McGrath RentCorp (MGRC) 2012 Q1 法說會逐字稿

Welcome to the McGrath RentCorp first-quarter 2012 conference call. At this time all conference participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. This conference is being recorded today, Thursday, May 3, 2012. I would now 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 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 seven days following the call by dialing 1-800-406-7325 for domestic callers and 1-303-590-3030 for international callers. The passcode for the call replay is 4531502. This call is also being broadcast 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 Eastern Time, or 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, 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.

For the first quarter 2012 total revenues increased 8% to $79.8 million (sic - see press release) from $73 million for the same period in 2011. Net income increased 3% to $9.9 million from $9.6 million, and earnings per diluted share were flat at $0.39.

Reviewing the first-quarter results for the Company's Mobile Modular division compared to the first quarter of 2011, total revenues decreased $0.9 million, or 3%, to $28.4 million, primarily due to lower sales revenues, partly offset by higher rental and rental-related services revenues.

Gross profit on rents decreased $0.5 million, or 4%, to $10.5 million, primarily due to a decrease in rental margins to 53% from 55%, partly offset by higher rental revenues. Lower rental margins were a result of $0.5 million higher other direct costs for labor and materials and $0.1 million higher depreciation. Selling and administrative expenses increased $0.7 million, or 9%, to $8.5 million, primarily as a result of the increased investment in our portable storage growth initiative.

The lower gross profit on rents and sales combined with increased selling and administrative expenses resulted in a decrease in operating income of $1.6 million, or 29%, to $4 million.

Finally, average modular rental equipment for the quarter was $517 million, an increase of $20 million. Equipment additions were primarily to support growth in the Mid-Atlantic region and for our portable storage initiative. Average utilization for the first quarter decreased from 66.8% to 66.5%.

Turning next to first-quarter results for the Company's TRS-RenTelco division compared to the first quarter of 2011, total revenues increased $1.5 million, or 5%, to $30.5 million, due to higher rental revenues.

Gross profit on rents increased $1.2 million, or 13%, to $10.9 million. Rental revenues increased $1.4 million, or 6%, and rental margins increased to 47% from 44%, as depreciation as a percentage of rents decreased to 40% from 43%. Selling and administrative expenses increased $0.3 million, or 5%, to $6.7 million, primarily due to increased salary and benefit costs. As a result, operating income increased $0.9 million, or 14%, to $7.4 million.

Finally, average electronics rental equipment at original cost for the quarter was $261 million, an increase of $9 million. Average utilization for the first quarter increased from 65.2% to 65.5%.

Turning next to the first-quarter results for the Company's Adler Tanks division compared to the first quarter of 2011, total revenues increased $5.4 million, or 37%, to $20.1 million, primarily due to higher rental and rental-related services revenues. Gross profits on rents increased $3 million, or 33%, to $12.3 million. Rental revenues increased $4 million, or 33%, and rental margins were flat at 76%, as depreciation as a percentage of rents increased to 16% from 15% and other direct costs decreased to 8% from 9%.

Selling and administrative expenses increased $1.5 million, or 41%, to $5.1 million, primarily due to increased salary and benefit costs and bad debt expense. As a result, operating income increased $2.2 million, or 36%, to $8.2 million.

Finally, average rental equipment for the quarter was $201 million, an increase of $67 million. Average utilization for the first quarter decreased from 86% to 76.5%.

On a consolidated basis, interest expense for the first quarter 2012 increased $0.7 million, or 47%, to $2.2 million from the same period in 2011 as a result of the Company's higher average interest rates and higher average debt levels.

The first-quarter provision for income taxes was based on an effective tax rate of 39.2%, unchanged from the first quarter 2011.

Next, I'd like to review our 2012 cash flows. For the quarter ended March 31, 2012 highlights in our cash flows included net cash provided by operating activities was $35.5 million, an increase of $0.1 million compared to 2011. The increase was primarily attributable to higher income from operations, partly offset by other balance sheet changes. We invested $35 million for rental equipment purchases compared to $29.9 million for the same period in 2011, partly offset by $0.3 million lower proceeds from sales of used rental equipment. Property, plant and equipment purchases decreased $5.1 million to $1.8 million in 2012.

Net borrowings decreased $4.4 million from $296.5 million at the end of 2011 to $292.1 million at the end of the first quarter 2012. Dividend payments to shareholders were $5.7 million.

With total debt at quarter end of $292.1 million, the Company had capacity to borrow an additional $162.9 million under its lines of credit. And the ratio of funded debt to the last 12 months' actual adjusted EBITDA was 1.78 to 1.

