McGrath RentCorp (MGRC) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to McGrath Rentcorp first quarter 2006 earnings conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded today, Thursday, May 04, 2006.

I would know like to turn the conference over to Geoffrey Buscher, with SBG Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon. I'm the Investor Relations Advisor to McGrath Rentcorp and will be acting as moderator of the conference call today. On the call from McGrath Rentcorp, are Dennis Kakures, President and CEO; and Keith Pratt, Vice President and CFO.

Please note that this call is being recorded and will be available for telephone replay for up to 48 hours following the call by dialing 1-800-405-2236 for domestic callers, and 1-303-590-3000 for international callers. The pass code for the replay is 11057700. This call is also being broadcast live via the internet and will be available for replay. We encourage you to visit the Investor Relations section of the Company's Web site at MGRC.com.

Our press release was sent out today at approximately 4:05 Eastern Time or 1:05 Pacific. If you did not receive a copy but would like one, it is available online in the Investor Relations section of our website, or you may call 1-206-652-9704 and one will be sent to you.

Before getting started, let me remind everyone that the matters we will be discussing today that are not truly historical, are forward-looking statements within the meaning of Section 21E of the Securities & Exchange Act of 1934, including statements regarding McGrath Rentcorp's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements are based upon information currently available to McGrath Rentcorp, and McGrath Rentcorp assumes no obligation to update any such forward-looking statements.

Forward-looking statements involve risks and uncertainties which could cause actual results to differ materially from those projected. These and other risks related to McGrath Rentcorp's business are set forth in the documents filed by McGrath Rentcorp with the Securities and Exchange Commission, including the Company's most recent Form 10-K and Form 10-Q.

I would know like to turn the call over to Keith Pratt.

Thank you, Jeff. In addition to the press release issued today, the Company also filed with the SEC the earnings release on Form 8-K and its first quarter 2006 Form 10-Q. For the first quarter 2006, total revenues increased 9%, from $52.9 million in 2005, to $57.9 million in 2006. And net income increased 7%, from $7.2 million, or $0.29 per diluted share in 2005, to $7.8 million, or $0.31 per diluted share in 2006.

First quarter 2006 results included $0.8 million of non-cash stock compensation expense required under FAS 123R, reducing net income by $0.5 million, or $0.02 per diluted share.

Reviewing the first quarter results for the Company’s mobile modular division. Mobile modular reported an increase in total revenues of 24%, from $26.7 million in first quarter 2005, to $33.1 million in first quarter 2006. Resulting from a 13% increase in rental revenues, a 36% increase in rental-related services, and an 83% increase in sales.

The higher revenues were offset by lower gross margins and higher selling, administrative and allocated interest expenses, which resulted in a decrease in pretax income of $0.2 million, or 2%, to $9.1 million for the quarter, from $9.3 million for the same period in 2005.

Gross profit on rents increased 8%, from $12.4 million in 2005, to $13.4 million in 2006. The increase was a result of higher rental revenues, partly offset by a decrease in rental gross margins, from 65% in 2005, to 62% in 2006. Primarily due to higher repair and maintenance of the California classroom inventory in preparation for the upcoming school year.

Selling and administrative expenses increased $1.7 million, or 37%, to $6.3 million from $4.6 million in the same period in 2005. Primarily due to higher personnel and employee benefit costs, which included $0.6 million of non-cash stock compensation expense related to the adoption of FAS 123R.

Finally, average modular rental equipment for the quarter was $368.6 million, an increase of $45.2 million from the first quarter of 2005. Average utilization for the first quarter declined from 85.7% in 2005, to 82.8% in 2006, with quarter-end utilization of 82.1%. Resulting from higher California classroom returns over the past few quarters, as school modernization projects were completed.

Reviewing the first quarter results for the Company’s TRS-RenTelco division. TRS-RenTelco’s pretax income increased to $4 million in the first quarter 2006, from $1.9 million in the first quarter 2005. Primarily due to higher rental revenues and lower depreciation expense.

