McGrath RentCorp (MGRC) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp fourth quarter 2008 conference call. At this time, all conference participates 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, 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, 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 11125293. 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 p.m. eastern standard time, or 1:05 pacific standard time today. If you did not receive a copy but would like one it is available online in the investor relations section of our website or you may call 1-206-652-9704 and one will be sent to you.

Before getting started let me remind everyone that the matters we will be discussing today that are not truly historical are forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, including statements regarding McGrath RentCorp's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements are based upon information currently available to McGrath RentCorp, and McGrath RentCorp assumes no obligation to update any such forward-looking statements. Forward-looking statements involve risks and uncertainties, which could cause actual results to differ materially from those projected. These and other risks relating to McGrath RentCorp's business are set forth in the documents filed by McGrath RentCorp with the Securities and Exchange Commission, including the Company's most recent Form 10-K and Form 10-Q.

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

Thank you, Geoffrey. In addition to the press release issued today the Company also filed with the SEC the earnings release on Form 8-K. The Company also announced for the first quarter 2009 a 10% increase of the cash dividend to $0.22 per share for the quarter, representing on an annualized basis approximately a 4.3% yield on the February 24, 2009 closing stock price of $20.26. For the fourth quarter 2008, total revenues increased from $71.5 million in 2007 to $78.5 million in 2008, net income decreased 23% from $12.1 million to $9.3 million, and earnings per diluted share decreased from $0.48 to $0.39.

Reviewing the fourth quarter results for the Company's Mobile Modular division, Mobile Modular total revenues decreased $0.2 million, or 1%, to $40.1 million over the same period in 2007. Rental revenues decreased $0.1 million, while sales revenues decreased $0.5 million in 2008 compared to 2007. Gross profit on represents decreased $0.3 million, or 2%, to $16.9 million from $17.2 million in 2007, due to lower rental revenues and lower rental margins. Rental revenues decreased $0.1 million over 2007, while rental margins were 65% in 2008 compared to 66% in 2007.

Selling and administrative expenses increased $0.8 million, or 12%, to $7.5 million from $6.7 million in the same period in 2007, primarily due to increased depreciation expense for the new ERP, other IT infrastructure upgrades and the new Florida inventory center. The combined effect of the lower sales revenue, lower gross profit on rent, and increased selling and administrative expenses was a decrease in pre-tax income of $1.3 million, or 10%, to $11.7 million for the fourth quarter 2008, compared to $13 million for the same period in 2007. Finally, average module rental equipment for the quarter was $475 million, an increase of $29 million from the fourth quarter of 2007. Average utilization for the fourth quarter decreased from 82.8% in 2007 to 81% in 2008.

Turning next to fourth quarter results for the Company's TRS-RenTelco division, fourth quarter total revenues increased $2.2 million, or 8%, to $30.8 million compared the the same period in 2007, as a result of higher sales revenues. Gross profit on rents decreased $2 million, or 19%, to $8.7 million as compared to the same period in 2007. Rental revenues decreased $9.1 million, or 1% as compared to 2007, and rental margins decreased from 46% to 37%. Rental margins decreased due to higher rental equipment depreciation costs and higher costs of rental operations.

Selling and administrative expenses increased $1.4 million, or 27%, to $6.6 million from $5.2 million in the same period in 2007, primarily due to higher personnel and employee benefit costs and increased marketing and advertising expenses. The higher costs reflect the hiring of key personnel and the ramping of our TRS Environmental business. TRS was also negatively impact bade stronger US dollar against its Canadian dollar-denominated revenues. Pre-tax income decreased $3.7 million, or 56%, to $3 million for the fourth quarter 2008 from $6.7 million for the same period in 2007, as a result of lower gross profit on rents and sales, and higher selling and administrative expenses.

Finally, average electronics rental equipment at original cost for the quarter was $261 million, an increase of $33 million from the fourth quarter of 2007. Average utilization for the fourth quarter decreased from 71% in 2007 to 66.3% in 2008. On a consolidated basis interest expense for the fourth quarter 2008 increased 3%, to $2.7 million from $2.6 million for the same period in 2007, as a result of the Company's higher average debt levels partly offset by lower average interest rates. The fourth quarter provision for income taxes was based on an effective tax rate of 38.9%, down from 39.6% in the fourth 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 12 months ended December 31st, 2008, highlights in our cash flows included net cash provided by operating activities was $98.7 million, an increase of $3.8 million from 2007. We invested $88.3 million for the acquisition of Adler Tanks; $95.8 million for rental purchases; $13.6 million for property, plant, and equipment, primarily for the build-out of our new Florida inventory center and investment in our new ERP, partly offset by $29.3 million in proceeds from used equipment sales. Dividend payments to shareholders were $18.6 million. Net borrowings increased $107.7 million for the year from $197.7 million to $203.5 million, primarily to finance the acquisition of Adler Tanks.

