McGrath RentCorp (MGRC) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Second Quarter 2007 Earnings Conference Call. (OPERATOR INSTRUCTIONS) This conference is being recorded Thursday, August 2, 2007. At this time I would like to turn the conference over to Geoffrey Buscher of SBG Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon. I'm the Investor Relations Adviser 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, VP 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 call replay is 11093069.

This call is also being broadcast live over the Internet and will be available for replay. We encourage you to visit the investor relations section of the Company's website at MGRC.com. Our press release was sent out at approximately 4:05 prime minister Eastern time today or 1:05 Pacific time. 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 and 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 relating 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 now like to turn the call over to Keith Pratt.

Thank you, Geoffrey. In addition to the press release issued today, the Company also filed with the SEC the earnings release on Form 8K and its second quarter 2007 Form 10Q. For the second quarter 2007, total revenues increased to $67.4 million from $60.7 million for the same period in 2006. Net income increased 5% to $9.1 million or $0.36 per diluted share from $8.7 million or $0.34 per diluted share for the same period in 2006. Second quarter 2006 earnings per diluted share included $0.03 benefit from the impact of a Texas tax law change in May of 2006.

Reviewing the second quarter results for the Company's Mobile Modular Division, Mobile Modular total revenues increased $3.2 million or 9% to $39.1 million from the same period in 2006, due to $4.5 million higher rental and rental related services revenues partly offset by lower sales revenues during the quarter. Gross profit on rents increased $3.5 million or 29% to $15.3 million from $11.9 million in 2006, due to higher rental revenues and higher rental margins. Rental revenues increased $3.1 million or 14% over 2006, while rental margins increased to 62% in 2007 compared to 55% in 2006.

In 2006 rental margins were impacted by higher field service costs and higher materials costs related to the mix of building modification and preparation work performed during the quarter.

Selling and administrative expenses increased $0.8 million or 14% to $6.7 million from $5.9 million in the same period in 2006. The combined effect of the rental revenue increase and higher gross margin on rental revenues resulted in an increase in pre-tax income of $2.7 million or 32% to $11 million for the second quarter of 2007 from $8.3 million for the same period in 2006. Finally, average modular rental equipment for the quarter was $417 million, an increase of $45 million from the second quarter of 2006. Average utilization for the second quarter declined from 82.7% in 2006 to 82.1% in 2007.

Turning next to second quarter results for the Company's TRS-RenTelco division, second quarter total revenues increased $3.3 million or 14% to $26.9 million compared to the same period in 2006, due to higher rental and sales revenues. Gross profit on rents decreased $0.3 million or 4% to $7.9 million as compared to 2006. Rental revenues increased $0.7 million or 4% over 2006 while rental margins decreased to 39% in 2007 compared to 42% in 2006.

2007 rentals margins were impacted by $1 million higher depreciation expense primarily related to 22% higher average rental equipment. Selling and administrative expenses increased $1.1 million or 25% to $5.3 million from $4.2 million in the same period in 2006 primarily due to higher personnel and employee benefit costs and bad debt expense in 2007. As a result, pretax income decreased $0.9 million or 18% for the second quarter 2007 to $3.8 million from $4.7 million for the same period of 2006.

Finally, average electronics rental equipment at original cost for the quarter was $204 million, an increase of $36 million from the second quarter of 2006. Average utilization for the second quarter decreased from 71.1% in 2006 to 66.5% in 2007. On a consolidated basis, interest expense for the second quarter 2007 increased $0.1 million over the same period in 2006 to $2.8 million as a result of the Company's higher average interest rates partly offset by lower average debt levels.

The second quarter 2007 provision for income taxes was based on an effective tax rate of 39% compared to 32.1% in the second quarter 2006. The 2006 provision for income taxes was reduced $0.9 million during the second quarter to record the impact of the Company's deferred tax liability from a franchise tax law change enacted by the state of Texas in May, 2006. Excluding the impact of the Texas law change, the second quarter 2006 provision for income taxes was based on an effective tax rate of 39%.