For 2012 first-quarter adjusted EBITDA increased $2.5 million, or 7%, to $37 million compared to the same period in 2011, with consolidated adjusted EBITDA margin at 47% for both periods. 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 2012 earnings guidance, our 2012 full-year earnings guidance range remains unchanged at $2.02 to $2.12 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 were relatively flat at $19.9 million from a year ago. In our markets outside of California, rental revenues grew by 15% compared to the first quarter of 2011. However, they declined by 8% within the state. California continues to be plagued by fiscal and unemployment rate challenges.

Income from operations for the quarter decreased by $1.6 million, or 29%, to $4 million from a year ago. However, Modular rental operations gross profit declined only 5%. The higher percentage decrease in income from operations was due primarily to higher SG&A expenses associated with the continued expansion of our Portable Storage rental business and related divisional employee costs.

Modular utilization at the end of the first quarter declined to 65.7% from 66.7% a year ago. Yield on equipment on rent decreased slightly to 1.93% in the first quarter from 1.96% during the fourth quarter of 2011. Division-wide Modular first month's rental booking levels for the first four months of 2012 were down 4% over the same period in 2011. Within California bookings were 25% higher compared to a year ago, but outside of California booking levels were down 21%. We are very pleased to see an increase in California modular business bookings; however, a great deal of uncertainty still remains in the California modular market due to the continuing headwinds of state budget challenges, school district austerity measures, and high unemployment.

Lower bookings outside of California are due primarily to fewer public school modernization projects in the Florida market as compared to 2011. 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 to increase rental revenues and we would expect to see a disproportionate share of this revenue convert to the pre-tax line. More on this subject later.

Now let me turn our attention to TRS-RenTelco and their results. TRS-RenTelco's rental revenues for the first quarter increased by $1.4 million, or 6%, to $23.4 million from a year ago. The quarter started off slowly. However, March was a strong month and that momentum has carried right through April. We are seeing favorable demand both domestically and internationally across a number of end markets, including semiconductors and communication products and networks.

We saw yield on equipment on rent increase to 4.57% during the quarter from 4.48% a year ago. This was due primarily to a greater mix of communications equipment and, to a lesser extent, market pricing. Communications test equipment assets have shorter depreciable lives but higher rental rates than general purpose test equipment. Although rental revenues increased 6%, income from operations increased 14% to $7.4 million.

In addition to higher rental revenues our electronics business also benefited from lower depreciation and SG&A costs as a percentage of rental revenues, as well as slightly higher gross profit on equipment sales from a year ago. Depreciation and direct SG&A costs as a percentage of rental revenues declined to 39.7% and 17.6%, respectively, from 42.6% and 18.9% a year ago.

Gross profit on equipment sales rose by $0.1 million. The used equipment sale market, comprised of end user and broker sales, continues to be very healthy.

Ending first-quarter utilization decreased slightly to 65.1% from 66.1% in 2011 and continues to be in a very healthy range. We are continuing to benefit from our disciplined approach to equipment purchases and inventory management, conservative depreciable equipment lines, and more fully leveraging our existing base of employees and infrastructure.

Now let's turn our attention to Adler Tank Rentals. Our tank and box division rental revenues increased 33% to $16.2 million for the quarter from $12.2 million a year ago. The healthy increase in rental revenues was achieved despite lower business activity levels in Northeastern gas fields. Adler's other regional operations, including the Southeast, Midwest, and West, all experienced favorable year-over-year growth. There is 34% more equipment by dollar cost on rent from a year ago. 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 36% from the same period in 2011 to $8.2 million.

Period end utilization for the first quarter 2012 decreased to 73% from 89% a year ago and 80% at the end of the fourth quarter. The decline in period-end utilization is primarily related to lower business activity levels in the Marcellus gas shale region and, to a lesser degree, weather-related seasonality in the Midwest and East Coast markets. We are looking to redeploy this rental equipment within the Northeastern region or in other Adler regional markets as demand warrants.

Overall division-wide business activity levels have remained favorable. Booking levels during the first-quarter of 2012, based upon first-month's rent or billing rate, was 16% higher than for the same period a year ago. This trend is continuing in the second quarter. Adler Tank Rentals is well positioned to continue its rental revenue and earnings growth during 2012.

Now let me take a moment and update everyone on our portable storage and environmental test equipment businesses. Mobile Modular Portable Storage continued to make good progress during the quarter, as it did for all of 2011. Rental revenues doubled from the same period a year ago. We're working hard at expanding our Portable Storage business in the California, Texas, and Florida markets and we will continue to explore smaller fleet acquisition opportunities to accelerate our growth. We'll also continue 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.

