible to quantify what you think that impact might have been to the quarter, either on a utilization level or just a dollar revenue number?

Seth, I mean I would be guessing. Brad?

Yes, Seth, I don't think so. I mean I think while it's anecdotal, we can certainly speak to -- we can look at the annual rainfall that we received, and in the Southeast, we can look at the snowfall. So certainly from a climate standpoint, we could look at those things, but when we look at the individual markets and we look at the individual product types and we talk, more importantly, to our customers and our sales force, it's crystal clear that we were impacted not on the rates but on the physical utilization.

Right.

So the good news is, by and large, that's behind us. As John just stated, we're around 71% utilized today. We're significantly higher than that in aerial work platforms and cranes, and earthmoving's certainly moving forward. And, again, I reference earthmoving because it's the product type as it's working in the dirt that's most impacted by those inclement weather conditions. So we can't quantify, but we feel like we've got a really strong basis for those comments.

Okay. Can you give us the dollar utilization by type? I don't think that's -- I see the -- and I'm sorry, the time utilization by type, by the categories for the quarter? Is that something that's available?

Hang on just a second. See if Leslie has that.

And maybe the comparable versus the prior year?

I don't know that we'd typically give that information, Seth, but we'll take a look and see if we can get that to you.

Well, I mean it sounds like your signal -- so it sounds like aerials and cranes are 70s or so, and is earthmoving in, say, the 50s, 55, something like that? Is that the right way to think about it?

Well, look, I guess the point I was trying to make is that earthmoving is the product that's most likely impacted by weather, and it certainly proved out to be that way. And as far as where we are today, I don't have that information in front of me, but cranes typically are running north of 80% and our aerials are running in the mid-70s right now. And I apologize; I don't have the earthmoving utilization in front of me, but it's probably in that 55 to 60 range.

Okay. I'm just trying to get a sense for what's doing better, what's accelerating and decelerating.

Aerials and cranes are running at significantly higher utilization levels than dirt, and again, some of that is weather related, too, because dirt just gets impacted a lot more by weather than those other two products do.

Right, okay, understood.

And you called out particular strength, I think, on the West Coast. I mean can you give us a sense of how far down that business -- how far down did that business fall relative to -- I mean how much more runway do you have there to kind of just get back to par, I guess, is what I'm trying to figure out? Could that region continue to put up outsized growth, I guess?

I think we've got runway in front of us in that region, and I think they have probably surpassed prior levels of performance at this point.

They have, Seth. Look, we've got an outstanding management team in that region. They've been together for many years now. They've improved -- internally, that region has improved substantially for us for the past three years. And as John just stated, they continue to do so.

We're also encouraged that not only our manager's doing a good job but that we're seeing commercial activity pick up, and that's going to continue to give those capable people opportunity to improve.

Okay, thank you. And I guess just one last one. If it's possible, can you give us the rate increase for April since we're (inaudible) May?

Seth, I don't have that in front of me, and I tell you, our preference is to give quarterly numbers just because we think it's more meaningful, but we will have that number here shortly. I do not have it in front of me.

Okay. Do you think it was up? I mean it sounds like the first quarter was fairly flat sequentially. I mean month on month, it was fairly consistent.

Yes, so sequentially it was up 2.1%, and I believe that every month of the quarter improved at some level.

Okay. And do you think that that would've continued into April then?

I wouldn't expect that level of increase. A more reasonable expectation would probably be to be somewhere around flat, but we'll have those numbers shortly.

Okay. Thank you very much.

Philip Volpicelli, Deutsche Bank.

Good morning, John and Leslie. This is [Sean Wandrak] on for Phil.

Just a couple questions for you here. I know you talked about weather a couple times here. I guess my question's a little different. Do you think that there's potentially some pent-up demand that we'll see come out in the second quarter just due to weather being so terrible during the first quarter?

I would defer to Brad on that.

I think it's difficult to try to quality pent-up demand with earthmoving projects. There's a certain amount of contractors to do an amount of work within a given region, and so when it dries up and it quits raining, those folks go to work quickly, and we certainly see some immediate improvement, particularly with the earthmoving products, as I've tried to characterize, because of the nature of the type of work they're doing.

But is it going to be material to the extent we would speak to it? I don't believe so. Is it going to be positive to our utilization? Absolutely.

Okay, great. And then with non-res picking up a little bit, you see more jobs on the West Coast. Can you talk about what kind of jobs you're seeing, what you think is driving that revenue upwards there?

It's really broad based on the non-res construction. I mean it's from medical facilities to schools to -- I mean it's pretty broad based. Retail has come back a little bit. I don't know that I can say any one category's a lot stronger than another; I think it's fairly broad based.

And it seems like it's more private investment than (inaudible)?

Much more private investment than we've seen. Until last few years, there's been no private investment, and that is improving, and I think one of the reasons is the banks are starting to lend in that area again, and that was shut off for some time.

Okay, great. And are you seeing any kind of a slowdown in industrial activity, or has that been pretty stable year over year?

No. I'll let Brad speak to that, but it's -- there's no slowdown.

Sean, we review information like [Peck Reporting], and reviewing the 180-day kick-off report for the territories we cover, we've seen that -- the industrial projected spend -- these are projects slated to start in the next 180 days -- go from -- the April number was $31 billion to $42 billion in May. That's a substantial jump.

