McGrath RentCorp (MGRC) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the McGrath RentCorp Third Quarter 2007 Earnings Conference Call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference will be open for a question and answer session. (Operator instructions). As a reminder this call is being recorded today, Thursday, November 1st, 2007. I would now like to turn the conference to our host Mr. Geoffrey Buscher with SBG Investor Relations.

Thank you, operator. Good afternoon. I'm the Investor Relation 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, 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 call replay is 11087722.

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 web site at MGRC.com. A 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 on line in the investor relations section of our website where 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 the McGrath RentCorp 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 10K and Form 10Q. 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 third quarter 2007 Form 10Q. For the third quarter 2007, total revenues increased to $80.8 million from $77.9 million for the same period in 2006. Net income was $11.9 million or $0.46 per diluted share, down from $12.7 million or $0.50 per diluted share for the same period in 2006.

We are reviewing the third quarter results for the Company's Mobile modular Division. Mobile modular total revenues increased $4.6 million or 10% to $48.9 million over the same period in 2006 due to $3.7 million higher rental and rental related services revenues and $.9 million higher sales revenues during the quarter. Gross profit on rents increased $1.6 million or 11% to $16.6 million from $15 million in 2006 primarily due to higher rental revenues. Rental revenues increased $2.1 million or 9% over 2006, while rental margins increased to 64% in 2007 compared to 63% in 2006.

Selling and administrative expenses increased $.9 million or 14% to $7.2 million from $6.3 million in the same period in 2006 primarily due to headcount additions to support business growth and higher personnel and employee benefit costs. The revenue increase and higher gross margin on rental revenues partly offset by lower gross margin on sales and increased selling and administrative expenses resulted in an 8% increase in pretax income to $14 million for the third quarter 2007 from $12.9 million for the same period in 2006.

Finally, average modular rental equipment for the quarter was $435 million, an increase of $42 million from the third quarter of 2006. Average utilization for the third quarter declined from 83.7% in 2006 to 83.1% in 2007.

Turning next to the third quarter results for the Company's TRS-RenTelco Division, third quarter total revenues decreased $.2 million or 1% to $26.4 million compared to the same period in 2006 due to lower sales revenues partly offset by higher rental revenues. Gross profit on rents decreased $.1 million or 2% to $8.9 million as compared to 2006. Rental revenues increased $1.7 million or 8% over 2006, while rental margins decreased to 41% in 2007 compared to 45% in 2006. 2007 rental margins were impacted by $1.7 million higher depreciation expense primarily related to 22% higher average rental equipment.

Selling and administrative expenses increased $.5 million or 11% to $4.9 million from $4.4 million in the same period in 2006 primarily due to headcount additions to support business growth and higher personnel and employee benefit costs. As a result, pretax income decreased $1 million or 17% to $4.9 million for the third quarter 2007 from $5.9 million for the same period in 2006 primarily due to lower gross profit on sales, higher selling and administrative expenses and lower gross margin on rental revenues.

Finally, average electronics rental equipment at original cost for the quarter was $215 million, an increase of $39 million from the third quarter of 2006. Average utilization for the third quarter decreased from 70% in 2006 to 68.4% in 2007. On a consolidated basis, interest expense for the third quarter 2007 decreased $.3 million to $2.7 million from $3 million for the same period in 2006. The third quarter provision for income taxes was based on an effective tax rate of 39%, unchanged for the same period in 2006. The Company's estimated effective tax rate of 39% is based on the 2007 expected revenue distribution by state.

Next, I'd like to review our year to date 2007 cash flows. We continue to generate strong cash flows to invest in our business and return value to our shareholders. For the nine months ended September 30th, 2007, highlights in our cash flows included, mass cash provided by operating activities was $54.2 million, a decrease of $17.5 million compared to 2006. The decrease was primarily attributable to the reduction of accounts receivable in 2006 due to the collection of large aged accounts receivables that did not recur in 2007 and slower collection of receivables in 2007 partly offset by improved operating results and other balance sheet changes.