Rental revenues increased 8%, to $18.3 million, compared to $16.9 million in the first quarter of 2005. While sales revenues decreased $1.6 million, or 26%, from $6.1 million to $4.5 million in 2006.

TRS-RenTelco’s gross profit on rents increased 56%, from $4.8 million in the first quarter 2005, to $7.4 million in 2006. The increase was a result of higher rental revenues, combined with a reduction in depreciation expense, which resulted in rental margins improving to 41% in 2006, from 28% in 2005.

Finally, average electronics rental equipment for the quarter was $156.7 million, an increase of $7.2 million from the first quarter of 2005. Average utilization for the first quarter improved from 61.6% in 2005, to 69.5% in 2006, with quarter-end utilization of 70.6%.

On a consolidated basis, interest expense for the first quarter 2006 increased 37% to $2.4 million from $1.7 million for the same period in 2005, primarily as a result of the Company’s higher average interest rates in 2006.

In addition, the provision for income taxes was based on an estimated effective tax rate of 39%, compared with 38% during the same period in 2005. The Company’s estimated effective tax rate of 39% is based on the 2006 expected revenue distribution by state.

Next, I’d like to review our first quarter 2006 cash flows. We continue to generate strong cash flows to invest in our business and return value to our shareholders. For the first quarter 2006, net cash provided by operating activities increased $4.9 million over 2005, a 26% increase, to $23.7 million, and resulted primarily from the reduction in accounts receivable, offset by other balance sheet changes.

Net cash used in investing activities was $34.9 million and included $39.9 million for rental equipment purchases, $0.6 million for purchases of other assets, with $5.5 million in proceeds from used equipment sales, reducing the cash requirements for our investing activities.

Dividend payments to shareholders were $3.5 million, and stock option proceeds were $1.8 million. As a result, net borrowings increased $13.3 million during the quarter. We continue to have a solid low-leveraged balance sheet.

For 2006, first quarter EBITDA increased $1.8 million, or 7%, to $27.4 million, compared to $25.6 million in 2005, with consolidated EBITDA margin at 47%.

Our definition of EBITDA and a reconciliation of EBITDA to net income are included in our Form 10-Q for the quarter.

With respect to 2006 earnings guidance, we continue to expect year-over-year rental revenue growth from both rental businesses. At this time, based on our first quarter 2006 results and our outlook for the remainder of this year, we are reconfirming our 2006 full-year earnings per share guidance to be in a range of $1.50 to $1.60 per diluted share.

At this point, I would like to turn the call over to Dennis.

Thank you, Keith. Let’s start with some color on our modular rental business results for the quarter. I was very pleased with our 24% increase in revenues to $33.1 million for the first quarter 2006 from a year ago. Especially pleasing was our increase in rental revenues of 13%, to $21.4 million from last year’s results.

As we always say, rentals are the key barometer of the health of the business. The rental revenue increase was primarily related to classroom shipments in the third and fourth quarters of 2005, from the educational markets we serve. We should experience the full 12-months of rental revenues in 2006, on the great majority of the classroom orders shipped, in the second half of 2005.

Although rental revenues increased by 13%, our increase in gross profit on rents was only 8%. With first quarter end utilization at 82%, as compared to 85% a year ago, this reflects a larger quantity of classroom buildings currently in inventory, due to the completion of various California school modernization projects over the past few quarters.

As a result, during the first quarter, we began to ramp up our inventory center classroom processing efforts and incurred increased cost in preparing this equipment for future rental. We will see the rental revenue benefit of these expenditures in future quarters upon shipment of this equipment.

In Florida, student population growth, class size reduction, our hybrid classroom product and the phasing out of older model code portable classrooms are continuing to support our strong growth. 2006 has started off very nicely, as we continue to experience strong order levels and an expanding base of school district customers.

It’s important to note that for the 2006-2007 school year, under the class size reduction statute in Florida, school districts are required to meet class size limits based on the average number of students per class at the school level, as compared to the district level, which had been the standard since the program was implemented in the 2003-2004 school year.

Furthermore, in the 2008-2009 school year, school districts will be required to meet the average class size at the individual classroom level. These requirements could have a very favorable impact on our business levels.

