McGrath RentCorp (MGRC) 2011 Q3 法說會逐字稿

Welcome to the McGrath RentCorp Third Quarter 2011 Conference Call. (Operator Instructions)

This Conference is being recorded today, Thursday, November 3rd of 2011.

Now, I would like to turn the Conference over to Geoffrey Buscher of SBG Investor Relations. Please go ahead.

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 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 seven days following the call by dialing 1-800-406-7325 for domestic callers, and 1-303-590-3030 for international callers. The pass code for the call replay is 4477142.

This call is also being webcast live over 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 4.05 p.m. Eastern Time, which is 1.05 Pacific Time. If you did not receive a copy but would like one, it is available online in the Investor Relations section of our website, or you may call 1-206-652-9704, and one will be sent to you.

Before getting started, let me remind everyone that the matters we will be discussing today that are not truly historical are forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, including statements regarding McGrath RentCorp's expectations, beliefs, intensions 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 and its Third Quarter 2011 Form 10-Q.

For the third quarter 2011, total revenues increased 26%, to $105 million from $83.2 million for the same period in 2010. Net income increased 58%, to $15.4 million from $9.7 million. And earnings per diluted share increased by 55%, to $0.62 from $0.40.

Reviewing the third quarter results for the Company's Mobile Modular division, compared to the third quarter of 2010 -- total revenues decreased $1.9 million, or 5%, to $35.3 million due to lower rental, rental-related services and sales revenues. Gross profit on rents increased $1 million, or 10%, to $10.8 million. Rental margins increased to 54% from 47%, primarily because other direct costs as a percentage of rents decreased to 29% from 37%. The higher rental margins were partly offset by $0.8 million or 4% lower rental revenues.

Selling and administrative expenses increased 15% to $8.4 million, primarily as a result of increased investment in our portable storage growth initiative. The higher gross profit on rents and $0.3 million higher gross profit on sales, partly offset by increased selling and administrative expenses, resulted in an increase in operating income of $0.4 million, or 7%, to $6.1 million.

Finally, average modular rental equipment for the quarter was $506 million, an increase of $13 million. Average utilization for the third quarter decreased from 67.8% to 67.1%.

Turning next to third quarter results for the Company's TRS-RenTelco division, compared to the third quarter of 2010 -- total revenues increased $4.4 million, or 16%, to $31.7 million due to higher rental and sales revenues. Gross profit on rents increased $2.5 million, or 27%, to $11.7 million. Rental revenues increased $3 million, or 14%; and rental margins increased to 47% from 42%, as depreciation as a percentage of rents decreased to 39% from 42% and other direct costs decreased to 14% from 16%.

Selling and administrative expenses increased $1 million, or 19%, to $6.4 million, primarily due to increased salary and benefit costs. As a result, operating income increased $1.7 million, or 26%, to $8.2 million. Finally, average electronics rental equipment at original cost for the quarter was $265 million, an increase of $19 million. Average utilization for the third quarter decreased from 67.7% to 65.5%.

Turning next to third quarter results for the Company's Adler Tanks division, compared to the third quarter of 2010 -- total revenues increased $6.6 million, or 51%, to $19.6 million, primarily due to higher rental revenues. Gross profit on rents increased $5.4 million, or 72%, to $12.8 million. Rental revenues increased $6.1 million, or 60%; and rental margins increased to 80% from 75%, as depreciation as a percentage of rents decreased to 13% from 14%, and other direct costs decreased to 7% from 11%.

Selling and administrative expenses increased $1.3 million, or 42%, to $4.4 million, primarily due to higher personnel and benefit costs and bad debt expenses. As a result, operating income increased $4.4 million, or 87%, to $9.5 million. Finally, average rental equipment for the quarter was $164 million, an increase of $55 million. Average utilization for the third quarter increased from 78.3% to 88%.

Turning next to third quarter results for the Company's Enviroplex classroom manufacturing subsidiary, compared to the third quarter of 2010 -- sales revenue increased $12.7 million, to $18.5 million; gross profit increased $3.4 million, to $4.4 million; and operating income increased $3.3 million, to $3.5 million.

On a consolidated basis, interest expense for the third quarter 2011 increased $0.4 million, to $2.1 million from the same period in 2010 as a result of the Company's higher average interest rates and higher average debt levels. The third quarter provision for income taxes was based on an effective tax rate of 39.2%, compared to 38.8% in the third quarter 2010.

