McGrath RentCorp (MGRC) 2008 Q2 法說會逐字稿

Welcome to the McGrath Rentcorp second quarter 2008 conference call. At this time all conference participants are in a listen-only mode. Later we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS)

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

Thank you, operator. Good afternoon. I'm the Investor Relations Advisor to McGrath Rentcorp. I 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, Senior 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 11116860. 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 website at mgrc.com.

A press release was sent out at approximately 4:05 today Eastern Time today, or 1:05 p.m. 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 21(e) 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 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 second quarter 2008 form 10Q.

For the second quarter 2008, total revenues increased 10% to $74 million from $67.4 million for the same period in 2001. Net income and EPS increased 11% to $10.1 million, and 17% to $0.42 per diluted share respectively, from $9.1 million and $0.36 per diluted share for the same period in 2007.

Reviewing the second quarter results for the company's Mobile Modular Division. Mobile Modular total revenues decreased $1.8 million or 5%, to $37.3 million, compared to the same period in 2007, due to $1.2 million lower sales and $1.1 million lower rental-related services revenues, partly offset by $0.5 million higher rental revenues during the quarter.

Gross profit on rental revenues increased $0.2 million or 1% to $15.5 million from the same period in 2007, due to higher rental revenues, partly offset by lower rental margins. Rental revenues increased $0.5 million or 2% over 2007, while rental margins decreased to 61% from 62% in the same period in 2007.

Selling and administrative expenses increased $0.4 million or 6%, to $7.1 million from $6.7 million in the same period in 2007.

Pre-tax income decreased $0.7 million or 6%, to $10.3 million for the second quarter 2008, from $11 million for the same period in 2007, primarily due to lower gross profit on sales and rental-related services revenues.

Finally, average modular rental equipment for the quarter was $454 million, an increase of $37 million from the second quarter of 2007. Average utilization for the second quarter decreased from 82.1% in 2007, to 82% in 2008.

Turning next to second quarter results for the company's TRS-RenTelco Division. Second quarter total revenues increase $5.1 million or 19%, to $32 million compared to the same period in 2007, due to higher rental and sale revenues.

Gross profit on rental revenues increased $1.8 million or 22%, to $9.7 million, as compared to 2007, due to higher rental revenues and higher rental margins. Rental revenues increased $3.3 million or 16%, as compared to 2007. And rental margins increased from 39% to 41%.

Selling and administrative expenses increased $1.1 million or 21%, to $6.4 million from $5.3 million in the same period in 2007, primarily due to employee additions to support business growth and higher personnel and benefits costs.

Pre-tax income increased 32% for the second quarter 2008 to $5.1 million, from $3.8 million for the same period in 2007, primarily due to higher gross profit on rental and sale revenues.

Finally, average electronics rental equipment at original cost for the quarter was $248 million, an increase of $44 million from the second quarter of 2007. Average utilization for the second quarter increased from 67.5% in 2007, to 69.4% in 2008.

On a consolidated basis, interest expense for the second quarter 2008 decreased $0.5 million to $2.3 million from the same period in 2007. As a result of the company's lower average interest rates partially offset by higher average debt levels.

The second quarter provision for income taxes was based on an effective tax rate of 39.2% compared to 39% in the second quarter 2007.

Next, I'd like to review our 2008 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 30th, 2008, highlights in our cash flows included net cash provided by operating activities was $45.4 million, an increase of $16.6 million or 58%, compared to 2007. The increase was primarily attributable to the improved results of operations in 2008, lower tax payments in 2008 compared to 2007, and other balance sheet changes.

We invested $54.7 million for rental equipment purchases and $11.3 million for property plant and equipment purchases, partly offset by $12.6 million in proceeds from used equipment sales. Dividend payments to shareholders were $9.1 million. Net borrowings increased $37 million, from $197.7 million at the end of 2007, to $234.7 million at the end of the second quarter 2008.

We continue to have a solid, low-leveraged balance sheet.

There were no repurchases of common stock during the three months ended June 30th, 2008. During the six months ended June 30th, 2008, the company repurchased 968,746 shares of common stock for an aggregate repurchase price of $21.9 million, or an average price of $22.61 per share. There were no repurchases of common stock during the three and six months ended June 30th, 2007. At this time 2 million shares remain authorized for repurchase.

