H&E Equipment Services Inc (HEES) 2018 Q3 法說會逐字稿

Good morning, and welcome to the H&E Equipment Services Third Quarter 2018 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Kevin Inda, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Nicole, and welcome to H&E Equipment Services conference call to review the company's results for the third quarter ended September 30, 2018, which were released earlier this morning. The format for today's call includes a slide presentation, which is posted on our website at www.he-equipment.com.

Please proceed to Slide 2. 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 3. 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. 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. A summary of these uncertainties is included in the Safe Harbor statement contained in the company's slide presentation for today's call and also included the risks described in the risk factors and the company's most recent annual reports on Form 10-K and other periodic reports. Investors, potential investors and other listeners are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after the date of this conference call.

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

Thank you, Kevin, and good morning, everyone. Welcome to H&E Equipment Services Third Quarter 2018 Earnings Call. On the call with me today are Leslie Magee, our Chief Financial Officer; Brad Barber, our President and Chief Operating Officer; and Kevin Inda, our Vice President of Investor Relations. My comments this morning will focus on our third quarter results, our business and overall market conditions, and then Leslie will review our financial results for the quarter. When Leslie finishes, I will close with a few brief comments, after which, we'll be happy to take your questions.

Proceed to Slide 6, please. Demand in the nonresidential construction markets we serve remained strong during the third quarter, resulting in another good quarter for our business. Total revenues increased approximately 24.3% or $63 million to $322.1 million in the third quarter. Adjusted EBITDA grew 22.2% to $108.2 million compared to $88.5 million a year ago. In the third quarter, we generated net income of $21.3 million or $0.59 per diluted share compared to $8.5 million or $0.24 per diluted share a year ago.

On an adjusted basis, for the third quarter of 2017, net income was $27.1 million or $0.76 per diluted share. Our effective tax rate was 26.4% compared to a negative 11.7% a year ago, primarily due to a discrete item. Also, there were several onetime items in the year-ago quarter related to our notes offering and termination of the previously proposed Neff transaction. Leslie will elaborate further on these items and their year-over-year comparisons in her discussion. The performance of both our rental and distribution businesses were strong compared to a year ago.

Proceed to Slide 7, please. Strong results from our rental business continued as we capitalized on the healthy nonresidential construction markets. Rental revenue increased 24.2% or $30.4 million to $156 million from $125.6 million a year ago. Physical utilization remained high at 71% despite growing our fleet $236.6 million organically year to date. Utilization has been steadily increasing as this growth was absorbed in our end-user markets. In recent weeks, utilization has returned to industry-leading levels. It is worth reminding listeners that we do not expect to reach the prior year's unprecedented utilization levels and we believe we have made the appropriate investments in the fleet this year to better serve our markets. Dollar utilization was 35.9% compared to 30% -- 36% a year ago, and we achieved positive rates for the sixth consecutive quarter up 2.2% year-over-year, an 0.8 points sequentially. Rental gross margins improved to 50%.

Proceed to Slide 8, please. This slide illustrates our nationwide footprint, various regions, 89 branch locations, 19 greenfield sites that we have opened since the beginning of 2013 and 8 sites acquired in the CEC and Rental Inc. acquisitions earlier this year. We have called out these sites in red to demonstrate our strategy of pursuing acquisitions and improve our density in existing growth markets where we are under exposed. We are also pursuing acquisitions to provide us with an entry in completely new markets that possess strong nonresidential construction trends and opportunities.

Slide 9, please. Demand trends and customer sentiment remained positive in our major end-user markets. Nonresidential construction, which represents 60% of our total revenue on an LTM basis as of September 30, 2018, is healthy. Industry data shows nonresidential construction spending is up 4.4% through August and continued growth is forecast for 2019. The industrial market remains a solid market for our business in terms of both rentals and new equipment sales.

It is important to note that while new project activity is a positive for us, the majority of our exposure is on existing plants for ongoing maintenance work. While several major projects are winding down, a new wave of projects is expected, with numerous projects recently announced. Global demand for LNG is also rapidly growing, and according to projections, a next round of LNG CapEx is required to maintain sufficient supply to satisfy this increasing demand. The Gulf Coast is a particularly attractive location for these projects due to the existing infrastructure ports and inexpensive resources.

