H&E Equipment Services Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 1.13 | About: H&E Equipment (HEES)

H&E Equipment Services (NASDAQ:HEES)

Q3 2013 Earnings Call

November 01, 2013 10:00 am ET

Executives

Kevin Inda

John M. Engquist - Chief Executive Officer, Director and Member of Finance Committee

Leslie S. Magee - Chief Financial Officer, Principal Accounting Officer and Secretary

Bradley W. Barber - President and Chief Operating Officer

Analysts

Neil Frohnapple - Longbow Research LLC

Nicholas A. Coppola - Thompson Research Group, LLC

Joe Box - KeyBanc Capital Markets Inc., Research Division

Philip Volpicelli - Deutsche Bank AG, Research Division

Seth Weber - RBC Capital Markets, LLC, Research Division

Steven Fisher - UBS Investment Bank, Research Division

Sameer Rathod - Macquarie Research

Matthew Dodson

Operator

Good day, and welcome to today's H&E Equipment Services Third Quarter 2013 Conference Call. Today's call is being recorded.

At this time, I'd like to turn the call over to Mr. Kevin Inda. Please go ahead.

Kevin Inda

Thank you, Shannon, and Welcome to H&E Equipment Services conference call to review the company's results for the third quarter of 2013, which were released earlier this morning. Format for today's call includes PowerPoint presentation, which is posted on our website at www.he-equipment.com.

Please proceed to Slide 1. 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 2. During today's call, we will 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. 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 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.

John M. Engquist

Thank you, Kevin, and good morning, everyone. Welcome to H&E Equipment Services third quarter 2013 earnings call. On the call with me today is Leslie Magee, our Chief Financial Officer; and Brad Barber, our President and Chief Operating Officer.

Proceed to Slide 3, please. This morning, I'll give an overview of our third quarter performance and also discuss activity within our regions and current market conditions. Leslie will then review our third quarter financial results in more detail. When Leslie concludes, I'll provide our thoughts on the balance of this year and into 2014 and we'll then be happy to take your questions.

Slide 5, please. Our business delivered strong results again this quarter as we continued to execute our operating strategy, capitalize on the positive trends on our end user markets and leveraged our strong industrial market penetration. We are seeing demand for rental equipment continue to increase, and we also experienced increased demand for new and used equipment this quarter, which we believe is indicative of a healthier economy in general construction market.

Construction activity in the industrial areas we serve, particularly the oil patch and petrochemicals industries, is the highest we've seen since the last peak cycle and we believe it is continuing to expand. We see continued positive business trends and our employees are doing an excellent job of capitalizing on these increased opportunities.

As a result, total revenues increased 32.2% to $270.4 million versus last year, with rentals increasing 14.9%, new equipment, 84.1% and used equipment, 47.2%. Adjusted EBITDA for the third quarter increased 25.2% to $70 million compared to $55.9 million a year ago. Net income for the quarter was $14 million, or $0.40 per diluted share, versus adjusted net income of $10.9 million, or $0.31 per diluted share a year ago.

The rental environment continues to show steady strong demand, and as a result, our rental revenue increased 14.9% versus a year ago and margins increased to 49.6% from 48.9%. Utilization remains at a high level on a much larger fleet at 72.3% based on OEC compared to 72.9% a year ago. Rental rates were up 5.2% compared to a year ago and improved slightly from the second quarter.

We are pleased with our focus and discipline on capturing rate gains. However, rates are understandably moderating given the solid increases we've seen in the last 2 years.

Slide 6, please. Let me now briefly provide some specific comments regarding activity in our various regions. All of which we believe point to an improving economy and continued cycle expansion. Our Gulf Coast region is experiencing significant industrial expansion as petrochemical and oil patch activity is high and reports indicate that multibillion capital investments relating to the petrochemical and oil patch industries, as well as other types of manufacturing facilities, are expected to occur over the next 3 to 4 years. We expect these backyard projects to drive demand in the coming years.

During the quarter, we opened a new service center in Pasadena, the heart of the petrochemical industry in Texas, just outside of Houston where we're planning further expansion to capitalize on these opportunities. Oil patch and construction activity in our Intermountain region is strong, driving a significant share of our total revenue and gross profit.

