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H&E Equipment Services, Inc (NASDAQ:HEES)

Q4 2013 Earnings Conference Call

February 28, 2014 10:00 am ET

Executives

Kevin Inda - IR, Corporate Communications, Inc.

John Engquist - CEO

Brad Barber - President & COO

Leslie Magee - CFO & Secretary

Analysts

Joe Box - KeyBanc Capital Markets

Neil Frohnapple - Longbow Research

Nick Coppola - Thompson Research Group

Shawn Wandrack - Deutsche Bank

Seth Weber - RBC Capital Markets

Steve Fisher - UBS

Operator

Good day, everyone, and welcome to today's H&E Equipment Services Fourth Quarter 2013 Conference Call. Today's call is being recorded. And at this time, I would like to turn the call over to Mr. Kevin Inda. Please go ahead, sir.

Kevin Inda

Thank you, Lisa, and welcome to H&E Equipment Services conference call to review the company's results for the fourth quarter and full year 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 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'll refer to certain non-GAAP financial measures and we've reconciled these measures to GAAP figures in our earnings release, which is available on our website.

Before we start, let me offer the cautionary note that this call contains forward-looking statements within the meaning of the Federal Securities Laws. Statements about our beliefs and expectations and statements containing words such as may, could, believe, expect, anticipate and similar expressions constitute forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in 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 Engquist

Thank you, Kevin, and good morning, everyone. Welcome to H&E Equipment Services fourth 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 fourth quarter performance and also discuss activity within our regions and current market conditions. Leslie will then review our fourth quarter and full year financial results in more detail. When Leslie concludes, I'll close with our thoughts on the outlook for 2014. After we'll be happy to take your questions.

Proceed to Slide 5, please. We believe our fourth quarter performance was indicative of the across the board strength that continued in our business and demonstrates our ability to capitalize on improving market conditions. We were pleased with the conclusion to a great year for our business. We delivered positive results in our rental business which include our higher margin and strong utilization while at the same time expanding our fleet.

Our distribution business delivered solid results as well. While sales were still strong in our new equipment segment it did experience a decline against the same period last year. It is worth mentioning that this decline in new sales is a result of a few high dollar crawler cranes that were sold in the prior period. And user demand for new equipment remained strong. Our continued focus on leveraging the increasing demand in our end-user markets was reflected in our financial results for the quarter.

Total revenues increased 3.8% to $259.6 million versus the same period last year with rentals increasing 12% and used equipment increasing 28.9%. EBITDA for the fourth quarter increased 17.5% to $70.9 million, compared to $60.4 million a year ago. Net income for the quarter was $14.6 million and $0.41 per diluted share versus net income of $10.7 million or $0.31 per diluted share a year ago.

The rental environment continued to show steady strong demand and as a result our margins increased to 48.9% from 48.1%. Utilization remained at a high level on a much larger fleet and rental rates increased 5.6% compared to a year ago.

Please proceed to Slide 6. I just want to make a few brief put important comments regarding this slide. We see all of our regions having benefited from the improved market conditions and higher end-user demand. Our equipment was put to work on a vast array of construction projects; projects we believe were made possible by an improving economy, from highway infrastructure to apartments, retail and shopping mall, office and many other projects.

In the fourth quarter, we saw a capital spending on construction activity that had disappeared during the recession emerging once again. We're seeing this in even our less industrial regions. Our industrial focus in our Gulf Coast and inner mountain regions continue to generate the majority of our revenue and gross profit, and we expect this will continue and increase in 2014.

We are heavily embedded in the petrochemical, oil patch and other related industries along the Gulf Coast and in our inner mountain region. We believe activity related to these industries is at an all time high. As a result, we have opened a store in Lubbock, Texas since the first of the year.

Further more, and as I have discussed on previous call, we expect to benefit from what has been reported as historically high levels of projected capital spending relating to new projects in these industries in our Louisiana and Texas markets.

Proceed the Slide 7 please. This slide just illustrates the current and positive market indicators relating to the construction markets. Forecast call for increased growth in 2014 and beyond, and we believe this is the beginning of an expansion cycle in non-residential construction. As I mentioned earlier, we're closely monitoring the industrial projects that are expected to begin breaking ground this year in Louisiana to construct new petrochemical and manufacturing plants.