In Texas, we are hopeful of building on the success we experienced in 2005, in growing both our educational and commercial business levels. In California our commercial activity has been strong to date in 2006. We are seeing increased activity in both residential and commercial construction and in the petrochemical market.

For our California educational business, although the opportunity flow has been favorable to date in 2006, it is not to the level of the past few years. We feel this is directly related to a number of school districts waiting for the passage of a statewide facilities bond measure for modernization later this year and then moving their projects forward in 2007.

However, we are continuing to book classroom orders in California for 2006, and expect to capture a number of additional opportunities still pending.

In California, over the past few years our modular business has benefited greatly from the need to modernize public schools. The market demand for modernization continues to be very favorable in California. Key to our continued success in this market segment is the availability of state bond monies to help fund these projects.

At this time, we believe the outlook for November 2006 California facilities bond measures to support the ongoing need to modernize schools is very promising for a number of reasons, including bipartisan support in the legislature.

In fact, the legislature has scheduled 4 votes in both the Senate and the Assembly for this evening on the bond issue. The ultimate passage of this bond measure in November, should support increased modular classroom rental ordering activity in California in 2007 and 2008.

It's important to emphasize that the need to modernize California’s aging public schools is an ongoing one. The two most recent statewide modernization bond measures were for a total of over $5.5 billion and provided project funding for roughly the past 3.5 years. With virtually all of these funds now apportioned, there is currently a timing dynamic between new funds being made available and a higher number of new projects moving forward.

Most importantly, demand continues to be very strong in this market segment and assuming passage of a modernization facilities bond measure in November 2006, we would expect the number of opportunities in 2007 to be very favorable.

Now let’s take a closer look at TRS-RenTelco, our test equipment rental division. TRS-RenTelco had a very favorable increase in rental revenues of 8%, to $18.3 million, from $16.9 million a year ago. This is reflective of improving market conditions and a broader range of product segments experiencing increased business activity.

I am very pleased by the higher business activity levels we experienced in the first quarter 2006, in both our communications and general purpose test equipment product areas. These higher business activity levels continued through April. We are hopeful that 2006 is shaping up to be a much stronger year than in 2005.

As a result of the increased business levels we have seen, we are actively purchasing rental equipment across a broad spectrum of product lines to support rental revenue growth. At the end of the first quarter, utilization stood at just under 71%, compared to 62% a year ago. This is reflective of both our proactive selling of under-utilized equipment during 2005, as well as the increased business activity year-over-year.

We had a very significant increase in gross profit on rents for the first quarter 2006 of 56%, to $7.4 million, from $4.8 million a year ago. Roughly one-half of the improvement came from the increase in rental revenues and the other half was the result of lower depreciation and rental operations expenses.

We made good progress in 2005 at becoming more cost effective in the management of our rental inventory and operations, and these improvements are evident in our first quarter results. In these results, we are also continuing to benefit from having extended the useful lives on 2 models of highly utilized communications test equipment, in April of 2005.

We are continuing in our work at refining and executing on our business development strategies, with a high focus on the deployment of the most cost effective marketing mediums to reach each of our target customer bases. Our goal is to create an increasing level of rental opportunities for TRS-RenTelco by smartly utilizing our outside and inside sales and marketing teams, the internet and electronic communications.

In closing, I want to comment briefly on our increase in SG&A expenses for the quarter. Our results reflect higher selling and administrative expenses as compared to a year ago, including the non-cash expensing of stock options. You should also know that a significant portion of the increase relates to the increased business levels and size of the Company today. We are more fully staffed entering 2006, as we filled a number of key positions in operations, corporate administration and IT, during 2005 to support our growth needs.

Additionally, in the first quarter we experienced higher salary and benefit costs and higher commissions from increased booking levels.

I just want to mention that we are continuing to make progress in upgrading our operating and financial software applications. This investment will serve us in the years to come by creating information system platforms that provide us the scalability necessary for increased business levels and greater operating efficiencies.

We are currently looking to be completed with these efforts at the end of 2007.