TRS-Environmental's rental revenues increased 35% for the first quarter of 2012 over the same period a year ago. We also saw favorable year-over-year increases in both the number of order opportunities and new customers. However, in spite of healthy top-line growth we continued to be challenged in making our environmental test equipment business profitable. This stems primarily from the short-term nature of its rental terms.

During 2012 we'll be doing a deeper dive in our environmental test equipment business, including its cost structure, rental term trends, competitive landscape, and opportunity outlook. Our goal is to create an environmental test equipment rental business that can be a meaningful contributor to the Company's earnings.

Now for a few comments on SG&A. SG&A expenses were up 15% for the first quarter of 2012 compared to a year ago, and 2% higher compared to the fourth quarter of 2011. The year-over-year increase relates primarily to employee, IT software and hardware, and facilities infrastructure costs.

A significant portion of the employee cost increase is related to new employees to support the growth of our portable storage and tank and box rental businesses. The majority of the increase in IT costs relates to bringing our new financial accounting system on line late in 2011 and its related amortization expense. Finally, the higher facility costs are driven chiefly by new property rentals to support the expansion of Mobile Modular Portable Storage and Adler Tank Rentals geographic footprints.

Please know that we are very focused on managing our overhead costs tightly to ensure that we are meeting our annual SG&A expense-to-rental revenue target ratios which are a component of senior management's compensation program.

Now for a few select closing remarks. To summarize our first-quarter results, our electronics and tank and box rental businesses have solid quarter-over-quarter increases in both rental revenues and income from operations. However, our modular business had flat rental revenues and a decrease in both gross profit and income from operations.

Our modular rental business continues to face challenges from the California economy. However, I believe California has seen the worst of the Great Recession and is gradually recovering. This isn't visible in our latest quarterly results for modulars, but there are a growing number of positive indicators, both factual and anecdotally, that I believe are a good signal.

In my annual letter to shareholders for 2012 I outlined these indicators. To be balanced, I also listed those items that are negatively impacting the California economy. I welcome you to read these and other comments in this annual communication to the investment community. If you are a shareholder, the letter was mailed along with the 2012 proxy statement. It can also be found on the Investor Relations page of our website at mgrc.com.

How quickly and how far the California economy recovers are difficult questions to answer with certainty at this time. It will take many years for a full recovery, but in the meantime, don't discount the potential upside earnings opportunity for our modular rental business on its way back.

Please consider the following items. We are the leading provider of modular building rentals in California for both educational and commercial needs. We have a great brand name and large customer followings. We have a legacy suite of well maintained rental assets at a significantly lower cost basis than what new equipment costs.

Since the Company's inception in 1979, California modular utilization, based on the original cost of rental assets, historically averaged in the low-to-mid 80% range through 2007. Between 2008 and 2011 average utilization declined to the mid-60% range. Utilization has stayed in the mid-60% range over the past 15 months. And for each 1% increase in utilization, even at today's lower market prices, it adds approximately $0.02 per share of EPS.

Earlier I spoke to the decline in Adler Tank Rentals period-end utilization to 73% from 89% a year ago. I want to emphasize that our tank and box rental business continues to perform well. To provide you with some perspective on the lower utilization level, we had $153 million of equipment on rent at the end of the first quarter of 2012. That compares to our high water mark of $157 million of equipment on rent at the end of the third quarter of 2011, when our utilization was 91%. In effect, at the end of the first quarter 2012 we had only $4 million less of equipment on rent compared to our peak utilization level.

We've continued to build equipment over the past six months to support business activity levels and building out inventory necessary for Adler Tank Rentals regional locations across the country. When equipment is returned from either gas field or oil field projects, the number of units returned, even on a single order, can be large. Once returned, over the next few quarters the equipment either gets put back on rent in the existing market or it's transferred to other Adler markets to support their rental needs. So we're looking to redeploy this idle rental equipment and are pleased with the number of potential opportunities we are experiencing.

It's also important to keep in mind that Adler annual utilization for the three-year period from 2009 to 2011 was 66%, 76%, and 86%, respectively. We are still learning what normal utilization levels will look like over time for our tank and box rental business.

Finally, although EPS was flat at $0.39 per share for the quarter from a year ago, income from operations was up 7%. The flat EPS level is due to higher interest expense as well as a higher diluted share count. The impact for both of these items was approximately $0.03 per share. The higher interest expense from a year ago is two thirds related to a higher average interest rate for the quarter due to our new fixed debt agreement entered into in April of 2011, and one third related to a higher debt balance.

The higher share count for the quarter from a year ago is primarily due to an increase in basic shares from the exercise of equity grants and less so due to an increase of diluted in-the-money shares relative to their equity grant strike price. Looking forward, keep in mind that beginning in 2010 we modified our equity compensation program to significantly lower the dilutive impact to earnings of equity grants. We'll begin to see the impact of these program changes over time as pre-2010 equity grants phase out and the new program grants replace them. I invite you to read more on the particulars of these changes under the Long-Term Incentive Compensation section of this year's proxy.

