McGrath RentCorp (MGRC) 2009 Q4 法說會逐字稿

Welcome to the McGrath Rentcorp fourth quarter 2009 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). This conference is being recorded today, Wednesday February 24th, 2010. 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 am the Investor Relations Advisor for McGrath Rentcorp, and will be acting as moderator of the conference call today. Representatives 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 1-888-203-1112 for domestic callers, and 1-719-457-0820 for international callers. The passcode for the call replay is 2395490. 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. Our press release was sent out today at approximately four o'five Eastern Time or one o'five Pacific Time. If you did not receive a copy, but would like one, it is available on-line 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.

While 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. The 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 a 2% increase of the cash dividend to $0.225 per share for the first quarter of 2010, representing on an annualized basis approximately a 3.8% yield on the February 23rd, 2010 closing stock price. For the fourth quarter 2009, total revenues decreased 15% to $66.5 million, from $78.5 million for the same period in 2008. Net income decreased 4% to $8.9 million, or $0.37 per diluted share, from $9.3 million, or $0.39 per diluted share for the same period in 2008.

Reviewing the fourth quarter results for the Company's Mobile Modular division compared to the fourth quarter of 2008, total revenues decreased $9.5 million, or 24% to $30.6 million, due to lower rental, rental-related services and sales revenues during the quarter. Gross profit on rental revenues decreased $2.8 million, or 17% to $14.1 million. Primarily due to 17% lower rental revenues with rental margins increasing to 66% from 65% in 2008. Rental margins increased as a result of reduced material and labor costs in our inventory centers, from lower business activity levels and extensive cost reduction efforts.

Selling and administrative expenses decreased 16% to $6.3 million, due to lower personnel and marketing costs. Lower gross profit on rental revenues, rental-related services and sales resulted in a decrease in operating income of $3.5 million, or 26%, to $10 million. Finally, average Modular rental equipment at original cost for the quarter was $484 million, an increase of $8 million. Average utilization for the fourth quarter decreased from 80.9% in 2008, to 69% in 2009.

Turning next to fourth quarter results for the Company's TRS RenTelco division, compared to the fourth quarter of 2008, total revenues decreased $4.1 million, or 13%, to $26.6 million, due to lower rental and sales revenues. Gross profit on rents decreased $1.6 million, or 19% to $7.1 million. Rental revenues decreased $3.5 million, or 15%, and rental margins decreased to 36% from 37%. Selling and administrative expenses decreased $0.9 million, or 13% to $5.8 million, due to lower personnel and marketing costs. As a result, operating income was flat at $3.9 million. Finally, average electronics rental equipment at original cost for the quarter was $242 million, a decrease of $18.5 million. Average utilization for the fourth quarter decreased from 66.3% in 2008 to 63.6% in 2009.

Turning next to fourth quarter results for the Company's Adler Tanks division. Adler Tanks was acquired in December 2008, and so fourth quarter results are compared to the third quarter of 2009. Fourth quarter total revenues increased $1 million, or 15% to $7.7 million, due to higher rental and sales revenues. Gross profit on rents increased $0.5 million, or 14% to $3.8 million, rental revenues increased $0.9 million, or 19%, and rental margins decreased to 65% from 68%. Selling and administrative expenses were flat at $2.3 million. As a result, operating income increased $0.3 million for the fourth quarter 2009 to $1.8 million.

Finally, average rental equipment at original cost for the quarter was $71 million, an increase of $8 million. Average utilization for the fourth quarter increased from 61.4% to 68.2%. On a consolidated basis, interest expense for the fourth quarter 2009 decreased $1.1 million to $1.6 million from the same period in 2008. As a result of the Company's lower average interest rates, partly offset by higher average debt levels. The fourth quarter provision for income taxes was based on an effective tax rate of 35.8%, compared to 38.9% in the fourth quarter 2008. The lower effective tax rate in 2009 was due to higher business levels outside of California in states with lower tax rates, primarily resulting from the first full year of the acquired Adler Tanks operations.

Next I would like to review our 2009 cash flows. For the 12 months ended December 31st, 2009, highlights in our cash flows included net cash provided by operating activities was $122.4 million, an increase of $23.7 million, or 24% compared to 2008. The increase was primarily attributable to collection of Accounts Receivable and income taxes receivable, partly offset by lower income from operations. We invested $70.5 million for rental equipment purchases compared to $95.8 million for the same period in 2008, partly offset by $29.3 million in proceeds from used equipment sales. Property, plant, and equipment purchases decreased $11.4 million to $2.2 million in 2009. Dividend payments to shareholders were $20.4 million. Net borrowings decreased $58.2 million from $305.5 million at the end of 2008, to $247.3 million at the end of 2009.

