McGrath RentCorp (MGRC) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp third 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.

Thank you, operator. Good afternoon. I'm the investor relations advisor to McGrath RentCorp and will be acting as moderator of the conference call today. On the call today 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 11120726. 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 today at approximately 4:05 p.m. Eastern Standard Time, or 1:05 p.m. Pacific Standard 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 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 related to McGrath RentCorp's business are set forth in the documents filed by McGrath RentCorp with the Securities and Exchange Commission, including the Company's most recent Form 10-K and form 10-Q.

I would 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 8-K and its third quarter 2008 Form 10-Q.

For the third quarter 2008, total revenues increased to $86.3 million from $80.8 million for the same period in 2007. Net income was $11.6 million, down from $11.9 million. And diluted earnings per share was $0.48, up from $0.46 for the same period in 2007.

Reviewing the third quarter results for the Company's Mobile Modular Division, Mobile Modular total revenues decreased $1.1 million, or 2%, to $47.8 million over the same period in 2007, due to lower sales and rental-related services revenues, partly offset by higher rental revenues during the quarter.

Gross profit on rents decreased $0.9 million, or 5%, to $15.7 million, from $16.6 million in 2007, primarily due to lower rental margins.

Rental revenues increased $0.2 million, or 1%, over 2007, while rental margins decreased to 60% in 2008, compared to 64% in 2007.

Selling and administrative expenses increased 8% to $7.7 million from $7.2 million in the same period in 2007, primarily due to headcount additions to support business growth, higher personnel and employee benefit costs and increased bad debt expense.

Pre-tax income decreased $2.2 million, or 15%, to $11.8 million for the third quarter 2008, from $14 million for the same period in 2007.

Finally, average modular rental equipment for the quarter was $466 million, an increase of $31 million from the third quarter of 2007. Average utilization for the third quarter declined from 83.1% in 2007 to 81.1% in 2008.

Turning next to third quarter results for the Company's TRS-RenTelco Division, third quarter total revenues increased $5 million, or 19%, to $31.4 million, compared to the same period in 2007, due to higher rental and sales revenues.

Gross profit on rents increased $0.7 million, or 8%, to $9.6 million, as compared to 2007. Rental revenues increased $2.2 million, or 10%, over 2007, while rental margins decreased to 40% in 2008, compared to 41% in 2007. 2008 rental margins were impacted by $1 million higher depreciation expense, primarily related to 20% higher average rental equipment.

Selling and administrative expenses increased $1.4 million, or 28%, to $6.3 million from $4.9 million in the same period in 2007, primarily due to headcount additions to support business growth and the launch of TRS Environmental, higher personnel and employee benefit costs and increased bad debt expense.

Pre-tax income increased $1 million, or 20%, to $5.9 million for the third quarter 2008, from $4.9 million for the same period in 2007.

Finally, average electronics rental equipment at original cost for the quarter was $258 million, an increase of $43 million from the third quarter of 2007.

Average utilization for the third quarter increased from 68.4% in 2007 to 68.6% in 2008.

On a consolidated basis, interest expense for the third quarter 2008 decreased $0.1 million, or $5%, to $2.5 million from $2.6 million for the same period in 2007, due to lower net average interest rates, partly offset by higher average debt levels.

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

Next, I'd like to review our year-to-date 2008 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, 2008, highlights in our cash flows included -- net cash provided by operating activities was $81.3 million, an increase of $27.1 million, compared to 2007. The increase was primarily attributable to the improved operating results, lower tax payments and other balance sheet changes.

We invested $82.6 million for rental equipment purchases, $12.7 million for property, plant and equipment, primarily for build out of our new Florida inventory center and investment in our new ERP, partly offset by $21.5 million in proceeds from used equipment sales.

Dividend payments to shareholders were $13.8 million.

Net borrowings increased $24.6 million, year-to-date, from $197.7 million to $222.3 million. With total debt at quarter end of $222.3 million, the Company had capacity to borrow an additional $168.7 million under its lines of credit. We continue to have a solid, low-leverage balance sheet.

For 2008, third quarter adjusted EBITDA increased $0.7 million, or 2%, to $37.9 million, compared to $37.2 million in 2007, with consolidated adjusted EBITDA margin at 44%. Our definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income are included in our Form 10-Q for the quarter.