Improvements in the construction markets are benefiting our West Coast, Southwest, Southeast and Mid-Atlantic markets, with all of these regions delivering year-over-year growth. Specifically our branches in Arizona, California, Florida and Nevada are benefiting from increased spending on a wide range of construction projects.

Please proceed to Slide 7. As you can see from this slide, reports on current market conditions are positive and further expansion and growth is forecasted in the next year. On our last call, I highlighted several significant capital projects occurring in our Gulf Coast region, where we have our highest concentration in penetration in the industrial sector. As more details emerge about these projects, we're becoming increasingly excited about the economic impact and opportunity for our business in the years to come.

It is reported that Louisiana, where we're headquartered, is expected to be home to an industrial expansion with approximately $90 billion projected in the aggregate to be spent by national and international firms over the next 5 to 6 years to construct new manufacturing facilities and petrochemical plants in Louisiana. We believe this level of capital spend would be unprecedented for Louisiana.

We're closely monitoring the developments in Louisiana, as well as other major capital projects along the Gulf Coast and believe we are well-positioned to capitalize on this significant industrial construction activity.

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

Leslie S. Magee

Thank you, John, and good morning. I'll begin on Slide 9. As John said, we're very pleased with our strong third quarter performance, in which our total revenues were $270.4 million, an increase of 32.2%, and gross profit was $80.3 million, an increase of 20% compared to the same period last year. The drivers of our revenue growth continued to be rentals and new and used equipment sales, and these the segments again deliver the strongest demand compared to a year ago.

As we dive deeper in to the results, I'll begin with our rental business, first covering revenues and then I'll provide gross profit highlights for each of our segments. Rental revenues were $89.4 million for the quarter, a 14.9% increase over the same period a year ago. We have continued to invest in our fleet, which is increased approximately $108 million or 12.4% from the year ago, based on original equipment costs or OEC. Although our fleet has grown significantly, we have maintained high utilization levels with average time utilization based on OEC at 72.3% for the quarter compared to 72.9% a year ago.

In addition, based on number of units available for rent, average time utilization was 66.6% compared to 68.9% last year. Also, average rental rates increased 5.2% over a year ago and increased 0.7% compared to the second quarter of this year. Rental rate improvements were seen across all product lines.

As a result, our dollar returns were consistent with the prior year at 36.7%. New equipment sales were $90.2 million, an 84.1% increase from $49 million a year ago. Demand for cranes, which increased 87.2%, and earthmoving equipment, which increased 98.1%, continue to show strength and drive demand for new equipment.

Used equipment sales were $36.8 million, an $11.8 million or 47.2% increase over the third quarter of 2012. The increase was primarily due to strong used cranes and aerial sales.

Business activity in our parts and service segments was solid again with revenues of $40.3 million.

Let's move on to discussion of gross profit by segment. Total gross profit for the quarter was $80.3 million, compared to $66.9 million a year ago, an increase of 20% on a 32.2% increase in revenue. Consolidated margins were 29.7% compared to 32.7% a year ago. Our individual business segments are each performing well, but with comparatively high demand in new equipment sales this quarter, consolidated gross margins were negatively impacted by this shift in revenue mix.

Our rental business delivered margins of 49.6% compared to 48.9% a year ago. Margins on new equipment sales were 10.6% compared to 11.5% in the same period last year, primarily due to mix and a few large package deals with lower margins for the quarter.

Gross margins on used equipment sales were 26.3% compared to 26.4% in the same period last year. As a reminder, used equipment sales are comprised of the sale of used inventories, such as trade-ins and the sale of equipment from our rental fleet. In the third quarter, equipment sales from the rental fleet were 88% of total used equipment sales at a 29.7% gross margin compared to rental fleet equipment sales of 82% of total used equipment sales at a 31.8% gross margin a year ago. This quarter's margin were affected by product mix within our sales from the fleet, but the important point is that residual values of the used equipment remained strong.

Parts gross margins were 28% compared to 26.7% a year ago, and service gross margins were 64% versus 61.1% a year ago due to revenue mix. Margins on the other revenues were 3.4% compared to 6.7% in the third quarter of last year.