Next, I'd like to review our 2011 cash flows. For the nine months ended September 30th, 2011, highlights in our cash flows included -- net cash provided by operating activities was $104.5 million, an increase of $38.4 million or 58%, compared to 2010. The increase was primarily attributable to increased deferred taxes and other balance sheet changes, together with higher income from operations.

We invested $120.7 million for rental equipment purchases, compared to $93.4 million for the same period in 2010, partly offset by $21.5 million in proceeds from used rental equipment sales. Property plant and equipment purchases increased $10 million, to $15.2 million in 2011. Net borrowings increased $24 million, from $265.6 million at the end of 2010 to $289.6 million at the end of the third quarter 2011. Dividend payments to shareholders were $16.6 million.

With total debt at quarter end of $289.6 million, the Company had capacity to borrow an additional $165.4 million under its lines of credit. And the ratio of funded debt to the last 12-months' actual adjusted EBITDA was 1.83 to 1.

For 2011, third quarter adjusted EBITDA increased $11.8 million, or 34%, to $46 million, compared to the same period in 2010, with consolidated adjusted EBITDA margin at 44%, compared to 41% in 2010. 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 2011 earnings guidance -- based upon our year-to-date results and the outlook for the fourth quarter, we are increasing our previous 2011 full-year earnings guidance of $1.65 to $1.75 per diluted share to an updated range of $1.84 to $1.89 per diluted share.

Now, 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 $0.8 million, or 4% from a year ago, to $20.1 million and were up approximately 2% from the second quarter of 2011. In our markets outside of California, rental revenues grew by 15% compared to the third quarter of 2010. However, they declined by 13% within the state. California continues to be plagued by fiscal and unemployment rate challenges.

Income from operations for the quarter increased by $0.4 million, or 7%, to $6.1 million from a year ago. The increase in income from operations in 2011, despite the reduction in rental revenues, is the result of considerably higher inventory center costs a year ago primarily for the preparation of a number of larger customized commercial building complexes.

Modular utilization at the end of the third quarter was down slightly, to 67%, from 67.7% at the end of the second quarter of 2011. Yield on equipment on rent increased slightly to 1.98% in the third quarter from 1.96% during the second quarter of 2011.

Division-wide modular first month's rental booking levels for the first 10 months of 2011 were up slightly, to 3%, over the comparable period a year ago. Booking results varied significantly inside and outside of the California market. In California, first month's rental booking levels for the 10-month period were down approximately 16%, while outside of California they were up 27% from a year ago.

A great deal of uncertainty remains in the California modular market due to the continued headwinds of state budget challenges, school district austerity measures, high unemployment and lower levels of commerce. We expect it to remain a very price-competitive environment in all of the modular markets in which we operate, until utilization levels begin to rise across the industry.

Please keep in mind that as our modular rental business returns to growth, it will require limited new capital investment in increase rental revenues. And we would expect to see a disproportionate share of this revenue convert to the pretax line.

Now let me turn our attention to TRS-RenTelco and their results.

TRS-RenTelco's rental revenues for the third quarter increased by $3 million, or 14%, to $24.8 million from a year ago. The healthy pipeline of order opportunities experienced earlier in the year continued through the third quarter of 2011. In fact, we again set a new record on first month's rental booking levels during the third quarter. We're seeing favorable demand both domestically and internationally across a number of end markets including semiconductors and communication products and networks. We also benefitted from improved pricing levels, as yield on equipment on rent increased from 4.36% a year ago to 4.76% during the third quarter of 2011.

Although rental revenues increased 14%, income from operations increased 26%, to $8.2 million. In addition to higher rental revenues, our electronics business also benefitted from higher gross profit on equipment sales and lower depreciation and laboratory costs as a percentage of rental revenues from a year ago.

Sales revenue increased by approximately $1.1 million, and gross profit on sales increased by $0.3 million, compared to the third quarter of 2010. The used equipment sale market comprised of end user and broker sales continues to be very healthy.

Depreciation in laboratory costs as a percentage of rental revenues declined to 39.3% and 13.4% respectively from a year ago. We are continuing to benefit from our disciplined approach to equipment purchases and inventory management in more fully leveraging our existing base of employees and infrastructure.