With respect to our strategic planning efforts, we continue to move forward in our assessment of various initiatives in 2006. For our modulars business, we are continuing to evaluate other US geographic markets that can support our regional sales and inventory center structure with a strong base of educational business. For electronics, we are continuing to evaluate strategic development opportunities in selected international markets, in which we are either currently doing business or are considering entering.

We also continue to evaluate both core and potential third-leg acquisition opportunities for growth.

On the investor relations front, I wanted to make everyone aware that Keith and I will next be presenting at the CIBC Investor Conference, in New York City, on Tuesday, June 13th.

Finally, you’ll be receiving information shortly regarding this year’s annual meeting. I did want to share that this year’s meeting will be held on Wednesday, May 31st at our TRS-RenTelco facility adjacent to the Dallas/Ft. Worth airport. This change of venue will provide shareholders an opportunity to view and better understand our electronic test equipment business and also to meet the great team at TRS-RenTelco.

And now Keith and I are pleased to address any of your questions.

[OPERATOR INSTRUCTIONS] Cliff Walsh with Sidoti & Company.

Question about the bond issue. Any sense as to how large it will be? I’ve heard anywhere from $3 billion to $6 or $7 billion, but not sure what the specification is for modernization funding?

What I read in the Sacramento Bee this morning was on the school facility side it looked like a total of roughly $10 billion. Now that would be broken out between permanent school funding as well as modernization. On the modernization side I’ve heard anywhere from $3 to $4 billion, in that range. Which is a pretty significant item for just one bond measure.

Okay. So they have a vote tonight and then provided it passes, then it’s definitely on the ballot in November?

That’s correct. Again, our understanding is that it has bipartisan support. The Governor supports it as well. So there’s a lot of positives trending towards it being placed on the ballot.

Okay. Any polling being done on potential support for the bond from the public?

Not that I’m aware of, but historically in the last 20 to 25 years, there’s only been 1 statewide facilities bond measure for education that has not passed. It’s a pretty low threshold. It’s 50% plus 1.

Okay. I noticed on the Enviroplex side, revenue was down significantly year-over-year and I know that business fluctuates quarter-to-quarter. But did the issues with the piggyback contracts on new classrooms in California affect that business in terms of deliveries and order rates during the quarter?

I first want to mention that from a backlog standpoint – Keith, you might want to mention--.

Backlog is looking quite healthy. And Cliff, you’re right, the number is down year-over-year. It was $1.3 million in the first quarter of this year, down from $2.3 million in the first quarter of last year. But generally the first quarter is a softer quarter for that business and I wouldn’t take it as highly indicative for what the outlook could be.

I will also mention too, the backlog is $11.6 million at this point, compared to about $7 million last year at this time. So there are some favorable items going on there. But in general, you have to question about is the piggyback dynamic impacting that business?

Quite frankly, it makes it a little bit more difficult to the speed of things in terms of closing transactions, but quite frankly, Enviroplex may actually benefit from that versus other companies. Because their reach may not have been as broad as larger modular manufacturers and as a result, if more is going out to bid, they should see more bid activity and they potentially could see more actual business. So it actually could be a silver lining for the smaller companies.

Okay. And in terms of in the actual quarter, there seemed to be some confusion in the marketplace. Did you see that with your customers?

Are you saying with respect to the piggyback dynamics?

Yes, when the opinion went out from the Attorney General, it seems like they didn’t know what to do with it, you know, should they be ordering classrooms, are they going to get reimbursed for it? So I wasn’t sure if you saw some of that or your customers were impacted by that?

There certainly was some confusion amongst school districts, but I think people have kind of found north now and what their county councils, their legal authority, so to speak, are telling them what they need to do or not do. So every district is a little bit different, but business is getting booked and it’s getting done.

Okay. Did you have any sales to hurricane affected regions on the classroom side?

We did not in the first quarter.

Okay. Any sense as to what to expect from the Texas market in terms of people being displaced from the Gulf Coast, are they staying, are they going? Have your school customers there given you any indication as to – have they ordered anything or are they kind of waiting to see what the enrollment numbers are looking like?