With total debt at year end of $305.5 million, the Company had capacity to borrow an additional $85.5 million under its lines of credit. We continue to have a solid low average balance sheet. For 2008, fourth quarter adjusted EBITDA decreased $2.5 million, or 7%, to $35.1 million, compared to $37.6 million in 2007. Consolidated adjusted EBITDA margin for the fourth quarter decreased from 53% in 2007 to 45% in 2008. Our definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income are included in our press release for the quarter.

Turning next to 2009 earnings guidance. We currently face more uncertainty in forecasting our annual outlook than in any recent period. We expect 2009 financial results to be driven by lower business activity levels and more competitive pricing, in our core modular and electronics rental operations compared with 2008, partly offset by various cost-reduction initiatives and the full-year contribution from Adler Tanks, which was acquired in December 2008. We expect full-year earnings per share to be in a rage of $1.30 to $1.45 per diluted share. The impact from the delay in completion of the 2009 California state budget, the related spending reductions, and other macroeconomic factors could cause results to be lower than currently forecasted.

In 2009 we expect low single-digit growth in rental revenues and lower sales revenues. We expect lower rental revenues in our modular and electronics rental operations offset by the full-year contribution from Adler Tanks . Selling and administrative costs are expected to increase by approximately $8 million to $9 million compared to 2008 as a result of the Adler Tanks acquisition. Various cost-reduction actions have been taken to prevent selling and administrative cost increases in other parts of the business, while continuing and increasing investment in key long-term growth initiatives. Full-year interest expense is forecasted to be approximately $11 million to $12 million. We expect the 2009 estimated effective tax rate to be similar to the 2008 rate, which was 39.1%.

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

Thank you, Keith. Let's go right to our results for our modular rental business. Mobile Modular had flat rental revenues quarter over quarter and for all of 2008 was up a modest 3% to $103 million. In California we had a good volume of educational rental opportunities in 2008 and were successful at closing a high percentage. However, there was significant downward pressure on rental rates in order to capture this business. This is a function of lower classroom utilization entering 2008, the state's fiscal crisis, and tighter school budgets. For non-residential construction projects, we saw significant slowing of business activity levels in the second half of the year, and only minimal opportunities throughout the year for residential-related construction programs. We also experienced a higher level of returns than anticipated in our California commercial business segments for the year.

In Florida, we had strong year-over-year educational rental revenue growth, as we benefited from the higher run rate in the second half of 2007 and favorable booking levels, offset by higher-than-expected returns in 2008. We continue to benefit from the popularity of our Campus Make-a-Classroom product, class size reduction and the phasing out of older model code portable classrooms. We also experienced a difficult commercial rental environment in Florida in 2008 with decreasing demand and a very competitive pricing environment. In 2008, in the Texas markets, we experienced continued favorable demand in bookings for both educational and commercial-related market segments. We had strong quarter-over-quarter, and year-over-year rental revenue growth. Our educational business activity was driven by modernization in student-growth needs, and our commercial business benefited from healthy petrochemical and industrial activity.

In North Carolina and Georgia in 2008 we made good headway in establishing the Mobile Modular brand name. We introduced both a hybrid classroom product, as well as enhanced commercial product into these markets during the year. We made favorable progress in building our rental revenue base, but we faced very price competitive markets along the way. We also expanded our mid-Atlantic modular business marketing efforts into Maryland and Virginia in 2008. Our marketing pick-and-shovel methods will take some time to pay off in these new geographies; however, we are confident that over the long term we will achieve meaningful success. For the Modular division overall we experienced a 4%, quarter-over-quarter reduction in our average rental rate. Modular utilization stood at 81% at year-end 2008, compared to 80.8% at the end of the third quarter 2008, and 82.8% at the end of 2007.

Now let me turn our attention to TRS-RenTelco and their results. Our test equipment business had flat rental revenues quarter over quarter. However, for all of 2008 rental revenues grew by a healthy 10% to $93 million. We benefited from a strong pipeline of opportunities throughout the year. However, the competitive nature of the markets created continued pricing pressure. Combined with a higher level of returns during the second half of 2008 compared to a year earlier and customer order activity slowing later in the year due to concerns with the economy, there was significant downward pressure on both gross profit and margin on rents, especially during the fourth quarter.