At this time, I'm going to turn the call over to Leslie to discuss our fourth quarter and full year in more detail.

Leslie Magee

Thank you, John, and good morning. I'll begin on Slide 9. Our fourth quarter performance was a solid close to 2013 with total revenues increasing 3.8% to $259.6 million and gross profit increasing 11.1% to $81.6 million compared with the same period last year. The primary drivers of our revenue growth this quarter were rentals and used equipment sales.

I will briefly touch on each of our business segments beginning with our rental business first covering revenues and then I will provide gross profit highlights of each of our segments. Rental revenues were $90.4 million for the quarter, a 12% increase over the same period a year ago. We have continued to invest in our fleet, which has increased approximately $117.8 million or 13.3% from a year ago based on original equipment cost or OEC. Although our fleet size has grown significantly, we have maintained high utilization levels with average time utilization based on OEC of 71.9% for the quarter compared to 71.8% a year ago.

In addition based on number of units available for rent average time utilization was 66% compared to 66.6% last year. Also average rental rates increased 5.6% over a year ago and increased 0.4% compared to the third quarter of this year. Rental rate improvements were achieved across all product line. Our dollar returns were 36.2% compared to 36.4% a year ago.

New equipment sales were $77.8 million, down 10.6% from $87 million a year ago. And as John indicted in his earlier remarks, this decline was primarily the result of lower demands for large cranes, which decreased by $17 million or 24.9%. Keep in mind that when 2012 came to a close, we experienced significant year-end buying, which has resulted in a challenging prior year comparison.

However, the decline in demand for large cranes was partially offset by increased demand in new earthmoving and aerial equipment resulting in increases of 73.5% and 24% respectively. Used equipment sales were $38 million, an $8.5 million to 28.9% increase over the fourth quarter of 2012. The increase was primarily due to strong used cranes and earth moving sales. Fourth quarter combined revenues in our parts and service segment were $39.8 million.

Now let me briefly walk through gross profit by segment. Total gross profit for the quarter was $81.6 million compared to $73.5 million a year ago, an increase of 11.1% on 3.8% increase in revenues. Consolidated margins were 31.5% compared to 29.4% a year ago. Gross margins have increased due to revenue mix combined with strong performance in several individual business segments.

Our rental business delivered margins of 48.9% compared to 48.1% a year ago. Margins on new equipment sales were 10.7% compared to 11.6% in the same period last year primarily due to mix and higher volume related to a few large packaged deals of the quarter.

Gross margins on used equipment sales were 29.7% compared to 30.2% in the same period last year. The health of used equipment market is evident by the demand for used equipment and the strength of the residual values of our used equipments. Parts gross margins were 30.2% compared to 27.4% a year ago and service gross margins were 63.9% versus 59.4% a year ago due to revenue mix. Margins on other revenues were 6% compared to 1.7% in the fourth quarter of last year.

Moving on the Slide 10 please. Income from operations for the fourth quarter increased 18.6% to $33.8 million or 13% margin compared to $28.5 million, on 11.4% margin a year ago. The driver of the increase was the shift in revenue mix to rentals and solid performance from our business segment I just discussed on the previous slide.

Proceed to Slide 11. Net income was $14.6 million or $0.41 per diluted share compared to $10.7 million or $0.31 per diluted share in the same period a year ago. Our effective tax rate was 31.1% compared to 36.1% a year ago due to higher saleable permanent differences in relation to pretax income. These permanent differences will be reduced this year resulting in a higher 2014 tax rate that should approximate statutory rates for those federal and state taxes.

Please move to Slide 12. EBIDTA was $70.9 million or 17.5% increase over the same period last year and EBIDTA margins were 27.3% compared to 24.1% in the same period a year ago also effected by revenue mix combined with improved rental and parts and service gross margin.

Next Slide 13. SG&A was $48.7 million, a 7.9% increase over the same period last year and SG&A as a percentage of revenue was 18.8% this quarter, compared to 18.1% a year ago. Our greenfield initiatives added $1.1 million of the total $3.6 million increase in SG&A this quarter compared to a year ago. And further, we incurred increased wages, commissions and incentive pay largely due to the growth in the business.