While our exposure to the oil patch is low at 7% of total revenues, demand on energy-related projects remains very strong. During the third quarter, time utilization in oil and gas-focused markets remained strong at 73.4%, with almost highly exposed Midland market running more than 80%. As a result of massive energy-related activity in the Permian and Eagle Ford Basin, our branches that serve these markets are also benefiting from an increase in general nonresidential construction projects to support the oil patch, including housing, retail, infrastructure, schools, hospitals and more.

The electrical grids in these areas are also at capacity and require significant expansion to keep up with the extraordinary growth in power demand. Lastly, we believe that the fleet mix and age continue to be competitive advantages for our business. We have one of the youngest fleets in the industry, at 33.8 months, compared to an industry average of 44.5 months.

Slide 10, please. Demand across our end-user market remains strong and is broad-based across our entire footprint. Customer sentiment continues to be positive. Industry data forecast ongoing strength in the nonresidential construction markets. Economic indicators remain positive as well. Overall, we are encouraged with the current environment and opportunities for our business.

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

Good morning, everyone, and thank you, John. I'll begin on Slide 12 to cover the financial results in more detail. We are pleased with our third quarter performance. Our business delivered good results and we are also encouraged by the current trends as we conclude the year. Let me provide a few reminders before I discuss our third quarter results. First, our third quarter results include CEC's legacy operations, which were acquired on January 1; and Rental Inc.'s legacy operations, which were acquired on April 2.

Second, there were several onetime items in the year-ago quarter. The company completed its notes offering and the repurchase and redemption of its previously outstanding notes. Our operating results for the third quarter of 2017 included a $25.4 million nonrecurring item associated with the premiums paid to repurchase and redeem the old notes and the write-off of unamortized note discount and deferred transaction costs associated therewith, and $8.7 million of income net of merger costs resulting from the previously announced termination of our merger agreement with Neff Corporation, which was terminated in the year-ago quarter. Additionally, our effective income tax rate was a negative 11.7% in the third quarter of 2017, due primarily to a discrete item related to unrecognized tax benefit as a result of a lapse of the applicable statute of limitation.

With those reminders behind, let me move to our results for the current quarter. And for a high-level overview, our total revenues increased 24.3% or $63 million in the third quarter compared to the same period a year ago to $322.1 million, driven primarily by the strength in both our rental and distribution business. Gross profit increased 22% or $20.7 million to $114.7 million from $94 million a year ago. Margins were 35.6% compared to 36.3% a year ago, primarily as a result of revenue mix with significantly higher volume but lower margin new equipment sales.

Let's take a look at the underlying details of the 24.3% top line revenue growth beginning with rental revenue. Rental revenues increased 24.2% to $156 million. And as John referenced, physical utilization remained high, with average time utilization based on OEC of 71% for the quarter. AWP physical utilization was 71.9% of OEC compared to 76.1% a year ago. The decline was largely the result of the significant expansion of our AWP fleet combined with a challenging prior year comparable, as mentioned by John.

Conversely, both crane and earthmoving utilization increased compared to the year-ago period. Rental rates improved again this quarter, 2.2% year-over-year, and rates improved in all product lines. Rates also increased 0.8% sequentially. With strong utilization and rates, our dollar returns were 35.9% versus 36% last year.

The strong results in our distribution business continued with an increase in new equipment sales of 39.4% or $19.3 million to $68.2 million. The improvement in new equipment sales was largely due to higher new crane sales, which increased $12.4 million or $36.7 million, and was comprised mostly of small crawlers, all-terrain and truck-mounted cranes. Sales of new earthmoving equipment increased 39.3% or $5.3 million during the quarter.

Used equipment sales increased 36.2% or $8 million to $30.3 million, largely as a result of higher used AWP sales. Sales from our rental fleet comprised 88% of total used equipment sales this quarter compared to 91% a year ago. Our parts and service segments delivered $47.9 million in revenue on a combined basis, up 5% from a year ago.

And at this time, let me touch on gross profit and margin. Our total gross profit for the quarter was $114.7 million compared to $94 million a year ago, an increase of 22% on a 24.3% increase in revenue. Consolidated margins were 35.6% compared to 36.3% a year ago and the shift in revenue mix to lower margin new equipment sales resulted in pressure on consolidated gross margin.