We’re not hearing about any significant quantities of displaced students. I think it’s a fairly broadly spread type item. But we’re not seeing at least business activity-wise anything related to that dynamic.

Okay. And can you comment a little bit on RenTelco’s activity on April, did the momentum kind of pick up a little bit as we got into some better weather?

We had a good first quarter from an overall rental revenue standpoint, but probably more importantly from a booking standpoint. And then April was very strong. So it was a very good month in terms of the differential of what we added in the way of new bookings versus what returned. So the net of that.

But overall, that business in a very broad manner, seems to be hitting on the cylinders. So we’re very pleased about that and we’re very hopeful that this is going to be a much stronger year.

Okay. And back to California classrooms just for one question. Can you remind me where things stand in terms of the aging of schools? What’s the stat that they’re using now? You know, 50% of schools are 25-years or older, something like that, is that about right?

I’ve heard anywhere from 55 to 70% of California schools are 25-years or older. And that’s a trigger for being able to qualify for various modernization work. And of course, California with all of its seismic dynamics. That’s obviously a very big area of concern.

[OPERATOR INSTRUCTIONS] John Gibbons with Oden Partners.

Could I just ask why – I’m doing this for many years and you cited in your text and in your comments this $1 million higher repair and maintenance expense to the preparation of classrooms for upcoming school year. You also talked about the fact that the market didn’t have quite as much going on. And you also supply classes back. Is there something that you elected to do here that you wanted us to see? I mean, you always have these maintenance repair costs.

Well, we have ongoing maintenance or repair costs to prepare the fleet for rental, but in particular, we needed to get ahead of the curve. Because rather than buying new equipment this year for the California market, it means that we need to turn the assets that we have. So we ramped up our staffing, both permanent employees as well as contract employees and temporary type employees, to process this equipment. So increased labor cost and also increased material costs, as you’re processing a larger number of classroom buildings through your inventory center.

Okay, so you’ve got a lot of returns and you’re processing a lot and that’s why you thought you should cite it. Because this is something that can vary from season to season, depending on what you’re getting back and what you want to put out.

Yes, there’s definitely ebb and flow in the number and it was a factor that contributed to the lower gross margin on rents in the modular business for the first quarter of this year compared to a year ago.

So this is where you’re going to be. You’re not going to buy a lot of new equipment, because you’ve got this stuff that you can rehab.

Well, for California, with the returns we got in the third and fourth quarter and some that we got in the first quarter, it’s key that we turn that product. And to the extent we need to add assets, then we add assets. But we want to utilize what we have first. And of course, for our other educationally it’s different. You obviously notice in our numbers that we have some increased activity in Q1 and so forth, but more of our buying activity these days is for the Florida market.

Got it. Just trying to find out why you cited it particularly, because obviously your school year is August-September.

It takes a while to prepare equipment and you’ve got to get ahead of the curve. And so the first quarter and probably into the second quarter as well, we’re going to have this increased processing just to get all the equipment ready to ship out in June-July-August.

Right. But of course you created this facility to do this, so if you will, your cost of doing that are going to yield to your benefit in these two years.

Yes. From an efficiency standpoint, we’ve got things pretty well figured out. But again, it’s just an absolute volume dynamic and again, kind of the cardinal sin in the rental business is not having assets ready when the opportunity is there. So we always want to be ahead of the game.

And you’re fortunately – I guess this is sort of off in a different direction, but we’ve heard a lot of noise about weather related issues out there in other companies, but since you’re taking equipment in and not putting stuff out quite the same rate, you probably weren’t impacted very much by any of these weather issues, right?

We really haven’t had any weather dynamics. But I just want to elaborate just on the comment on not as much going out. Know that most of the classroom we’re booking in the first and second quarters and virtually all educational rentals go out during late second quarter and third quarter. So you can have a very good booking year, but the impact of that really isn’t until Q3 and then Q4 when you get a full 3-months of that.

You should feel good about what you’re telling us.