Slide 10, please. Income from operations for the third quarter increased to 35.5% to $33.9 million, or 12.6% margins, compared to $25 million or 12.2% margin a year ago. Despite the significant operating leverage achieved in SG&A expenses this quarter, the leverage was offset by the mix shift in revenue and the resulting impact to our gross margin from the high demand in new equipment sales, as I just mentioned on the previous slide.

Proceed to Slide 11. Net income was $14 million, or $0.40 per diluted share, compared to $3.7 million, or $0.11 per diluted share, in the same period a year ago. Adjusted net income in the third quarter of last year was $10.9 million, or $0.31 per diluted share. Our effective tax rate of 33.5% compared to 29.7% a year ago.

Please move to Slide 12. Adjusted EBITDA was $70 million, or 25.2% increase over the same period last year, and adjusted EBITDA margins were 25.9% compared to 27.3% in the same period a year ago, also affected by revenue mix.

Next, Slide 13. SG&A recorded $7 million, a 10.8% increase over the same period last year, yet SG&A as a percentage of revenue declined to 17.4% this quarter compared to 20.7% a year ago. Our greenfield initiatives added $1 million, or approximately 22% of the total $4.6 million increase in SG&A this quarter compared to a year ago.

Further we incurred increased wages, incentive pay and healthcare costs largely due to the growth in the business.

Slide 14 and 15 include our rental fleet statistics. And our fleet based on original equipment cost at the end of third quarter was $978.9 million versus $871 million a year ago, an increase of 12.4% or $108 million.

During the third quarter, we increased the size of our fleet by $24.6 million based on original equipment cost.

Our gross fleet capital expenditures for the quarter were $79.6 million, including noncash transfers from inventory. Net rental fleet capital expenditures for the quarter were $47.3 million. For the quarter, gross PP&E CapEx was $8.4 million and net was $7.7 million. Our average fleet age as of September 30, 2013, was 35 months.

Next, Slide 16. At the end of the third quarter, our outstanding balance under the ABL facility was $135.1 million, and accordingly, we had $260.9 million of availability at quarter end under our ABL facility, net of $6.5 million of outstanding letters of credit.

I'll now turn the call over to John for further discussion about our views on earnings year over year and 2014 and then we'll open the call for questions.

John M. Engquist

Thank you, Leslie. Please proceed to Slide 18. As I've discussed most of these points previously, let me quickly close by stating that this is an opportunistic environment for our business. We believe that the general construction market is in recovery mode, and we see end user demand in our key industrial markets growing at high levels. The capital projects underway and anticipate in Louisiana along the Gulf Coast are significant opportunities for us to leverage. We believe the key indicators in our business are pointing in the right direction, and we expect these positive trends will continue throughout this year and into 2014. We're focused on continuing to execute our operating strategy and capitalize on market conditions.

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

Question-and-Answer Session

Operator

.

[Operator Instructions]

And we will take our first question from Neil Frohnapple with Longbow Research.

Neil Frohnapple - Longbow Research LLC

John, want to spend a moment on the distribution businesses. Very strong performance in the third quarter. But was wondering if you can help us understand the sustainability of this into the fourth quarter and into 2014?

John M. Engquist

I think that we've got a lot of momentum, and my expectation is that continues. If you look at our business last several years, the fourth quarter has been very strong from the standpoint of equipment sales. There has been some significant tax benefits to drive that. Those benefits have been reduced a little bit, but they're still significant. And we're continuing to have a lot of inquiries right now. There are tax benefits. We think the fourth quarter will be another strong quarter. And when you look at the industrial expansion that's taking place in the Gulf Coast, that's going to drive a lot of equipment sales. And I think it's going to benefit our cranes business. Brad, I don't if you have any more color on that, but we're seeing plenty of demand.

Neil Frohnapple - Longbow Research LLC

Great. I guess just a quick follow-up to that, John, I mean, do expect -- you noted that you expect the fourth quarter to be another strong quarter? Last year's fourth quarter, you've been reminding us and is up against a very difficult comp. Do you think you'll be able to match or exceed last year's fourth quarter on the distribution side?