Slides 14 and 15 include our rental fleet statistics. And our fleet based on original equipment cost at the end of fourth quarter was $1 billion versus $883 million a year ago, an increase of 13.3% or $117.8 million.

During the fourth quarter, we increased the size of our fleet by $21.9 million based on OEC.

Our gross fleet capital expenditures for the quarter were $70.4 million, including non-cash transfers from inventory. And net rental fleet capital expenditures for the quarter were $38.1 million. Gross PP&E CapEx was $8.7 million and net was $7.8 million. Our average fleet age as of December 31, 2013 was 34.9 months.

Next, Slide 16 please. At the end of the fourth quarter, our outstanding balance under the ABL facility was $102.5 million, and accordingly, we had $293.5 million of availability at quarter end under our ABL facility, net of $6.5 million of outstanding letters of credit.

Next, Slide 17. Let me concluded back quickly reviewing our full year 2013 results. And to summarize, 2013 was an impressive year resulting in total revenues of $987.8 million or an 18% increase in revenues, a 17.3% increase in gross profit and a solid gross margin of 30.6%.

As I highlighted earlier, due to the increase demand we have invested in our rental fleet and increased the size by approximately $117.8 million or 13.3% to $1 billion in total OEC.

Even with a significantly largest fleet time utilization remained high at 70.8% based on OEC and we raised rental rate of 6.9% for the full year.

Income from operations increased to $115.3 million on a 11.7% operating Margin compared to $89.2 million on a 10.7% margin in 2012. Net income increased to $44.1 million or $1.26 per diluted share in 2013 versus $28.8 million or $0.82 per diluted share in 2012.

2012 adjusted net income was $35.4 million or $1 per diluted share. We finished the year with EBITDA at $255.5 million on a margin of 25.9%, compared to $196.5 million on a margin of 23.5% a year ago or EBITDA of $255.5 million compared to 2012 adjusted EBITDA of $206.7 million on a margin of 24.7%.

At this time, I'll turn the call over to John to discuss our 2014 outlook and then we'll open the call for questions.

John Engquist

Thank you, Leslie. Please proceed to Slide 19. Let me quickly close by saying that 2013 was a great year four our business and we could not have achieve such positive results without the dedication and solid execution by our employees. As a result, we also delivered significant gains in shareholder value which is very important to everyone at H&E Equipment Services.

We expect 2014 to be an exciting year and believe the trend we are experiencing in the marketplace will continue. Many indicators are pointing to the majority of the recovery in nonresidential construction still to come with a very log runway ahead. We believe that our rental business is positioned to benefit the most from this robust growth with end-user demand currently significantly higher than this time last year. At the same time, based on customer feedback, we also expect our distribution business will continue to operate at higher levels. We are excited about the wide range of construction projects being reported in our markets and look forward to the resulting appetite for rentals and new and used equipment.

As I mentioned earlier, we expect our focus on the industrial sector along the Gulf Coast will be a major contributor to our growth in 2014, particularly if the anticipated historically high upcoming capital spend comes in as reported. We believe the overall market conditions are very encouraging and our focus remains on solid execution to improve our market position and capitalize on the anticipated positive trends in our industry in 2014.

At this time, we would be happy to take your questions. Operator, please provide instructions.

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Joe Box with KeyBanc Capital Markets

Joe Box - KeyBanc Capital Markets

Hi, good morning.

John Engquist

Hi, Joe.

Joe Box - KeyBanc Capital Markets

Question for you guys on weather and just the impact on rental rates. I guess the weather could certainly slow project starts, but I'm a little more curious on the impact on rental rates. Does weather typically give rental companies pause on raising rates or is it something that you look through? Just any sort of clarity that you guys could give us on sequential rate expectations, would be pretty helpful.

John Engquist

Joe, I do not know that weather has impacted our rates and I will tell you why. In spite, a really weather conditions our utilization has held up very well. January and February, we are running well ahead of a year ago on utilization. So the demand is very strong. So I'm not sure that we've seen much impact on rate. Really what drive rates one way or the other it's physical utilization and we are currently experiencing some pretty strong utilization. Brad, you got any?