For 2008, second quarter adjusted EBITDA increased $2.7 million or 8% to $34.6 million, compared to $31.9 million in 2007, with consolidated adjusted EBITDA margin at 47%. Our definition of adjusted EBITDA and our reconciliation of adjusted EBITDA to net income are included in our press release and form 10Q for the quarter.

Turning next to 2008 earnings guidance. At this time, based on second quarter 2008 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 $1.72 to $1.82 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. We experienced a very challenging residential construction market in California during the second quarter, with a significant level of returns and very limited opportunity for new sales office rentals. We also saw lower demands and a more competitive environment for new, non-residential construction projects in California that utilized single-wide modulars. However, we are continuing to see healthy demand for larger, non-residential construction projects in California, emanating from $30 billion in bond measures passed in late 2006, for the building of waste water treatment plants, dams, levies, and other infrastructure.

The additional good news about these engineering-type projects is that they typically utilize larger modular complexes and have multi-year rental terms.

Keep in mind that residential construction represents less than 4% of company-wide annual rental revenues historically.

Commercial business activity in the Texas market continued to be favorable during the quarter and is supported by a strong oil industry sector. In Florida, we saw favorable levels of commercial opportunities and booking activity during the second quarter of 2008.

For clarity purposes, we define our commercial rental business for modulars as everything other than education. In other words, in includes general office, display and work space for residential construction, non-residential construction, commercial and industrial businesses, the petrochemical industry, healthcare, and a large mix of other specialty needs.

For educational rental business during the first half of the year, we saw respectable classroom booking levels for the 2008-2009 school year in the California, Texas, and Florida markets. However, we also experienced continuing pricing pressure in the California educational market during the first half of 2008, as rental companies competed to utilize their idle classroom inventories.

Our equipment returns through the first half of the year were inline with our expectations. Keep in mind that the great majority of the classroom rental orders booked during the first half of the year will not ship and begin billing until the third quarter of 2008, and that virtually all of these orders will be multi-year transactions.

In the first half of 2008, in our newest modular market, North Carolina and Georgia, we generated favorable levels of both commercial and educational opportunities. We got off to a slower start than anticipated in the conversion of opportunities to orders, but our momentum has been building. Our modular product offerings in these new markets provide end users with improved floor plan design, higher building material standards, and vastly improved esthetics than our competitors [Legacy Suites].

There's a higher cost associated with this product and, thus, there is more pick-and-shovel work to be done with decision makers in getting the Mobile Modular brand and its value proposition established in these markets. However, we believe that over time our product and service innovation efforts will reward Mobile Modular with increased market share.

At the end of the second quarter, utilization for our modular fleet stood at 82% compared to 83% a year earlier. The reduction utilization level relates predominantly to residential construction returns and a more competitive commercial construction market in California. It's important to note that approximately 30% of our modular rental revenues today are generated outside of California.

Although the California market is experiencing various challenges today, it will always be a significant contributor to our earnings. However, our efforts over the past two years to increase our modular business levels in both Florida and Texas in particular is serving us very well today in helping to balance our exposure to regional events. We believe our expansion into both North Carolina and Georgia more recently, will further serve this dynamic in the years ahead.

Now turning to Enviroplex, our wholly-owned California classroom manufacturing subsidiary. They had sale revenues of $4.6 million during the second quarter, up from $1.5 million a year ago. For the six-month period, sale revenues were $6.5 million in 2008, compared to $2.6 million in 2007. In addition, Enviroplex's backlog at the end of the second quarter was at a very favorable level. Our team at Enviroplex has done a very good job thus far in 2008 in both booking activity and in their execution of orders. We're looking forward to a favorable second half of the year for Enviroplex.

Now let's take a closer look at TRS-RenTelco, our test equipment rental division. TRS-RenTelco had a strong increase in rental revenues of 16% to $22.6 million, from $20.3 million a year ago. We benefited from favorable market demand across a fairly broad base of customer segment, including communications network, aerospace and defense applications, and semiconductor and consumer electronics product development and manufacturing. Our pipeline of opportunities has continued favorably into the third quarter.