John M. Engquist

Look, we're going to have a strong quarter and you're right, the fourth quarter last year is exceptionally strong. It's a tough comp. But we're confident there's a lot of demand out there and we're going to close the year strong.

Bradley W. Barber

Neil, I think I'll just second John's comments. A lot of good activity. With the nature of these large cranes, it's certainly possible that we could. At the same time, a few large deals really move the needle from a revenue standpoint. But I can tell you momentum is good, appetite seems to be pretty robust among our end users, and we feel very optimistic about Q4 being a very solid quarter. How that actually ends, from historical standpoint, from revenue still yet to be seen, but it's going to be a good quarter of sales.

Neil Frohnapple - Longbow Research LLC

And just one final one for me. Can you provide any commentary on your rental business performance in the month of October? Did you see rental rates increase versus where we ended the third quarter? And just any other color you could provide would be helpful.

John M. Engquist

I don't have color on rental rates right now, and I really don't like to give monthly rate numbers. They can be deceiving. I prefer to do it on a quarterly basis, but utilization has continued to increase. Our utilization is very strong and we're very, very pleased with where we are from a utilization standpoint.

Operator

And next we go to Nick Coppola with Thompson Research Group.

Nicholas A. Coppola - Thompson Research Group, LLC

On that rate performance, certainly understood that you've seen really strong growth over the last couple of years and there is some inevitable moderation. But is there anything else you could tell us about drivers you're seeing out there in the competitive environment? How should we be thinking about rates?

Bradley W. Barber

Nick, this is Brad. The comments I would make is that I think we have seen the same environment that are larger and then some smaller competitors have seen, which is really healthy utilization, continued increasing rates over the last few years. And rates have gotten a little softer as far as the increases have gone. My anticipation is that all of us in our sector are going to continue to focus on return on assets, and at the utilization that all of our companies are running today, we should expect to see continued improved rental rates. So I view it as a situation where we had steady increases for a couple of years starting to moderate here the last quarter, a couple of quarters but still positive. And as we go through the seasonal slow time, meaning of November, December, January, fully expect to see all of us head back in a positive direction. So I think there is still plenty of upside for rental rates. Will it be the same growth rate we saw last 2 years? I don't think that's reasonable. Will it be consistent and positive? I believe that is what we will see.

Nicholas A. Coppola - Thompson Research Group, LLC

Okay. That's helpful. And then I just heard your comments about being happy with utilization, but what do you -- how do you think about max utilization? So as you think about '14, what kind of room for improvement is there or do you feel like you may be approaching a point where you don't want be stocked out and turn away orders?

Bradley W. Barber

Yes, so I would say happy may be the wrong term, and I apologize. Where we are is we're at a level that we're not going to run a lot higher utilization to be able to properly service our customers. So we have opportunity in many ways. #1, we can continue to grow our fleet. We can look within the mix for higher-return assets that our customers are consuming. And then, as I just stated, we're going to have an opportunity to continue to increase the rental rates on the existing fleet, as well as future purchases. So I think we've got a lot of upside within the mix or the view of utilization.

Nicholas A. Coppola - Thompson Research Group, LLC

All right. Okay. And then last question for me, I apologize on this. Do you quantify how much increase you saw in new equipment sales in terms of cranes and in earthmoving?

Bradley W. Barber

Yes, I think Leslie did. Earthmoving was up close, it almost doubled year-over-year.

Leslie S. Magee

Close to 100% increase. It was 98% and cranes were up like 87% year-over-year, in new equipment.

Operator

And next we go to Joe Box with KeyBanc Capital Markets.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Nice job just reaccelerating the equipment rental, incremental gross profit margin in spite of getting a little bit less contribution from price. Can you maybe just frame up what the big drivers were behind getting those incremental gross profit margin back into the 50% range from the 40% last quarter?

John M. Engquist

I think it's true. It's largely related to very strong utilization. We're running at very, very high utilization level right now. I think that's the biggest driver.

Joe Box - KeyBanc Capital Markets Inc., Research Division

I mean, are you finding that maybe you're investing a little bit less in terms of mechanics or drivers at this point and maybe that's also helping or is it just sheer volume on rent?