And now Keith and I welcome your questions.

Thank you, sir. (Operator Instructions) David Gold; Sidoti.

Couple of questions for you. First, on Adler, curious if you give a sense -- obviously you said on the sequential decline it was split between lower gas fields versus seasonality. It's hard for us, so it may be hard for you, but maybe you can help by way of giving a breakdown, if you can, or [essential] breakdown, as to how much of the decline you'd attribute to seasonality versus the lower gas. I guess just being the first quarter that we're seeing a sequential decline, it's tough to -- basically we can't comp it to anything. What's your sense of that?

I sense the majority is related to the gas field reduction in activity. Yes, I don't think there's any question about that. But there's certainly some degree of seasonality involved as well.

Got you. I guess the other side of that is basically how you think about timeline for a return to increase in utilization. I guess the seasonal piece of it, right, we'd think would go away. So then it's just a matter of redeploying on the gas side. But what's your outlook for that?

Well, in terms of the -- if you look at the opportunity environment today and business activity levels, it's very, very healthy. So when you look at seasonality, typically that's -- and this was somewhat of a mild winter to begin with. So there's always some seasonality. But it looks like the spring is opening up very nicely in terms of opportunities. And we feel very good about the fact that we'll get this equipment redeployed. How much of it gets redeployed back into the gas fields in the Northeast is another question, but we certainly have strong opportunity levels in virtually all of our other market segments that can absorb that equipment over the next quarter or two.

So we're quite confident about the level of business activity and opportunities we're seeing, even opportunities to redeploy a certain amount of that equipment right back into the Northeast gas fields.

Got you. So I guess on that basis, the other question I guess I just have there is how much of it do you expect to redeploy by repositioning, or sending out to other uses versus just repositioning geographically?

Well, I can tell you at this point we having moved any equipment yet. We are looking first for the opportunities that are regionally located so we don't have to incur any more transportation costs than is necessary. But that's really hard to say. It's a timing issue. And utilization can move very significantly up when you look at a quarter-end number. It just depends on how quickly the equipment gets on rent within the quarter that would impact the average utilization.

But I think what's most important about this is that there's no short of opportunities to redeploy the equipment. It's just the matter of how quickly those hit within the second quarter and then where utilization will be at at the end of the quarter, if you're using that as a point-in-time snapshot.

So it's possible that it's back to growth or to increasing by the end of the second quarter?

Well, I would be very surprised if our utilization levels are not higher by the end of the second quarter.

Higher than the average for the first or higher for the quarter end?

Higher for both.

Okay. All right. And then just one other -- in the letter that you mentioned, which had a ton of information, so we appreciate that, one of the things that you spoke about was succession planning. And was curious if there was -- particularly, I mean, I note you mentioned Joe as the next CEO. Curious if there was a timeline in place for what you're thinking, or is it more positioning just to make sure that we have a deep bench?

The latter. And I personally -- I'm an advocate of succession planning shouldn't be a secret to the investment community. It's important that --

You're the anti-Buffett.

Well, I'm a big fan of Warren Buffett. Maybe that's one area that he could have used an upgrade in. But at the end of the day we take it very seriously here. I'm the large shareholder, as most people know. And the future of the Company matters great to me, as it does to all shareholders. Our board and management has acted very proactively over time here. And this was a good time, being my 30th year in the Company to make certain people aware that we've got a plan going forward, although there's no immediate plans for myself to retire. We've got a lot of ground to cover between now and then. But the great thing is is that we've got really exceptional leaders in the wings, and Joe Hanna leads that group.

Perfect. I appreciate it. Thanks, Dennis.

Scott Schneeberger; Oppenheimer.

First on Modular, within California obviously you're making progress, each quarter reporting a lesser decline year over year in the rental revenue. How should we be thinking -- you made some comments about the condition of California -- how should we be thinking about it from a seasonality perspective, though? Is it reasonable to expect that that will continue to improve as we get into the summer months? Just, Dennis, curious how you're viewing it.

Well, business activity levels for the first four months are very positive. But, again, remember that's off low bases from last year. However, the tone feels different. When you chat with the sales people everybody feels busier, even in the more competitive sizes in single-wides, et cetera. It's just hard to calibrate. I'm very cautious about prognosticating on any level about the California market other than what I -- there's factual items, there's anecdotal items. And the same time we've got to see it translate into numbers. And until we start seeing it translate into numbers, it's really hard to calibrate where we'll be, et cetera.