We invested $78.4 million for rental equipment purchases partly offset by $19 million in proceeds from used equipment sales. Dividend payments to shareholders were $13.1 million. Net borrowings increased $18.9 million year to date from $165.6 million to $184.5 million. We continue to have a solid, low leveraged balance sheet.

For 2007, third quarter adjusted EBITDA increased $.3 million or 1% to $37.2 million compared to $36.9 million in 2006 with consolidated adjusted EBITDA margins at 46%. Our definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income are included in our Form 10Q for the quarter. Based on the results to date and our outlook for the remainder of the year, we expect full year results to be towards the lower end of our 2007 guidance range of $1.65 to $1.73 per diluted share. At this point, I would like to turn the call over to Dennis.

Thanks, Keith. Let's begin with some color on our modular rental business for the quarter. Quarter over quarter rental revenues increased by 9% to $25.9 million. This increase is primarily related to new educational rentals coming on line during the quarter and to a lesser degree new commercial rental activity. We should experience a full 12 months of rental revenues in 2008 on a large number of these educational orders.

We've had favorable educational rental opportunity in booking levels in all of our classroom markets during 2007. In California, we're beginning to benefit from the high level of modernization monies made available from the Statewide School Facilities Bond Measure passed in late 2006; however, we also experienced a more price competitive market compared to past school ordering seasons due to higher classroom inventory levels coming into 2007.

In Florida, the popularity of our hybrid classroom product, class size reduction and the phasing out of older model code portable classrooms supported our educational business growth. In the Texas market, we experienced favorable demand in booking for both modernization and student growth needs. Keep in mind that the great majority of the classroom rental orders booked during 2007 are multi year transactions.

For the third quarter 2007 in California, our commercial rental revenues grew over the comparative quarter last year; however, at a lower rate than anticipated. This was due to lower business activity levels in both residential and nonresidential construction. Texas had favorable quarter over quarter growth in commercial rental activity and in Florida we are pleased with the volume of commercial opportunities we are experiencing as we work to establish the mobile modular brand name in the market.

At the end of the second quarter, utilization for our modular fleet stood at 82.9% compared to 82.8% at the end of the second quarter of 2007 and 82.9% a year ago. Although we had favorable outbound shipment levels in classrooms in all markets during the third quarter, our quarter ending utilization was impacted primarily by lower opportunity levels and returns in both residential and nonresidential construction markets in California.

We had a very favorable increase in both gross profit on rents at 11% to $16.6 million and in gross margin on rents to 64% from 63% 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 favorable quarterly increase in rental revenues of 8% to $21.7 million from $20 million a year ago. This was our highest rental revenue quarter since the merger of TRS and RenTelco in 2004. Early in the third quarter we began to see higher conversion level of opportunities that had been building during the second quarter. We've experience healthy rental revenue activity across a broad range of applications including wireless and wire line equipment, aerospace and defense systems and products, and broadband network infrastructure.

Entering the fourth quarter, our pipeline of opportunities has continued at favorable levels. TRS RenTelco's pretax earnings and gross profit on rental revenues were both lower than a year ago business due to higher depreciation and higher selling and administrative expenses. Depreciation expense increased due to our continuing purchases of the latest technology test equipment to support growth and our need to reduce our inventories of older technology equipment. We're also more fully staffed than a year ago. Most of these positions are sales and marketing related and are helping to drive higher rental revenue levels.

Utilization at quarter end increased to 69.9% from 68.8% a year ago and 67.2% at the end of the second quarter of 2007. When you examine the level of net additions to our original cost of inventory of $43 million over the past 12 months, a 24% increase, combined with higher utilization it speaks to both the changing technology environment and the growth of the test equipment rental industry.

Depreciation expense for the quarter was $10.2 million compared to $8.6 million last year or a 20% increase. Depreciation expense as a percentage of rents, or DAPR as we refer to it internally, increased to 47% from 43% a year ago, a decrease from 48% in the second quarter of 2007. The increase in depreciation expense from a year ago is a result of increased rental equipment purchased over the past 12 months to serve demand for both new product introductions and overall higher business levels. Essential to higher profitability in the quarters ahead is our ability to continue to reduce inventory levels of lower utilized models and their related depreciation expense.