For gross margin detail by segment. Rental gross margins for the quarter were 50% during the quarter compared to 49.7% in the year-ago quarter, primarily due to higher rental revenue and lower rental expense as a percentage of rental revenue. Margins on new equipment sales increased to 11.5% for the third quarter compared to 10.9% a year ago and used equipment sales gross margins were 32.3% compared to 32.1% last year. Margins on pure rental fleet on lease sales were 36% compared with 33.7% a year ago and parts and service gross margins, on a combined basis, were 40% compared to 40.5% a year ago.

Let's move to Slide 13, please. Income from operations for the third quarter of 2018 was $45.3 million or 14.1% of revenue compared to $47.7 million or 18.4% of revenue in the year-ago quarter. Adjusted income from operations a year ago was $39 million or 15% of revenue. On this space is third quarter 2018 income from operations increased 16.9%. The increase in income from operations was primarily a result of revenue growth and strong margin results in our rental and distribution business compared to a year ago. The decline in income from operations as a percentage of revenue was largely due to revenue mix, a decline in gain on the sale of PP&E and lower margin on other revenues, but was partially offset with operating leverage in the business on an adjusted basis.

Proceed to Slide 14. Net income was $21.3 million or $0.59 per diluted share in the third quarter compared to $8.5 million or $0.24 per diluted share in the same period a year ago. On an adjusted basis for the year-ago period, net income was $27.1 million or $0.76 per diluted share. Our effective tax rate was 26.4% compared to a negative 11.7% a year ago due to the discrete item previously mentioned.

Please move to Slide 15. Adjusted EBITDA was $108.2 million in the third quarter compared to $88.5 million a year ago and margins were 33.6% compared to 34.2% last year. Margins decreased for the reasons mentioned on Slide 13 related to margin on income from operations.

Next, Slide 16. Before digging into the current quarter's expenses, let me remind everyone that the prior year period included a benefit of $2.2 million in SG&A of merger and acquisition transaction costs due to the reclassification to merger costs. These costs were related to the termination of the proposed acquisition of Neff Corporation a year ago.

Excluding this $2.2 million favorable impact to SG&A expense in the prior period, total SG&A for the year-ago period would have been $57.4 million or 22.2% of total revenues compared to 21.8% of total revenues for the quarter ending September 30, 2018, resulting in operating leverage on an adjusted basis this quarter. The remaining increase in SG&A expenses was due to higher labor, wages, incentive and other employee benefit costs of $8.9 million due to the CEC and Rental Inc. acquisitions completed this year, a larger workforce and higher compensation related to improved profitability. Also, SG&A includes $0.9 million of amortization expense associated with intangible assets from purchase accounting for this acquisition and our greenfield branch expense increased $0.6 million compared to a year ago.

Next on Slide 17. Our growth fleet capital expenditures during the third quarter were $135.1 million, including noncash transfers from inventory. Net rental fleet capital expenditures for the quarter were $108.3 million. Gross PP&E CapEx for the quarter was $7.4 million and net was $6.1 million. Our average fleet age as of September 30 was 33.8 months.

Free cash flow for the third quarter was a use of $79.6 million. This compares to a positive free cash flow of $12.9 million a year ago. The net increase in use of cash versus last year was primarily due to timing of working capital needs and an increase in rental fleet CapEx. We've included GAAP reconciliations to net cash provided by operating activities to free cash flow at the end of this presentation.

Next on Slide 18. At the end of the third quarter, the size of our rental fleet based on OEC was $1.8 billion, a 25.3% or $354.8 million increase from a year ago. And average dollar utilization was 35.9% compared to 36% a year ago.

Proceed to Slide 19, please. At the end of the third quarter, the outstanding balance under the amended ABL facility was $219 million. Therefore, we had $523.3 million of availability at quarter-end, net of our $7.7 million of outstanding letters of credit. And with our strong balance sheet and ample liquidity, our capital structure supports our growth strategy.

And at this time, I'm going to turn the call back to John.

Thank you, Leslie. Please proceed to Slide 21. To conclude, it's been a very positive year for our business and the trends remain solid as we finished 2018. Based on our customer sentiment as well as industry data and forecast, we believe the cycle will continue with positive growth into 2019. We remain focused on capitalizing on the growth opportunities in the nonresidential construction markets we serve as well as continued execution of our growth strategy.