But it does feel considerably better today than it did last year, than the year before that, et cetera. So it's a matter of just how much traction we're able to get. I mean, things are getting better. I don't think there's any question about that. There's new housing developments. There's more activity in the general commercial side of business. There's more infrastructure projects. And we've been starting to see some additional school work that we hadn't seen in the past couple of years, so.

Thanks. One more on modular -- I don't know if I got the numbers right, but you were talking, I believe, about bookings in California and outside of California. And it sounded like they were down outside of Florida because -- or down outside of California [in] Florida. Did I get that right and can you elaborate what the dynamic is there?

Absolutely. In 2011 we saw a very good uptick in Florida early on in the year in modernization projects, bookings, et cetera. We haven't seen that same dynamic this year in the Florida market. So if you look at the decrease outside of California, it's primarily related to that early business we got last year and it not being in place this year to date.

However, that being said, in the Florida market student population is anticipated to be up about anywhere from 15,000 to 30,000 new students for this school year, which is a very nice increase. Will that translate into additional rentals? I don't know. But that's certainly a very good sign for that market. And it seems to me that there are some dynamics now where with that increase in school population that districts that are uncertain as to where that flow of student population is going to go. We could get some benefit from that as the spring and summer progresses. But to answer your primary question, it was strictly related to that early, first-four-month bookings business that we got last year in modernization work that didn't repeat itself this year.

And just, Dennis, help us along a little bit more with bookings. Should that then concern us that your growth outside of California that's been very attractive in the Modular segment for the last two quarters, because you didn't see a lot of booking activity in Florida in the first four months of this year relative to a strong last year -- how should we think about that? Might the growth slow outside of California now in bookings -- not in bookings, in utilization?

To be right up front with you, our Mid-Atlantic is doing very well. Texas is a strong market, although they're a little bit behind in the first four months year over year. But I think if you look at the Mid-Atlantic and you look at Texas which are -- it's a large part of our outside-of-California business, I feel very good about their prospects, as I do about Florida over the long run. So we'll just have to see. I mean, really you're just talking about really one -- within the Florida market the modernization piece not really having materialized this year as it did last year.

But overall things are getting better in Florida. Texas continues to be a very strong market for us. And the Mid-Atlantic is growing favorably. So, yes, I think it's more of a dynamic in the numbers last year/this year, but has less to do with kind of true market health.

Okay. And just wrapping that up, you're about flat year over year now on modular revenue, rental revenue. Would we see a step back because of these developments, or are we just talking about this piece of modernization in Florida is just a piece and you're seeing more activity in California but you don't want to -- you guys are typically conservative -- you don't want to commit to anything yet? And I realize I'm kind of pushing you toward the guidance you haven't provided. But are we going to see dynamic change on a comparison or on some of these things you're talking about that we should be aware of, moving from this flat year over year in the first quarter to the second quarter? Are we seeing a big directional move one way or the other, or is it not that meaningful, what we've talked about just now?

Personally, at this juncture I think it's too early in the year to tell and I just don't think it's materially to the negative side from what we saw in the decline outside of California. I just don't. The markets don't feel like the first four months numbers showed, at least on the decreased year over year. But we'll see how the second quarter progresses. We'll have more information to share later in the summer.

Thanks. That's helpful on that. I have a couple Adler questions, but that's a good transition to last year in the first quarter you did -- it's a seasonally soft quarter, but you did fine. You put in the press release that you were not going to increase your guidance because of the California market and some uncertainty there. But you felt really good about the business. No such commentary this year. You just maintained; it was a solid quarter. What will it take to see your guidance increase from here and just overall progress from here? What are the sticking points that you think would have you most concerned and what are the opportunity points that could take that higher?

Well, I would say primarily it would be Adler and, A, how quickly we get this underutilized equipment on rent. That's A. Because in the rental business you may get it on rent at some point, but the sooner you do the more income you're going to have. But that's primarily the area. And we've also, with Adler, we've expanded the geographic footprint some. And we have some new markets. Depends how quickly we're up to speed in some of these markets, a very low overhead model to be able to move into a new area. But I'm feeling very good about that business, but needless to say, with utilization being down and our process of redeploying these assets, it's too early. But we'll know a lot more by our Q2 call in August with respect -- but it really probably holds mostly in Adler.

In California I just kind of put to the side for a moment. We've got to see things in the numbers there. So we're going to keep a very conservative outlook there. And electronics, it's a machine. They're performing very, very well and they had a fantastic year last year. Those will be tough comparatives. But they seem to be on the right track.

That sounds good. So really the swing factor being Adler there was my takeaway. And I posed the question to you as, is that where the potential upside is. Just want to check, are you concerned about downside or is this more of, hey, we have to wait and see what happens and really thinking more of the upside?