Although there was a slight reduction in rental rate yield sequentially from the first quarter of 2008, this reduction is mainly due to changes in our equipment mix versus market pressures or the replacement of lower-priced TRS (inaudible). At the end of the second quarter, utilization stood at 70%, compared to 67.2% a year earlier. The higher utilization level was driven by a healthy rental marketplace as well as improvement in our sales of earlier generation test equipment inventory.

Gross profit on rents increased 22% to $9.7 million for the quarter, compared to a year ago. In addition, gross margin on rents increased to 41% versus 39% last year. Higher rental revenues and lower equipment depreciation as a percentage of rents drove the higher margin level. Going forward, we strive to increase gross profit and gross margin on rent as we grow our business levels, better manage our asset pools, and create greater leverage of our centralized sales and equipment processing infrastructure.

Now for some additional comments on our strategic growth efforts. Earlier this year we announced our entry into the market for renting portable storage units. Our goal has been to incubate this organic effort at our northern California location in Livermore and, if successful, to roll it out to other locations over the next few years. We've had good success to date, benefiting chiefly from synergies with existing Mobile Modular customer relationships.

We're focused on creating a [differentiated] product that should serve us well going forward. We should emphasize that it will take some time before a portable storage rental business becomes meaningful to our earnings. I'm hopeful that with our learnings and success thus far we may be able to move faster in expanding this business into other modular markets that we operate in today.

At our annual shareholders meeting in June, we announced our entry into the environmental test equipment rental business. We'll be running this new initiative out of our Dallas-based electronic test equipment facility and leveraging our order processing, inventory control, and equipment maintenance and handling systems. We're offsetting various staffing to support this new initiative.

Environment test equipment business provides rental products for air, soil, and water monitoring and sampling, and other products including noise and vibration measurement, thermal imaging and GPS surveying equipment. The products are typically rented to environmental consulting firms, industrial companies, and industrial hygienist. While getting started in this business -- just getting started in this business and are humble learners, but believe that we can ramp our knowledge and our results fairly quickly.

We continue to be interested in potential acquisitions to help accelerate the growth of each of these new rental initiatives, as well as for established rental businesses. We are also continuing to explore additional rental product businesses that we have the potential to enter through a strategic acquisition or organically.

With respect to our new ERP application platform, we are now in position to launch phase one in early October, directly following our busy season for modulars. Phase one, by far, is the largest and most complicated component of our IT application investment.

In closing, it's important to keep in mind that there is a countercyclical dynamic to our rental products that can service during a more challenging economic and tighter credit environment. In our modular business, we've experienced significant challenges in residential construction and more competitive non-residential construction in educational markets in California. However, in spite of various negative macroeconomic data and more regionalized concerns, we have had a good first half of the year.

Our earnings results reflect the benefits of both rental product and geographic diversity in our business makeup today. Additionally, we believe that economic downturns can potentially create attractive opportunities for well-focused and financially healthy enterprises. Downturns can also create opportunities for good companies to either gain on or put greater distance between themselves and their competitors when general economic conditions improve. We are hopeful of being able to take advantage of both of these dynamics.

As always, we aspire over the long run to produce strong financial results in order to return value to shareholders through both share appreciation and the payment dividends. We will also continue to be opportunistic in buying back our shares in order to return value to shareholders.

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 the line of David Gold with Sidoti and Company. Please go ahead.

Hey. Good afternoon.

Hi, David.

Hi, David.

So last, I guess on your call in April, you had commented at that time on the California booking season being fairly favorable. And it sounds like the update today is that maybe things sort of continued but pricing was a lot tougher there. Had something changed or is my memory wrong? Or what's sort of the big difference?

Well, I don't think there's a great deal of difference between the Q1 call results and where we're at today. I mean, it's been a competitive six months in terms of pricing.

Yes.

We've had to work hard for every deal. We've been successful in a great majority of them. It hasn't been as strong this year as certainly in some past years. But we certainly held our own, and, quite frankly, we think we took market share in the educational side this year, as well as on the commercial side. It was tougher markets, but you -- sometimes in those markets you create much greater focus with your sales force and you're really on top of stuff. So I don't think any real difference there from where we were in May on the Q1 call.