Lastly, we paid our 17th consecutive quarterly cash dividend on September 7. As always, future dividends are subject to board review and approval each quarter.

At this time, we'd like to take your questions. Operator, please provide instructions.

(Operator Instructions) Our first question will come from Neil Frohnapple with Buckingham Research.

Could you talk more about the 51% increase in new crane sales? Are you starting to see a recovery in the categories that have been bouncing along the bottom? And I guess, if not, are you beginning to see a pickup at least in crane rebuild activity that could serve as a positive leading indicator?

Neil, the areas on the crane side we're really seeing improved sales is the all-terrain cranes and we're seeing some nice activity on crawler cranes. Rough terrain cranes remain depressed. We're not seeing the same level of activity there as we are in crawlers and all-terrains. And we've seen some activity on the rebuild, but nothing -- no significant increase. Brad, you got any more color on that?

No. Look, I second John's comments, no significant increase. We're seeing some opportunities, but they've kind of been steady on that side. And while our outlook for cranes remains positive, I think back to last year, we had a very large increase in new sales Q3 to Q4. And I'll tell you, we -- our view for the remainder of this year is solid and good. I don't want to signal that we're -- we have any concerns because we do not, but I don't think we're going to have that same large quarter-over-quarter increase in Q4 this year that we did last year. I think that was more of an inflection point. Now we're kind of a steady state and likely to continue to improve over a period of time.

Yes. And I would add. I think we saw some pull forward in sales in the fourth quarter of last year for some tax reasons. And again, it's not our expectation. We had $74 million in new equipment sales in the fourth quarter of last year. We do not expect that to repeat this year. We're going to have a strong quarter, but not to that level.

Okay. Sounds good. And then, John or Brad, you obviously absorbed a significant amount of rental fleet year to date, which has impacted utilization. So can you elaborate on your comment that utilization has returned to industry-leading levels during the fourth quarter? And I realize you won't hit last year's fourth quarter record performance, but could you even possibly see an atypical sequential increase versus the third quarter?

Well, I will tell you that we are currently running, since Monday, we have been running north of 75% utilization on that much larger fleet. I think that's a tremendously positive metric. We think we're going to see some improved utilization going forward from where we are now until the typical seasonality starts setting in, but we feel very positive about our rental business right now.

Okay. And that 75%, John, that's versus the 71% you guys achieved in the third quarter, correct?

The 71% was an average for the quarter, so the 75% is a point in time. But today, we are north of 75% utilization.

Okay. And then last one, if I can. I realized you don't provide rental rate guidance, but do you feel like the demand environment will be supportive of rental rate growth, again, in 2019?

We absolutely do.

The next question comes from Kathryn Thompson with Thompson Research Group.

This is Steven Ramsey on for Kathryn. Thinking about the rental business, just going forward, if the cycle stays positive and growing, would you be happy with time utilization near 70% and rates continuing to improve in that 2% range? And would you sort of -- or ballpark target investing in fleet to maintain metrics around that? Or are you looking for something better?

Well, look. It's our expectation for next year that our utilization will improve. We brought in a tremendous amount of fleet in the second and third quarter. Took us a little while to digest that and absorb it. It put a little pressure on our utilization. We've absorbed that fleet. As I said a minute ago, our utilization is currently at 75%. So we think we will see some improved utilization next year, which will drive a positive rate environment for us.

Excellent. And then thinking about investments in greenfields, is there a reason that you would or would not be more aggressive in greenfields in the next 9 to 15 months? And maybe just kind of the trade-offs between holding off on greenfields for potential M&A kind of the puts and takes between the 2 places to allocate capital?

I think what you'll see us do is use our greenfield strategy where we want to increase the density in existing markets. Houston would be an example. And Dallas and Atlanta, big markets where we have multiple locations where we want to improve our coverage. And I think as we enter new markets where we don't think have a presence, we will focus more on acquisitions to enter those markets.

And our next question comes from Seth Weber with RBC Capital Markets.

I kind of want to go back to where some of these prior questions on time and rate and things. So I mean it sounds like, just kind of tying together some of your comments, it sounds like you're messaging dollar utilization should be up year-over-year in the fourth quarter and then, obviously, again next year. Is that the right way to think about it? I'm thinking dollar utilization, I know you don't want to give rate guidance specifically, but it sounds like you're messaging times getting better, rates are up, so I would think dollar utilization could be up year-over-year in the fourth quarter and then again next year?