Finally, ending third quarter utilization declined slightly, to 66.3% from 67.4% in 2010. However, it was up compared to ending second quarter 2011 utilization of 65.4%. Ending third quarter original cost of rental assets increased to $268 million from $248 million a year ago. The approximate $20 million increase in rental assets was made up primarily of communications test equipment assets that have shorter depreciable lives but higher rental rates than general-purpose test equipment. These metrics support how, in spite of utilization declining slightly quarter-over-quarter, rental revenues grew very favorably.

Now let's turn our attention to Adler Tank Rentals. Our tank and box rental division rental revenues increased 60%, to $16.1 million for the quarter from $10 million a year ago. The strong increase in rental revenues was directly related to higher business activity levels and continued expansion of Adler's rental equipment inventory. We are serving a wide variety of market segments including industrial plant, petrochemical, pipeline, oil and gas, waste management, environmental field service, and heavy construction.

Income from operations for the quarter increased 87% from the same period in 2010 to $9.5 million, as the business further leveraged existing employee and facility infrastructure and also benefitted from its base of longer-term rental transactions.

Business activity levels in bookings have continued very favorably through the third quarter of 2011. Period-end utilization for the third quarter 2011 increased to 90.5%, compared to 77.4% a year ago.

Now let me take a moment and update everyone on our organic rental initiatives. First, TRS-Environmental, our environmental test equipment rental business, continued to make favorable progress during the third quarter of 2011. We saw the number of order opportunities increase by 33% from the same period a year ago. We also saw booking levels based on first month's rent increase 40% from the third quarter 2010.

These increases are chiefly due to gaining more traction with customers in a slowly improving marketplace. We believe that when the economy improves further and project work increases, coupled with our country's increasing sensitivity on environmental matters, we can become a significant rental provider in the environmental test equipment industry.

Our portable storage business also continued to make good progress during the quarter. Rental revenues grew by 20% sequentially over the second quarter of 2011 and nearly doubled from the third quarter of 2010. We're working hard at expanding our portable storage business in the California, Texas and Florida markets, and we're continuing to explore smaller fleet acquisition opportunities to accelerate our growth.

We are also continuing to add sales professionals and operations staff in growing the business. Looking forward, we are excited about the momentum and opportunities for growth in the portable storage industry.

Lastly, our Mid-Atlantic modular expansion continues to achieve favorable growth. Rental revenues grew by 25% over the third quarter of 2010. We are seeing improving commercial market activity, especially for larger building complexes, and are continuing to make good progress in capturing new educational classroom rental business with our innovative classroom products designed specifically for these markets. Our outlook for growing the base of rental revenues and profitability levels for the Mid-Atlantic region going forward is very positive.

Although these new initiatives are all relatively small today compared to our legacy rental businesses and Adler Tank Rentals, collectively, between our environmental test equipment, portable storage and Mid-Atlantic initiatives, they are contributing on an annualized basis approximately $13 million in rental revenues based upon a third quarter 2011 rental run rate. This is up from an annualized rental run rate of approximately $11 million from the second quarter of 2011. It should also be noted that these results have been achieved in a very challenging economy.

During the first nine months of 2011, we had a net addition of approximately $82 million in original costs of rental assets. We plan to continue to invest capital for rental equipment purchases and an SG&A to support accelerated growth of these newer rental businesses, and Adler Tank Rentals in particular, as well as for our legacy electronics business and for specific modular regional markets.

It's essential that we take full advantage of various market and competitive dynamics that currently exist in order to attract more customers and create higher rental revenues sooner rather than later, especially in our newer rental businesses. The faster we can ramp the rental revenues of these initiatives and our larger rental divisions, the sooner we can absorb and further leverage these higher SG&A expense levels to produce greater profitability.

Now for some closing remarks. Our results for the first nine months of 2011 reflect very good momentum in our electronic and environmental test equipment, tank and portable storage rental businesses. For our modular rental division outside of California, we've experienced an increase in both rental booking levels and rental revenues for the first 10 months of the year from the same period a year ago. However, the California modular rental market continued to face significant challenges from state budget deficits and high unemployment.

It's important to note that our California K-through-12 public schools modular classroom business is an important income contributor to our overall company results. However, as of the third quarter 2011, it only represented approximately 8% of our total company rental revenues.

Our 2011 third quarter rental revenues of $61 million were our highest quarterly results in the Company's history. This is also our sixth consecutive quarter-over-quarter increase in both rental revenues and net income coming out of the great recession. The 55% increase in EPS for the quarter from a year ago was driven chiefly by higher rental revenues from strong business activity since the beginning of the year, primarily from our tank and electronics rental businesses. We also benefitted from higher profit on sales, especially from Enviroplex; our continued depreciation expense management disciplines in our electronics division, and increased leverage of our existing base of employees and other infrastructure.