Sales revenues were up markedly during the fourth quarter from a year ago, as we move proactively to sell lower utilized equipment. Lower gross profit and margin on sales in the quarter are a result of our tactics to eliminate reoccurring depreciation expense sooner rather than later in anticipation of a more challenging 2009 market environment. In 2008, we had a net addition of $23 million in original costs of test equipment inventory for an increase of approximately 10% to $256 million. The majority of the increase was related to technology freshening and business growth.

Ending fourth quarter utilization in 2008 was 64% compared to 69.3% a year ago. This is a good indicator of the slowing opportunity conversion rate that we began experiencing in the fourth quarter. Our average monthly rental rate declined to 4.5% in the fourth quarter 2008 from 4.8% a year ago. The factors contributing to this decline were the replacement of lower-cost TRS-acquired equipment, with new higher-cost-bases equipment and the competitive market environment as we continue to push to grow our market share.

Now let's turn our attention to our recent acquisition of Adler Tank Rentals. Due to our planning efforts for the integration of Adler Tank Rentals late last year we were able to hit the ground running in early 2009. We have moved to add sales positions, build additional rental inventory, integrate various back office administrative and accounting functions, assess facility needs, and begin development of an integrated marketing plan. Despite of the potential distraction during our initial integration window, Steve Adler and his team have done a very good job on staying focused on business development and their customer relationships. The Adler team's energy and enthusiasm for the business is very evident in their communications and actions. Mike Buckland, a member of McGrath RentCorp's executive management group, is working day to day with Steve and other Adler employees to assist with operations and to learn the business intimately. The operating cultures and value systems of Adler Tank Rentals and McGrath RentCorp are very similar and this has made for a smother integration process.

Now for some further comments on 2008 and our future. The Company surpassed $300 million in total revenues for the first time in 2008, in spite of very turbulent financial markets, regional market challenges and a quickly deteriorating macroeconomic environment. We fought hard for what we achieved in both revenue and earnings. In 2008 we were also able to execute on our strategy to leverage our business-to-business rental acumen to both position the Company for additional sources of long-term growth and to further diversify our product offerings and geographic footprint. We did this by spawning two organic product product areas in portable storage containers and environmental test equipment and by acquiring Adler Tank Rentals, which is engaged in hazardous and non-hazardous liquid and solid containment rental business. With these new initiative investments made in 2008 we view ourselves as now having five distinct rental legs from which to grow.

Each rental business has its own specific products, core markets, and industry dynamics. However, we should benefit from various customer, facility, and operational synergies between these rental businesses. With this broad platform of business-to-business rental products we believe that we've now set the table for future growth from a product diversification standpoint. That being said, we will continue to proactively explore acquisition opportunities to grow and create greater critical mass and earnings potential for each of these rental engines. We also brought our new modular business operating software application online this past October. This system will support the scaling of the modular business in the years ahead. It also is the platform that we will eventually plan to have all of the Company's rental businesses operate on, including our recent entry into the tank rental business.

Finally, we secured a new $350 million five-year credit facility with favorable terms in May 2008 with a syndicate of banks. This new agreement replaced an existing $190 million line of credit. I'd like to publicly thank Keith Pratt, our CFO, and Dave Whitney, our Controller, for their excellent of securing this long-term financing in the terms that they did and with the terms negotiated. Although we believe we have positioned the Company favorably for longer-term meaningful growth 2009 has many challenges in front of it. Our guidance range of $1.30 to $1.45 per diluted share attempts to estimate how rental market challenges, macroeconomic events and a financial crisis may impact our results. Needless to say, this has been the most difficult forecasting period that I have experienced in my over 25 years with the Company.

Now for some of our challenges in 2009. Foremost is the California fiscal crisis. In late December 2008 the lack of an balanced budget in effect forced California's Pooled Money Investment Board, the PMIB, to cease making short-term loans to public agencies to begin their infrastructure projects. This resulted from the state's difficulty in selling general obligation bonds, or commercial paper, due to the prolonged, unresolved budget crisis. In turn, this action by the PMIB froze all new public agency infrastructure projects dependent upon the PMIB short-term loans for moving forward. Fortunately an balanced budget was just passed and signed into law. However, it is contingent upon seven propositions passing on a special election set for May 19th.

The timing on when the PMIB will begin making these short-term loans is currently undetermined, if it be as soon as a few weeks or a few months. The uncertainty of the timing of the flow of these monies makes it very challenging for us to project new educational rental business volume in California in 2009. The good news is that there's approximately $2.3 billion of voter-approved modernization state bond capacity available to support an increasing backlog of projects. The additional good news is that in the recent November 2008 elections over $20 billion in local educational bond monies for both new construction and modernization projects were passed.