With total debt at year-end of $247.3 million, the Company had capacity to borrow an additional $131.7 million under its lines of credit. For 2009, fourth quarter adjusted EBITDA decreased $3.3 million, or 9% to $31.9 million, compared to $35.1 million in 2008 with consolidated, adjusted EBITDA margin at 48%, compared to 45% in 2008. At December 31st 2009, the ratio of funded debt to the last 12 months adjusted EBITDA was 1.94 to 1, compared to 2.15 to 1 at December 31st, 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 2010 earnings guidance, with the weak economy and challenging outlook, we face significant uncertainty in developing our annual forecast. We expect 2010 financial results to be driven by higher business activity levels in our TRS RenTelco, and Adler Tanks rental operations, offset by lower business levels in Mobile Modular. We expect full year earnings per share to be in a range of $1.30 to $1.45 per diluted share. In 2010 we expect low single-digit percentage growth in rental revenues compared to 2009, and higher sales revenues. We expect higher rental revenues in our Adler Tanks and TRS RenTelco rental operations, offset by lower rental revenues in Mobile Modular.

Rental equipment depreciation expense is expected to be slightly lower than 2009, selling and administrative costs are expected to increase by approximately $4 million compared to 2009, as a result of growth and continued investment in our tank and portable storage operations, and removal of some of the employee cost austerity measures implemented in 2009. Full year interest expense is forecasted to be approximately flat compared to 2009. We expect the 2010 effective tax rate to be 38.8%. 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's rental revenues for the quarter decreased by 17% from a year ago to $21.5 million. Sequentially from the third quarter of 2009, rental revenues were down approximately 5%. During the fourth quarter, our Modular rental business continued to face challenges in the California market, related to the timing of bond sales and the funding of educational infrastructure projects, School District austerity measures, and a challenging commercial environment.

Our Modular business experienced a significant level of equipment returns during 2009, approximately 18% higher as measured by floors over 2008. The good news is that although for the first 8 months of 2009, each month reflected a net inflow of equipment. During the last four months of the year, we had significantly lower returns, and a net outflow of equipment for two of those months. Although the California economy continues to have its challenges, there are some bright spots. First, there is a significant demand for school modernization projects with many projects being shovel-ready. The challenge is the timing of state bond sales, and the apportionment of both existing and new bond sales funds to specific school districts, in order for them to begin these multi-year projects.

Second, a large majority of local bond and partial tax measures for educational infrastructure put before voters by school districts over the past few years have passed. We are beginning to see some school districts tap these monies to cover 100% of their costs in order to commence with these projects. The districts will in turn be reimbursed for the state's portion of these project costs once the flow of state bond sales proceeds improves.

Third, we are also seeing more infrastructure or public works projects in the California market. These projects are for waterway, public transit, healthcare, roadway, and other public infrastructure improvement. In part, we believe that Federal stimulus funds are a factor in the higher level of these types of projects we are seeing. What is especially favorable about these projects is that they are typically for larger square footage modular buildings, and tend to be for multi-year rental terms.

Lastly, surprisingly, we have even seen some limited activity in the home developer market in California, with the availability of lower land and labor costs. This has been primarily in new entry-level housing tracts. The Texas market challenged throughout 2009 due to the macro and petro economic environments, appears to be healthier entering 2010. We are seeing modestly improving business activity levels in both commercial and educational markets. In Florida, state budget issues and resulting facility economizing by school districts, the delay in moving forward with the next phase of class size reduction, and flat to slightly declining student population hurt classroom booking levels in 2009. Our commercial business in Florida was also highly challenged this past year, with lower business activity in a highly price competitive environment. We are hopeful for improved market conditions in 2010.