As Keith spoke to earlier, based upon our favorable results through the first nine months of 2011 and our current outlook for the fourth quarter, we've elected to raise our full-year EPS guidance range for the year. With McGrath RentCorp's broader platform of rental products in geographies today, it has and will continue to support earnings, if weakness hits one of our business units; and also produce more substantial earnings growth when the macroeconomic picture improves. It's once again clear from this quarter's results that our strategy of creating additional earnings engines through greater product and geographic diversity is working.

And now, Keith and I welcome your questions.

(Operator Instructions) Scott Schneeberger, Oppenheimer.

I'll start with -- well, let's start with Enviroplex. That was a very big quarter for them. It obviously contributed some of the upside in your total company quarter. Could you give us a feel for what you were expecting in your guidance versus what they delivered, so we could kind of connect the dots to get an EPS upside, perhaps -- the contribution from Enviroplex?

Sure. It's a reasonable question, Scott.

Just a couple of things about Enviroplex -- first thing is, the team and leader of that business have done a phenomenal job, in a very difficult economy, of working to reposition the business, attracting some new customers outside of the traditional K-through-12 public schools. Done a great job. You've seen great revenues -- $18.5 million in the third quarter. It's a record third quarter for the business. And based on year-to-date, it will be a record year for the business.

Having said all that, it is a business which can at times be challenging to make a healthy operating profit on. Of all our businesses, it's the lowest EBIT margin business that we're in.

So when you look at the upside, we were optimistic we'd see a good revenue profile from the business. We were a little bit more cautious in what the EBIT contribution would be. And I think the team did a great job in the third quarter with the results they delivered. It contributed by $0.08 compared to a year ago. And we'd factored in a little bit of EBIT from Enviroplex, but we were cautious about what the final number might be.

And the other comment I would make on Enviroplex is -- that is a business where I really recommend investors look at the contribution on a full-year basis. If you look back for Enviroplex in the first and second quarter of this year, you'll see we actually incurred an operating loss. So certainly, the third quarter results are great results, but you have to put them in context and really look on a full-year basis.

Thanks, that's helpful, Keith. So what I infer from that -- because I modeled a bit, too, and it doubled up on my revenues -- but down to the income level, it's tough to decipher. And it was flattish last year on operating income. It sounds like you expected that, plus maybe a little, but not what it delivered. Is that fair?

Yes. I think that's fair. And just to sort of round out the picture -- if you look into the fourth quarter, the contribution from sales from Enviroplex will essentially be immaterial -- there may be a very small amount in there. And if you go back to my earlier comments -- when the revenue contribution is low, given the overhead in that business, we tend to run an operating loss for quarters where the revenue's low. So keep that in mind as you look into the fourth quarter. Really, we weren't sure when those revenues would hit -- if it would be all in the third quarter or the fourth quarter. We got a very large contribution in the third quarter.

Thanks.

While we're looking ahead to fourth quarter, I'd like to switch it to guidance a little bit. Your outperformance was great in third quarter -- congratulations. The increase to your guidance for the full year for EPS was pretty much in line with your outperformance. Thus, looking at the consensus, that's at the high end of your new range if we keep our numbers the same. Could you speak to -- is that conservatism? I realize the comps get tougher, but just how you came to that -- a little bit of the thought process.

Yes. I think the first comment is -- we're delighted with the results year-to-date and delighted with the way the business has performed as we've entered the fourth quarter. When we look at forecasting, we've predicted that there'll be some seasonal softness in our electronics business and also in the Adler business. And we're also forecasting that sales will be lower in the fourth quarter. Clearly, we've discussed the Enviroplex contribution. But just generally, we're taking a more cautious stance on sales.

So we feel great about the business. We're expecting normal seasonality. And that's what gets us to the numbers that we've given in the guidance range. And I would also say, just given the overall macroeconomic conditions, we don't want to be overly aggressive as we come to the final stretch of the year.

That's fair.

Taking it back up a level -- you won't give your guidance for next year until the fourth quarter call. But you have the momentum heading into this year end. Could you speak a little bit to visibility -- what you expect in the next year, how much sight you have into next year right now? Just -- not guidance, but a feel?