Bradley W. Barber

Well, look, I think that can be a piece of it, Joe, because we are entering October, November, typically our peak rental months. So maybe the term would be -- we're kind of hitting on all cylinders and there's some incremental gains from each of those. But as John stated, that certainly the largest piece of that improvement just came from the additional leverage of more equipment on rent compared to the previous period.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Got it. And just a question on the petrochemical and energy projects that you expect over the next couple of years, can you maybe just talk to the equipment usage on this type of project? Is a low-single digit percentage the right way to think about equipment share as a percent of the total project?

John M. Engquist

I'm not sure I know how to answer that question, Joe. One, I will tell you that the need for equipment will be very broad-based across all of our equipment categories, depending on what stage of projects in. It's going to impact our dirt equipment. It's going to impact our crane business in a big way and it's going to impact our aerial business. It's going to be broad-based demand. But how to break that out percentage-wise, I'm not sure I can do that for you.

Bradley W. Barber

I don't think I could do either, Joe. I will say this, though, it's going to be really good for H&E Equipment Services. With our blended mix of rentals, part sales service being the largest road [indiscernible] distributor, having all these service technicians with the skill levels that cannot be replicated by our competitors, it's going to bode well. And I will go further to say that I think our distribution, our more traditional distribution-based attributes, parts and service will lend itself and enhance our opportunities on the rental side of these projects.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Agree with you completely, Brad. I mean maybe is this a better way to think about it. So in terms of the equipment intensity that you might have for, say, a commercial or a nonres construction project, and I get that it varies based on type of project, is the equipment intensity much bigger for these petrochemical projects or is it basically the same?

Bradley W. Barber

No, it's bigger. It's higher intensity. It's got potential to consume more equipment. Now, you do have certain types of nonres projects like a big stadium job or something, the Cowboy Stadium, we had 400 machines on that job, maybe more than that for a long time. So there's exceptions to that, but these projects are very equipment intensive, these industrial products.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Right. And in terms of what you sold out of the new equipment business, do you think any of that equipment went toward some of these projects or are they still a year or 2 from seeing some sales?

John M. Engquist

No, we had a few sales, I would call ancillary at this point but no, nothing meaningful. And I think we're somewhere in the 6- to 18-month range before we start to see real meaningful impacts, and it's only going to get better from there.

Operator

And next we go to Philip Volpicelli with Deutsche Bank.

Philip Volpicelli - Deutsche Bank AG, Research Division

First question is for Leslie. The floor plan financing outstanding at end of the quarter?

Leslie S. Magee

$49.7 million.

Philip Volpicelli - Deutsche Bank AG, Research Division

$49.7 million, great. And then I believe you guys talked about 6 greenfield branches being opened this year. I can count 5 so far. Can give us a sense of where the last one might be and then what your plans are going forward in terms of greenfields and possible M&A?

John M. Engquist

Sure. Philip, we, so like you say, towards the end of last year, we're up in Midland and Mesquite, both in Texas. We have Seattle in January this year, Fort Worth in March of this year, Union City in the Bay Area in July, and then most recently Pasadena in October. We have approved and are moving forward with opening of Lubbock, Texas right now. And as far as additional opportunity, it's readily available to us. So we've got plans to open another 6 or so locations in 2014. While we've not given a lot of guidance around these locations or investments, I will say that all of the locations I just mentioned are performing well ahead of our internal expectations. We're doing well. We're moving at a controlled pace, but the strategy is paying dividends for us.

Philip Volpicelli - Deutsche Bank AG, Research Division

Great. And in terms of M&A, I know there's a couple of books out there the marketplace. Are using the pace of opportunities across your desk accelerate or are the multiples at reasonable levels? What are your thoughts on M&A?

John M. Engquist

There's obviously, there are some assets for sale out there, and we'll always take a look. We're not pursuing anything right now. But as I said in the past, we've got a balance sheet and a capital structure that will certainly allow us to pursue the right opportunity if and when it comes along, and we'll be optimistic and just take that approach.