Okay. Fair. So looking forward now again as the booking season's progressing, we look out over the, say the next 12 months, do we expect growth from that market?

When you say from that market, the California market?

California specific, yes.

Okay. Well, the benefit we're going to get now is Q3 we have the educational, a great majority of that comes online.

Yes.

We should get the benefit from these larger complexes, which are typically multi-year transactions. It'll really play out on the side of how much more impact there is to the residential construction piece of things as well as to a commercial construction. The residential area's where we really saw the downturn in terms of significance in the California market in the first half of the year, so.

I see.

But we really have to see what's going to play out with respect to those dynamics I just mentioned.

Got you. And then just you'd made a comment about the contracts or the bookings that you're getting are generally multi-year. With tougher pricing out there, have we succumbed to the pricing to get the units our there? So should we see tougher pricing on these multi-year contracts? Or did you hold the line on the pricing and basically take what you could get?

Well, when I talked about multi-year contracts, really they fall into two areas. One is certainly on the educational side. Most of everything we book there is a multi-year term.

Yes.

And that's been a more competitive market. But where we've also seen longer-term transactions are in the larger complexes for this larger commercial construction-type projects or non-residential construction projects. X amount of that coming from the bond measures passed in California.

The good news about that is that those assets, we actually had to buy assets in the market --

Yes.

-- for that demand. So that means pricing is done very well with that product. So we've -- it's an interesting mix of dynamics in a market at any given time when you have as a diverse a group of end users as we do. But that's actually been a good healthy market for us.

Yes, the pricing seems to be more challenged in California, in parts of the education market --

Um-hmm.

-- and then on parts of the commercial. And I don't think we're seeing those same pressures in Texas or Florida.

Yes. Yes. Okay. And then, if I can, just switching over to RenTelco. I think your comment was that the pricing was more an issue of mix than say a competitive pricing arena.

That is correct. I mean, we monitor that very closely quarter-over-quarter and sequentially.

So there's some fairly impressive strength there on that side of the world. What are we doing differently these days? Presumably, I would guess that we're picking up market share, it's not a function of the market growing that aggressively, right?

Yes, I think it's that combination of both. The market is growing some. There's new technology demand out there. And at the same time, we made a decision a couple years ago in evaluating international opportunities and we made a decision that, although we will continue to work the Americas as a whole, we were going to really focus on our backyard, and that was U.S. domestic and Canada. And we've had very good growth there. I don't think there's any question we're definitely taking market share and it's not insignificant. But there's good business level there.

Yes. And then on the pricing due to mix, are we pushing now equipment, then, that's sort of a lower value proposition or --

It's really the difference between general purpose test equipment which is about two-thirds of our inventory and communications test equipment. And the more general -- general purpose has a longer life but it has a lower rental rate.

Yes.

So when you buy more of that equipment and put more of that on rent, it has the impact of lowering the overall rental rate yield --

Yes.

-- on equipment on rent. So that's the dynamic. So --

Got you.

-- we're only buying for the demand that's there in both sectors.

Got you. Got you. Terrific. That's all I have. Thank you, both.

Thank you.

Thank you. Our next question is from the line of Scott Schneeberger with Oppenheimer and Company. Please go ahead.

Thanks. Good afternoon, guys.

Hi, Scott.

Hi, Scott.

Hey, just following up on a bunch of David's questions. The -- I got the sense, I think something, Dennis, you said, that -- and I believe it was on the TRS side, that you were seeing momentum flowing through into the third quarter. Was I accurate on that?

I did make that statement in the prepared comments that our pipeline of activity, and specifically through July, has continued to be very healthy, so.

Okay. So a pretty bullish outlook through the end of the year in TRS?

Well, the one comment I would make is that it feels very good right now. The pipeline looks good. I mean, we had a very good year. My expectations are that we'll finish the year strong. But again, there are macroeconomic dynamics out there that we always have an eye on. But I think, as a whole, the markets are pretty healthy that we operate in.

And could you just take us a little bit deeper there? I mean, we're seeing broadly an economic slowdown. You alluded to elements of your business being countercyclical. Can you take us a little bit deeper there, why you think that you could see sustained strength and if we do see the economy really turn?