Scott, the best way to respond to that is that if you look at our businesses currently -- Adler, needless to say -- you've got to look at each one independently, but Adler is obviously performing extremely well. And depending upon how significant any seasonal downturn is, there are dynamics there that impact revenues in the first part of the year. But they're performing very well. That business -- we're getting equipment now into a variety of regional markets that we haven't been able to over the past year or so. And so we're starting to get a flow of more opportunities that we're booking there.

If you look at our electronics business -- right through today, our pipelines are very strong. Our outlook for next year is cautiously optimistic. We've had a very good run with the business, and that business is typically prone to some cycles. So it really depends on more general economic dynamics, if we really begin coming out of the recession in a much more strong manner. That's good for the business, although we've done very well during a very challenging time because of some of the industry sectors that we have focused on.

The modular business seems to be stabilizing. Utilization's been in a very stable range for the last 12 to 15 months. If you look at the state of California, unemployment's down below 12% from about 12.4% in January. The state in effect, since Jerry Brown took office, will have put about $10 billion to $11 billion of funds into public type projects through June of 2012. That's the projection. So there's a lot of money that's targeted to be coming in for project work that should support additional jobs and tax revenues, et cetera.

And then, of course, the modular business outside of California -- that's growing and favorable. Florida has turned around nicely, it's starting to grow in population again. We're seeing the class size reduction steps various schools are taking to comply with those requirements. Texas is our strongest modular market because of the oil industry, petrochemical industry, and the greater diversity of the Texas market today.

So business by business, they all look quite favorable, except California is still in a period of determination, for lack of better phrasing. And we are hopeful that the right medicine has now been taken. We got a budget in place by the deadline, earlier in June. And things seem to be proceeding in an orderly fashion. And there's more money -- they just sold some more bonds here in the last couple of weeks, of which $1 billion was targeted for school-related work and multiple modernization type projects.

So that kind of rounds out how we look at next year. And of course, as you said, we don't provide that guidance until towards the end of February next year.

Fair enough.

One more for me -- it's kind of a two-part question. Could you address Adler -- you ended the quarter above 90% utilization. I think I read somewhere in the press release, though, that you were happy with the supply you were getting. And obviously you have built up that business and have been able to capture demand.

So the questions herein are -- how is your ability to get supply? And what are you thinking about with regard to CapEx plans? That's less of a number question and more of your propensity to continue to fuel this.

Well, first of all, from a supply standpoint, even though supply has been very tight over the past 12 to 18 months, we have the benefit of Sabre Manufacturing, which is Steve Adler's manufacturing business. We also have developed some new relationships in manufacturing that are producing good-quality products. So we're feeling much more comfortable about the supply side for filling our needs.

And then, if you look at our approach towards capital spending for that business, we're really now trying to build out our established regional markets which have been a bit starved for equipment over the last year or two, as I mentioned earlier. So there's a wide variety and mix of needs in those markets that we're actively pursuing -- everything from pipeline inspections to storm water pollution control, environmental needs, heavy construction projects. So that is an important goal of ours, is to round out our mix of business with the development of these regional markets. So we're going to invest accordingly for that for the business.

In terms of the different oil and gas shale and other energy development needs, we'll certainly be selective on those markets. There's certainly a continuing very good opportunity. And our goal there is to really distribute much more so geographically the equipment for those types of needs.

Great. Thanks for taking on my questions. And congratulations again. Good job.

Thank you.

David Gold, Sidoti & Company.

Couple of questions for you. Wanted to see -- still a little unclear on the outlook on the Enviroplex side. So maybe it would help if you can give a little bit of color as to essentially the setup for the big sale. Was it one large sale? And how did it sort of come about? Presumably, this is something that maybe was in your guidance for the year; it just was a question of timing? Or it wasn't there at all?

David, one thing that I would want to emphasize -- you ask a very good question -- I want to emphasize that Enviroplex and the modular school manufacturing business -- is that typically the third quarter is by far the strongest quarter of the year.

So what you saw with Enviroplex -- there were a number of orders that made up those results -- a couple of large ones in particular, but a number overall -- what you saw was it was a timing issue. You just made [the comment] -- timing -- everything really kind of hit in the third quarter. So where things could've been sometimes spread more towards the end of the second quarter, some [switch] to the fourth, they really executed according to plan in terms of the timing of projects.