In our new mid-Atlantic region, we are continuing to make progress in capturing new educational business with our innovative classroom products designed for these markets. The mid-Atlantic educational market was not immune from budgetary pressures during 2009. However, in spite of a very challenging macro economic environment, we reached profitability in the mid-Atlantic in 2009. We are looking forward to growing our base of rental revenues and profitability during 2010. As a result of the continuing challenges we faced across our Modular rental division during the quarter. Period end utilization fell to 69% compared to 69.5% at the end of the third quarter 2009. We are hopeful that this modest decline in sequential quarter end utilization is an indication that the worst is behind us. As our Modular division enters 2010 we are cautiously optimistic that we will see improving market conditions as the year progresses. However, we expect it to remain a very price competitive environment in all of the markets in which we operate until utilization levels begin to rise.

We are also aware that although a higher percentage of our Modular business is generated outside of California today than at any time in our history, improvement in our division-wide financial performance is chiefly dependent on the health of and success in the California market. Although California has not solved its budget challenges at the state level, unemployment remains high, and commerce has been sluggish, we believe that we are likely bouncing off the bottom of the trough. Anecdotally, there appear to be more positives than there were just a few months ago, including more public works and infrastructure opportunities, various school projects beginning to move forward, the anticipation of additional bond sales in early spring in California, an improving petro chemical environment, and recent lower equipment return levels. None of this is to say that our Modular business doesn't have a lengthy recovery period from where we stand today. However, these positives may indicate we are likely beginning to see a move in the right direction.

Now let me turn our attention to TRS RenTelco and their results. TRS RenTelco's revenues declined by 15% from a year ago to $19.7 million, and income from operations was flat at $3.9 million. The 15% decrease in rental revenues relative to flat earnings was primarily made up through lower equipment depreciation expense, higher profit on equipment sales, and lower SG&A expense. We have done a good job at taking cost out of the business by selling under-utilized equipment, and adjusting our staffing levels to support current business activity.

If you look at our sequential quarterly results, we believe they tell a more accurate picture of the health of our electronics business as we enter 2010. Our rental revenues for the fourth quarter of 2009 increased by 7%, and income from operations increased by 16% from our third quarter results. We continued making good progress during the quarter in selling under-utilized equipment and reducing depreciation expense. Quarterly depreciation expense was $9.6 million compared to $9.8 million in the third quarter of 2009 and $11.4 million in the fourth quarter of 2008.

Our gross margin percentage on equipment sales for the quarter was 36% and reflects healthy secondary sales markets. Ending fourth quarter utilization increased to 63.1%, compared to ending third quarter utilization of 61.8%. Our average monthly rental rate increased to 4.27% from 4.13% during the third quarter, driven by increased environmental test equipment rentals that carry higher rental rates. Both of these metrics are indicators of a stable market environment during the fourth quarter of 2009. Improvements in business activity levels and operating results over the second half of 2009 have been encouraging. However, our first quarter 2010 results are subject to our customary year-end seasonality increase in equipment returns and the ramping up of business levels during the first quarter.

Now let's turn our attention to Adler Tank rentals. Adler rental revenues and income from operations were $5.9 million and $1.8 million respectively during the fourth quarter. Sequentially from the third quarter of 2009, this represents an increase in rental revenues of 19%, and income from operations of 20%. During the fourth quarter, Adler experienced higher business activity levels compared to the third quarter as measured by units shipped and first month's rental revenues. Business activity levels have continued favorably thus far in the first quarter of 2010.

We are serving a wide variety of market segments including industrial plants, petro chemical, pipeline, oil and gas, waste management, enviro field service, and heavy construction. Average utilization for the fourth quarter increased to 68.2% as compared to 61.4% for the third quarter of 2009. However, market conditions continue to be highly competitive during the quarter. Looking forward we are very enthusiastic of the prospects for Adler becoming an increasingly significant contributor to McGrath Rentcorp's earnings.

Now let me take a moment and update everyone on our two newest organic initiatives, environmental test equipment and portable storage during 2009. First, our environmental test equipment rental initiative made good strides throughout 2009 in growing its number of billing customers, opportunities, orders booked and rental revenues. In fact, our rental revenues grew each quarter throughout 2009 in very challenging market conditions. We believe that we will continue to grow this business during 2010, and that over the next few years we can become a significant rental provider in this industry. Our portable storage initiative continued to move forward during 2009 and also experienced increasing rental revenues each quarter. During 2009 we expanded our portable storage business into all of our modular inventory center locations. We've leveraged this existing infrastructure to reduce our cost structure and ramping our portable storage business.