Based on results to date and our outlook for the remainder of the year, we expect full year results to be in the range of $1.70 to $1.75 per diluted share, which revises the previous guidance 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 continued to experience a very challenging residential construction market in California during the third quarter, with continuing returns and very limited opportunity for new sales office rentals.

We are also continuing to see lower demand in a very competitive environment for new non-residential construction projects in California that utilize 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. We also benefitted from some increased activity from the effects of Hurricane Ike.

In Florida, we continued to experience favorable levels of commercial opportunities and booking activity during the third quarter of 2008.

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

For our educational rental businesses, we saw respectable classroom booking levels for the 2008-2009 school year in the California, Texas and Florida markets. However, in California we experienced returning educational equipment at similar levels to outgoing classrooms. Additionally, in California we experienced continuing pricing pressure in the educational market, as rental companies competed to utilize their idle classroom inventories. In both Texas and Florida we continued to grow our educational rental revenues during the quarter, as compared to a year ago.

During the third quarter in our newest modular markets, North Carolina and Georgia, we continued to generate favorable levels of commercial opportunities. We also continued our seed planning efforts in introducing new portable hybrid classroom products in these markets.

Our modular product offerings in the North Carolina/Georgia markets provided end users with improved floor plans, higher building material standards, higher energy efficiency and vastly improved esthetics than our competitor's legacy fleets. There's a higher cost associated with these products and, thus, there is more pick and shovel work necessary with decision makers in getting the 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 third quarter, utilization for our modular fleet stood at just under 81%, compared to 83% a year earlier. The reduction in utilization rate relates predominately to continuing residential construction returns and very competitive commercial construction and educational markets 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 has experienced various challenges today, it will always be a significant contributor to our earnings. However, our efforts over the past few years to increase our modular business levels in both Florida and Texas in particular is serving us today in helping offset some of our exposure to regional events. We believe our expansion into both North Carolina and Georgia more recently will further serve to diversify our geographic footprint in the years ahead.

Now, turning to Enviroplex, our wholly owned classroom subsidiary in California, they had sale revenues of $7.2 million during the third quarter, up from $5.5 million a year ago. For the nine-month period, sales revenues were $13.6 million in 2008, compared to $8.1 million in 2007. In addition, Enviroplex's backlog and pipeline levels at the end of the third quarter were quite favorable. Our team at Enviroplex has done a very good job thus far in 2008 in booking activity, execution of orders and in setting the business up for future successes.

Now, let's take a closer look at TRS-Rent Telco, our test equipment rental division. TRS-Rent Telco had another favorable quarterly increase in rental revenues of 10% to $23.9 million from $21.7 million a year ago. We are continuing to see the benefits from favorable market demand across a fairly broad base of customer segments, including communications network, aerospace and defense applications, and semi-conductor and consumer electronics product development and manufacturing.

Our pipeline of opportunities has continued favorably into the fourth quarter. However, we do expect some seasonal slowing of business activity levels towards the end of 2008. At the end of the second quarter, utilization stood at 68%, compared to 70% a year earlier. Utilization levels in the upper 60% range to 70% are considered very healthy.

Our quarter-over-quarter pre-tax profit increase of 20% to $5.9 million reflects our continuing growth in the rental marketplace, as well as in the sales of prior generation test equipment.

Now, for some additional comments on our strategic growth efforts. Earlier this year, we announced our entry into the markets 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 made good progress with this initiative to date and have benefited from relationships with existing Mobile Modular customers.

As a result of our progress thus far, we are planning to accelerate the introduction of our portable storage products into other modular- - into our other modular locations in the first half of 2009. We're focused on creating differentiated products and levels of service to support our growth moving forward. We want to emphasize that it will take some time before our portable storage rental business becomes meaningful to our earnings.

Our new environmental test equipment rental initiative continues to move ahead as planned. We've purchased inventory, staffed the business, developed our website and have begun renting equipment. With the business based out of our Dallas electronic test equipment facility, we've been able to leverage our order processing, inventory control, equipment maintenance and handling systems, as well as some personnel.

Our environmental 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. These products are typically rented to environmental consulting firms, industrial companies and industrial hygienists.