So I wouldn't read anything more into that. And as Keith said, very appropriately, look at the full-year numbers, and that tells the whole story. But also would emphasize that we have a very strong leader there who -- when available public monies for public school construction projects have been rather small in sum, he was able to go out and create additional opportunities to leverage the capacity of Enviroplex. So we're very pleased with that. And if the economy gets better over time, hopefully we can even do better than we will do in 2011.

But I don't want to -- we shouldn't read more into the third quarter results there -- look at the whole year.

Right.

David, just [around that] in terms of guidance -- if you look back, we gave a fairly full commentary on guidance when we increased the guidance back in August. And if you look at our comments on an increase in sales revenues, we actually attributed the increase to the Enviroplex business. So it was definitely on our radar, and we communicated it accordingly.

So then, I guess the other side of that is -- did it wind up, Keith, being more profitable than you expected at that moment? Or was it just a bigger sale? So in other words, if we brought up revenue guidance for the anticipated sale, and we're taking guidance, again, so to speak -- that's, I guess, what I'm getting at. I'm just trying to understand where we were there.

Yes, I would say for the full year, it's slightly better than we expected and really where we've seen the strength in the businesses back on the rental side. I mean, we're doing very well with our Adler business, very well with our TRS business.

And the other thing I would point out -- if you look at our segment report, all four parts of the business showed an increase in EBIT year-over-year. It was more modest than the modular business, but not to be overlooked. Modular's EBIT in the third quarter of 2011 is actually above what it was in 2010 and, in the case of TRS and Adler, consistent with the last few quarters, very healthy growth in operating profit.

So we're delighted with Enviroplex. But really, the core rental businesses are performing extremely well, particularly Adler and particularly TRS.

Right.

And then, one other -- just really following up on the guidance question -- essentially, to Scott's earlier comment -- essentially, the high side of your guidance is where consensus is right now for the fourth quarter -- it's $0.42. And if we looked at the third quarter of $0.62 and we assumed that baked in there was Enviroplex of, call it, $0.09 -- even so, that suggests a lot more seasonality than your business has shown in the years past. Right? The drop between [$0.54], let's say, taking out Enviroplex; and the $0.42 that the guidance suggests.

So I guess there, more curious which businesses might you -- what am I missing there, basically? Where could there be more seasonality than I'm thinking right now?

As I said earlier, seasonality, we believe, is a factor in the TRS business and the Adler business. We have a lot more history with TRS. And so we know in that business, once you get around Thanksgiving, you're generally seeing a drop-off in what we term the billing rate over the last five or six weeks of the year. Some years that's more modest than other years -- very hard to call. We take a conservative view as we forecast it.

And then, in the case of Adler, we really have less seasons that we've experienced owning the business. Clearly, it's a newer business. It's outdoor project work. So in certain parts of the country, there can be a slowdown. When that occurs, some users will return tanks to us. So again, hard to calibrate right now -- generally a factor as you get into the latter parts of Q4.

What happened a year ago was we expected seasonality. And if you look at our results, we actually saw growth quarter-to-quarter in rents at both Adler and TRS. But as we mentioned when we reported on Q4 of 2010, that was a surprise to us, a pleasant surprise, and not something we'd bake into a guidance range.

And I guess, just one last one. I know again, we're probably a quarter away from seeing guidance for 2012. But when we think about Enviroplex, and we think about it as a third quarter business, do you have a shot, or would you expect to have the same level of success a year from now? Or do you view the sale as more of a one-off?

Well, again, it's not the sale -- it was from a variety of customers, as Dennis mentioned. Most of that business you'll see recognized, typically, in the third and fourth quarter.

I think it's good to put it in historic context. If you look at the last 10 years with that business, their revenues are typically in a $10 million to $12 million range. There's a couple years we've done better than that, a couple years we've done worse. But more commonly, it's in that $10 million to $12 million range. And it's not a high-profit business for us.

Yes.

What we've seen is the team has done a great job in 2011 of attracting some new business generally with customers that haven't been significant in the past. And they'll make some money this year. And it's a great accomplishment they've made. I think it's a little -- we don't want to bake that level of performance into next year yet, until they have a chance to build up a new order book and demonstrate that they can repeat something close to that. It's premature.

Okay. Thanks.

(Operator Instructions) Joe Box, KeyBanc Capital Markets.