Looking forward, we believe we are well positioned to sell equipment through our sales channels and both equipment brokers and end users. Assuming continuing favorable rental and sale market opportunity levels, we would expect improvement in depreciation as percentage of rent in the fourth quarter of 2007.

SG&A expense for electronics for the quarter was $4.9 million compared to $4.4 million last year. The biggest contributing factors were increased personnel expenses due to open positions being filled, increased sales compensation levels and bad debt expenses.

And now for a few comments on our focused efforts and initiatives for the remainder of 2007 and going into 2008. In reviewing our results today for 2007, we've had favorable year over year rental asset and rental revenue growth in both rental divisions; however, each business has a different set of dynamics and path associated with getting to higher gross profit in rent and pretax profit levels in the quarters ahead. For modulars, we need to continue our good progress in 2007 and utilize our idle classroom, California classroom inventory.

Turning the corner in 2008, our pipeline of opportunities appears to be very favorable; however, we expect to continue to see a very competitive pricing environment minimally during the first half of the year until our classroom inventory is more fully utilized. Although we'll experience expenses in preparing this equipment for rental in the quarters in which we perform the work in our inventory centers, a significant amount of the rental stream from utilization of this equipment will hit the pretax line since we are already incurring the depreciation in interest expense in our financials.

The modular rental assets we have been purchasing in 2007 have predominantly been for our Florida and Texas markets to serve classroom rental growth. We need to continue our pick and shovel work at increasing our educational business base one school district at a time. An example of this is reflected in our Texas results over the past two years. Our third quarter 2007 rental revenues compared to the same period in 2005 reflect a 47% increase with our mix of educational billings improving from 18% in 2005 to 25% in 2007.

For electronics, for the first nine months of 2007 we increased our net additions to rental inventory at original cost more than we did for the entire year in 2006. This speaks to changing technologies and good market conditions. Although we ended the third quarter at a very healthy 70% utilization level, depreciation as a percentage of rent is running at a current rate of 47%. Ideally, we would like to see this metric at 45% or below. We're highly focused on selling various (inaudible) generation test equipment and lowering depreciation as a percentage of rent. The other benefit that we will derive as we sell this equipment is higher gross profit on sales levels. If we are successful, we should see increased quarter over quarter profitability going forward.

We've seen lower sales revenues and pretax profit in Enviroplex through the third quarter of 2007; however, our order backlog is higher in the fourth quarter than it was a year ago. We recently hired a new business leader for Enviroplex for the stronger business development focus entering 2008 and available state and local facility bond monies for permanent modular construction purchases by school districts. We are looking forward to higher business activity levels for Enviroplex in the quarters ahead.

Let me now turn our attention to our longer term strategic planning and corporate development efforts. Our geographic expansion into both North Carolina and Georgia has moved slower than we would have liked to have seen thus far in 2007; however, we are beginning to accelerate our progress. We've recently hired a regional leader to oversee North Carolina and Georgia, the mid Atlantic region as we've [gone into] this geographical area.

We also are in the process of hiring various sales team members. We're close to completing our design and engineering for new rental equipment in both markets and to place our initial building orders by the end of 2007. We have also established our initial marketing and promotional programs. We recently completed a review of other mid Atlantic modular building rental markets and believe that there are additional areas that have favorable demographics and growth opportunities. We'll have more to share in these markets as well as other potential geographic expansion investigative efforts early next year.

We're in the final stages of evaluation of potential new test equipment product lines that could be melded into our Dallas operations in order to leverage our existing TRS-RenTelco facility and systems infrastructure. We will elaborate more on decisions surrounding these efforts on our Q4 conference call in February of 2008.

We have also continued to explore potential third leg rental products and have narrowed our current list of opportunities. We are currently doing some final due diligence steps on a particular product and its related rental markets and hope to share more early in 2008.

I also wanted to mention that we're making good progress with the development of our new Florida Regional Sales and inventory center. We expect to have this facility on line during the first half of 2008.