We are continuing to explore potential acquisition opportunities to, A, help accelerate growth of each of these new rental initiatives; B, create additional business-to-business rental products earnings engines; and finally, to grow our established rental businesses.

With respect to our new ERP application platform for modulars, we are very happy to announce that we successfully launched phase one in early October. Phase one is by far the largest and most complicated component of the IT application investment that we've spoken to you over the past two years. The IT team, as well as a large group of dedicated individuals from all areas of our modulars division, did outstanding work on the project. In fact, in a meeting with the software vendor CEO this week, he indicated that this was the smoothest go-live of their application system that they had ever experienced. He attributed it to the quality of McGrath RentCorp's employees and their commitment to ensuring a successful launch.

In our financial planning efforts for 2009, none of us have ever before experienced the challenges and uncertainty of the current macroeconomic environment. Financial planning is challenging in general and it gets exponentially harder when there are unprecedented events, as the mortgage meltdown and paralyzed credit markets.

However, in difficult planning environments I've always found that it's helpful to process and re-ground on one's core financial and other strengths. These attributes tend to provide some level of comfort and can help with navigating in uncertainty.

First, there is a countercyclical dynamic to our rental products in times of economic uncertainty and tighter lending environments in that businesses may tend to rent versus buy in order to conserve capital. This is my 26th year with the Company and I've seen many different economic cycles. Although we have faced some significant macroeconomic environment challenges over the years, McGrath RentCorp has tended to fare better than most other companies, due to this countercyclical dynamic and our very strong cash flows.

Next, our management team is seasoned at belt tightening and cost control in recessionary environments. We began recession planning in earnest in early October and will be moving to put in place various aspects of our planning over the next few weeks.

Having sufficient capital to operate as normally as possible during such an environment and to take advantage of new opportunities has always been a strength of ours. Fortunately, our rental businesses generate significant cash flows, even in difficult economic periods. We also benefit from lower CapEx spending during such periods, which typically accelerates our pay-down of debt, thus creating even more available capital.

Add to our strong cash flows the fact that earlier in 2008 we put in place a $350 million credit line with a group of banks that provides us with adequate dry powder to both weather tough economic times and to take advantage of business expansion opportunities.

We believe that economic downturns can potentially create attractive acquisition or other business opportunities for companies that are strategically focused and have strong balance sheets. Downturns can also create opportunities for good companies to either gain on or put greater distance between themselves and their competitors, especially as general economic conditions improve. We are hopeful of being able to take advantage of both of these dynamics.

Let me share some examples of how we have historically taken advantage of past challenging economic environments. During the early 1990s recession, we purchased the large land parcels for our present California modular operations and corporate facilities. In 1991, we purchased RenTelco and merged it with our electronics test equipment business operations. And in late 2003, while still in the aftermath of the telecom and dotcom bust periods, we began negotiations on acquiring TRS and consummated the acquisition in the first half of 2004.

Looking ahead, while we have not yet completed our detailed plans for 2009, we currently expect the slowing economy will make it difficult for our existing operations to achieve growth in earnings per share next year. We believe that our rental divisions have solid market positions, generate significant cash flows, and will weather an economic slowdown better than many businesses.

That being said, we will continue to make investments in strategic initiatives to support eventual higher earnings growth. 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. Ladies and gentlemen, we will now begin the question and answer session. (OPERATOR INSTRUCTIONS) And our first question comes from David Gold with Sidoti and Company. Go ahead, please.

Hi. Good afternoon.

Good afternoon.

Hi, David.

Was hoping that you could add a little bit of color- - I know it's still preliminary- - as we start to think about 2009, particularly with say flattish or lack of earnings growth. I think your comment, Dennis, was that you still would continue to invest in the business, as we'd expect. But I'd guess, does that say that, when you think about things from a revenue perspective, that you'd still expect some revenue growth in '09? Or do you think, when we look at the different businesses, that we might actually see revenue come in some?

Well, I think when you look at the overall picture, I think you'll see revenue growth. I do think that margins will be challenged. I do think that, you know, there's pricing pressure, especially in the California market, in both the commercial and educational businesses. And very well our test equipment business could come under greater pricing pressure if there is a slowdown in test spending or general electronics, business downturn. So.