Bradley Barber

Yes. Joe, the only thing I would add is I think that we do our competitors do and to a certain level of customers do as well, weather is always a short term phenomenon and it can certainly have a impact maybe even within a quarter if the weather severe or not, but it's never been typical in the industry for weather to be severe long enough impact rates and that really be the driver.

Joe Box - KeyBanc Capital Markets

Great. I just didn't know that it would cause a slower start to the year, but that's helpful. Thank you. And then maybe a question of the new locations. I noticed obviously first year with a slug of new locations coming online. Can you maybe just give us a feel for a revenue contribution, maybe where margin shook out and at say the pace of current growth? How long could it be before these locations hit an average rental margin?

Brad Barber

Sure. We have not given much guidance specific to those locations. I would point out that we opened four locations actually in 2013. We started this initiative late 2012 when we opened midland in the Midland and Mesquite, Texas in 2012. In 2013, we opened Seattle, Fort Worth, Union City, California, and then Pasadena, Texas. As John, mentioned in his comments we have already opened Lubbock. They were opened February 1st for business and we expect to achieve four to five more locations opened this year.

As it pertains to the averages, they range very vastly, Joe. So we've kind of with the small number of locations that we're opening meaning that four, five, six locations per year, we've shied away from giving guidance, because you can have an operation that has $10 million in inventory and an operation that has $20 million inventory and the numbers were dramatically different. I will say that with all of the greenfields that we have opened in 2012 and 2013 that we have well exceeded our internal expectations and that our plans are going very well.

Joe Box - KeyBanc Capital Markets

Understood. Fair enough. Maybe switching gears over to free cash flow. At this point in the cycle, which is arguably still pretty early, how are you guys balancing free cash flow with the idea that the market could have several years of expansion? Do you have a plan in place where at some point in the cycle you want to start generating a lot more cash and maybe do you levering the balance sheet, or is it still years out and that's not really something that you need to start thinking about right here?

Brad Barber

Joe, look, our level of capital spending this year and '14 will be very similar to what we did last year. The net spend will be a little different because I don't think we are going to sell as much rental equipment as we did a year ago. We don't need to; our fleet is very young, but at the gross level and at the growth capital spend they are going to be similar to last year. From a cash flow standpoint, we anticipate this year being neutral to slightly cash flow positive and our expectation is as we go out in future years, we will start generating more cash.

Operator

We will take our next question from Neil Frohnapple with Longbow Research.

Neil Frohnapple - Longbow Research

Hi good morning. Congrats on a nice quarter and year.

John Engquist

Thank you.

Brad Barber

Thank you, Neil.

Neil Frohnapple - Longbow Research

Can you talk about SG&A in 2014 and put some text to consider. Should we expect incremental costs obviously from the new store openings in '14 and -- yes, if you could just talk about directionally how we should be thinking about SG&A?

Brad Barber

Yes, and Leslie may want to give more color, I think that you're going to see some increase in absolute dollars. And the biggest area of our business that we are projecting growth in next year is the rental segment. We're looking at really strong growth there. So I think you will see some absolute dollar increase, but I think as a percentage of revenue our SG&A will remain relatively flat.

Leslie Magee

Flat is accurate.

Neil Frohnapple - Longbow Research

G&A is when they're relatively flat.

Brad Barber

Right.

Neil Frohnapple - Longbow Research

Okay. And that's total overall?

Brad Barber

That's correct.

Neil Frohnapple - Longbow Research

Okay. And then I guess to switching gears quickly. Can you just talk a little bit more about the modest parts and service decline in the quarter? It was obviously very little, but how should we be thinking about these businesses as we head into 2014?

John Engquist

Yes, look for the year we showed decent growth in that, and one thing I would point to in our parts and service business is the margin improvement we saw in the fourth quarter which was very strong. That's an area of focus for us. We're anticipating solid top line growth in that segment and really significant margin improvement next year. So I think we have been very focused on the margin side and whether weather played somewhat of an impact or it didn't, I don't know, I can't tell you that, but we're a little bit surprised that our growth was flat year-over-year, but our expectations are for reasonable growth next year and margin improvement.