Let me address some additional challenges we are facing this year. Residential construction activity can best be described as minimal. We don't expect any meaningful recovery in this sector until mid-2010 at the earliest. We expect non-residential construction opportunities to be fewer in 2009 compared to last year, and very price sensitive, especially for single-wide equipment. With the price of oil falling below $40 a barrel, we expect to see lower refinery and petrochemical business activity levels in our Texas and California modular operations. The impact of this dynamic is challenging the model with great accuracy.

Our electronics rental business has grown very nicely over the past few years. However, due to the severity of the macroeconomic business environment, activity levels slowed considerably in December from earlier in the year, and have continued to decline during the first quarter of 2009. Market share and critical mass have been and will continue to be extremely important to our long-term financial success. As long as the current recession continues we expect downward pressure on rental rates and operating margins to persist.

Helping to offset some of these market challenges in 2009 are the following items. The countercyclical nature of portions of our rental businesses and the dynamics of limited capital availability making rentals attractive. In looking at our classroom business, keep in mind that even in the most challenging macroeconomic citals -- cycles, student populations typically don't change much and having adequate classroom space is still required. Although California has its challenges we shouldn't forget the $30 billion worth of voter-approved state bonds available for infrastructure development of bridges, levies, water resources, and other large engineering tech projects over the next few years.

We will also benefit from a full year of Adler Tank Rentals acquisition. The acquisition was accretive to earnings in its first partial months of operations for McGrath RentCorp. Although we are in a very severe recession, we fully expect all of our new organic initiatives, environmental test equipment, portable storage and our Modular's mid-Atlantic expansion to grow a market presence and rental revenues in 2009.

Finally, the management team has been working since the third quarter of 2008 on various austerity measures to support lowering expenses. Here are some of the items that either have already been or will be implemented to reduce expenses in 2009. We have frozen salary levels. We have reduced bonus potential by 25%. We have reduced equity grant levels by 25%. We've made a 50% reduction in the Company's annual ESOP 401(k) contribution. Vacation [reccrual] has been reduced by one week. Mandatory furlough days have been established. Manufacturing production and other staffing reductions have occurred and we're continuing to assess the need for additional reductions. A higher percentage of healthcare expense will be borne by employees, with management taking a higher percentage than others. We've made reductions in IT projects. We've delayed or implemented -- we've delayed or eliminated investments in personnel, infrastructure, and training. Finally, we've made reductions in general expenses, such as travel, office expense, temporary staffing, and meetings.

As you can tell from the list I just read you, a number of our expense reductions have a direct impact on our employees. We've been blessed over time by having our ranks filled with knowledgeable, highly-capable and tenured individuals. The value of such a workforce is immeasurable towards our long-term success, but it's especially valuable in a very challenging macroeconomic environment to have the maturity level and understanding of one's employees, as we do, in knowing what needs to be done for the continued health of the Company. As a result of our growth strategy and new initiatives, we believe we are well positioned today to become a larger and more-profitable Company as economic conditions improve. While we expect the next 18 to 24 months to be an extremely challenging operating environment, we would expect McGrath RentCorp to fair better than many companies due to the countercyclical nature of portions of our rental businesses, our strong cash flows and low leverage balance sheet.

Longer term we believe our strategy of investing in earnings, engines and more diverse business-to-business rental market segments will generate growth in income and share value, while maintaining our financial strength, protecting our balance sheet, providing attractive dividends, and making the Company more resilient to future economic cycles. Over the years we viewed recessions opportunistically in that there can be a broader selection of potential investment and better values to support our long-term earnings growth.

And now, Keith and I are welcome -- Keith and I welcome your questions.

Thank you, sir. (Operator instructions). And our first question is from the line of David Gold with Sidoti & Company. Please go ahead.

Hi, good afternoon.

Hi, David.

Hi, David.

Couple of questions. First, you said a lost in the last few minute, but essentially when I compare -- when I look at the fourth quarter numbers, and then I look at the guidance that you've put out, fourth quarter just wasn't that bad, so to speak, so you have given a few reasons, but wondering if -- basically, has something more happened in the last six weeks that's really pushing you to take the more aggressive stance, or was it the returns that you're seeing, or it is just more conservatism?

Well, it's a combination of items, David. Certainly in our electronic's business we've continued to see an erosion in the billing rate, and so that's built into the projection. In the California market, in particular, with the budget situation that only recently has been resolved, and then determining when there will be a flow of monies to initiate new projects is the big question mark there. The later in the year that comes in to play or starts that impacts new projects coming on line and rental revenue rates for the year, so that's very difficult to judge at this point. So those with the two biggest items there. Those are -- California's a very important market to us, and electronics as a whole, even though the pipeline has remained fairly good in the new year, the conversion into order activity isn't occurring as we would like to see it, so -- but those are the two most important areas.