And David, the other thing I would add is an environment- - in an environment where revenue growth is fairly modest, then it really puts a lot of pressure on managing costs. And, as you have seen over the last few quarters, as we had planned during the course of 2008, there has been a steady uptick in our costs. We've been rolling out the new initiatives as we planned to and we've incurred some additional run rate expenses on our IT and our ERP system. So, with the -- as you'll have seen for Q3 -- with the SG&A at a consolidated level just under $15 million, that will uptick slightly in the fourth quarter, and we will really be going into 2009 with a fairly substantial SG&A run rate. And so, you know, that makes the comps, when we look at earnings growth, a little more challenging in the face of more modest revenue growth.

I see. Okay. And then, when we look at TRS, I think there was a comment in there that towards the end of the year you'd expect the strength that you've seen there to tail off. Was that right?

Well, what the comment was -- there's a seasonality to that business, and typically you see it in the fourth quarter, come the second half of November and certainly into December, to where there are an increased amount of returns, fewer rentals and then it begins to ramp back up, typically after the end of the year.

A lot of businesses during that period of time actually shut down for a week or two at a time, so there's no need to keep equipment around. So, that's fairly typical for that business in the second half of the fourth quarter.

Okay. Okay. So and then just staying on that business, we see another tick-down in your average rental rates there. At the same time you're having what looks to be terrific success in winning new business. Are we pricing more aggressively or is it generally a- -just a competitive- -a more competitive environment so to speak?

If you look at the quarter-over-quarter reduction and you look at -- there's three components that really come- - that make up that delta there between quarters. One is market conditions, which is the biggest of the three. And that's really driven by competitiveness in the market and obviously our attempt to gain market share, which we believe that we're doing.

The second item is related to mix of equipment. So, the extent that we're buying more general purpose equipment versus communications equipment, that has a lower rental rate associated with it.

And then, last is the changing out of previously acquired TRS equipment that we purchased at $0.55 to $0.60 on the dollar for equipment at -- of the list dollar -- for equipment that's $0.85 to $0.90 on the list dollar. So, those three components, the biggest one being the market dynamics.

Got you. And just one last, if I might. As, again, as we're thinking about next year, if growth moderates, as you expect, presumably we can expect coincident with that basically your spending to moderate as well on equipment?

Yes, it would.

So, one would expect that in that environment, you'd have higher free cash flow?

Very well could have higher free cash flow, exactly. We would pull back the reins on spending. And, you know, when we do that with our business historically, we really pay off, from a debt standpoint. Debt levels reduce fairly significantly over time.

David Gold. Got you. Thank you both.

Okay. Thank you. And our next question comes from Scott Schneeberger with Oppenheimer. Go ahead, please.

Thanks. Good afternoon, guys.

Hi, Scott.

Hi, Scott.

Hi. The- - I guess, can we talk a little bit about the California budgets for the classrooms and what you saw this summer? Just an update on how much of a Prop. 1D was used and the outlook there.

Well, in terms of available funding, there's no shortage of available funding from Prop. 1D. In fact, the current picture is that those state monies should fund projects throughout 2009. That's the current picture. So, there's no shortage in that regard. And there would then be another bond measure more than likely in 2010. So funding is in place for that.

And then even from a local school bond side of things, which pays for the other half of modernization projects there, in the election just earlier this week on Tuesday, I think roughly about 90% of the local bond measures passed. So, there's- - from a funding standpoint, there's certainly- - the districts, there are no issues with respect to the bond measures. And even selling the bonds, the local school districts, although they are perhaps having to pay a little bit higher interest rate today, still they're able to sell their bonds and be able to generate the funds they need from the local side to match up against the state funds.

Okay, but it sounds like- - it sounds like it's a pretty challenging season, with some pricing competition. I guess, just comments on this year and looking ahead to next?

Yes, two dynamics that impacted this year in California on the educational markets. One is, although the outgoing number of units was favorable or in line with our expectations, returns from an orderly standpoint of them coming off rent, they just about matched up with what we were putting out. And the equipment then that we are putting out is going out at a lower rental rate, because of the competitiveness of the market. So we're feeling, you know, the fact of tough to make gains in terms of the net number of educational units going out in California. And then those that are going out are, again, at, on average, a lower rental rate.