You know what, we keep moving along, but it’s just that necessary item of when you have rental assets you’ve got to turn them. And again, no need to buy new assets until you’ve made use of those and then you go from there.

Right, I got it. Thank you very much.

Gerry Heffernan with Lord Abbett.

Actually, I would like to continue off the questioning of the previous caller there, just to make sure I understand this right. The higher return rate that we experienced Q3, Q4, those assets need to be ready to be returned to the field upon customer request, so that’s why they’re currently going through this maintenance refurb program, which is why we’re incurring the expenses?

That is absolutely correct.

Okay. And if they had not come back, we would still be looking forward to customers coming and looking for assets, however, they would have to be new purchased assets, is that correct?

Exactly. So the ebb and flow of the business is such that you have X amount of returns, you want to process and get that equipment out first and then have new assets to cover the additional.

Right. And if it was new assets, the cost for those would be going through as a capital expenditure right to the balance sheet and we would only be seeing the depreciation come on, as opposed to the full cost of a refurb, which actually you may be extending the life by a pretty long period?

You’re correct in your comments.

Although I would caution you that very little of the refurb work is capitalized. A small amount of it, there are some situations where we add value to a building, such as adding a restroom, and there are a small number of units over 15 years old where we can do a major refurb and expand their useful life. But the vast majority of the expenses are a period expense.

I understand that. And that’s what we’re seeing here in that $1 million increase in expenses.

What you’re doing is repairing that building, as you said, perhaps that building will then stay out for 4 or 5 years. But you’ve got to do that work, even the general maintenance work to be able to put it in a position to do that. So you do get that.

Okay. And when we’re talking about refurb work here, I mean, I’ve seen some of the stuff you do there, where we go right down to the bare, 4-corner points of steel and redo floor, walls and the whole bit.

That’s not really what – in the first quarter, what you’re seeing here is really general maintenance and repair with nothing special in the refurb side of things.

Okay, so perhaps new tile, new painting.

Exactly. It’s maybe replacing a piece of siding, some wall paneling inside, it could be new carpet, you know, capitalize it the second time, those types of items.

Okay. I’m trying to understand the flow of this, looking ahead 4 quarters and understanding these things don’t go out until the second or third quarter, we really don’t see the lease revenue from it until the fourth quarter. But then as we go into the ’07 year, we will have a renewed rental flow from these assets. What we will not see in this year is a step-up in the balance sheet total asset value number, because we didn’t go out and buy new assets.

Let’s qualify this to the California market versus our other two markets, Florida and Texas. California, you’d see fewer purchases in California this year, because of exactly what you just said. It’s kind of like you’ve got to take your medicine on the expense side early in the year to get buildings prepared.

But then when you come to Q3 and Q4, you’re deploying assets, you’re picking up maybe two-thirds of a quarter of rent in Q3, a full quarter in Q4, but you don’t have those expenses that you incurred in the first couple of quarters. So that’s always the pleasantry of preparing early and then you get the revenue benefit and really the only cost you have against that is depreciation going forward, with a little bit of probably field service expense, from a pure rental operations standpoint.

What can you tell us about the rental rates – and again, I’m sticking to California where we had the preponderance of the returns – the rental rates of the units returned versus current market rental rates that we would be looking forward to beginning to see the flow from in Q4?

Well, the educational rental market has been more competitive in the first quarter. And I don’t think that’s surprising to us in terms of ourselves and some of our competitors have had higher returns of equipment. So we’ve seen some greater competitiveness there.

At the same time, a lot of business is done off the piggyback contracts, in which case you’ve got an existing customer, he needs some additional buildings and he’s just really adding to the same price level in terms of what he pays per month, that he did in his last buildings.

So although there are various projects that are more competitive, there are other ones that just kind of go along at similar rates.

Okay. I was thinking that some of these units would have come off from rates that were established a couple of years ago, as opposed to what the current piggyback contract would be?

It just depends on when it went on a rent, where the rates were at at that point in time, how competitive was that rental situation--?

Right. I’m trying to get a feel from yourself as to the units that were returned, how does the average rental rate of those units, given that they all went out at different times and under different rates, compare to what is the current market if you were just to piggyback off of today’s rate structures?