I see, okay. And then can we delve down a little bit more by division? Obviously you commented, but essentially you'd expect some modest growth and it's really the contribution from Adler presumably, but --

Yes, Adler is actually offsetting weakness in the modular and the electronics businesses.

Right. So, when we look at, though, the two businesses, presumably weak, can you give a sense, Keith, for which do you expect to be more painful, or mare pain this year?

Yes, we've looked at that and what I would say is both are feeling the pain. If we look back in '08 it was really a tail of two businesses. Modulars had a more flattish year, electronics, taking the year as a whole, had very nice growth in rental revenues. I think as we look in to '09 for both of the businesses we see pressure on the rental operations part of the business, pressure on the volume of sales, and also pressure on the gross margin structure. And I would say both businesses, in our efforts to forecast them, are both showing significant pressure.

And Adler business, though, is holding up in spite of the issues in the petrochemical?

Yes, Adler's business -- from the plan that we had put together at the end of 2008 we are still on track for that and we feel good about that. Fortunately for Adler a lot of their business isn't dependent upon oil field exploration. They have a very broad base of end users and the oil exploration piece is not a significant part.

Got you. And then just one other, and then I'll -- Keith, on the interest expense that you're forecasting presumably -- I was looking for quite a bit more interest given the Adler acquisition, and so can you just walk us through basically the thinking that you use all of the excess cash flow to pay that down pretty quickly, because I guess it's just not a big jump year to year given the acquisition late in the year?

You're right with your observation, David. The key thing to note about our debt structure is the vast majority of our debt is actually variable rate debt and it's tied as LIBOR as the index, so when we look at the interest expense we're currently experiencing we are definitely benefiting from the low level of LIBOR. To give you a feel for our total cost of debt last year, overall for the year, the debt was costing us close to 4.5%. As we look at what we're experiencing today and we look at our estimate for the year as a whole in '09, we'll probably be where in the 3.5% to 4% range. Again, that's assuming that LIBOR stays close to its current very low levels, but if we stay in that range we will, we expect, meet the interest expense forecast that I mentioned in the guidance comments. So essentially it's lower interest rates are helping to offset the higher level of debt. And I would say that's an improvement from what we would have expected even three months ago, so it's good.

Okay. Okay, got you. Perfect, very good. Thank you both.

Thank you David.

Thank you. Our next question comes is from the line of Scott -- pardon me, Scott Schneeberger with Oppenheimer & Co. Please go ahead.

Hi, Dennis and Keith, it's Jim for Scott.

Hi, Jim.

Just to better understand the push and pull of the -- how the California budget just was passed and you still had Prop 1D funds that were through '09 earmarked, plus I know the budget cuts were made with potential stimulus funds expecting to come back in at some point in '09. Can you just talk about -- I know it's tough to engage exactly the timing of such, but just what the landscape within those three how that's going to look in '09 and how you thought about that when thinking about your guidance for '09?

Well, I can address that, but let me first say that the challenges for '09 are all around timing. The funding is in place for school projects for modernization. It appears now that with the federal stimulus package that's going to help backfill some of the cuts that they had to do with in the state budget, which would have put pressure on the general fund, which is where various rentals for classroom products are paid from. So there's a lot of goodness that has occurred here in just the last couple of weeks, but it really has everything to do with timing. And quite frankly with the budget having been passed -- , assuming that the May 17th propositions pass favorably, it'll be 50% plus one vote needed for those -- but I'm feeling much better now, at least in terms of those mechanisms.

Everything's going to be in place, but in terms of when the state starts releasing money to be able to initiate new projects, can impact us significantly, because if they're released in the next few weeks we get a much bigger uptick from that from the standpoint of school districts being able to initiate projects or take them out of a stalled status, whereas if monies aren't released until closer to summer in any significant fashion, there may be some districts that defer until next year, or start projects later in the year. So that's the real wild card. It's timing and the go -- again, good news is there's plenty of money for a modernization project in California, which has really driven our rental activity level for schools over the last four or five years, but it's the disbursement and districts being able to start projects, so that's what -- what's baked in our guidance is an appropriate level of conservatism

Okay. And I guess the second question I have, I know that a few days ago one of your largest suppliers in the TRS segment, Agilent, took down the numbers and they're doing headcount reductions and they're seeing lower activity levels, which is what you're citing, but is that a potential source of opportunity there just from the perspective of customers renting that equipment as opposed to buying, or --?