Now, going forward next year the key is really first and foremost is available funding. And that's all in place and appears that it will be in place. So, that's a real good guy. The demand is certainly there. We'll just need to -- it's really a function of what's coming off rent versus what new projects will get started. And, again, we're working on our financial plan now and we'll have guidance for next year come mid-February.

Thanks. And then on -- and Dennis, you had mentioned the $30 billion bonding from the Florida infrastructure projects and that that's going well. How far along would you say are you into that, is the state into that? You know, is- - how much of it is spent or do you not know it that way? And how much more of a runway do you see?

My understanding is that there are very adequate monies there still to be spent.

Do you think they will be? Or the money's available, but are things slowing down? Or is infrastructure continuing to be built?

It's continuing to be built. So, I imagine, though, that, you know, that's a vast sum of monies -- that it takes some time to spend that, you know, carefully. So.

Sure. And you, earlier you were talking with David about how potentially more free cash flow generation in a- - next year, if we see West Coast CapEx spending. What is the appetite for share repurchase, debt reduction? How acquisitions -- any prioritization in that order?

Well, certainly from a standpoint, if we have our choices, we'd much rather take the capital and invest it in future earnings engines, either in core business new initiatives or new third legs, so to speak. So, that's our first choice. And we certainly work hard at and we have been working hard at looking at opportunities.

Short of that, there's capital that can be utilized and our share price is in an attractive range. We have an authorization currently to purchase back, I think, up to approximately $2 million?

Two million. We have a full $2 million authorized.

And we certainly, as you know from our past history, have been active in buying back our stock. So that certainly is an alternative there, secondary to investment in future earnings engines.

And then finally, Keith, could you just refresh me on the credit line? What you borrow at? What your balance is? Just kind of the update there. Thanks.

Sure. I'll give you the full range of sources of capital that we have. The largest is a five-year unsecured revolving credit facility that was put in place in May of this year. It's a $350 million facility, so it's good through 2013. In addition, we have a $5 million sweep service facility for cash management services. And then we also have a private placement note and we have a remaining $36 million in that facility, as well.

So, if you take all three sources of capital, the capacity available to us is $391 million. At the end of September we were utilizing $222 million of that. And that allows us $169 million of available capacity.

And it's also worth noting, between the end of the second quarter and the end of the third quarter, we actually reduced debt by $12 million from $234 million to $222 million.

The $350 million line, that's based on a pricing grid. With our current leverage we pay 125 basis points over LIBOR and we're generally borrowing at one-month LIBOR rates. And that has been very volatile, particularly over the last month or two, but currently is right around 2.3 or thereabouts.

So, our actual total net cost of borrowing for the third quarter was 4.4% and that compares with 5.7% a year ago. So, notwithstanding some of the challenges in the credit markets, our cost of debt was actually very attractive in the most recently completed quarter.

Great. Thanks. That's all for me.

Okay. Thank you. (OPERATOR INSTRUCTIONS) And our next question comes from Jamie Sullivan with RBC Capital Markets. Go ahead, please.

Hi, thanks for taking the question.

Hi, Jamie.

Hi, Jamie.

On the modular side, it sounds like the biggest change versus expectations was in the level of returns that you received. I was wondering if you could give us a sense of the magnitude versus typical experiences and when the last time you experienced that kind of pattern.

Yes, I don't think there's anything too unusual about the return levels. I mean, it's just a matter when, you know, in the normal course of projects completing, they come back off ramp. And that's one of the harder things to predict for our business. But what we typically look for is, you know, was there something to do with the project that had stopped early, whatever. But this is just the orderly return of equipment. And again, it's- - that's probably a tougher item to estimate sometimes in our business in some years versus others. So, nothing, I think, of a unique nature there, other than, just really business as usual. But, you can't- - returns are difficult to control and predict.

In fact, Jamie, as we looked at where we now expect to be in the fourth quarter compared to what we were expecting back in August, really the difference was the outlook for the modulars business. But it was as much driven by a reduction in the contribution from sales and even rental-related services.

And certainly rents were a little lower in terms of their contribution than we expected, but the delta was almost bigger on the sales and rental-related services.

Okay. So, basically modernization projects are finishing on schedule and nothing- - no surprises there. The biggest difference and the big reason for the change in guidance was that sales of modular units is coming in slower than expected.

Sales and rental related services, yes, both of those.