Next, I would like to review our 2007 cash flows. We continue to generate strong cash flows to invest in our business and return value to our shareholders. For the six months ended June 30, 2007, highlights in our cash flows included net cash provided by operating activities was $28.8 million, a decrease of $13.6 million compared to 2006. The decrease was primarily attributable to the collection of aged accounts receivables in 2006 that did not recur in 2007, partly offset by improved operating results and other balance sheet changes. We invested $55 million for rental equipment purchases partly offset by $11 million in proceeds from used equipment sales.

Dividend payments to shareholders were $8.6 million. Net borrowings increased $20.4 million from $165.6 million at the end of 2006 to $186 million at the end of the second quarter 2007.

We continue to have a solid, low-leveraged balance sheet. For 2007, second quarter EBITDA increased $3.9 million or 14% to $31.9 million compared to $28 million in 2006 with consolidated EBITDA margin at 47%. Our definition of EBITDA and a reconciliation of EBITDA to net income are included in our press release and Form 10-Q for the quarter.

Turning next to 2007 earnings guidance, at this time based on second quarter 2007 results and our outlook for the remainder of the year, we are reconfirming our full year earnings per share guidance to be in a range of $1.65 to $1.73 per diluted share. At this point I would like to turn the call over to Dennis.

Thank you, Keith. Let's begin with some color on our Modular Rental business for the quarter. I was quite pleased with our 14% increase in rental revenues to $24.7 million for the quarter from a year ago. This increase is primarily related to educational and commercial shipments in the second half of 2006. We should experience a full 12 months of rental revenues in 2007 on a large number of these orders.

We've had favorable educational rental opportunity and booking levels during the first half of 2007. In California, we are benefiting from strong demand in modernized, aging public school infrastructure and the passage of the November, 2006 statewide facilities bond measure to fund these projects. In Florida, the popularity of our hybrid classroom product, class size reduction, and the phasing out of older model code portable classrooms continues to support our educational business growth.

In the Texas market, we are seeing favorable demand for both modernization and student growth needs. Keep in mind that the great majority of the classroom rental orders booked during the first half of 2007 will not ship and begin billing until the third quarter. However, most of these orders are multi-year transactions.

For the second quarter of 2007, our commercial rental booking activity in the California and Texas markets was generally strong with some continuing weakness in the residential developer sector. In Florida, we've been experiencing a favorable level of commercial opportunities to date and are excited about the long term opportunity to grow our commercial rental business there.

At the end of the second quarter, utilization for our modular fleet stood at 82.8% compared to 81.5% at the end of the first quarter of 2007. With the favorable classroom booking levels we have experienced in the California, Florida, and Texas markets, we would expect to see further improvement in utilization during the third quarter.

We had very nice increases in both gross profit on rents of 29% to $15.3 million and on gross margin on rents to 62% from 55% a year ago. These results are due to higher rental revenue levels and lower direct cost of inventory center operations compared to a year ago. With our anticipated rental revenue growth levels, and equipment processing outlook, we believe low to middle 60% gross margins on rents are likely to be achieved for the full year.

Now, let's take a closer look at TRS-RenTelco, our test equipment rental division. TRS-RenTelco had a modest increase in rental revenues of 4% to $20.3 million from $19.6 million a year ago. We experienced slower than anticipated conversion of opportunities to orders particularly during June. However, our pipeline of opportunities is at a very favorable level and we've had a good start to the third quarter in bookings.

We are seeing favorably market demand across a fairly broad base of customer segments including aerospace and defense, wireless and network equipment manufacturers, and telecom installers. During the quarter, we saw our average monthly rental rate reduced to 4.99% compared to 5.09% during the first quarter. This is mainly due to a greater mix of general purpose test equipment that typically has lower rental rates but longer lives compared to communications test equipment. Other factors contributing to lower average monthly rental rates were account penetration and competitive pressures, and the phasing out of TRS acquired equipment at approximately 55% of list price compared to new equipment purchases at approximately 90% of list price.