Well, I would say perhaps the bigger dynamic -- and you're alluding to it there -- is really if capital is tight for customers and they're buying less from Agilent or from Tectronics or any of the large equipment manufacturers, they may have a tendency to rent that equipment versus buying it because they don't have the capital or they want to use the capital for other means. So there is a countercyclical dynamic to that business that can come into play in tighter capital credit markets.

Okay, thank you.

Thank you, and our next question is from the line of Jamie Sullivan with RBC Capital Markets. Please go ahead.

Hi, good evening.

Good evening.

Hi, Jamie.

So I guess from the guidance you're saying it's appropriately conservative around some of the timing issues, if -- does it consider that potentially the May 17th vote does not go through?

I would that our expectation in the room is that we'll have an balanced budget because if that vote is unsuccessful on May 17th everything will get -- have to be reset, then the state is in a much more challenging position as we would be with the school districts and so forth. But our belief system is, is that the voters of California understand the seriousness of matters. I think we have a very [centrus] governor who really has worked both sides of the aisle and that I think the state -- the electorate is ready to get this behind us. We'll take our medicine. There's a lot of good things in here for the future in terms of being able to live within your means. So our expectation is that at May 17th those will pass successfully, and again, we'll learn more between now and then about the dynamics of that election, but I feel, at least today, my temperature gauge on it is that that it'll be successful.

Sure. Okay. Now does the timing of the budget and when money starts to flow, will that be impacted by the timing on the school year, as well? I know typically it's bumping up again when your education booking season is usually in full swing, just wondering if you could comment on some of the moving parts there?

Well, we do, needless to say, most of our booking in the first six months of the year and then the actual installation work occurs starting, in most cases, in May or then most of it starting then and then during the summer while school is not in session, so it could be that there is a real bottleneck of activity. The further this goes the summer will be crammed with work and there's only so much that can get done in that window. And the other pieces, too, is that districts are -- those districts that are not ready will have less time to get ready in terms of preparing for their project, et cetera. So the later it pushes out in terms of a flow of monies to where districts can get started, that gets -- that will directly impact what our bookings will be for this year, and in turn what level of rental revenues we're recognize for the year on the new equipment going out.

Sure, okay. And again, you're focused more on modernizations, not on number of teachers employed by the state? Does that -- is there any relation there?

Well, in terms of -- you may be speaking to classroom reduction and number of classrooms, et cetera, at this point we haven't seen any dynamic that lead us to believe that there's any -- going to be any significant teacher reductions. There will certainly be some district by district. Every district has their own, really, budget to deal with within the district. Some will cut out nonessential programs, some will perhaps make some adjustments in class size reduction, but we're not seeing anything, or hearing anything on a broad scale. Again, the good news is this federal stimulus package is injecting some significant amounts of money into the state in both -- at the governor's discretion to backfill the general fund, as well as for specific programs that otherwise were being cut in the state's budget.

Okay. If I could move to some of the commentary on returns, can you talk about that a little bit. Where you're seeing the returns, what kind of -- what surprised you there in the volume of returns?

Well, let's talk about California first. Certainly residential construction. We saw increased returns in 2008 as home builders couldn't sell homes. Their pha -- their phase, they're not building the second phase of an project, but they'll do is to economize they'll -- they have unsold homes so they'll put their sales office in an unsold home. We also saw in the non-residential construction side earlier returns on equipment, and we believe that it's driven by the fact that they don't have as much work going on, they're actually going to complete the projects they have quicker and sooner. They're also economizing on costs, as well. And there's some that's just related to the coincidental -- the timing of things just coming back when projects complete, which they just are in an orderly fashion, so we kind of have that combination of items in California with respect to early returns.

I also mentioned some earlier returns -- or increased returns in Florida. That's more -- certainly on the school side. It's really budget driven and economizing by districts. They've eliminated some nonessential programs -- music, art, those types of items -- and with their budget situation they're trying to be as frugal as they can be. They've relaxed some of the requirements for this year in class size reduction. So perhaps some districts that had already geared up for that know that they really don't need to meet those ratios for another year or so, and we had some returns related to that. The other pieces, too, is there's some student population reduction in Florida, so there's been further compaction of classroom space.

Okay.

However, long term in Florida, we feel very good about, but these are items directly related to the budget and the flatter education model.

Sure. It sounds like the California dynamics, those really haven't changed since -- as of, say, November, but the new pattern in the returns has been in the Florida area, or has the return pattern in California accelerated beyond what you --?