On the previous call, we talked about a number of LNG plants that are slated to be right in our back yard, both in Southwest Louisiana and South Texas. So while industrial's been strong, we see plenty of additional projects come, and [it] will continue to do so.

Okay, great. Thank you for that.

And then just a quick housekeeping item. Can you give the balance in your floor plan receivables during the quarter?

Our floor plan payables are $67.7 million.

Sixty seven point seven -- sorry about that.

And then you had also talked about -- when you think about growth in the business, less of an acquirer, more towards green fields. Can you just talk about what your plans for green fields were this year again?

Sure . What we say is we anticipate doing six starts this year. We've opened Midland -- excuse me, we've opened Mesquite and Forth Worth, and we are opening right now Union City, California in the Bay area. So we will be active within the next month there, and we should have no trouble accomplishing -- excuse me, we also opened Seattle in January -- and we'll have no trouble accomplishing the other couple locations to round out the six that we had projected.

Okay, excellent. Thank you very much for your color. Good [luck in this] quarter.

Thank you.

(Operator instructions)

Matthew Dodson, JWEST LLC.

Can you just talk a little bit -- or I guess I was trying to understand you. You're [adding] equipment on the crane side. Is this the first time that you've added equipment on the crane side? And can you also help us understand the ramifications to that? I would assume that it's a bigger dollar rental and impact. (Inaudible - technical difficulty) EBITDA margin, or is it (inaudible - technical difficulty)?

Matthew, the answer is still we're the largest (inaudible) crane distributor in the world. We have a substantial crane rental presence, and that's an ongoing piece of our business and has been for a long period of time.

My reference that I made to recent purchases, that's really just in addition to because we see considerable opportunity, particularly in the industrial sector, where we rent a lot of these rough terrain cranes. So maybe that will be helpful to you.

Yes, so I mean, basically, what you're seeing, though, is that -- you're seeing an acceleration then in your rental of cranes? Is that correct?

Yes.

See more opportunity, yes.

Yes, we just see a lot of opportunity there. There's about $30 billion' worth of work, industrial work, new construction coming to South Louisiana. Similar numbers for South Texas.

So there's just a lot of industrial expansion coming over the next five years, and we feel like we're a little bit under-fleeted for that opportunity on the crane side right now, so we're investing some money there.

Got it. And then just may I ask you a follow-up to that? So if I look at renting a crane, as opposed to renting a scissor lift or etcetera, does a crane have inherently -- I assume it has a longer duration so that would help your utilization because of the dollars are bigger? Is that (inaudible)?

What it does, typically what you see, your gross margin on crane rentals is very strong. I mean it's north of 50%. But your dollar returns are less than other products. It's a very long-lived asset and your dollar returns are less.

Where you really make a lot of money in the crane business is on the lifecycle. They have residual values that are second to anything that I know of. I mean we can typically rent a crane for three or four years and sell it for very near what we paid for it. Brad?

No, Matthew, the only thing I would add in addition to that is cranes drive a substantial opportunity for parts and service sales. So as John's spoken, we think about the crane business not the greatest dollar returns, certainly among the best gross profit from a rental standpoint. Really nice margin, high residual, long-life assets, and then we get to provide a lot of parts and service to the customers that we sell these used cranes to at some point down the road.

And, I'm sorry, but does that affect your utilization over time? Because I assume if I rent a crane from you, I'm going to keep it for six or nine or 12 months, as opposed to an aerial platform. So does it affect your utilization if cranes are getting better, or is that not something to focus on?

It probably is positive to our physical utilization but not so much to our dollar utilization. It's two different calculations there.

Right, okay. Hey, thank you. I'm sorry for the silly questions.

No, not a silly question at all. Thank you.

Thank you.

(Operator instructions)

Joe Box, KeyBanc Capital Markets.

Just a few quick follow-ups for you.

I think last quarter you had talked about potentially bringing on some ancillary products to kind of supplement some of your general rental products. I'm just curious if you could give us some color here. Maybe if you look at it on an average location basis, are you talking about adding $0.5 million' worth of additional equipment, $1 million' worth of equipment? I mean what's kind of your timeframe to actually bring this on?

Sure. Joe, there's not a lot of an update from the previous quarter. We're still -- it's about 5% of our overall investment, and I think over time, that will probably move into the 9% to 12% range, and I'm speaking of the next couple years, right?

And to take an average, I mean we could almost just do the math and calculate 66 locations, but the truth is just depending on the size of the individual market, the value of those products range fairly wide. So we're at 5% today in our overall OEC, and we will continue to incrementally improve or grow that piece over a period of time, and we expect to see it move into the 9% to 12% range as we mature into that business.

So it sounds like alternately the pace of which you're bringing it on is very slow so that it's not going to potentially detract from your utilization rates if you just bring on a lot of equipment on the front end just to have it in stock?

That's correct.

That is correct.

Yes, we want to be fairly conservative with our approach.

Okay, great. And then just a question on your new locations. I know, obviously, you guys have an integrated model and sometimes you have dealer capabilities along with your rental capabilities. The six new locations you're adding, are they primarily rental?

They are. They're primarily rental locations, no distribution.

Understood. Thank you.

Thank you.

Thank you.

And it appears we have no further questions at this time. I would like to turn the conference back over to our presenters for any additional or closing remarks.

I appreciate everybody joining us this morning, and we look forward to speaking to you on the next call. Thank you.

And that does conclude today's conference, and we thank you all for joining us.