We are also benefiting in these new markets from synergies between our legacy modular building customers and their portable storage needs. We continue to seek smaller acquisition opportunities in our existing regions, to accelerate the growth of our portable storage business. Keep in mind that both our environmental test equipment and portable storage initiatives are relatively small today, compared to our legacy rental businesses and Adler Tank rentals. However, we expect both initiatives to become increasingly important in the years ahead, as we execute our growth plans for each business. Lastly, the mid-Atlantic region expansion of our Modular rental business was profitable during 2009.This is slightly ahead of schedule. We are continuing to make good progress in capturing new educational classroom rental business with our innovative classroom products designed specifically for these markets. However, our environmental test equipment and portable storage initiatives, our Modular rental business levels in the mid-Atlantic are relatively small, compared to our other established Modular geographies or products. However, we are making good progress and expect this initiative to become an increasing, meaningful contributor to our modular financial results over time.

Now for some closing remarks. 2009 was a year with many challenges. McGrath Rentcorp weathered the worst of the macro economic recession, and its financial strength has remained intact. We owe this to the countercyclical nature of portions of our rental businesses, our strong cash flows, and low leverage balance sheet. We also believe we managed our expenses tightly, and took costs out of our businesses as activity levels warranted. We will be continuing various expense reduction austerity measures in 2010.

Equally as important during 2009 is that we kept our foot on the accelerator with respect to our new organic initiatives and with our newly acquired tank rental business. While the tendency is to hunker down during such a difficult economic environment as we experienced this past year, we were innovating our products, buying rental assets, building our infrastructure, working hard at creating stronger customer relationships, and sharpening our operational execution. You can expect more of the same going forward as we work to build on our successes this past year.

We believe we are well-positioned today to become a larger and more profitable company as economic conditions improve. Essential to our overall earnings improvement is the recovery of our California Modular classroom and commercial rental markets. Although we are less dependent upon the California market today than we were a few years ago, and should be less so as our newest rental initiatives grow, California's results are vital to our financial health. As a result, by recent improvements in both our electronics and tank rental businesses, there is a potential for downward pressure on earnings for the first half of 2010. This is primarily related to customary third quarter shifting dates for new classroom rentals in California.

As for the strength of our cash flows, during 2009 we generated $79 million in free cash flow after funding investment in our new tank rental business, our portable storage, environmental test equipment, and Modular mid-Atlantic initiatives, and our legacy rental businesses. We were also able to decrease our debt by $58 million and in turn increase our unused capacity under our lines of credit to $132 million. Approximately $20 million of the free cash flow generated in 2009 was used to pay a dividend that at today's share value is approximately a 4% yield. Our current dividend payout ratio of approximately 60%, higher than our historical levels of between 35% to 45%. This is a result of lower EPS during 2009. While we will continue to assess the dividend each quarter, it is likely that potential future dividend increases will be modest until our earnings growth moves us closer to our more historical payout ratio levels.

In closing, we believe that our strategy of investing in new earnings engines in 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. And now Keith and I welcome your questions.

Thank you. (Operator Instructions). We will take our first question from Scott Schneeberger with Oppenheimer.

Thanks, good evening, guys.

Hi, Scott.

I guess first I would just like to jump off into the guidance, a few questions there with regard to what you are seeing. The guidance is for low-single digit percentage growth in rental revenue, up in two of the segments, down in another. Could we just get a little indication of how much magnitude on either, and then the follow-up there is could you take us into, Dennis, specifically in California, with regard to bond issuances, California budget, and what you see kind of a level down or two for modular this season?

Yes, Scott, I think you really got as much color as we can give on the rents. You will see if you look at the business on a quarter-to-quarter basis for both Adler and for TRS, if you look at the results for rents in Q2 of last year we saw improvement through Q3, and then through the final quarter of the year. So we see some helpful trends there. We hope that continues and we are assuming there will be some year-over-year improvement in the rental revenue outlook for both those businesses, and then when you look at Modulars, I think as you suggested by your question, you really have to go region by region across the business. Mid-Atlantic we still see potential for growth there. That is a market that we are investing in and we see more opportunity. Texas is still a healthy market and we see some further opportunity there. Florida is probably more flattish. And California, we think based on where we ended 2009, that will be softer in 2010 in total, compared to what we delivered in 2009. Dennis, I don't know if you would like to add anything.