Looking at profitability during the quarter, pretax income was 18% lower at $3.8 million compared to $4.7 million in 2006. This is related mostly to higher depreciation and SG&A expenses. Depreciation expense for the quarter was $9.7 million compared to $8.7 million last year and depreciation as a percentage of rents increased to 48% from 44% a year ago. This is being driven by our large number of new product introductions over the past year. The net out is that as we are purchasing and putting on rent the latest technology equipment, we need to be adjusting inventory levels of prior models as utilization of this equipment moves lower over a period of time. In turn, we sell our older technology test equipment to a broad equipment broker network and to end users. During periods where there are an increased number of new product introduction from OEMs, rental revenues can lag behind the increased depreciation expense. Keep in mind that technology change is typically a very healthy dynamic for us because it allows us to refresh our inventory offerings.

Assuming continuing favorable market opportunity levels, we would expect improvement in depreciation as a percentage of rents in the second half of 2007. SG&A expense for electronics for the quarter was $5.3 million compared to $4.2 million last year. The biggest contributing factors were increased personnel expenses due to open positions being filled, related move in and placement fee expenses, increased sales bonus levels, and bad debt expense. It should be noted that many of the positions that are now filled compared to last year are sales and marketing related and should support rental revenue growth in the quarters ahead.

At the end of the second quarter, utilization stood at 67.2% compared to 66.9% at the end of the first quarter. Overall, we would expect utilization and profitability to improve in the second half of 2007 as we increase utilization of newer technology equipment that we have acquired over the past 12 months and continue to sell older generation inventory.

And now for a few comments on our outlook efforts and initiatives for the remainder of 2007. Historically, our third and fourth quarters are typically the quarters in which the overall strength of the year plays out. This year should be no exception. Let's take a closer look at the factors during the second half of 2007 that should have a material effect on our full year results.

In Modulars, the great majority of classroom shipments from bookings in the first half of the year will occur in the months of July and August. We should see our first full quarter's impact for all of our educational activity in 2007 in the fourth quarter. We've experienced favorable commercial activity to date in 2007 that we are anticipating will carry into the second half of the year. Although new residential construction opportunities have been fewer, our existing sales offices already on projects appear to be staying on rent longer. As a result of these factors, for our modular business we are anticipating favorable increases in both rental revenues and equipment utilization levels in the second half of the year.

For our electronics business, we've been experiencing a healthy level of opportunities from a fairly broad base of market segments and have a solid pipeline of potential orders heading into the second half of 2007. July reflected a favorable increase in our monthly billing levels as we began converting more opportunities to orders. We need to continue to be successful in the marketplace renting later model technology test equipment and selling older technology and lower utilized assets in order to lower depreciation as a percentage of rents.

Looking forward, we expect higher quarterly overhead expenses in the second half of 2007 as we continue to invest in our planned modular geographic expansion, investigation and incubation of other strategic growth initiatives, creating greater management bench strength, and IT infrastructure and ERP application platform changes.

On the strategic front, as you are already aware, we will be launching in two new modular markets in 2007. One of those locations will be in North Carolina in the Greater Greensboro area, and the other location will be in Georgia in the Greater Atlanta area. These markets are attractive to us primarily due to the long term general and student population demographics. We are working diligently to fill the key positions associated with these start up operations through hiring and internal transfers as well as to design and manufacture products that can ideally provide us with a competitive advantage in the marketplace.

We are also continuing our efforts at exploring a number of other potential geographic markets to expand our modular rental business. For TRS-RenTelco, we've recently completed our initial studies of potentially making a facilities and infrastructure investment in the Asia Pacific market, more specifically China, Malaysia and Singapore. At the present time, we've decided to continue to serve our customers in the incremental opportunities we receive from these geographies from a Dallas operation center. Going forward, we will continue to monitor the overall rental volume opportunity in the Asia Pacific market for greater critical mass and potentially making an in-country facilities and infrastructure investment.