Well, I think you're talking overall the countercyclical dynamic. And I can talk to both product groups. I mean, in modular, certainly, a lot -- companies, it's interesting where not every company is experiencing a downturn just because the economy is. And what you can do is, customers, rather than make large capital expenditures for office space, might decide to go ahead and rent something and wait until they see a more favorable economic environment to make investments.

So the rental industry for -- especially for office space and for those types of needs is the least expensive and fastest way to accommodate space needs.

For electronics, a lot of companies that would otherwise maybe buy know the great majority of test equipment is purchased. But when credit gets tight and people want to be a little more cautious with the dollars they spend, they may elect to rent more and so we benefit from that.

So that's how I kind of speak to the countercyclical side of things.

Okay. And I think I've heard from you in the past that you do benefit cyclically and countercyclically. I think if you had your way, you'd like to see the tide rising, but you still do well in this environment.

We are very fortunate that our rental products work both ways. And here even on the electronic side, when demand picks up and people want to buy more, in a lot of cases, the manufacturers can't produce the equipment fast enough. But because of our placement with them in orders, we're able to have equipment sooner, rent it to people on an interim basis until they can get the goods they're purchasing. And then, of course, all the other dynamics about renting in that market are even better when the economy's good, so.

Great. And I just want to try and poke one hole at the comment on the countercyclicality of modulars. I'm jumping around here, but. You are saying that you're seeing some softening in, obviously residential and then in commercial in California, correct? But I guess you're mitigating that by moving around to the type of customer you're serving?

Well, the residential piece is certainly -- we've seen a significant decline in rental revenues year-over-year in that business, Q2-over-Q2. And then on the other -- if you look at commercial construct -- look at non-residential construction, it's really two buckets. It's really the single-wide fleet which is more -- they're typically smaller construction projects that a lot of what our competitors have. That's a much more competitive environment. But on larger complexes which serve a lot of engineering-type projects or much longer-term-type projects, we're seeing that quite -- being a quite favorable market today. And we've always been a real leader in that market sector in all the states in which we operate, in California, and we're seeing a real benefit there from those bond measures that support that kind of business.

So it's things that are coming off and you're able to put into place on the infrastructure work that's picking up?

Yes, large complexes that are in California, we're able to utilize whatever's coming off rent. And like I said before, we're even having to buy [out] to support that demand. And we love that kind of business because it's multi-year contracts and it's for fairly standard equipment that we can, in our inventory centers, modify fairly readily when we turn it back from a customer. So we have that in-house capability that is definitely a competitive advantage more so than other folks.

Sure. Within modular, I -- the -- I guess we were looking for a little bit more out of utilization, and, obviously, we've already -- you've already addressed why pricing was off a little bit.

Is it -- is it the commercial side or the education side that's somewhat holding utilization back? It's not bad, but it's, by no means, robust.

We'll note a couple things. The residential construction market, those assets that are in the residential construction market typically have a pretty high unit cost. They're sales developer officers. And the way we calculate utilization is original cost of assets utilized versus total original cost of assets. So that's a higher unit cost asset. So when you have a slowdown in that sector of the market, you're going to see that in the numbers.

The other dynamic is that we still have X amount of shipments to ship here in both Florida and California for the school market for this year.

And that's -- and that's taking me where I want to go next. So I got the sense, as you were answering David, that basically pricing is very competitive, but you are getting more than -- you think you're taking share. You think you're doing well there. But you made comments that it is a weaker year. I wanted to understand that. Is it going to be a solid year, you've taken share, pricing's a little weaker and that's what you meant when you said weaker? Or is this, relative to past years, a weaker year for the -- for the summer up-ramp in California?

Well, it's not as strong a booking year overall as past years, but it's still a very respectable year. We've had a -- we've had a year that -- you know, decent. So I'm not -- now, at the same time there's pricing pressure there which impact rental revenue levels. So we had a -- if you look back on what we projected for the year, I think we feel pretty good about things.

And I think the other dynamic is, you talked about market share. I think this year really demonstrated the success revenue in Florida and Texas. We're definitely taking market share in those markets both in educational and commercial and it's good to have diversity. California will continue to be a very big market for us. It can have some ups and -- ups and downs, but overall it's going to continue to do very well over time.