I think Keith has articulated it appropriately, and let me speak to the bond side of things for California. What we are seeing currently is the fact that there is good demand for modernization projects, and it is really this timing of funding. There are quite a few shovel-ready projects as I mentioned in my prepared comments. And currently there is still about $1.7 billion in available bond fund sale capacity, and our latest information is that the state is going to be going out for bond sales in March for about $4 billion worth of bonds, and we won't know how those bonds get parceled out amongst the different programs in the state, but it is a good sign if the state is going to market next month to be able to sell I think it is $2 billion of taxable and $2 billion of tax-exempt bonds. We believe that is a very good positive potentially for the business. And then what we are, what this is really going to come down to is we are just about 2 months into the ordering season, bookings are pretty much in-line with what we expected to date on the school side of things. But we really, the telltale will be over the next three months here. By the Q1 call in early May, we will have a very good feel for classroom bookings for the year, and California in particular.

Thanks. That is helpful. On a seasonality question with regard to the guidance, and I am not sure I heard it right, so please clarify for me. You mentioned some softness in the first half. I am not sure who was in a particular segment, but Keith you had mentioned that we are seeing momentum in Adler and electronic equipment rental over the last few quarters into 2010. Could you just clarify for me what those statements were?

Scott, two dynamics there. One is the modular business. If you look at the fall-off in rental revenues in the fourth quarter, it is really a function of where the quarter ends. That also tells you where you start the new year. When you look at 2010, we have got a ramp from where the lower levels were, and the majority of new business outside of commercial comes from education, which really is a second half dynamic, in terms of hitting the income statement. That is why we talked about seasonality there, because you are not likely to get much lift, if anything in the first half of the Modular business, unless it's coming from another region in the mid-Atlantic or somewhere. So that is how that is playing out there. And that is why we are talking about the first half of the year and softness in Modulars.

With our electronics business, even though we had a very good fourth quarter, that business still winds down in the last few weeks of the year. We get returns, and then that is also a function of where we start the new year. When you have that lower billing base to end the year, you are starting at that level of lower, even though the business is up from the start of the year. You have to ramp it again in the first quarter. So those are two dynamics there that are in play in 2010.

And Scott, if I could just add, one thing you could look at is the first quarter results of 2009. And then if you look at where we ended in the fourth quarter of 2009, as we now enter 2010, and we anticipate first quarter results in 2010, you will see that for TRS and Modular, the comps are pretty rich. We had a pretty high level of rental revenue in TRS and in Mobile Modular in the first quarter of 2009. And again you can look at where we ended 2009, and that gives you a sense of just as Dennis said, the departure point for building up our revenue at the start of 2010.

Understood. So just to summarize, it is really nothing more than typical seasonality of which I am familiar, and some comps. Nothing new or different though? That is just what I wanted to be sure of.

Correct. The way to really think of it is for TRS and Adler, there was some economic weakening early in the year, continued through the first half of Q2. And then really on all of our comments on last year's calls, we were seeing sequentially healthier business from the middle of Q2 right through to year-end.

Thanks. Just shifting it up with another if I could, the increased SG&A for 2010 primarily investment spending it appears, I guess with regard to Adler, that has been a success for you. You continue to spend to grow on that. How much longer and how diverse geographically diverse do you look to get that, and can you just remind us how broad your footprint is right now?

Let me handle the latter part first. Our footprint today is for the most part Texas, the Southeast, New Jersey, the mid-Atlantic area, and the Northeast and the Midwest. In 2009 we expanded into California. We also expanded into Florida and the western Pennsylvania market. And as you look at that business going forward, there is a lot of runway for us to grow it. We are very enthusiastic about it. Our goal, you can say we are national now, but a small national player. We expect that business to become much larger in the years ahead, and there is quite a bit of opportunity.

Thanks. And so the way you are thinking about it is, well, you would spend more if business conditions pick up, and you have more to spend, but right now this is the comfortable, the level you are comfortable with looking out at what you expect for 2010.

Yes, it is a new business. We are still learning, but just as you said, we have plenty of capital to grow the business. We continue to make new investments, and it is a very sound opportunity in the years ahead.

And Scott I would add of that increase in SG&A, and you are right with your comment. In fact, about two-thirds of that addition is related to growth initiatives, but those growth initiatives do include the full spectrum of Adler being very important, but also continued investment in portable storage, our presence in the mid-Atlantic for Modulars, and our environmental test equipment initiative. And the net effect of that investment is we will be adding people to the team, to help us continue to pursue more opportunity in those areas.