I mean, I feel -- sitting here on May 3, 2012, looking at the whole year, if you were to ask me how I feel about our guidance at this juncture, I think it's very solid. At the same time, we have many moving parts to our story and to our earnings, including Enviroplex, the timing on those orders, et cetera, and of course the utilization of the Adler assets. So just a lot of moving parts, too early in the year. We'll know a lot more, as I said, later on.

All right, thanks. That's helpful, Dennis. I want to throw in a couple more, if I could. You've been adding a lot of capacity to Adler and a bit of a step down here in utilization. But as you pointed out on quite a larger base year over year. What are the CapEx plans in Adler right now?

Well, Adler we continued to build robustly through the first quarter. And our plan is fairly frontloaded. But we need to have those assets on the ground to react to opportunities in all the markets in which we operate. We've pulled back on the new equipment throttle for obvious reasons because we have more of the 21K product on the ground. And we're still building certain boxes as well as certain specialty tank equipment that isn't the standard 21K.

So the good news for us is that we can get equipment fairly readily from a variety of manufacturers currently; that bottleneck has changed over the past six months. So we're in a very good position, but we've pulled back on the throttle. And don't be surprised if you start seeing some pay-down in debt more significantly in the quarters ahead. And at the same time, if we need to add more significantly to Adler's asset level, that's a good thing. But we've really taken a wait-and-see approach, which is prudent at this juncture.

Okay. And you answered my next question. If you do end up slowing down from this wait-and-see approach, debt reduction is the first priority thereafter.

Yes. And, again, in the grand scheme of things it's at a fairly pace, because we still put a lot of capital into our electronics business. We're still funding asset investments in portable storage in the Mid-Atlantic region. I really think it's a matter of the pacing of the Adler spend. And as Dennis mentioned, we're pretty well -- we have a lot of equipment today and we added some more equipment in the first quarter. So we really -- we frontloaded Adler's CapEx. And we'll see how the deployment goes over the weeks and months ahead.

Thanks. And finally -- and thanks for allowing me so many -- what are the transferrable -- the transfer costs of moving -- Dennis you had said earlier you hadn't moved any fleet. I think you said there's still some opportunity you see in the Northeast in oil and gas and you're looking into that, I guess, before you move. Could you just help us think about -- and other end markets as well -- how you think about these decisions and as granular as you can get about quantity of underutilized assets? And what are you thinking of as their next move? Thanks.

Scott, just to give you a couple of very, very rough ways to think about this, the cost of moving a tank is in the neighborhood of $2.00 per mile. So just to give you, in very broad terms, if you took as an example moving tanks from, let's say, the Northeast to the Gulf Coast, order of magnitude that might cost you around $3,000, which again, in very simple terms, is about three months of rent.

So when we look at big moves between regions or over long distances, you're really looking at how many months do I think this product might sit on the ground. And what's the likelihood that it's a temporary lull in a local market versus a longer-term change that would cause you to move equipment between regions. But just to give you some parameters at a very high level as to the kind of things that we have to trade off. And, again, as you know, the tanks are fully usable in any part of the country.

All right, Keith. That's real helpful and I guess just bringing it close to home. I think when you guys were going around the horn, every geographic region that you categorized sounded like it was performing better year over year. I wasn't sure what metric, if you could clarify that. And then really it was just Northeast where you have the excess capacity. Can you single out, oh, utilization is X in the Northeast versus Y elsewhere and just give us a feel of how geographically isolated that might be?

The difficulty -- well, first of all we don't break it out like that for the investment community as a general -- just for competitive reasons. At the same time, if you kind of looked at the Northeast, it isn't the Northeast that's -- it's just really the gas fields within the Northeast. Our business along the Eastern seaboard has been very strong. And so it's really this one market segment in this one geography. So otherwise I'm very, very pleased and enthusiastic about how we're performing in the way of the opportunity flow and bookings, et cetera.

And, Scott, keep in mind something we talked about on the last call. Some of this shift -- with the low price of natural gas we're seeing drillers shift to liquids-rich gas and more oil field plays. And really what we're working through here is some of that churn in terms of rigs being moved, new opportunities being started up. And some of that's a multi-month process.

Fair enough. I guess, well, I'm not sure how to ask it, but what -- with the shales in the Northeast -- well, you said you didn't want to get more granular, so I guess I don't have the question there. All right, I'll step aside there. I'll circle back. Thanks, guys.

(Operator Instructions) Andrew Gadlin; CJS Securities.

Most of my questions on Adler have been answered. The first question I'd asked is on TRS. Some of your competitors have talked about some weakness in some end markets. It doesn't seem to have been a problem for TRS. Could you talk about that a bit?