Staying with our electronics business, we are also on track to complete our potential new test equipment product lines investigative work by the end of the third quarter. Finally, in 2007 we are continuing to explore potential third leg rental products and are looking to complete our analysis on a short list of potential products before year end. We will have more to share on all of these efforts in the quarters ahead.

I also wanted to mention that the 122 acres that we purchased in Florida in late 2005, due to our faster than expected growth in the market, is currently under construction and that we expect our sales and inventory center to be operational sometime during the first quarter of 2008. Finally, our IT infrastructure and applications platform upgrade to support a larger McGrath RentCorp are in full swing with the launch of phase one targeted for the first quarter of 2008. And now Keith and I are available to address any of your questions.

Thank you, Sir. Ladies and gentlemen at this time we will begin the question and answer session. (Operator Instructions). And our first question will come from the line of Angela Chang with RBC Capital Markets. Please go ahead.

Good afternoon. I was wondering whether you could talk more about what you're seeing in California. Is it coming in line with expectations and was the Q2 utilization of 82.8% relatively in line with what you were expecting?

Yes, I would say the classroom and commercial activity levels are in line with our expectations and utilization as well from where we're at the end of the second quarter.

Okay, and the trends going into Q3 -- generally favorable?

Yes, they are.

Q3 is really crucial to the education market where a lot of buildings go out on rent to school districts during the summer months when students are not on campus.

Okay, great. On the tech equipment side, did I hear right your test equipment utilization was 66.5%?

Let me just double check here. Average price.

Okay, just wondering if you could give us a sense of when you think that will bottom out. And have you been seeing signs of improvement going into Q3?

Yes, well it improved between the end of Q1 and the end of Q2 as I mentioned just a moment ago, about 0.5% increase. And then heading into Q3, July has been a very favorable month in terms of conversion of opportunities to bookings. So we've seen some further improvement in July.

Okay, that's very helpful. Finally, just one more question and I'll get back. SG&A levels, are they relatively in line? And are these to be considered normalized levels?

Yeah, I think Angela, the way to look at SG&A is to turn back and reflect on comments we made at the beginning of the year. We actually targeted an increase in SG&A for the year to approximately $52 million. And the drivers of that increase were new initiative work, particularly around the two new modular markets, but also other investigative work we're doing for our electronics business and some third leg opportunities. That was an important driver, about $2.5 million of the increase year over year. We also talked about the fact that with our new ERP platform that we're working to introduce in 2008, we're also doing a number of IT infrastructure upgrades, and that work is increasing our expenses in '07 by about $1 million to $1.5 million compared to '06. And then I would say you have general, what I'll call inflationary pressures on the SG&A cost structure in the salary and benefit arena as well as other areas. So we're definitely in an investment cycle for our infrastructure and for pursuing growth opportunities and that's causing an up tick in the SG&A. And I would say what we've seen year to date is broadly in line with what we would have expected. In a couple of areas, we're probably a little bit behind on some of the hiring that we're in the process of doing, and so I would expect continued sequential increases as we go into the second half of the year.

Great. Okay, I think I'm all set. Thanks for taking my questions.

Thank you. Our next question will come from the line of Scott Schneeberger with CIBC World Markets. Please go ahead.

Hey, guys, can you hear me? Great, thanks. I guess first off, in California with regard to prop 1D spending, we've heard in the past William Scotsman speak of having inventory available up into the 500 plus range. You just answered that, yes, things are looking in line. In reading the press release, I don't know, maybe I'm over reading into things, but I thought I saw very favorable thus far in '07. Just can you quantify a little bit more what the size is going to be and anything with more color on the California opportunity?

What I would add to what comments we've made already is the fact that although 2007 has been favorable, what's also favorable is the fact that what we're seeing looking forward into '08. So as we turn the corner this year into next year, some opportunities this year that didn't materialize, we're seeing things line up favorably for 2008. So our expectations I think were met for '07 and it also appears to be a healthy transition into 2008 with projects setting up for next year.