Philip Volpicelli - Deutsche Bank AG, Research Division

Okay. And last one for me, in terms of capital spending, a couple of your smaller competitor, regional competitors have talked about pulling forward CapEx into the fourth quarter from the first quarter because of the discounts from manufacturers. Are you seeing that?

John M. Engquist

Yes. There's some of that. I mean, we have probably invested a little heavier late in the year than is typical for us just because of opportunity, particularly in Texas. The demand we got there right now is just amazing. So yes, I think we probably -- and Brad might want to give a some more color on this. I mean we've invested some money here probably a little more so than we typically would this time of year, but it's really not so much based on any kind of discount, it's based on pure demand.

Operator

Next we go to Seth Weber with RBC Capital Markets.

Seth Weber - RBC Capital Markets, LLC, Research Division

Actually, I just wanted to follow-up on the prior question. I mean, you obviously sound, John, you sound particularly bullish and encouraged about the outlook. Do you feel like you have adequate infrastructure? Do you think you'll be hiring more sales staff, more mechanics, et cetera? I mean, do you think that we'll start to see SG&A creep up here going forward or do you feel like you have kind of adequate resources at this point to address the opportunity ahead of you?

John M. Engquist

No, I think we have adequate resources to address the opportunity. And I can tell you we're always hiring technicians. I mean that's something we're always pursuing and always will. And there's a shortage of technicians in our sector, so when we find a good one, we're going to hire him if we can. But no, we absolutely have adequate resources and we're structured to grow our business significantly as we stand.

Seth Weber - RBC Capital Markets, LLC, Research Division

Okay. Just from the -- given the positive dynamics around your footprint, are you seeing anything unusual with bidding activity? Are you seeing some of the other competitors get more aggressive, trying to come in to your footprint or do you feel like there's just enough opportunity out there that you're able to continue to kind of drive your business like you would expect? I think you referenced some of your competitors pulling forward simply?

John M. Engquist

I don't think we're seeing anything unusual on the competitive front. I think it's more of the same, nothing unusual there. And there is a going to be a tremendous opportunity in this Gulf Coast area. I mean we looked at a report this morning in the greater Baton Rouge area, probably comprises 4, 5 perishes around each Baton Rouge. I mean, there is $27 billion worth of industrial projects underway that are fixing to start. There's more than that in Southwest Louisiana, so it's kind of that's something Louisiana has never seen before and it's a huge industrial expansion, so there's certainly enough for everybody. Now obviously everybody is going to be looking at this opportunity, but unless Brad sees something different, I don't see anything unusual on the competitive front, just more of the same.

Bradley W. Barber

Seth, I think there's reasonable discipline by all of our competitors. As John has said, we'll see more of the same. But no one is getting overly aggressive on the rate front, and so it's very encouraging and I think 2014 is going to give us some real opportunity.

Seth Weber - RBC Capital Markets, LLC, Research Division

Okay. Just one last one. I mean historically your distribution business has not -- you've been more on the small midsized crawler cranes. are you starting to see more requests or are you contemplating adding more of the bigger crawler cranes to your offerings? Or I mean, your margins ticked down a little bit. That usually happens when you sell more bigger stuff. Do expect to sell more large cranes going forward?

John M. Engquist

We have recently sold an 18,000, which is, obviously, a very large crawler crane, and we're -- I think the inquiries on large crawlers is definitely up. We're talking to more people about it. So Brad, you got...

Bradley W. Barber

Seth, look, that 18,000 John referenced, we're talking about machines that probably carry a 5% to 6% margins instead of the more traditional, 10% to 12% margin on some of the other large projects. So could we sell, when you say are we adding those to our offer, we're working with Manitowoc consistently on our inventory needs, balancing our needs against their inventory and their build schedules. And we're in communication. We think we'll be able to source the products. I think there is an opportunity that the larger products will excel more than they have in maybe the last 12 to 18 months, and we may be starting to see some of that right now. So maybe that's helpful to you.

Seth Weber - RBC Capital Markets, LLC, Research Division

Yes, that is. I'm just sorry, lastly, one of the other OEMs talked about extra inventory in the North America crane channel. Are you guys seeing anything to that effect?