Well, Seth, we're still going to be lagging last year fourth quarter in utilization, okay. At this point a year ago, we were at 77% utilization. We're at 75% right now. So we'll see how the average works out for the quarter, but it's still my expectation that we're going to lag last year somewhat in utilization so we're going to get positive rates. So where dollar -- fleshes out, I'm not sure. I think we would be probably flattish, but we're just going to have to see how the math works there. But we don't expect to be up in physical utilization year-over-year because like I say, a year ago, we were running 77% at this time.

Yes. Seth, let me add, part of our calculus there is on all of this replacement in growth capital, right. I mean, our pricing has been really strong from the manufacturers. Meaning, we're paying generally no price increases in the '18 as compared to '17. But when you sell off those older assets, you're replacing it with a higher cost and that numerator is somewhat of a headwind. Now that's a constant what that plays into when you look at how the many dollars we've invested. So look, we could be positive in Q4 but...

It remains to be seen.

It remains to be seen.

Okay. So fourth quarter kind of close, but next year it should be up as sort of -- if you're -- I think you just answered. And you said before, time is going to be up and rate is going to be up so that's fair.

Next year will be up. That's fair.

Okay. And in that situation, considering the higher -- I imagine the equipment costs are probably going to go up a little bit next year. You've got some wage inflation, things like that. Can this business do -- is a 50%-ish rental pull-through margin on the rental business a good way to think about it? Could it be 55%? Or I mean how are you thinking about pull -- incremental margins on rental for next year?

Look, I think 50% is very reasonable and it could be a little better than that. I mean, it's -- but 50% certainly, we'll do that.

Okay. And if I could just tie one last one in. Brad, do you think -- is CapEx, is rental CapEx down year-over-year in the fourth quarter? I think you did something like $50-ish million last year. Do you think it will be lower than that?

We can -- look, we gave some guidance last quarter, and I think Leslie is looking for that data right now. And we gave a range and we still feel comfortable with the range we gave. It's going to be flat to slightly down.

Our next question comes from Steven Fisher with UBS.

I wanted to ask you conceptually about cash flow and leverage over the course of the next year. Obviously, 2018 has been a big year for CapEx. It seems like the market has been a bit punishing on companies that have leverage here. So how should we think about your motivation to focus on cash flow and deleveraging next year and kind of where do you want your leverage ratios to be?

Well, look, we're around 3 turns right now. That's going to come down in the fourth quarter because we don't spend a lot of capital in the fourth quarter so you'll see that leverage come down somewhat. And it is our expectation that we will not spend anywhere near the growth capital next year that we did this year, so that's going to generate some nice free cash flow for us and you will see our business delever next year.

Okay. And is 2x to 3x kind of about the range where you think you want to be?

Yes. That's typically where we stay, between 2 and 3 turns. And again, we're at 3 turns right now but we've done 2 acquisitions this year and had some really heavy fleet growth, so of that number will come down.

Okay. And then John, you mentioned that some of the projects are winding down before this next wave starts. I guess, to what extent do you think timing is going to result in some industry underutilization over the next few quarters as that fleet maybe comes off rent? Or do you think there's another source of demand that would absorb that fleet?

I think we've already felt the impact of these projects coming down. You've had Sasol and a couple of other big ones come down, so that's already -- we've had the impact to that. So going forward, I think towards the end this next year and early next year, you're going to see some more projects coming online. And I tell you, we're really, really pleased with what we're hearing on that front. I mean, there's a lot of big projects being announced and this is going to be another very significant wave of industrial activity in the Gulf Coast.

Okay. And then just last one here. You mentioned that crawler demand seems to be picking up, but not rough terrain. Could you just talk about what some of the differences in the demand drivers are there that are causing the pickup in crawlers but not rough terrain?

Sure. I think if we step back maybe the last couple of years, we've talked about the softness in the crane business, the softness in the rates, the softness in the physical utilization. And while the utilization was impacted on the larger crawler cranes, it's been exponentially impacted on the RT cranes. And so the good news is, as our rough terrain crane fleet is running almost 90% utilized today, that fleet is down significantly. We've continued to shrink that crane fleet because of the declining dollar utilizations, but that level has picked up and we believe that could be an indicator that there's a healthy balance of supply and demand with RTs. And then RTs will start to trend up from this point going forward. That being said, we have not seen any significant RT orders or purchases. Now we saw rough terrain cranes every month, but it's been at a low level that we expect to start to improve at some point here in the near future.