Sir, does that answer your questions? Ladies and gentlemen, if there's additional questions at this time, please press the star followed by the one on your pushbutton phone. (Operator Instructions) Our next question will come from the line of Margot Murtaugh with Snyder Capital. Please go ahead.

Yes, thank you very much. So in the new markets that you've just named, can you talk a little bit about the student demographics and why those markets are attractive? Also when you would start shipping product, what's the process of getting established and then starting to ship product?

All right, very good. With respect to the demographics, when we look at North Carolina ad we look at Georgia, they have some very favorable projections over the next 20 to 25 years in terms of student growth. There's affordable housing, there's good job growth, all those things that are connected with student population. But also too, some of those markets have seen some challenges in school facility funding which is always a positive item for classroom rental. So overall, those are, from a demographics and also from a funding standpoint, appear to be long term good prospects for us.

Talk a little bit about the process to get established.

With respect to getting established, there's a series of events here, not the least of which is hiring, staffing, leadership, as well as going through product design and development and then selecting manufacturers to build product and also locating office space as well. So we're engaged in all those efforts right now. There's a lot of different pieces there. We have to keep in mind these are very much start up operations and it takes some time to get things going. So we are in that process today and we'll have more to share on our progress in the quarters ahead.

So you wouldn't say like how long it will take you to start actually shipping products or?

Well, we would expect ideally this year to start shipping product and it's just a question of it's just not going to be significant. And really you need to look out towards the next couple of years to where we'll build momentum over time.

Okay. What about competition in those areas?

Competition in those areas, we have the same competitors that we do in the other states in which we operate. And that would be William Scotsman and of course the new ModSpace which is a combination of GE and Resen.

What -- do you have any competitive advantages versus them or is the market big enough to include all of you, or?

Well, what I would respond to you in terms of that is that we certainly compete very effectively with them in the markets we're in today. And then also, too, an advantage we have going into the new markets is that we can build product to suit the latest needs in the market. So we have an opportunity to innovate in any new market because we're building assets anew. We can build them to meet the later needs of customers and design them differently so they have a competitive difference to both our competitors.

Okay, thank you.

Our next question is a follow up from Scott Schneeberger. Please go ahead.

I'm sorry, I lost you before, I'm having a phone issue. Just kind of following up back on the California question I had asked before -- a concern you had was pricing initially as some of those started to go out. How is the pricing environment right now? In California education?

The California education -- I think the year played out as we thought it would. It was much more competitive in the early part of the year and as inventory began to get more utilized, it got slightly better. But still it was a competitive year pricing wise. We would expect next year actually things to start moving north.

What inning are we in as far as having it play out, the California education opportunity here? I realize it should get better in '08 as more and more contracts are let. But how much of what you expected to see have come thus far and how much do you still expect to see over the coming months?

I'm still -- there's still a significant amount of opportunity on new projects that will go into 2008. You've got to remember when a bond measure passes in November of the prior year, a lot of schools are not ready to really embark the next year in getting the projects going. And that's what we encountered this year. Although we had a favorable level of opportunities in bookings, we had a lot of school districts that just weren't ready to pull the trigger so to speak in terms of their projects in '07. So my comment earlier with respect to transitioning '08 relates to a number of districts that are geared up to start next year.

Thanks. And can you differentiate between rental and sales in this, in the bond measure opportunity?

Well really all of our modernization work is strictly rentals. Sales are on the more on the permanent modular side of things and really our focus has been on rent. So no large sale impact of any sort for us.

Okay, thanks. Shifting gears a little bit. The third leg opportunity you spoke of, did I hear you say it was something that's imminent in 2007? Did I infer properly?

No, all we're doing is investigative work at this time and we have a shorter list of opportunities that we're drilling down on to see if any of those are viable to pursue an opportunity.