Looking forward, we expect higher quarterly overhead expenses going into 2008 as we continue to invest in our planned modular geographic expansion, investigation and incubation of other strategic growth initiatives, greater management bench strength, and IT infrastructure and ERP application platform changes.

Finally, when you look at our numbers more closely through the first nine months of 2007, although we've had another good year thus far in rental assets and rental revenue growth, we've experienced lower gross profit on sales at mobile modular, TRS RenTelco and Enviroplex. This impact is approximately $0.04 to our overall earnings year to date. As we've shared historically, equipment sales associated with our rental businesses can fluctuate depending on customer requirements, equipment availability and funding.

As most of you know, we've got a number of moving parts to our businesses that can impact our full year earnings right through the end of the fourth quarter. However, as Keith spoke to earlier based upon our lower gross profit on sales through the third quarter, we feel it prudent to update our guidance at this time to reflect that we expect our 2007 full year results to be towards the lower end of our guidance range of $1.65 to $1.73 per diluted share. And now Keith and I are available to address any of your questions.

Thank you, sir. We will now begin the question and answer session. (Operator instructions). Our first question comes from Scott Schneeberger with CIBC World Markets.

Hi. It's Amy [Ruderman] for Scott Schneeberger of CIBC.

Hey, Amy.

Hi. How are you doing? My first question is on pricing. We had -- I guess you had anticipated pricing softness in 3Q into 4Q. I'm curious why you're seeing pricing pressure into '08. Has something fundamentally changed about the market?

I don't think anything has fundamentally changed. We did expect the pressure this year and I think when you look at the flow of opportunities going into '08, I think there's a larger number of opportunities into '08 than we would have thought otherwise. So perhaps the industry didn't generate as much opportunity this year although it was very healthy, but we're seeing more opportunity going into '08. So we expect that competitiveness to continue.

Okay. Are you seeing more competitiveness than you anticipated, more competitors in the California market?

Not more competitors, no. Same number of -- same players. It's just been more competitive on pricing between the players that are there.

More competitive pricing, okay. Then my next question is can we see volume pick up enough to compensate for that pricing pressure?

I think when you examine the metrics of modular buildings and rental industry, what's most key is utilization and term. You'll have rate pressure from time to time, but the real big levers that move the numbers are get your equipment on rent and especially with education rental. The term piece is so important. So even though there's been pricing pressure here and we expect it going into next year as well, we don't think in the long term of profitability it's very significant.

So you don't think the pricing pressure is the issue? It's more getting the volume up?

When you look at term versus price, especially with educational rentals, it's essential especially when you have rental terms of 60 to 70 months and a lot of transactions. So, if you don't get it out in a given year then you're waiting a whole 'nother year to be able to start generating any revenue on it. We just don't think in the long term picture this is very significant.

Amy, while it's too early to say clearly what volume will be next year and answer your question whether it will offset pricing pressure, the early indications are that a lot of customers are planning projects for next year and we feel pretty good, but it is very early days.

Okay. For next year, do you mean for the next school year? Can we anticipate additional orders for the '07/'08 school year?

I think as we turn the corner into the next school ordering season, which will in effect starts January through June '08, we feel very good about the opportunity that we're seeing, the pipeline of opportunities, and of course, what's also there as well are the bond monies to support those projects. So we feel very good about entering 2008.

Okay. So essentially, as far as orders, we're done for the '07/'08 school year and we're focused on the '08/'09 school year?

Education for the most part that has run its course for this year although there can be [onesie], [twosie], but, yes.

Okay. And then, as far as on the modular side for utilization since it was down, is it just the education that was causing it to be down or is it also the commercial side?

I think there's two sets of metrics here. The average utilization was down. We're (inaudible) utilization since September 30th and that was at 82.9 compared to 82.9 a year ago and was up very slightly from the end of the second quarter. So, that's probably the more telling metric because that's the latest information. And what we had there was really a dynamic that we had good schools shipments in all markets, California, Texas and Florida, but in California our commercial activity was slower and then in our Texas market, although good commercial activity going out, we had some larger complex returns and in Florida we had some returns toward the end of the third quarter in classrooms. So, that's kind of a net out there as to why those numbers are really looking flat year over year.