And then the crawler side, what's different there?

The crawlers are typically on larger infrastructure projects. Jobs that you would think would maintain a longer lifespan, heavier lifts, large petrochem bridges, energy, particularly in the wind farm business. And so that's been pretty good and it's still incrementally improving, and we've seen some additional activities and expect to continue to do so.

I will take our next question from Stanley Elliott with Stifel.

Can you talk about the M&A environment? It sounds like you're going to slow down some of the growth CapEx into next year. Does that get replaced by M&A? Or how do we think about the trajectory of growing the business into 2019?

Yes. We're going to continue to look for acquisition opportunities. We've been very pleased with opportunities we're seeing there and I think you can expect us to do 2 to 3 acquisitions a year going forward -- of the tuck-in type, but we're pretty pleased with what we're seeing out there.

So pretty much in line with kind of some of the size-wise perspective of what you all have done here as of late?

Yes. I would expect to see similar stuff. Companies with EBITDA in the $20 million range on average.

Perfect. And then just to make sure I heard correctly, the expectations would be for utilizations to be up in the next year?

We think, yes. I believe that utilization in 2019 will improve over this year. We're not going to have the huge influx of assets that we had in the second and third quarter. Our growth spending will moderate somewhat and it's our expectation we'll see improved utilization next year.

(Operator Instructions) We'll move on to our next question from Ross Gilardi with Bank of America Merrill Lynch.

Just on the -- all the CapEx you spent in the third quarter in all the fleet coming, I mean do you think that was an industry-wide phenomenon? And certainly, supply-demand remains tight. I think some have naturally wondered with you and your largest competitors why rate wasn't even stronger in the third quarter. Do you think there was still a little bit of indigestion going on temporarily throughout the industry that might have impeded rate growth a little bit even though it was still positive? And as you rein in your CapEx a little bit, would you -- if time ut (sic) [utilization] truly is up next year, do you think the rate environment actually reaccelerates?

Well, as it relates to us, I think we grew our fleet more than our competitors did on a percentage basis. We had some heavy fleet growth. It's certainly impacted our utilization. We've had -- and I'm speaking of H&E., we've had 6 consecutive quarters of rate growth. So you start getting a lot tougher comps. We were about where we expected to be on rate and we were very pleased with our sequential growth, almost 1 point sequential growth. I think that's more important than the year-over-year growth, so we think we're in a positive rate environment. Going into next year, I think you're going to see the sector maintain very strong utilization and we should be able to drive rates next year.

Got it. Obviously, some of the oil service companies have come out with more cautious near-term commentary in the Permian, seems like it's more related to just lack of pipeline availability and things of that nature. But listening to your time ut in the different basins, you don't seem to be seeing really any of that. So could you just discuss a little bit like just the nature of your business in the key basins and why like a pause in maybe upstream activity wouldn't necessarily have a detrimental impact on your business?

Look. If you take Midland and San Antonio, both of those stores have been running around 80% utilization. And as I said in my comments, I think we're getting some real benefit from infrastructure projects to support all of the growth we've seen, particularly in the Midland market. I mean, they just don't -- they don't have hotels, they don't have enough schools, they don't have enough hospitals. I mean, there's tremendous infrastructure work going on. So even if there's been some pull back in drilling because they can't get -- ship this product because of lack of pipelines and whatnot, we're getting so much activity from an infrastructure standpoint. We just haven't missed a beat in those markets.

Got it. And back to this rough terrains crane market. I mean, I get you were saying before, but what the heck is going on here? I mean, you've had -- you shrunk the fleet, and the time ut is getting better, but is there something structural going on in that market? Is that particular product losing share to other types of cranes for some reason? Is there any new foreign competition in rough terrain cranes? It's hard to fathom how you've gone through like -- it seems like a pretty big boom in the U.S. economy and had a couple of different mini cycles here, broader economic activity, and this market just seems like it's, overall, just dead from what you're describing.