So the great news is is that we've done some very healthy diversification and we're getting considerably larger in the other markets that we're in today.

So tying it back to the guidance. You maintain the EPS guidance and you can talk about it. But I assume that the 10% organic revenue growth that you kind of gave was the original guidance at the beginning of the year. That is, I assume, still intact. Is -- are we going to see it swing a lot more to TRS? Is it going to be TRS plus 10 and modular significantly below 10? Just any color there?

Scott, I think the best thing to do is just look at the numbers today. I think, in general, we're very pleased with the results in the first and second quarters. This has been a good first half of the year. Typically, as you've seen with the business, we get more EPS in the second half of the year. For all the reasons Dennis discussed, we're a little bit more cautious for parts of the modular business in California, particularly that developer side on the commercial side. So that's why we're not going to make a change in the guidance. We feel very comfortable with the guidance range where it is today.

The other thing we've got to keep in mind is Q3 is an important quarter for sales, particularly on the modular side. And we just need to see how that plays out during the course of this quarter and into the early part of next quarter. So where we stand today, great first half to the year, feel good about the business, little cautious in some of those macroeconomic risks that are out there, and let's see how the next quarter plays out.

Okay. Thanks. Any -- you may not want to, Keith. But any further insight with regard to sales? You just mentioned it. Anything you saw in the second quarter that would lead you to believe that it should be a concern into the third quarter?

Yes, I would say nothing specific. I mean, as you look in detail at the numbers, you'll see modular sales were down a bit compared to the second quarter of last year. Again, third quarter's an important quarter for that business. Enviroplex was up nicely. So that's another indicator that buildings or classrooms are being purchased here in California, and Enviroplex had a very nice Q2.

Sure. Thanks. If I could just throw one or two more in on different topics. I missed what you had said on the IT spend, something about it being tough in the first stage. And I'm sorry, I just didn't hear it. Could you kind of give us an update there?

What I indicated is that we, in effect, now have the phase one of our IT initiative on the shelf and ready to launch in October at the end of our modular -- the busy season for modulars. And what I indicated was that that is by far the largest spend and the most involved development work of all the IT investments that we're making.

So the good news is is that the hardest part of that initiative is, in effect, on the shelf now and we're ready to roll that out in October.

Will -- I guess, Keith, I should ask you. Is that going to have some type of 3Q impact in the financials that's worth noting?

Yes, it'll be more in the fourth quarter, Scott. And, as you know, we have a lot going on in the ERP arena and IT infrastructure upgrades. I would say that this is all [baked] into the guidance that we laid on for the year.

The ERP specifically, just to give you a feel for it, when we turn that on and start to amortize the capitalized cost, that's somewhere around half a million dollars of increment -- incremental expense per quarter. So it's one example of one of the important elements of the increase in SG&A that we had planned for during the course of 2008.

Okay. And it sounds like tracking to plan this far and no surprises going forth. I apologize for going so long. One or two more I want to throw in. The -- you have 2 million shares still authorized. You did not do repurchases in the second quarter, but appeared to be fairly aggressive in the first. Just want to get a sense of what you're thinking there, what we may -- should be expecting.

I think really what we did speaks for itself. We were very active in the market at the end of 2007 and in the early part of 2008. We kind of characterized that -- characterize our approach here as being analysts of the stock, the stock price, and what we view to be fair value. And then we're opportunistic when we see an attractive purchase price. And I think you'll see us continue to do that. We did get our authorization renewed from the Board, so we have the full 2 million share repurchase authorization in place. And you'll also note that in May we refinanced our revolving credit lines and that allows us additional capacity both to grow the business and to take advantage of repurchase opportunities as we see them.

So we feel very well positioned and will, in our normal way, will take advantage of market opportunities when the arise.

Sure. Now, I mean, obviously, you mentioned the cost basis for the repurchases with something in the 22 range. And I would agree that that's a great price to get your shares. In the second quarter, not doing any, are we to infer that mid- to high 20s means you're fully valued?

We really don't comment on how we make those determinations.