Okay. And what types of rental related services? Can you give a little more clarity there?

Rental related services, they're primarily the payment we receive when we deliver and set up a building at a customer's site and then when we dismantle and return it to our facility. And again, the level of that work is a little bit lower in terms of the run rate than we had previously expected. And really, that's the primary difference.

Okay. So, that doesn't move with the level of activity in outgoing and incoming?

There is a relationship, but those revenues are recognized ratably over the rental contract terms. So, it's a more gradual ebb and flow on that particular revenue stream. And the way to think about it is we have less being added to it than we have dropping off it. But it's not purely a function of activity. It also relates to average rental terms and really the total expenses involved in any particular project. So, that number can move around a little bit and it's been moving- - it has not been increasing quite as we had expected.

Okay. All right. Thanks for the reminder there. And, as we look out into '09, it sounds like, I guess, if I could just make sure I understand what you're saying, is you're essentially saying you're expecting modest revenue growth, but with some of the investments that you're making in new areas, you know, the margins won't- - you're not expecting margin improvement, and maybe some margin decline because of the run rate of SG&A that you're hitting at by the end of the year.

I think that's a fair characterization.

Okay. And, diving a little bit more, you mentioned some recession planning. I'm just wondering if you can give a little bit more clarity on the options that you're evaluating there and how much room you have to adjust margins based on what you're seeing in the market?

Well, you know, when you look at recession planning, we -- obviously we are fairly seasoned in that regard. But what we try to do is we really try to look at- - taking in account those items that- - where we can- - I'll give you some examples -- economizing on IT maintenance; eliminating new hires; economizing on travel; invoking salary freezes as you need to; potentially furloughing employees towards the end of the year; elimination of outside contractors in our plant operations. I mean, you can really go through a full slate of items and you have some tier one, tier two and tier three type items.

But we really try to understand -- but there's no sacred cows as we look at things. And, you know, typically what we try to do is minimize the impact on the work force. Ideally, you don't want to do a reduction in force.

The good news about where we're at today is that our businesses from a revenue standpoint, you know, we're doing- - they're healthy. Obviously modulars in California is somewhat challenged. But, I mean, they will obviously turn the corner on that at some point.

So, it's a matter of really managing your work forces smartly, not throttling back on investment in the new initiatives, because you need to get those up and going. They're important. And actually,, down economies actually help you sometimes more, because the competitors in those industries are actually kind of throttling back much further. And you can actually get some better traction during those windows.

So, we want -- those decisions we made about longer term earnings engines we're very committed to. But then you have to economize wherever else in the business that you can. And that's what we do. But we go through it very thoughtfully. We want to minimize from a risk standpoint, which we don't at this point expect to do. And we also want to minimize in terms of any cash compensation type dynamics for employees. So we're sensitive to that, because we've got a very fine group of employees and we all need to pull together and look at ways in which we can economize.

Right. Thanks for the detail there. If I can just squeeze in one more. What was the bad debt expense in the quarter? And also the impact from Hurricane Ike?

Hurricane Ike impact was fairly modest for the quarter. We did get some damage to buildings, but that's largely covered by insurance. The net impact on our cost structure was probably around $100,000 or thereabout. So, slightly negative.

And I would also say they'll probably be some new business opportunities that we've seen at- - over really the last month or so.

And then, in terms of bad debt expense, the increase there- - just pulling that up- - it was up slightly from the year-ago period. I would say a little bit more pressure, particularly in the Southern California market for modulars. But not dramatic change. But just a little bit more pressure there than we've seen in the past and something we're managing carefully.

Okay. So, not too much to read into there.

No.

Okay. Thanks, guys.

Thank you very much.

Okay. Thank you. And, ladies and gentlemen, that does conclude the question and answer session. I would now like to turn the conference back over to management for any closing statements.

We'd like to thank everyone for joining us today in our Q3 call. We'll look forward to chatting with you again in February of 2009, when we go over our Q4 results, as well as our guidance for 2009. Thank you so much, now.

Ladies and gentlemen, this concludes the McGrath RentCorp third quarter 2008 conference call. If you'd like to listen to a replay of today's conference, please dial 800-405-2236 or 303-590-3000, with the pass code 11120726. ACT would like to thank you for your participation and you may now disconnect.