Okay. Then, can you remind me again about the split on your business for non-res construction versus res? What is the percent of revenue associated with that in California and overall?

Actually, we don't break out between markets, but resident, non-res construction is about 10% to 11% of our modular rental revenue mix and residential is about 9% to 10%.

Nine to 10%.

Just a note that non-res is a little bit higher.

That's a percentage of the total modular rental business.

Okay. Then just moving along to electronics. Average electronics rental rate declined. When can we expect to see stabilization in the rental rate?

I think we're actually getting much closer now. If you notice that the sequential quarters was 4.99 to 4.93. So, a little bit down, but not significant in the way of reduction. Certainly, the quarter over quarter and that's a function of three items in particular. One is the trading out of list price equipment by $0.55 on the dollar TRS transaction versus about $0.85 to $0.95 that we pay on buying new equipment. The second item is our mix of inventory. If you have more general purpose equipment versus communications equipment that has a longer life and a lower rate. And then the third item is the competitive nature of the market in terms of as we are looking to penetrate and grow rental revenues in various accounts, we see more pricing competition in order to accomplish that. So all those have contributed, but if you look sequentially here over the last couple of quarters we're growing rental revenues nicely and that is starting to really flatten some there.

Okay. And then as far as utilization, what are you targeting on electronics?

Great question. We finished the quarter at around 70%. We actually are running a bit more favorably from that going into Q4; if you look at our first month in Q4 which was a very good month, again. Anywhere - anything at 70% or above is healthy. As we began to sell more of the earlier generation technology equipment, we may even see that number tick up more in the fourth quarter.

Now what counters that in the fourth quarter is you start getting some returns typically in December, as companies gear down at the end of the year and then they gear back up at the beginning of the year. So, I think we're in a very healthy range right now that can certainly up tick within the quarter and then you could feel pressure toward the end of the quarter, but the larger our asset base gets, the higher utilization we should able to run that business at to address spot demand. So, anything really in the 68% to 72% range, perhaps a good high end is not unrealistic and is healthy.

We were certainly pleased to see the utilization in that business improve in Q3 compared to Q2.

All right. I'll get back in the queue. Thank you.

Amy, thank you.

Our next question comes from the line of Mark Grzymski with RBC Capital Markets.

Good afternoon.

Hey, Mark.

Hey, Mark.

Just wondering if you can clarify on the -- not clarify, but maybe we can go little deeper here on the non-res business. Are you feeling more pressure on that side of the business or on the educational side from your competitors in California?

I think we feel good about the educational business volume that's in California. We were pleased with the opportunity flow this year and also what we're seeing going into '08. On the commercial side of things, in California what we experienced was a mixed bag. We experienced less business activity on the single wide equipment, but when you looked at our complex commercial construction area it was very strong. What I mean by complex, its multi four complexes typically for larger projects.

We might be starting to see now some of the $30 billion in infrastructure bonds starting to come into the market as we have various project now for waste water treatment plants, dams, bridges, those types of large infrastructure items. That area has continued strong. In fact, we're actually buying assets to support that. But the single wide area in California is where we saw pressure on both non-res and res.

Okay. I guess that makes sense because California is spending a lot on infrastructure. I would assume that part of the non-res business that you're seeing the softness in, which is logical given that the residential portion of California is very weak.

The residential portion has been weak without question. Now here's the other side of the coin. Although we had a third quarter in California where commercial -- single wide commercial activity was slower, we've actually had very good start in that area in Q4. So, it's a bit of a mixed bag. I don't think it's a referendum on California in terms of commercial construction. The numbers are what they are in the third quarter, but in my conversations with our sales staff entering Q4 it seems busier than it was in Q3 in that single wide area. So, again, there's a bit of a mix there.

Okay. Okay. Understood. Now just moving on to TRS RenTelco. If you're bringing on new equipment, is it fair to assume that your gross margin should go higher because you put those units out on lease; you're going to get better pricing? More aggressive pricing?