Okay. Thanks. And then -- and then finally, on the -- both new businesses, just curious to hear a little bit about the new one, but also on the storage containers, I guess more of a focus on that. How is that progressing? How rapidly is that ramping?

Well, my outlook, or I should say, to date, and I feel very good about where we're at. The outlook feels very good. We've received, I believe, a very nice impact from customers that have been contacting us historically about do we rent this product because we also -- they were renting modular buildings from us. So I think we benefited from that and were able to serve those customers. And we really just recently started a full -- fuller marketing effort on the web and with our website and so forth.

So I'm very excited about the potential to grow that business, not just organically, but also being able to be opportunistic in the regional acquisitions going forward should they present themselves.

For our environmental test equipment business, the beauty of that is it's an up-and-coming test equipment environment. No pun on words there. But it's one in which we've been able to build into the infrastructure, utilized infrastructure in Dallas and be able to add kind of the personnel to support the additional product area. We were able to utilize existing systems, procedures, some of the senior management. So from a cost structure basis, it really is something we believe that can really service in the long run and it's going to take us time, though, to get our -- it's a new group of customers for us. It's going to take us time to get to know that group more fully. But we feel that it's very similar to our test equipment business in terms of how it operates and that we should be able to ramp that successfully over time. And again, should there be acquisition opportunities we would certainly look at those very closely.

Okay. Thanks so much. And thanks for answering all my questions.

Thank you. (OPERATOR INSTRUCTIONS) And our next question is from the line of Jamie Sullivan with RBC Capital Markets. Please go ahead.

Hi, guys. Good afternoon.

Hi, Jamie.

Hi, Jamie.

Quick question on the residential. You said that's 4% of total.

What I said is historically it's less than 4%. And you, if you look at this quarter, actually, it's right around 3% of our total rental revenues for the quarter.

Okay. So I guess -- and that's a -- that includes TRS --

Yes. So if we look at --

-- rental too? Okay.

-- total, total company rental revenues, it's right around 3% in the second quarter.

Okay. All right. And just wondering, on the residential return, it seems like there's a bit of a lag there with returns and when we've seen weakness in the market. Is that what typically happens?

Well, what we -- here is the dynamic with the residential drop. When the residential construction market started having its problem, the units we had on rent, because they couldn't sell homes, they actually stayed on rent longer. So the dynamic was, the poorer the sales were, they needed the sales offices to stay in place longer because they weren't able to move the homes.

So but finally once these projects started ending they're coming back. And, of course, on the opportunity side it's extremely limited. So what you saw is the delay in equipment coming back because homes were not moving. Once they do come back, there is not a large amount of volume of new opportunities in the first half of the year to support turning that -- those assets back out.

Right. Okay. And then I guess in California, is it the construction market weakness that is driving surplus inventory which is then leading the price competition in education? Is that kind of the main dynamic that's going on in the market?

Yes, I wouldn't say it's surplus -- certainly not surplus equipment.

Right.

And because the equipment, the educational market, that equipment has been highly utilized for a long time. There was a delay in bond money between bond bid -- and -- over a period of time and districts are ramping up and the equipments --

That's a different asset.

They're different assets. And they're getting utilized. So the educational market assets, it just so happens when there's x amount at a given point in time, companies are going to make certain they try to get those utilized. But there's certainly no, in my opinion, no over supply for what the market needs are overall.

Okay. So the -- so that the commercial market is unrelated then in terms of --

It's -- I mean, they're really independent markets. And even within commercial we talked about residential, we talked about non-residential, and even within non-residential construction there's both the complexes and the single-wides. And then there's another roughly 20% of our business, 25% is that is a broad mix of other industry sectors, healthcare, general office space adjacent to existing facilities, industrial manufacturing, petrochemical. So it's -- they're all independent and they have their own little economies and shifts to them.

Okay. And just want to add, so no funding concerns on the education side from California tax revenues or budget gaps and some of that discussion that's going on?

Yes, there's -- one thing that I want you to be clear on, that budget stalemates in the state of California are more common than less common. So this is not unusual to us. And the Executive Branch and the Legislative Branch have arm wrestled for years over things. We've never historically seen any impact to us negatively from that arm wrestling for people to get what they want. And I would expect the same this year. There's nothing that I've read or heard and through our very good lobbyists in Sacramento that we're seeing this a negative based upon either the budget shortfall or the fact that there is no budget in place today.