Okay, and one thing I kind of took away from this call and earlier calls is that there's a lot of spending going on, SG&A and other, for infrastructure for new markets that is occurring in '07. I realize you're not going to give us '08 guidance right now, but everything is shaping up to be very rich in '08 I would say on the top line. Will there be a lot of drag of the spend this year into next year?

Yeah, I think, Scott, a way to think about SG&A, if you look at us historically and look at the full consolidated numbers, SG&A as a percentage of the rental revenue stream, for the last few years, it's been somewhere in the 26 to 28% range. And I think that some of the things we're spending on this year, 2007, will continue through '08. We have not made a final decision around how much further investment of new opportunities we'll be doing, but we'll probably still see some additional expense related to the continued ramp of our new modular markets. And some of the work we're doing on IT and ERP will continue through 2008. Though the planned launch of our new ERP is a phased launch, we'll see the first phase in 2008 and then there will be additional work and expense associated with at least one future phase beyond that. So I think it's a work in progress and a metric I would keep an eye on is looking at the SG&A, the total corporate level, in relation to the growth in rental revenues. And I think it's still going to be significant in 2008 and most likely higher than what we experienced in 2007.

Okay, two more if I may. One, the distribution center in Florida that sounds like you hope to have up by first quarter. Will that be used to support Georgia and North Carolina as they're relatively closer? Or is that stretching it?

No, really that's strictly a Florida operation. Not that it potentially couldn't prepare some equipment for those areas, but from an operational standpoint, those other locations, once they get to an appropriate size, would have their own inventory centers to process equipment.

Okay, and then finally, cap ex spending, how are you seeing that trend? And I guess if you could speak directly to -- we haven't seen the utilization really pick up in California modular yet. I would expect maybe we see a nice jump in 3Q. So how are you looking on that front? And then with regard to Florida and these new markets, modular and then overall? Thank you.

Well with respect to capital expenditures on the modular side of things, in California we're utilizing what equipment we have, so we're really not making any capital expenditures for new classrooms. So we will get a benefit here of utilizing what we have that's on the ground. Commercially, we are buying, actively buying assets in California and Texas to support that as well as in Florida. And we're buying educational product in Texas and Florida. So from a utilization standpoint, California should show ideally some healthy increase here. But all markets will, we would feel the overall effect for Q2 would be positive.

Okay, thanks very much.

Thank you. Our next question will come from the line of Jim Warner with Carlson Capital. Please go ahead.

Good afternoon, gentlemen, and congratulations on a great quarter. Could you provide a little more color about the financial return metrics that you're looking at when you're evaluating the third leg opportunity?

You know, for the most part, when we assess third leg opportunities, we're looking at a variety of items and not the least of which is, can we get returns on investment that are consistent with our existing businesses as well as how well can these additional third leg rental products meld into a customer base or what synergies do we have with existing businesses? So there's a variety of different items that we look at. But I won't share beyond that in terms of any specific metrics.

Okay, and then just shifting gears, I noticed in a subsequent event in July it looks like you ended up purchasing the remaining I guess 19% that you didn't own in EnviroPlex and I'm just curious, am I reading too much into this, but is this a strong indicator of the strength that you're seeing in California that you want to fully control your manufacturing arm?

You know, quite frankly it has a lot more with just operational ease of running the business and also the one of the founders of the -- the founder of the business is looking to retire and so it made very good sense at this time to go ahead and consummate the transaction and complete 100% ownership for McGrath. But nobody should read into this any additional expansion to manufacturing. Just from an operational standpoint it just really kind of makes things much simpler.

It's no real strategic shift, and as you know, Jim, overall in 2006, EnviroPlex contributed between 4 and 5% of total revenues and between 3 and 4% of pretax income for the business. So we're pleased with the business, it's a contributor, but it's not the biggest part of our efforts.

Thank you. Our next question will come from the line of Jennifer Graff with Trusco. Please go ahead.

Hi, I was wondering if you guys could talk a little bit about your Florida educational demand. I think in your June meeting you had talked about seeing growth maybe slowing down just a bit as the schools were kind of trying to determine what their needs were. So will you just talk about the outlook short term there?