Well, yes. That should be the case and also you're not incurring the inventory center expenses.

The key is utilization and that was more of a challenge, particularly earlier in the year, but as we get the new equipment and assuming we're getting a reasonable rental rate than if we keep it well utilized, gross margin should grow as the equipment pool grows so long as it's utilized, again, at a reasonable rate.

Okay. And then maybe just lastly since the technology area is not as familiar to me, could you maybe just tell us what the outlook is into 2008 as far as how you're seeing your rental equipment?

Well, we've seen a lot of activity this year in terms of a broad number of areas. Bandwidth needs are growing as people try to put more over wireless. IT spending by companies has been up. All of that is very positive for us and when we look at our pipeline opportunities it's continued strong. We're now into the first part of November and it still has continued at a very healthy level and in our discussions with customers, 2008 is looking pretty favorable at this point.

Okay. So, I'm not sure maybe I did see it tick down in spending on the telecommunications side on a CapEx basis. That really shouldn't impact you?

We're experiencing some good business levels, so sometimes the macro -- you're speaking to a macro factor. Sometimes those macro factors don't impact us directly right away. It depends on what product areas and so forth.

Okay.

In terms of year over year growth in rental revenues for TRS, third quarter has actually been our strongest quarter of the year. So positive and as Dennis said, we feel like we made a good start entering the fourth quarter.

Okay. Thanks, gentleman.

Thank you.

(Operator instructions). Our next question is a follow up question from Scott with CIBC.

Hi, it's Amy again.

Hi, Amy.

Hi. On the modular side, just getting back to the volume question again. Can we expect to see low teens? Right now we're in high single digits, obviously, on the modular side. Can we expect to see low teens going forward into '08 as you move some of that California modular onto rent?

Well, we'd like to believe so. It will all play out next year and like I said the things that line up nicely for us at this point are the fact that there's good demand going into next year for classroom rentals and California for modernization work. The funding is there. Those are both very positive. The dynamics in our Florida market are very good for class size reduction and replacement of older model coded buildings. And the Texas market, which is a huge educational market and we're starting to grow that, although it's smaller than our other educational markets, and commercial work down there, especially the petrochemical, all those items point to '08 for our modular business being a good year from today's perch and perspective.

Okay. Looking back over the past couple quarters into now, has the commercial side of the business, the part that's tied to non-res, has that come down?

Well, when you look at -- you have to look at it by market. The Texas market has been very strong and has another good year in commercial growth. The California market, even between southern and northern California, one market can be stronger than the other. But single wide has been where the pressure has been in California, but the offsetting item hopefully in the longer run here will be some of this commercial construction effort that's tied to larger complexes for infrastructure.

A lot of those tend to be a longer sales cycle to get them on rent, but they typically tend to be longer term as well. So, it's early now. We saw softness in the third quarter. The fourth quarter started strong in California with commercial on the single wide side. Texas continues. Florida is a new market. You put all that together. We really need to see more data before we really have a more definitive outlook on '08 for commercial construction.

Okay. So Texas and Florida are strong. California is still uncertain. Next question is given the recent tragedy in California, what has been the impact on your business and what impact do you see going forward?

Actually, I posed that question a couple days ago to one of our sales people in Southern California. They indicated that they had seen a few calls here and there, but quite frankly, in those types of events you may see a little bit here or there in terms of opportunities, we don't expect anything material from that. We're certainly ready and able to respond to serve both, whether it be home builders or commercial construction folks or people that are providing other types of services to the impacted parties.

Okay. And then just commenting on Florida. We've read in the news about demographic shifts with people moving out of Florida. How is that impacting your business there?

Well, on the educational side for the most part over the last couple of years past student population growth overall has been fairly flat to down a little bit, but that's not throughout every district. A number of districts are still growing, but we really made our headway in the fact that there's class size reduction still being implemented. They're phasing out the older model coded buildings and then the general popularity of our hybrid classroom product.