Brad Barber

Let me add that a nice portion of overall service and parts are derived from the crane business, the crane repairs, crane rebuilds. And as we've spoken before directionally about retail sales those large products typically lag the cycle; they're later cycle products. And so it's reasonable to assume that some level of repair, heavy maintenance, rebuild, getting these machines back in condition will also become like taco. And I will tell you that we have seen inquiries continually pick up on the opportunity to rebuild these large crawlers. So that's likely going to be one of the larger drivers of improvement but, as John said, we're not necessarily happy with our performance. We're going to continue to focus on the quality of revenue and improving the margin, and I believe that the volume will take care of itself through our sales and marketing efforts along with the large crane opportunities there to come.

Neil Frohnapple - Longbow Research

Great, thanks for the additional color, Brad. And just one final one. Can you just remind us what the carryover rental rate will be for 2014?

Brad Barber

I don't have that in front of us. If I had to guess 1.5 or 2 points, yes, yes.

Operator

We'll take our next question from Nick Coppola with Thompson Research Group.

Nick Coppola - Thompson Research Group

What is the cadence that you expect on the industrial projects in Louisiana and Texas that you have discussed? And obviously there is a big number there, and it's going to be a bit of a runway, fairly over going to be over a period of years although it's a curve. When do we start to see the benefits?

John Engquist

Well I think it will start in 2014, but I'll tell you trying to predict the cadence and timing of these projects is difficult. A lot of them have been announced. They're going through permitting processes and that can take some time. Brad, I don't know if he's got anymore.

Brad Barber

There's some site work going on fast. I mean, so some of these jobs are starting to materialize at some, but I certainly agree with John. It's very difficult to project. What we know is its going to be good. We're starting at some very minimal benefit from some of the high level profile large dollar projects. And we suspect that we will have more clarity as we start to work through Q1 and Q2 this year as to what our opportunities will be as it pertains to timing, but the opportunities are going to be very nice. It's just a matter of when at this point.

John Engquist

Several of these really big projects are in the dirt right now but its preliminary earth moving work, but I think we'll start to see some benefit this and it will ramp up significantly over the course of the next few years.

Nick Coppola - Thompson Research Group

Okay, that makes sense. And then just a second question here, very generally can you give us an update on expectations for rate improvement in '14? And is there an expectation that rates are just going to see a bit of a moderation from earlier years as rates can't keep rising like that? And I guess what -- what's your thinking around that.

John Engquist

Yes, our thinking is, I think you should expect some moderation on rate increases. We're going to get year-over-year improvement in rates. We've got some room left but those increases will moderate somewhat. But I think -- we're very confident we'll continue to get year-over-year rate increases with some moderation.

Operator

We'll take our next question from Philip Volpicelli with Deutsche Bank

Shawn Wandrack - Deutsche Bank

Good morning, this is Shawn Wandrack sitting in for Phil. Great quarter. Just building on the last gentlemen's question about rates, when you talk about rates by equipment type at this part of the cycle, can you give us any idea of which equipment is able to come in and garner the higher rates right now versus other piece of equipment?

John Engquist

I think our strongest rate increases have been on aerial product. Our weakest increases have probably been on crane. Brad, you probably got more color on this.

Brad Barber

Well, I do for this look, John just nailed the two key points. Crane utilization is high. It was high a year ago; it's a little higher today. It's going to grow exceptionally high and opportunity is going to grow I think exponentially as these large projects come online. As Leslie mentioned, we had rate increases in all product segments, but certainly we had more in the aerial worked platform piece of our business.

That could change a little bit, so cranes were one of the, may be the lowest contributor from a rate improvement standpoint, depending on the timing of these industrial jobs that could turnaround. That being official and it's important to keep in perspective the average cost of a crane versus average cost of an aerial in the relationship of those percentile increases. Cranes range from $250,000 to a $1 million per unit that are in our rental fleet. Aerials are probably more in the $40,000 to $50,000 average per unit.

So when we talk about a percent of increase it's a little more difficult but the dynamics are likely to exist for cranes to contribute at a much higher level than they did in previous periods, so hopefully that little color will give you some direction.

Shawn Wandrack - Deutsche Bank

And I find that when people talk about rates, a lot of times they're just talking about this blanket rate, but really need to look at the actual fleet you're doing. So basically while aerials are strong now, you could see a pickup towards the second half of the year potentially the cranes which could help boost rates?