Bradley W. Barber

No, we're not. There are always pockets of certain particular size class, you will. But in general, we feel pretty good about what's going on with the inventory levels in cranes.

Operator

[Operator Instructions].

And next we go to Steven Fisher with UBS.

Steven Fisher - UBS Investment Bank, Research Division

Just wondering to the extent that these strong new equipment sales are coming at the expense of rental at all, then I suppose somewhat related to that, are you finding that in this Gulf Coast region, in particular where there is perhaps a deeper pipeline of prospective projects that the new sales are becoming more relevant than rental?

Bradley W. Barber

Steven, the answer is no to really both questions. They're 2 independent businesses. We have a rental sales force. We have a retail sales force, and those guys don't get together and decide what we're going to do. The customer really drives that opportunity. Clearly, in the rental side, you know who our largest competitors are with United, Hertz, Sunbelt and those folks. On the retail side, it's more of the traditional distribution base of the Link-belt dealer, the Caterpillar dealer or what have you. So they're mutually exclusive of one another. And I think that the opportunity for both will continue to grow.

John M. Engquist

I do think you're going to see increased activity in our distribution business because of the magnitude of these projects and the confidence in the economy, but that will not be at the expense of the rental business. The rental business will perform very well and on its own.

Steven Fisher - UBS Investment Bank, Research Division

And in the Gulf Coast, where you have a deeper bench of prospective projects, that lend itself more to sales than rental or is there a role -- good solid role for rental as well?

John M. Engquist

There's is a good solid role for both. I mean it's going to drive a lot of rental activity and it's going to drive our distribution business. So I think that we're sitting here with a real, real strong business model to take advantage of this opportunity.

Steven Fisher - UBS Investment Bank, Research Division

Okay. Great. And then it sounds like a specific monthly data point, but just curious if there's any color that you can give, directionally on how the rental rate trend played out over the course of the quarter?

John M. Engquist

It was somewhat lumpy, and but again from the second quarter, we were up sequentially, 7/10 of a point, I think. So we had a sequential gain from the second to the third quarter. And on a monthly basis, it was a little bit lumpy. But it's a still solid but moderating rate environment, but we're still getting positive gains there.

Operator

And next we go to Sameer Rathod with Macquarie.

Sameer Rathod - Macquarie Research

Actually all my questions have been asked and answered. Thank you.

John M. Engquist

Thank you.

Operator

And next, we will take Matthew Dodson with J West LLC.

Matthew Dodson

Last quarter, you talked about significant inquiries in your crawler crane business and you're talking about today that you've seen more increase in kind of the heavy duty crawlers. Are you seeing the ability to push price on that side of the rental business?

John M. Engquist

No. On large crawlers, I mean, there's a suggested manufacturer's price-- the discounts on those are fairly slim. So I mean we typically don't discount these crawlers.

Bradley W. Barber

Yes, Matthew, I think one distinction, let me make just for clarity, we don't offer large crawlers as part of our rental offering. Now we have a substantial rental fleet of cranes, but those are primarily rough terrain cranes, to carry that cranes in and out on the smaller boot trucks. So the crawler crane business is more of a retail distribution business, not a really meaningful piece of our rental business.

Matthew Dodson

Got it. And so I guess on the rough terrain activity you guys mentioned last quarter and today, are you able to push price in front of what you have been seeing in inquiries that you've been talking about?

Bradley W. Barber

And you're referring -- when you say price, are you talking about rate?

Matthew Dodson

Rate. Yes. I'm sorry, rate.

Bradley W. Barber

We are getting rate gains on cranes. It's probably more moderate gains than some other products that we have, but we're running at strong utilization levels there, as most of our competitors in the crane rental markets are. So yes, we are getting rate gains there and pushing price.

Operator

[Operator Instructions].

And it appears there are no further questions in queue. I'd like to turn the conference back over to today's speakers for closing remarks.

John M. Engquist

Everybody, I appreciate you attending the call, and we look forward to speaking with you on the next call. I think we're in a very positive environment, and I think we've got some nice runway in front of us here. Talk to you next time. Thanks.

Operator

And that does conclude today's conference. We do thank you for your participation. You may now disconnect.

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