I think the California accelerated and Florida was more of a dynamic that's been occuring somewhat (inaudible) here, but when you go back and look at the entire year we're telling -- you can tell -- you can get a clearer picture of what's been occurring over time here.

Right. Okay. And as there -- as you look out, is there potential for returns in California to continue this acceleration, or do you feel as if they reached a bottom here, or what are your thoughts?

Well, I would say on the -- I think it's very difficult to determine -- we've lost in our numbers -- in terms of the residential construction site we've lost about half of that base of business, about 8% of our modular revenue rate ba -- 8% to 9%. We're probably down --it's probably about 4% to 5% now. We could see some further erosion there potentially. On the commercial construction side, we may see some further pressure on the single-wide standard commercial unit. We may, then again, benefit on the larger construction projects, these engineering projects, which are typically long complexes, multi-year terms, so there's some countering elements there that can support. On the classroom side we may have seen the low point, especially since we have a balanced budget now, assuming the initiatives pass -- or these propositions pass in May, because the money is there, the pent up demand is there for these projects. So we may very well have seen the bottom on that, but we'll learn more as the year progresses.

All right. And quickly, on TRS, do you plan to continue the destocking of high-cost equipment that's sort of underutilized? Is it --?

Well, just so you know, we are -- that's a vigilant part of running that business, so what we do very quarter is we do a very thorough impairment assessment and really focus on the cash flows, and where we're not meeting the thresholds we take -- we're proactive on dealing with that equipment. We've enhanced that process, and we started doing that last year to be able to get ahead of the wave in anticipation of the greater -- the general macroeconomic climate deteriorating, and so I think we've done a very good job of identifying that equipment that is a potential issue. We did that last year and we moved quickly, and we continue to assess that on a very frequent basis, so -- and the goal of all of that is to stay in front of any potential impairment. And again, we're doing a good job with that. I'm not overly concerned in any particular area right now, as we continue to do our diligence on that.

And, Jamie, I would just say the implication of all of that is, as we look at '09 we could see some pressure on the sales margin for our used equipment sales for the business.

Right. Okay, and then last question. On the pricing side, it -- is it -- are you being more aggressive on trying to gain share, or are you seeing competitors come in and price almost at an irrational level to win business? If you could comment on both sides of the business on the pricing side and then I'll jump off.

On both businesses? Okay. Well, we -- needless to say you see both dynamics. You see - occasionally you'll see people doing things that are probably not good economics, but we don't see a lot of irrational behavior in our markets. It really has a lot to do with building critical mass and sharpening the pencil a little bit and being able to keep your equipment utilized. One thing about our business is when you own assets and you're already incurring the depreciation expense, it's good to be renter -- generating some level of revenue on those assets. So we've always taken that approach, I think that has served us well over time. It also helped us to maintain customer relationships and be in position if things get better to be able to ramp up utilization levels, as well as pricing levels.

Similar dynamics on -- really in both businesses, and on the modular side, we've -- in particular because of the build-up of inventory in California it's been a pretty aggressive pricing environment. That also relates to school districts being much more frugal in their budgeting processes, and looking for a dollar everywhere they can get it. Interesting, in Florida, a very different market in terms of pricing where pricing has remained very stable over time, and that has everything to do with the fact that -- of the Campus Make-a-Classroom product that we have there in that we don't have a competitor that builds a similar product.

Okay.

And Jamie, what we're seeing, particularly on the modulars, is fewer new rental opportunities so fewer units going out on rent than are coming back and then we've got a rate differential, as well, in many markets, where the unit that comes back off rent was at a higher rate than the unit that we're putting out on rent, which is at a lower rate reflecting the market conditions that Dennis has described. So that all puts pressure on the yield and that's what we're seeing in the business.

Right. Okay. Well thanks for taking all of my questions, guys.

Thank you very much.

You're welcome.

Thank you. (Operator instructions). Our next question is from the line of Gerry Heffernan with Lord, Abbett & Co. Please go ahead.

Good afternoon, everybody. Keith, Dennis, how are you?

Fine, Gerry, how are you?

Doing well.

Good. Two real main questions here. One, could you discuss the dividend and discuss the decision to increase it by -- in the way that you did, given the fact that you're also going through, as you worded austerity measures, and just looking ahead to a difficult market here?

Gerry, in terms of the dividend, clearly we've got a track record of paying a dividend and we've seen steady increases. In terms of -- as to how we looked at it this year, we look a lot at the health of the operating cash flows of the business. We feel that those operating cash flows will still be heathy in '09, and we still think the long-term financial foundation of the Company is very solid and its ability to continue generating healthy cash flows is solid, and with that in mind we felt it was appropriate to make the increase to the dividend.