Thanks. One follow-up on that and then one more. Congratulations on your profitability in the mid-Atlantic. That is great. I know that is ahead of schedule. With regard to portable storage, how are you progressing there? Is that growing as rapidly? I don't know if we want to speak in terms of reaching profitability. But has that reached beyond California, or is that still familiar growing at a more measured pace?

Yes, the markets that we are in today is we are in California, we are in Texas, we are in Florida. Those are really the primary markets, and we are really trying to expand those business areas, and obviously we also have intentions to make that business larger over time. You speak in terms of profitability, if you just look at direct SG&A expenses for that business, it was profitable in 2009. If you allocate certain SG&A from corporate, it comes down into more of a break even neighborhood, but it is moving in the right direction. We are very enthusiastic about our portable storage initiative over time, and we think we can be highly successful at it.

Great, thanks. And the final one, you mentioned there may be some removal of employee cost austerity measures that were implemented in '09, it makes me think that you must be feeling better about the business in 2010 to make a statement like that. So the final question is kind of comprehensive of everything we have discussed. How are you feeling at this budget period this year versus where you were last year, because entering two years both of pressure you want to compare and contrast, and see if things are in fact better right now and how you feel?

There is a marked difference in our outlook in February of 2010 than there was in February of 2009. I think for most companies there was just so much uncertainty. There remains a lot of uncertainty, but we have a year under our belt with Adler. We feel very good about that. Our electronics business has turned around. Our initiatives, all three new initiatives are doing I think very well. They went through a very tough 2009 if you look at the macro environment and they continue to grow. So we think 2010 is a growth year for all of those initiatives. So our outlook is much more positive, and even in California it still continues to struggle, but there are more positives today by far than there were a year ago. It doesn't mean we are out of the woods yet, but I think we are getting more directionally, more correct every day.

Great. Thanks for taking all of my questions in the call.

Thanks, Scott.

We will go next to David Gold with Sidoti.

Hey, good afternoon.

Hi, David.

A couple of follow-ups as well. First, in the release in your guidance which is extremely helpful, the break out. You also comment on looking for higher sales from year-to-year. Is that an initiative that is underway, or what is sort of the thinking there? Are you guys pushing sales to sort of help utilization a little bit?

I think it is more market conditions overall. If you think of the early part of last year for example in electronics, while we were selling some product I think market conditions were a little tougher from a demand point of view. I think we have seen some improvements there. Enviroplex was very strong in 2008. We saw a significant reduction in Enviroplex sales in 2009. I think there is potential for things to be better in 2010 than they were in 2009. So I don't think there is any dramatic shift in strategy or policy in terms of de-fleeting. It is more of a slightly more robust end market demand for sales where we can pursue them.

Okay. And staying with that, on the TRS side, the higher gross margin on the equipment sales, anything to that? Was it just older equipment sold, or just better demand where you could get your price? What was pushing that?

Yes, I think if you look at some of the comments we made a year ago, first of all it was a tougher market set of conditions, and also we were doing a little bit more de-fleeting, if you will, of the electronics equipment pool. So there were certain items where we felt we had more than we really needed for the market demand that we could foresee. And in those cases where you are pushing sales a little more, you have to give up something on margin. I think the positive is, here we are at the end of '09, and I think market conditions are more robust, and closer to what used to be typical. You are seeing the margins lift accordingly.

Got you. Also, on the RenTelco side, can you speak a little bit as to what buckets you are seeing the demand improvement?

David, it is really very broad based. There is increased corporate IT spending, communication network work. It is quite broad. There isn't any one specific area that really is doing markedly better than others. It is just a broad lift across a number of market segments.

Okay. That is helpful. Then just shifting to Mobile Modular for a touch. Essentially you commented that there is a bond sale due in March that hopefully gets off successfully. When you think about your guidance, or how you think about the year laying out, what has to happen to basically make things, or what have you baked in there? Do you assume that that one happens? I know we are at an iffy spot, given that we are in the prime booking season, so to speak, and it has got to be a little tough. So what are you thinking when you put out the guidance? Do you think it happens? Do you need it to happen?