Great. And then I guess just as we look into the third quarter, should we see that business start to return to a growth mode?

When you say that business, just to clarify.

Modular. Modular.

Okay. Are you talking in the California market or are you talking the division?

Well, we saw the rental operation decline 2%. I'm just wondering if that's -- if that turns back into growth as soon as this quarter.

It'll be a function of -- we have, of course, the third quarter's a big shipping quarter. And in the third quarter you get -- you don't get a full month's worth of rental revenue like you will in the fourth quarter for what ships in the third. So there's a lot of goodness that potentially is coming here from shipments not only in California but also Florida and Texas as well as in the third quarter.

And then it's a function of the other dynamics, the residential housing market, how much does that -- is that deteriorating further, how significant? Does the commercial -- or I should say non-residential construction market, does that continue to be a challenge in single-wides but good in larger complexes? We're going to get the benefit of those larger complex rentals coming into the fourth quarter and next year. They're multi-year. There's a number -- plus the macro-dynamics out there.

But I think we feel pretty good about the overall modular business and the diversity that exists today. Texas and Florida are very strong and growing markets for us. And like I said, California will continue to do well over time. But you can certainly have quarters here, quarters there that are more challenged.

Sure. What's your sense of this quarter on the construction markets in California? Has it kind of stabilized, or? Any thoughts there would be helpful.

Residential, it's very hard to get a read on it. The quarter-over-quarter reduction was fairly significant. And it just depends on where that's going to bottom out. But again, it's not a large percentage of overall company revenues.

And then on the non-residential construction side, we've got a lot of goodness going on in the large complexes. But again, it's more challenge on the single-wide side. So I like the dynamic of the multi-year transactions, getting those in place. Those are income churners over time. And then, the single-wide market will take care of itself over time. You're still building in California and you certainly are building in other markets that we're in, so.

Right. Okay. And just switching to TRS. Wondering, utilization at 70%, do you see that going much higher?

That's very high.

What's that?

Once you get in the upper 60s, upper 60s, in fact, is high. 70 is very high. But I think if you look at us over the last eight to 12 quarters, you'll see that periodically we hit a 70% or thereabouts level, and it tends to be for just a briefer period of time. It certainly will be strived for, but I wouldn't make it into your assumptions as a long-term number.

Sure. Sure. Okay. Just curious on the environmental test equipment market. Can you give us a flavor for how big that market is or how big it is relative to the existing TRS business in terms of market opportunity?

Well, when we did on our homework on the market, and, again, there's not a lot of great information out there, but we targeted it somewhere between $125 and $200 million in rental revenues annually. And we also think it's a fairly, for lack of a better term, it's a market in -- the product area which we think that we can bring a lot of professionalism and efficiencies to doing that type of rental business. So we think that we bring very strong skills into that market arena and that we think we can do very well over time. So I would -- I would answer the question like that.

Okay. Thanks. One last one. On SG&A, you're still expecting about 20% growth on that line?

We're pretty much on track. I would say we've been executing on the initiative that we planned earlier in the year. Obviously, we've announced the portable storage and we've announced the environmental equipment at our electronics division. I -- that's all playing out. The thing that will [net out] the final number, we're a little bit later on rolling out the ERP than we had at first planned at the beginning of the year. So there's a slight benefit there. But there are also some parts of the new initiatives where we're, if anything going to spend a little bit more in the second half of the year.

So I think we'll still be in that zone that we forecast back in February.

All right. Thanks a lot.

Thank you.

Thank you. Gentlemen, there are no further questions. I'd like to turn the call back over to Mr. Kakuras for any closing remarks.

Well, I'd like to thank everybody for joining us this afternoon for the call, and we'll look forward to speaking with you again in early November on our Q3 call. Thank you all very much and have a very nice evening.

Ladies and gentlemen, this concludes the McGrath Rentcorp second quarter 2008 conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000 or 800-405-2236 and enter access code 11116860. Thank you for your participation. You may now disconnect.