Well, I would say it's coming back to life. But yes, it's been the most difficult piece of the 3 primary products. When you think about rough terrain cranes or all-terrain cranes and crawler cranes, rough terrain cranes, in any normal cycle, sell at multiples more volume than do the other 2 product types. Crawler cranes have the lowest sales volume in the U.S. market, all-terrain cranes have the second lowest sales volume and rough terrains have the highest sales volume, typically. So you had a much larger fleet out there to compete with. All crane types are very long-lifed assets. And so I think the answer is a lot of long-lifed assets, more rough terrain cranes than any other product type and subsequently, it's taking it longer to return. As far as new foreign competition, absolutely not. And I would even go on to add that Manitowoc -- Grove Manitowoc has done some engineering, introduced some new products that are, clearly, in our opinion, best-in-class. So we're positioned. They're positioned. When the recovery starts more holistically on the RT side we're going to benefit, but it's certainly lagging the other 2 product categories.

Okay. And then you saw the kind of the long-awaited pickup in parts, but not really in service. I think Seth kind of asked question this before. But what's going on there? And are you seeing any more service being brought in-house or going to third parties or anything like that?

No. It's really more of the same. I tell you, there's an area of our business where the tight labor markets have had the largest impact is in the service side of our business. So in some cases, I would tell you, even today, we had some levels of pent-up demand. What we don't have, and I don't want to confuse anyone who follows the business, are the same number of large crane rebuilds that we historically are able to perform. But as far as the traditional downed machine come-fix-it structural repair, the tight labor markets, I think, have had an impact on everyone.

Okay. And then just my last question. I mean with all the M&A in the space that's been occurring with yourselves and with some of the bigger players, I mean, are you seeing anything abnormal at all with used equipment flows? I mean, did you typically see any increase turn over of used views equipment right about as companies are about the change ownership, anything like that? Any strange fluctuations in used equipment prices and just some different categories of equipment that you're seeing?

No. I think my only comment to that is that the used equipment markets are very, very healthy. There's not a lot of supply out there. Pricing is a strong. We feel really good about the used equipment markets right now.

And we'll take our final question today from Yilma Abebe with JPMorgan.

Looking on Slide 7, the top chart where you show year-over-year rate trends. That 2.2% year-over-year in the third quarter, was that impacted any way by your recent acquisitions?

No.

I don't think in any material way. I think our acquisitions may have had -- been a little bit of a headwind to our physical utilization, but I don't think it impacted rates significantly.

It did not impact rates significantly, no.

Yes. Yes.

Okay. Okay. And then just looking at the same chart again, you talked about sort of year-over-year rate increases for many quarters here. And looking at this trend line here, I know you've seen nice uptick and a tick down a little bit, and I don't want to make a deal about 20 basis points. But anything that would explain that sort of lower year-over-year rate increase going from 2.4% to 2.2%?

You're talking specific to rental rates, correct?

Exactly. Exactly, the top chart on Slide 7.

Yes. So when I look at back to last year, Q3 of '17 was our largest sequential increase at almost a full point. And so I think it kind of gets into that year-over-year comp that John was speaking to earlier. I know some of our competitors have spoken about it. It's how we've always viewed rates. I mean, listen, year-over-year rates are very important to us. But if there's one thing that's more important, it's how we're performing sequentially because we know if we continue to perform positively, sequentially, those rates will yield the right results in the year-over-year over time. But to your question, last year, Q3 '17, we had nearly a 1 point increase over Q2. By far, our largest increase of the year. So it's our most difficult comp, but our utilization has returned. We have very healthy levels. We have the systems. We have the focus. We will continue to raise our pricing. And I think that small decrease year-over-year from Q2 to Q3 you just referenced will moderate itself and start to improve again.

And the fact that our utilization was down a little bit year-over-year due to this heavy fleet, that probably put a little pressure on rates, sure.

Okay. Okay. And then one final one. You talked about sort of your desire leverage level at 2x to 3x. From a financial policy perspective, is there a maximum leverage you would not exceed for M&A?

Yes. If we were to do a large acquisition more of a transformational acquisition, I would not want to take our leverage beyond 4x.

And we have no further questions in the queue at this time. I would like to turn the conference back over to our speakers for any concluding remarks.

Yes. I just want to thank everybody for being on the call. Look, we're in a strong environment, our business is performing very well and we think the outlook is bright. We're looking forward to next year. It's going to be a really good solid year for us. So thanks for being on the call.