Brad Barber

Right.

Shawn Wandrack - Deutsche Bank

And then next question, I know you guys have been very organic with your growth, but we have seen an increase in M&A activity over the past six months. Would you consider making acquisitions and in what magnitude would it be?

John Engquist

Yes, we would add as I said in the past, we've got a good strong balance sheet. We got more than adequate liquidity and good capital structure. We would be opportunistic if the right deal came along, if the right multiple, the maintenance we would absolutely look at on acquisition. We're not out. We don't have a team of people out chasing acquisitions. I tell you that. We're working on a Greenfield strategy. But we will be optimistic and if the right situation comes along, we're going to take a look at it.

Shawn Wandrack - Deutsche Bank

And did you happen to state exactly how many Greenfields you're planning to open this year?

John Engquist

Our expectation is we will open five locations. We're saying four to six but we'll probably open five locations this year, this year meaning 2014. We opened four locations last year and we did two on the back half of '12 when we started this Greenfield growth initiative. So five or six a year is kind of that's what we're planning on. We're planning on five or six high quality operations.

Shawn Wandrack - Deutsche Bank

Great. I mean echoing John's comments earlier, how projects in the Gulf Coast should drive growth in 2014. When I look at slide, I think it's four or five that shows the map of the state and when you look at the Gulf Coast, you mean 52% new revenue and 49% new gross fit. Is this going to be an area that you're targeting these Greenfields because I noticed a lot of the Greenfields last year were in different areas of the country? I'm just curious if you might be focusing more on that area this year.

John Engquist

Yes we definitely are. We recently put stores in Mesquite and Fort Worth and Lubbock. I mean, we're looking at Texas real hard because of the huge oil and gas play there and the petrochemicals side there. So yes, we're very focused on Texas right now.

Shawn Wandrack - Deutsche Bank

Is Louisiana also an opportunity or are you pretty comfortable with your footprint there?

John Engquist

Well there is some opportunity there. We're looking at adding some additional stores in Louisiana. We're doing the analysis; you've got to understand Louisiana is a pretty small state of 4 million people. So we can cover Louisiana pretty well with our existing stores as opposed a state the size and the scope of Texas, very different.

Shawn Wandrack - Deutsche Bank

And then last question, just a quick housekeeping question. What was the balance on your floor plan financing this quarter?

Leslie Magee

$49.1 million.

Shawn Wandrack - Deutsche Bank

Thank you very much Leslie.

Leslie Magee

Yes.

Shawn Wandrack - Deutsche Bank

All right. That is it for me. Great quarter and good luck.

Operator

(Operator Instructions) And we will take our next question from Seth Weber with RBC Capital Markets.

Seth Weber - RBC Capital Markets

So as I look your dollar utilization for the year is about 36% and if you go back to the prior peak 2006, 2007 it was closer to 40%. Is there something that has structurally changed that would prevent you from getting back to that kind of number?

John Engquist

No, I think we can get back to that number Seth. I think we're dealing with a couple of things. I don't think rates are -- utilization is back to kind of prior peak level, basically utilization, rates aren't. Totally all the way back. And then, we've got a inflation area headwind, I mean we're paying more money for equipment than we did at the prior peak. But I have no reason to think that we won't get back to that 40% range but little headwind, inflationary headwind and then rates just not quite back to where they were. So if that evolve, I think we get back there.

Seth Weber - RBC Capital Markets

I mean is it just the crane rental rates that you think are not back? And are aerial rates back to where they were and just the cranes are lagging or just?

John Engquist

Its segments, it's very different by product line, bones versus scissors but across the board I do not believe aerials are all the way back, the cranes aren't. But again, we're moving in that direction. And part of the problem besides from rate is the inflation area headwind we've got.

Seth Weber - RBC Capital Markets

And kind of on that topic, I assume you're talking about Tier 4 and things like that. Have you heard any chatter about rental companies being able to charge higher rates for Tier 4 equipment?

Brad Barber

No, not at all, not afterwards because customers won't go for that. If you tell them -- the fact is, if someone orders a 60-foot boom or 80-foot boom, they don't care if it is Tier 4 or whether it's a hammerhead cranes any machine we want to use. And in fact, they likely would prefer the Tier 3 product because they don't have the region processor especially on the -- there but (inaudible) the machine.