Question for you on the Adler business -- can you just talk a little bit about your strategy for positioning your fleets, maybe capitalize on some of the shale plays that are stronger than others? I guess, for instance, do you have the ability to put assets into maybe the Eagle Ford, the Bakken or the Marcellus Shale; versus, say, into the Haynesville Shale?

Yes. And we're in all those plays today. So it just depends on -- do you pursue more liquids-rich ones? Do you pursue more dry gas ones? I mean, there's just -- and who are the end users? That makes a difference as well, and their financial stability, et cetera. So our goal, from a tactical standpoint, is to be in as broad a geographic climate as we can, and then also with the best companies.

Okay. So you do have a little bit of flexibility to maybe move into some of the stronger plays, versus some of the weaker plays?

Yes. And again, we don't divulge breakdowns between shale regions. But we certainly are very cognizant of stronger versus weaker, et cetera; and liquids-rich versus dryer.

And again, Joe, those assets can be moved around the country if we needed to do that. But obviously, from an economic point of view, it's better if we move assets to a region and they stay in that region and experience ongoing rental opportunities.

Maybe just changing gears a bit -- a question for you on the California education market -- I think it's probably a bit early to make the call that there could be more education spending cuts if the state doesn't meet their revenue targets by the end of the year. But just hypothetically speaking, can you talk to what the potential impact might be if they don't meet some of their revenue targets by the end of the year?

First of all, my latest information, when you look at the tax revenues and you look at the trigger -- they've got triggers if various shortfalls occur. And I think the first trigger is if it's $2 billion short. And if even the first trigger is pulled -- which it could be, potentially -- you won't know till December -- there's really no negative impact for schools, other than perhaps -- I think school bus services is maybe the only negative in there.

So if the first trigger does get pulled, it shouldn't really impact budgets for facility-related budgets to the best of our knowledge. And then, it would really depend on a school-by-school basis as to what impact pulling a second trigger would have.

But right now, the outlook -- they've narrowed the gap. There was quite a shortfall July-August -- that's been narrowed over the last couple of months. They expect the second half of the year, in effect, from January through June, to be a stronger tax revenue window. But actually, everyone feels fairly good, even though I think now they're about $700 million to $800 million behind the tax revenue target. That may be just the way in which they broke down when they expected what revenues [when]. So it may be more of a timing issue is what I'm hearing from our resources.

That's good color. And just to be clear on that -- that first trigger -- does include possibly cutting the school year by one week? And if that is included in the trigger, would there be any impact to you guys if the school week was shortened?

I don't have an answer to that, but that's something I can look up. I wouldn't think so. Everything I'm hearing is that the first trigger has limited impact on schools. And with respect to our business, I would think even if there was one less day, I'm not quite certain how that would impact us negatively.

Great.

Maybe just jumping back to Adler here real quick -- can you just put some color around the long-term contracts that you guys referred to in the press release? Maybe what percentage of fleet is under long-term contracts, what's under spot, and maybe how much upside you see to pricing in the spot market? Thanks.

The way I'd answer that is -- historically, the liquid and solid containment industry has been a day-to-day rental business. Now, even though it's day-to-day, you have rental terms that are anywhere from a couple of weeks to sometimes a year or more.

However, when you get the supply-demand dynamics that are in the market today, and you're making significant investment as we are -- even though we know certain equipment is going to stay in rent for multiple years, we leverage the fact that we're making that capital investment and that we want greater certainty of commitment.

So we have ramped up, especially when it's larger volumes of equipment, that we're not doing those on a day-to-day basis. Because we can command multiyear terms. And it's good business for us. These are not immaterial investments we're making. And we've thus far been successful at really changing historical patterns where people really operated on a day-to-day basis, or the end user could return the equipment at a moment's notice with no penalty.

So that's a function of supply and demand, it's a function of a better rental product, a safer rental product. And so it's worked very favorably for us.

It's good color. That's it for me as well. Thanks.

Thank you. There are no further questions in the queue. I'd like to turn the call back to management for any closing remarks at this time.

I'd like to thank everyone for joining us this afternoon and this evening. We appreciate your interest in the business, and support. And we'll look forward to chatting with everyone again on our Q4 call in mid- to late February 2012. Thanks so much.

Thank you.

Ladies and gentlemen, this concludes the McGrath RentCorp Third Quarter 2011 Conference Call. If you would like to listen to a replay of today's Conference, please dial 303-590-3030, or 1-800-406-7325, and enter the access code of 4477142, followed by the pound sign.

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