Which particular end markets?

Aerospace and defense.

Yes. Well, certainly we're not as heavily invested in the aerospace and defense market as perhaps some of our larger competitors, although that certainly is a portion of our business. But we're not -- I mean, our business activity levels have been pretty solid. But, again, our mix of business is less so in that particular market segment than some others.

Just remind us, how much of the TRS business is in Europe?

We really -- it's miniscule.

On Mobile Modular, you've in the past been investing in some of these growth markets. I'm just curious, is your utilization in some of these other markets higher or lower than in California?

Higher.

Yes, higher. Yes, if you look at the Mid-Atlantic and you look at the assets that were built over the past year for the modular business, the great majority of those went to the Mid-Atlantic.

Yes. And the thing to keep in mind is the scale of those operations. There's still a very big fleet in the California market. So it can be slightly below the corporate average utilization. You can have higher utilization in other parts of the country but, particularly in the Mid-Atlantic, it's just a smaller base of equipment.

So you'll still be adding equipment there, I take it?

Well, that's certainly our plan.

Yes.

If you look at -- our internal financial plan is that we will be this year, yes.

And is there similar math that you can share about moving modular equipment from, let's say, California to one of these markets in terms of the cost?

Typically you're not moving equipment between states, although sometimes there could be an opportunity to do that. But for the most part there are different building codes. It's an expensive proposition, more so than on the tanks side in terms of recovery of rental dollars. But we haven't done much of that historically, although there can be opportunities where you may move some here and there. But it would be on a much, much reduced level than with our tank business, primarily because of building codes. The modular product in California is a very different product and very overpriced for the Texas market. The Florida product is very -- it's priced for the Florida market but not priced, really, for the Mid-Atlantic, so.

Understood. Thank you very much.

Joe Box; KeyBanc Capital Markets.

Just wanted to follow up real quick on Scott's booking question. Can you maybe just remind us on what the typical lag period is between when you generate a booking and then when you actually generate the revenue? And also, how much volatility do you typically see in your modular bookings?

I don't think there's an exact answer to translate between bookings and when you actually recognize the revenue. I'll give you an example like with schools. You could have school bookings in the first quarter that could either go on rent at the end of June or they could go on rent at the end of August. You could have other bookings that are going to go out on rent in two days. So it's really quite a mix there and it's just really hard to [look forward.]

By the way, the other piece, too, is that in the meantime you may have equipment coming back that's offsetting what's going out. And we have much less visibility on returns than we do on what's going in. So I'm just saying it's a tough science. There's a lot of moving pieces.

And, Joe, there is some volatility over the last few years, given the economic pressures on our customers. Plans can be in place. They can get changed. With more uncertainty we've seen some customers act much later than they typically would. And so there's a much shorter fuse between a booking and an order being placed in the field. But it's volatile. These are uncertain economic times still and projects are often discussed but not acted upon. And then sometimes when they're acted upon it can be a shorter fuse. So it moves around a lot.

Thanks. That's helpful. And then just a quick question for you SG&A at Mobile Modular. If you go back and you look at Modular's SG&A as a percentage of sales, it's averaged about 20% from 2008 to 2010. More recently it's trended up into the mid-to-high 20% range. I certainly understand and appreciate the opportunity in Portage Storage, but I guess I'm just curious what type of things are you guys doing to really keep SG&A in check until you either get scale in this business or you start to see a recovery in Mobile Modular?

Yes, Joe. The one thing I would say, and we've obviously done similar analysis ourselves -- we try to be very disciplined with SG&A across all parts of the business. We've obviously looked at this very hard in the modular business, given the downturn. But if you look at that business, the thing to keep in mind is rental revenue is lower due to two primary reasons. What we get paid when we put a unit on rent, or the rental rate, is lower than we've seen in many years, and that reflects market conditions. And our utilization of the fleet is lower. So when we look at the work that needs to get done in that business in terms of engaging with customers, working with them on projects, securing new business, there's still a lot of work to get done. We just don't get paid as much as we did in the past. And that hurts that metric that you've referred to.

So the core modular business the metrics aren't where we would like. The metrics are not where they've been historically, but we still try to be extremely careful with the spend. And then, as you rightly observed and Dennis pointed out, in addition to all of that, we've been growing our Mobile Modular Portable Storage initiative and that is SG&A intensive. It actually has a different economic profile, in that we have more cost in the SG&A arena, but less cost on the direct cost of operations, or the maintenance of the unit. So it inherently has a bit of a different profile. And even as that business matures it will have a higher SG&A as a percentage of rents.