Well, we anticipated at some point there is going to be additional bond sales. But I would, formerly in our guidance for the year there is an uncertainty piece in there as to when that is going to hit. We do know about the shovel-ready projects, or that there are certain shovel-ready projects. And we also know that local school districts, a number of them are fairly flush in terms of their parcel tax and bond money, and a number of them would move forward potentially to manage the cash flow until the state can reimburse them.

But I think if you look at the overall, our prognostication on this year is that I think we are entering it with conservatism, appropriately so, and we will really need to see how it plays out over the next 3 to 4 months. Even if bonds are sold in March, the question is were districts anticipating those funds coming in, and can they get these projects off the ground by summer time? And we are more apt to see perhaps some more off-season starts of projects as we go forward if the bond monies are available. So I think all-in-all, the bond measures that will be out to market in March, I think that is a real positive. We weren't necessarily counting on $4 billion worth of sales. And again we are not even certain how that's going to get apportioned amongst the different bond needs of the state. But it is a positive.

David, if I could just characterize, one way to look at the modular business, particularly in California, if we went back a year ago, I think customer behavior was reacting to a really very challenging environment and market conditions. If anything there was more panic in terms of people's thinking and actions. Here we are a year later, and while certainly we are expecting it to be a tough and challenging year, people are being a bit more rational as they make trade-offs about what they are going to do, where they can economize, but also how they are going to continue to navigate this tough set of conditions.

Got you. Absolutely fair. One last one, Keith, I think you gave the numbers, but can you just go over the period end utilization for the different businesses?

Yes, I think we mentioned that for Mobile Modular, we ended the year at 69%, and that was down from 69.5% at the end of the third quarter. And then for electronics we ended at 63.6%. That is actually an average. 63.6% compared to 66.3% in 2008.

We were 63.1% at the end of Q4.

Yes, did you say 63.1%?

63.1% at the end of Q4.

And the 69% was an average as well, or no?

69% was an ending utilization for Modulars in Q4.

Perfect, perfect. That is exactly what I wanted. Thanks so much.

(Operator Instructions). We will go next to Jamie Sullivan with RBC Capital Markets.

Hi, good evening, guys.

Hi, Jamie.

Question in Adler, you mentioned a number of different customer sets there. Can you talk about which ones, petro chem, construction are kind of driving a lot of the growth, and where you are seeing some success?

Scott, for competitive reasons, that is the extent of the color, excuse me, Jamie. For competitive reasons, that is the extent of the color we are going to give on what is occurring where. We have competitors that listen in on the call, and we just think it is most prudent just to leave it at that.

Okay. All right. And then in TRS, can you break down the general purpose and communications revenue for '09 for us?

Yes, I don't think that changed significantly from the prior year. In general it was about two-thirds general purpose and roughly one-third communications related.

Okay, so they both grew at the same rate, I guess you are saying?

Roughly.

Okay. All right, and I guess so the behavior in those end markets pretty much moves in lock step is what you are saying, at least you saw that this year. Is that typically how it happens over a cycle? Like R&D and network spending usually follows together?

Jamie, not necessarily. It happened in this period, but we have seen periods where you can have communications really take off because of various new technologies or infrastructure needs, et cetera. No different than if corporate IT spending has been lagging for a couple years, that you might see an uptick more on the general purpose side of things for various types of items.

Sure. Okay. Maybe you can talk about kind of the recovery and customer behavior, how they typically adopt rentals, and kind of what you are seeing now, and what kind of your opinion on where we are in that recovery cycle?

For electronics?

Right, for TRS, yes.

Well, what we have seen is fairly broad-based from a number of different industry segments. I mentioned a few earlier, but in the communications sector, and you look at aerospace and defense, we have corporate IT spending, and general electronics. So nothing in particular to speak to there, other than it has been a fairly broad lift.

Yes, really from the middle of the second quarter of last year we saw an increasing pipeline of business, more projects being contemplated by customers, and ultimately more projects resulting in demand for rental equipment. And that continued pretty nicely through the second half of the year.

Okay. And then moving I guess into Modulars, can you talk about some of the decline or the returns? Can you roughly break that down? Like how much is commercial versus education contributing to the returns?

They were both challenged in 2009 and we don't have a break out number here, but I would say it was fairly equally balanced. We certainly commercially on the single-wide and double-wide fleet got quite a few returns, as you might imagine. And then certainly on the school side, the orderly return of equipment was in play without a lot going out.

So equal contribution from commercial and education?

They were both impacted.