Gerry, I might also mention that our ESOP -- we've had an ESOP in the Company since the middle 1980s and our employees also participate in that dividend.

Understood. Understood. Certainly, your business is a strong cash flow business, always has been, having confidence in that going forward and raising the payout there certainly puts you in a small minority of people willing to do that in this day, and I find it a very interesting decision on your part. In regards to the current economic backdrop, the difficulties that are going on and all of the things that you've talked through on the call so far, what's the silver lining in all of this? What is going to occur in this current downturn period that is going to -- that will enable you to position McGrath to move ahead even stronger, even more profitably in the years 2011, through 2015?

Good question, Gerry. I think first and foremost is we have -- over the past year we have really -- we've selected our additional legs to the business that we've talked about for a number of years and we're very clear in our thinking about our ability and strategies to grow those businesses. Recessions really create a lot of opportunity for companies if they know how to use them properly. We feel with the capital that we have and our ability to do various items that I won't speak to in detail, but during windows like this, that we can really get a leg up on our competitors and be in a very favorable position as business activity picks up.

So I think most important is that we can really -- over the next 12 to 18 months work on really growing these businesses in terms of getting the right people in place, innovating with the right types of assets, being able to operationally get things really organizes and efficient. It's all of those kind of nuts and bolts items that we've been very good at over time, and sometimes slower business activity windows give you a chance to really do some things that you can't otherwise, and we're excited about our future. We've got a lot of new engines here that really have some significant potential, let alone the strength of our historical core modulars and electronics engines.

I think, Gerry, we've kept the leverage of the business relatively low, certainly compared to some players in various rental businesses, so that gives us a very solid financial foundation and we're building diversity in where the cash flows of the business come from. We're going to have more geographic diversity, more product diversity, and at the same time operationally we're keeping the focus on provide high-quality assets to our customers, and maintain a high level of service, and if we do all of that the franchises that we're building in each of these rental markets should be stronger in the outer years.

That's great, gentlemen. Thank you very much.

Thank you.

Thank you, and our next question is a follow-up question from the line of David Gold with Sidoti & Company. Please go ahead.

Hi. Was just curious if in light of everything you can give a sense of what -- how we should think about free cash flow this year> And tied to that, presumably if both businesses are slow on an organic basis, presumably we're not really out there spending that much buying new equipment, right?

David, I think the question is best answered as you indicated by looking at the capital spending. That's probably the biggest variable that will impact the total free cash flow for the year. We spent $96 million in 2008, and if I look at the drivers for '09 I think you can tell from our comments, and as you look at the utilization we're seeing in the modular and electronics business, that our traditional core businesses are likely to require less new capital in '09. Then if we look at the other initiatives that we have going -- the environmental test equipment, the portable storage, and some of the new modular markets -- we want to continue to invest in those, and with the addition of Adler, we expect Adler to grow and we'll be putting new capital in that business. So if we net all of that out, while there's still a lot of uncertainty in the business I would say that the CapEx is likely to be broadly similar to what we did in '08, but it's a different mix with the new initiatives getting more of the capital. And I would also say, given these tough economic conditions there's probably more potential for spending less capital in the traditional businesses if the economic conditions continue to be tough for the whole year, or tougher than we'd initially expected.

What do you see as a floor if we take into account you need to buy some for Adler presumably, and you need to keep the initiatives going? So in other words, on a similar level how much of that is for the two main businesses and how much of it is for those other initiatives and Adler?

The way I would respond to that, David, is just say Adler is a new enterprise for us. We need to build assets to support that business, and take advantage of market activity throughout the country, and so we will support that business appropriately and that's independent of what we do with our other businesses, and I think that's the extent of the color we give on that.

Yes. The other thing, David, I would point out is we throttle the CapEx based on market conditions and whether we believe we're going to get a good return on those investments, and we don't have to commit to spending that capital very far ahead of the time of deployment.

Got you, got you. Okay, thank you.

Thank you. That concludes our question-and-answer session for the -- for today's call. I would now like to turn the call back over to management for any closing remarks.

We'd like to thank everyone for joining us today on our Q4 2008 call. We'll look forward to chatting with you all again on our Q1 call in May. Thank you, all, so much.

Thank you. Ladies and gentlemen, this does conclude the McGrath RentCorp fourth quarter 2008 conference call. If you would like to listen to a replay of today's conference you can dial 303-590-3000, or you can dial 1-800-405-2236, and enter access code 11125293 followed by the pound sign. We thank you for your participation. You may now disconnect.