So, that's how we really have grown for the most part over the last couple of years and we see that going into next year as well. Florida is expected to turn in the next couple of years and start growing again.

Class size reduction is an ongoing program in the state and there's several more years of implementation work to be done there.

Right. Just touching back on pricing. You said into '08 we'll still continue to see softness on that pricing. Can you give us an idea of the magnitude?

It really depends on the dynamics of how early in the season inventories start getting utilized and then there's a point there and we've seen it before when various seasons where it's been more competitive. At some point there people -- existing inventories get more fully utilize and pricing moves upward. So really it's a timing issue next year on when that occurs. We expect it to occur sometime within the first six months. And then the other dynamic is on our other rental side of things, how much activity are we doing with other products that actually have higher rental rates in the average classroom rate. You can have an offsetting there that works for you in the other direction.

So, that was into the first six months of '08 you're saying?

We have stated basically in the prepared comments that we would need to see the first six months still have pressure there, but that could relieve sooner based upon just how quickly projects are getting bid and equipment is getting utilized.

Okay. Switching over to electronics, I read about the Danaher acquisition of Tektronix. How is that impacting competition on the electronics business? How will that impact it?

From our seat, we don't -- first of all it's too early to tell, A; B) our sense of things is that there's no real impact to us whatsoever. Tektronix is a big provider to us. They will continue to be so going forward. We have worked with them in various partnerships so we expect all that to continue and to be business as usual at this point.

We've work with Fluke as well, which is owned by Danaher.

I'm sorry? Could you repeat that again?

We continue to do business with Fluke, which is a division of Danaher in a test equipment business.

They were at one time separate.

Okay. So you buy from them?

We buy from both parties and Tektronix.

Okay and you continue to do so? You anticipate that relationship won't change?

At this point, no.

Okay. Anything more -- any more comments on the international front as far as account penetration on electronics?

Well, our main focus internationally has really been Mexico and certain countries in South America. Those are areas in which we've been able to serve fairly readily out of Dallas. And so, incrementally to do marketing and do further work there is pretty cost effective and we've actually done a good job of growing our business in Mexico over the past 12 months and are looking to continue those efforts.

Okay. All right. Thank you very much.

Thank you.

Our next question comes from the line of Adam Leitzes with Glacier Bay.

Hi guys.

Hi, Adam.

I may have been distracted for a moment during your prepared remarks, but I thought you kind of mentioned getting closer to going into a third leg of -- rental leg of the business?

We made a comment on that and that we've narrowed down the list of opportunities and we're highly focused in one area and we're not prepared to speak to that publicly right now, but we're finishing up some due diligence on that now.

Is this kind of a buy or a build opportunity? If it's a buy, can you talk a little bit how you're thinking about financing? Obviously, you guys are fairly under levered.

We certainly -- I think the way it should be looked at is in terms of organic and if there is a buy opportunity along with that, then we certainly have a balance sheet that could make -- be prepared to be able to act on something, but I think the investment community should view this as organic initially here until we have perhaps more to share on how we might look to grow that business assuming we move forward with it.

If it's more of an organic opportunity, what do you think generally of your leverage situation, your ability to optimize capital structure a little better?

I think that we are very well positioned. Our commercial banks are very supportive of us in lending us more money. Needless to say also our investment banking relationship should be put together some different types of structures. We're very well positioned.

Okay. Look forward to more on that. Thanks.

All right, Adam. Thank you.

There are no additional questions at this time. Please continue with any closing statements.

I'd like to thank everyone for joining us today on our Q3 conference call. We'll look forward to chatting with everyone on our Q4 call toward the end of February in 2008. Thanks so much.

Ladies and gentlemen, this concludes the McGrath RentCorp third quarter earnings conference call. If you'd like to listen to a replay of today's conference, please dial 1-800-405-2236 or international participants can dial 303-590-3000 using the access code of 11098621. Again those numbers are 1 800-405-2236 and 303-590 3000 with access code of 11098621. Ladies and gentlemen, this concludes our conference for today and thank you for using AT&T teleconferencing. You may now disconnect.