Okay. And then if we look at what you have in your rental base today, what is out on rent,how much is tied to modernization so to speak, versus say expansion and class-size reduction, from taking an existing facility and modernizing it because of crumbling infrastructure, and the other is for more space needs?

Well we run numbers, and you can say it is somewhere in the 40% to 50% range, in terms of what is more permanent infrastructure, and probably a little bit larger on the modernization side in terms of the mix of business.

Okay. All right.

And it is challenging to be precise with those kind of statistics, Jamie, because on occasion a school district may start with a rental need that is related to one need, and then over time additional needs occur, and they may continue to keep the classrooms on campus.

And it is different by market. Florida is predominantly no modernization. It is all really growth and student population-related. California has a bigger modernization mix versus the other.

Right. Okay. And I know that the visibility on the bond measures and that money flowing through is challenging, but it just, if we look at California, we have seen some stabilization, but the budget situation is certainly still very challenging out there. It may be several years before you see budgets for expansionary budgets in some areas. Do we need to see additional teachers before we would see kind of a really healthy growth market? Or the Federal funding to step in like stimulus-related, or do you think that even in this budget environment we can see return to a nice growth environment, with money flowing through and infrastructure spending? I would just like to get your thoughts there?

If we can talk both educational and commercial. I think on the educational side there is no question that there are significant challenges that exist today in terms of budgets. However, that being said, you have got approximately 6.3 million students in the state in K-12. Those students have to be housed in classroom space. The state, at least the projections that we have looked at most recently, it is expected to start growing its student population beginning in 2011, so when you put that together there is not a lot of funding available. Those additional students still have to be housed, or any additional student flow, even though you have declining, maybe a flat population growth overall for students, but it still could be growing in one district or another. Those students have to be accommodated with space.

Modular buildings, portable classrooms are the least expensive facility that a district can have, and it is a very immediate type of fix. So even in continued very tight budget conditions with those dynamics we should continue to do well. The other piece is as school districts, as school facilities age, they have to be refurbished. They have to be upgraded. We have seismic codes in the state. That is something that continually has to be done. Tight budgets or not, that is going to have to occur, and the state is going to have to find monies to do that over time to provide safe classroom space. And of course that feeds right into our rental fleet. So even without any real goodness there in terms of the budget side of things, there are some demand or push items that just, still make portable classrooms or the rental of them a very viable business going forward, let alone when the state, or just the economy gets some real fixes for its budget.

On the commercial side, we talked earlier about the additional infrastructure we are seeing, and that we believe Federal stimulus funds are somewhat contributing to that uptick. But that is no different than the WPA. That is how this economy may find itself getting itself to the next level, and getting out of this thing, or at least being a part of it. Overall as I mentioned in my prepared comments, there are many more positives today than there were a while back.

We are much more half glass full than half glass empty as we look forward. You can kind of get caught up in your own, if you sit in your office and you read all of the gloom and doom out there, that is one thing. It is another thing if you walk around and you talk to your sales people and you are talking to customers and you are reading more between the lines anecdotally of what is positive. So you have to balance both.

Right. Is there anyway you can, I guess along that vein, you talked about a lot of these shovel-ready projects, the districts have the money ready to go. They just need to pull the trigger. In terms of those construction projects whether it is construction spending or whatever, can you put some magnitude around it, number of projects, dollars, number of districts, that kind of thing? Is this a few projects? Is this, can materially move the needle, some sort of additional color there would be helpful?

Our base of information really comes from what we have learned from our lobbyists in Sacramento, and the fact that there are a number of districts that have, and we can't quantify, but there are a number of districts that have projects that are really ready to go. They have got their approvals. They have got their budgets. All of those dynamics and they are ready to go out to bid. And they are on an approved but unfunded list. There are some numbers that have been floating around about that, but I don't feel comfortable publicly speaking to any of those numbers at this point. We will learn a lot more over the next three to four months about how material or significant that could be. But at this point we are taking a conservative view and saying, yes, there are some. We will have to find out here just what that level will be.

Okay, thanks for taking all my questions.

Thank you.

And there are no other questions at this time. I would like to turn the conference back to our speakers for any closing remarks.

Well, I would like to thank everybody for joining us on our Q4 2009 call. We will look forward to chatting with everyone on our Q1 2010 call in early May. Thanks so much.

Thank you everyone. That does conclude today's conference. We thank you for your participation.