Seth Weber - RBC Capital Markets

Sure. But there --

Brad Barber

If you get someone a machine that they can use less and charge more you got to lose the capacity, so no there is no validity to that.

Seth Weber - RBC Capital Markets

Well, but there is some government contracts and things that I think are starting to mandate that, right?

John Engquist

Well, though quite it look, I think overtime. And I agree what Brad just said today, but overtime rights will adjust for the cost impact of Tier 4, they have to.

Brad Barber

Look they have always have. I mean, in our company every time there is a steel surcharge, everyone reacts and response but the truth is we pass that into our end user.

Seth Weber - RBC Capital Markets

Sure.

Brad Barber

And our new sales margins do not seem to change. They remain very stable.

Seth Weber - RBC Capital Markets

Sure.

Brad Barber

So whether it would be Tier 4 steel surcharge or other types of componentary that have just increased in price that have impacted the overall acquisition plus Tier 4 is no different I guess is what I'm saying. It will all get pushed through over a period of time. And it's part of that economic headwind that John mentioned.

Seth Weber - RBC Capital Markets

And then on the crane business I think over the last few quarters you've talked about inquiries you have a prospect list or an inquiry list that you kind of characterized as being strong. Has that continued here in the first part of this year?

John Engquist

It has and we feel pretty good about the conversations we're having right now. And Seth if I tell you that miss on new equipment sales that was totally related to cranes and I'm talking about literally a few cranes may be three cranes that were in the prior periods. So there is a few high dollar crawler cranes that didn't repeat, but I don't think that is all indicative of any kind of weak demand on the crane side.

Operator

We will take our next question from Steve Fisher with UBS.

Steve Fisher - UBS

I'm sorry if you have covered this already. I got on the call little bit late. But in terms of crane sales just wondering if there is any comment you could make on how we're looking in the first quarter thus far after kind of lower fourth quarter you called out in the release?

Brad Barber

Yes, so Q3 and Q4 have traditionally been really strong for retail sales particularly crane sales. And what I'll say on the call is that we're going to have a nice first quarter relative to typical first quarters as John just said we are getting plenty of inquiries we've got some small level of backlog and we see a lot of opportunity. So Q1 should be a good quarter for cranes sales relatively speaking to the cycle.

Steve Fisher - UBS

And then I know these metrics are going to balance around quarter-to-quarter but as you do expand your fleet which of your utilization metrics you mostly closely manage your business to?

John Engquist

Dollar utilization. The last caller Seth asked the question about returning to prior peak which is somewhere in the 40% range and so without us changing our mix, we think we can get back to that level and we're certainly managing to try to do so. Leslie spoke about our growth year-over-year substantial fleet growth, crane of utilization being relatively flat and then the 6.9% rate increase. So we're going to continue to push rates. We're going to continue to look for leverage within physical utilization, but our primary target to answer your question is dollar utilization of the assets.

Steve Fisher - UBS

Okay. And then just lastly curious what you're seeing on the competitive front in the Gulf Coast region. I mean to what extent are you seeing the influx of competition from players that are more traditionally outside the region as well as expansions from those that are within the region.

John Engquist

I don't think we're really seeing much of an influx with people who are typically on here. May be on the crane side we're seeing some of that because it's such a big crane market, but we have all of the players here on the United, Hertz, Sunbelt. I mean we're not short of any competition this side. But Brad I don't think we're seeing an influx.

Brad Barber

Really well Steve, what we saw a few years ago, when we were still in a more of a recessionary period, well a lot of folks relocating because there was more opportunity in the Gulf Coast, more particularly the Houston crane markets and things like that. But as far as of late no change. It's more the same. We're got every competitor you could list out, all vying for the same type of opportunity.

Operator

(Operator Instructions) And there are no further questions at this time. I would like to turn the conference back over to our speakers for any addition or closing remarks.

John Engquist

Thank you everyone for being on the call. Now clearly we feel good about 2014. I think it's going to be an exciting year with a lot of opportunity for us and we're going work hard to capitalize on those opportunities. We look forward to talking to you on the next call, thank you.

Operator

And that concludes today's teleconference. Thank you for your participation.

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