Joe, I might add that our modular business runs lean. Needless to say, with the downfall in revenues and earnings over the past four or five years, it runs very lean. But it has to have a minimum staffing in various areas to be able to capture business, et cetera. But know that we have pruned that division very carefully and that we're very wise about where we spend those dollars. So you can be assured of that.

And that's completely fair. I guess what I'm just really trying to understand, then, is as you look at SG&A as a percent going forward within this business, is it peaking out or could we see additional upside based on all the different factors that you guys just laid out?

Joe, the way I'd answer that is it probably has more of a -- it has a function of two items. How quickly do we start utilizing the existing assets that are in the modular fleet? How much uplift -- we're going to be getting revenue there, as I said in my prepared comments. Put a unit on rent that's been sitting idle for the last three years, and the SG&A piece, if nothing changes on those expenses, it just looks -- the ratios will be better without us spending obviously any capital, et cetera. So there's a lot of lift there to change that metric SG&A as a percentage of rent.

But the other piece is, and it's important, it's really a function of how much more growth we see in new markets for portable storage. Because new markets mean additional SG&A, more peo- -- we need additional people. You have additional -- you have office space. You have additional facility rentals, et cetera. So those are dynamics there to where if we're not growing as quickly with portable storage in terms of new locations and we're really more fully leveraging the SG&A that's already in the numbers, then that's an item that can really improve those ratios as well. So it's really both of those dynamics.

Okay. That's helpful. Last question for you and then I'll turn it over. Can you maybe just talk to what the overall supply looks like for the tank market? Are you seeing your competitors start to become as prudent as you are in terms of maybe scaling back in terms of what they're willing to spend on the CapEx front? Or are they basically just utilizing what might be available build slots from you guys stepping away and starting to grow their fleet?

That's a very difficult question to answer, from the standpoint that we were really engaged in building dramatically more than our competitors starting a couple years ago. And we've only recently kind of pulled back on that throttle. So I would say there's no doubt in my mind nobody has built the level of equipment that we have over the last couple of years. And that's been to our benefit as we took advantage of opportunity as our competitors were much more conservative.

It's a difficult question. There's other pieces to it, including the aging of our competitors' fleet. How much of those assets over time are just going to turn based upon them being retired? So there's a lot of moving pieces to that. I don't think -- without question the activity level with manufacturers certainly is lower today than it was last quarter, and definitely from a year ago. So I think the boom in the manufacturing side I think has pulled back. And I think that's a good thing, because what you don't want to do is just see people building without any foresight towards supply and demand going forward.

And that's exactly what I was concerned with. So, okay, great, that's good color. That's all I have. Thank you.

DeForest Hinman; Walthausen & Company.

I had to get off the call for a few minutes, so I apologize if this has been asked. But the company Poseidon Concepts, they have a different type of tank and they've recently raised some capital as well. I guess my first question is, are they a direct competitor with a steel tank?

They would be in certain large gas field reservoir applications, yes.

Okay. And they've recently announced that they're coming to the market with some smaller tanks as well. Do our steel tanks complement those tanks or would their growth potentially displace a job that a steel tank would be placed on?

Well, as I indicated, it's a competitive product on certain gas field applications, especially when you -- they have three sizes, to the best of my knowledge, at least they more recently have three sizes that equals X amount of tanks in size. It's still fairly large. The way I'd characterize that product, it's fairly much a single use product for gas fields for the most part. I'm not familiar with any other new products that they have in the mix now, so. But from what I've been familiar with, it's really very gas and oil field shale focused and wouldn't have application within an industrial environment, a refinery, other types of manufacturing plants or for the other variety of tank applications. That's to the best of my knowledge.

Okay, thank you.

Scott Schneeberger; Oppenheimer.

I figured out a way that I can ask that last question I was hoping to. You had mentioned last quarter that oil and gas as an end market vertical within Adler represented 35%. Could you just update us for this quarter?

Yes. I would just say right now I don't think we've run that data, to be very honest with you. So I couldn't give you an update on that. Needless to say, if most of the underutilized equipment is related to gas field work, that percentage has gone down.

Okay. Thanks for taking the follow-up.

Thank you. At this time there are no further questions in the queue. You may continue with any closing remarks.

Thank you. Thank you all for joining us on our Q1 2012 call today. We have our Annual Shareholders Meeting here in Livermore this coming June 6th, a Wednesday, beginning at 2 p.m. We'd love to have as many of the listeners today come to Livermore and be able to experience the facility here. We have Adler products. We have Portable Storage products and Modular products. And we're giving tours that day, as well as doing the formal Annual Shareholders Meeting. So if you can make it that would be great.

And thank you all for your continued support. Have a good evening.

Ladies and gentlemen, this concludes the McGrath Rentcorp Q1 2012 financial results conference call. Thank you for your participation. You may now disconnect.