Thank you. We've actually had a good booking season in Florida in spite of the fact that population growth overall has been fairly flat this year. Because various districts are growing and other ones are not growing. The other dynamics there that are favorable for us are the transitioning out of the older coded buildings, pre-Hurricane Andrew coded buildings as well as still further implementation of class size reduction. So all of those items have supported us favorably.

Also this year new in Florida is the fact that there was a law passed where schools cannot start until no sooner than two weeks before Labor Day. So that has deferred out some of the anticipated facility orders that we would have expected as they're trying to determine more closely what their actual student population increases will be in the districts. So actually, we're having some later ordering this year in the Florida market than we've had historically because of that.

Okay, but then you're still seeing demand fall right in with what you expected then?

Yes. This year is consistent with what we expected when we sat down and budgeted for the year. We're pretty much in line with what we anticipated.

How long will it take for the market to kind of transition out of the pre-hurricane buildings? Is that like a multi year phenomenon or less time?

It is a multi year phenomenon although in the last year we've seen a little bit more acceleration of that. But it really will happen over time and that should play itself out over the next three to five years potentially.

Okay, great. And then I just had a quick question on TRS. You mentioned some competitive pricing pressure there. I was wondering, are you seeing it more on your older equipment or are you seeing it equally on the new equipment that you're putting out there?

You know, it really depends on the account type more than anything. When you're trying to go after a competitor's account and trying to make penetration, you typically see it more in the type of account rather than in the equipment type. So it's more account related and trying to gain market share as opposed to specific equipment.

So it's you guys going after market share rather than a competitor being more aggressive and trying to take share from you?

Well, it goes both ways.

Right. So are you seeing a change in the market I guess is what I'm kind of getting at?

I don't think there's anything dramatically special there other than the fact that we are certainly looking to expand our presence in North America and pursue additional business in certain types of accounts.

Okay, great. Thank you so much.

Thank you. Our next question is a follow up from Margot Murtaugh. Please go ahead with your question.

Yes, thank you. I was just wondering philosophically, your debt to EBITDA is pretty low and lower than competitors. Why wouldn't you leverage up to so you can grow faster? I mean, why do you keep your leverage so low? I guess that's my question.

Well, quite frankly, it's really driven by what the opportunities are in making appropriate investments. So we have a large number of strategic opportunities that we're investigating just for that reason. We certainly have a very healthy balance sheet. We can certainly leverage at a much higher rate than we are today. But we will do so only if the right opportunity is there and we get the right return. So we're disciplined in the returns we look for and we of course back in 2004, those were our two most recent big strategic pushes. One was the expansion in Florida, the other one was the purchase of TRS and the merger of our electronics business with that. So we're actively engaged in looking at opportunities and hopefully we'll have some that hit here and we'll be able to further leverage our strong balance sheet.

I think we've been very fortunate, Margot, in that if you look at the last few years, we've really seen very significant investment in the business of an organic nature. And we've managed to do that largely with self generated funds. We've had very healthy operating cash flow performance in the business and I think any change of a step change nature is more likely with an M&A type event and obviously the last time that occurred was with the TRS acquisition in June of 2004.

Okay. I was also wondering why you don't fix your interest rate on your debt? Wouldn't this be an opportune time to do it? And don't you worry about higher interest rates?

Overall, interest expense is not a large part of the overall cost structure of the business. But we in fact will be reviewing the structure of our debt in the months ahead

Okay. Thanks a lot.

Thank you, Ma'am. Management, at this time we have no additional questions in the queue and I'd like to turn the conference over to you for any closing remarks.

Well I'd like to thank everyone for joining us on today's earnings call and we look forward to speaking with you again on our Q3 call in early November. Thanks, everyone, for attending.

Thank you, management. Ladies and gentlemen at this time we will conclude today's teleconference. We do thank you for your participation on the program. At this time you may now disconnect and please have a pleasant afternoon.