If you’re comparing piggybacks to piggybacks, because that’s really what you have to do here, it’s about the same. It’s in the same neighborhood. There’s nothing significantly different on piggybacks in one period versus another, but within that you can still have more competitive piggybacks that you’re competing against with certain customers in certain situations.

Okay, we better stop there. It sounds like we’re getting into the hog business here. Very good, thank you very much.

[OPERATOR INSTRUCTIONS] Alan Mitrani for Silver Lake Asset Management.

Can you talk about potential impact that Williams Scotsman will have as it tries to go public here?

My comment would be that Williams Scotsman has been a formidable competitor of ours for a number of years. They’re a good company. Quite frankly, now that they’ve been public 6-months, I’ve really seen no impact to our business.

Follow-up from Gerry Heffernan.

The tax rate, I see was 38% in ’05, 39% in ’06. Are we permanently at a higher level here in ’06?

Again, we have to estimate that each year, based on the distribution of sales by states. What we believe, 39 will be appropriate for this year. And we run the calculation every year as we try to keep the number accurate. So for this year, 39 is the number. You’re right that it was 38 in this period a year ago. We don’t see any change to the estimate for 39.

Can you tell me how the full-year ’05 ended up? I know I could go look it up, but if you would?

Yes, 37.5%. And we actually had some carry over from our TRS acquisition, where we had an adjustment that was reflected in the ’05 number and reduced the rate slightly. And that’s obviously not something that recurs.

[OPERATOR INSTRUCTIONS] Bill Wolfenden with RS Investments.

I apologize, I missed the first part of the call, so this may be repetitive. But in the press release you reference some expenses increasing relative to, a couple of times you mentioned sort of increased business levels. I was just wondering if you could expand on that? It sounds like you’ve got some visibility into some exciting stuff in the balance of the year and I just wanted to see if you could verbalize that maybe?

I think you’re seeing it at the SG&A side. What we do is, quarterly, based upon booking levels for both our modulars business and electronics business, from a booking standpoint we have to accrue commission or what you might call bonus monies. And so we had an up-tick in the first quarter this year compared to last year. So that’s a positive for both businesses and that booking activity is higher.

Okay. So that’s basically what you were referencing?

That’s what we were referencing.

And again, that was one of several factors that caused an up-tick in the selling and administrative area.

Okay. I know you give the annual guidance, but should we assume then, based on the conversation that was just being bandied around in the Q&A, that these gross margins are going to sort of go back up, that this repair and maintenance was sort of a one-time type of event?

Well what we said a little bit earlier on the call is that more than likely Q2 we would also see a similar level of expense in the inventory centers as we prepare as much equipment as we can for the school year. What you’d more than likely then see is in Q3 and Q4, once we kind of hit the level of inventory that we need available, more than likely you’ll see that take a step down for the second half of the year.

And again, to be clear, over the 4 quarters of 2005, we saw gross margins in a range of 62 to 65%, and that partly reflects the level of work preparing buildings, doing repairs, field issues and the like. So there is some ebb and flow there.

Okay. I understand that. But do you expect then, if we’re looking back at the 4 quarters of ’06, that we’ll be at equal or at least equal levels to ’05, or will there be a down-tick for the year on year results?

Bill, I think at this point it’s too early to tell. We have some visibility on Q2 in preparing equipment. And then like I said, in the second half of the year, I think we’ll definitely see a reduction. Because we really ramped up in Q1 and again, the key is to get ahead of the demand wave and make certain you’ve got the equipment ready to ship when the orders are there.

Thank you. Management, I’m showing there are no further questions. I’ll turn the conference back to you for any closing comments.

Thank you very much. I want to thank everyone for joining us this afternoon and we’ll look forward to speaking to you again on our Q2 conference call coming up in the middle of the summer. Thanks so much.

Thanks you. Ladies and gentlemen, that concludes the McGrath Rentcorp first quarter 2006 results conference call. Thank you again for your participation and at this time you may disconnect.