McGrath RentCorp (MGRC) 2012 Q2 法說會逐字稿

Welcome to the McGrath RentCorp Second Quarter 2012 conference call. At this time all participants are in a listen only mode. (Operator Instructions). This conference is being recorded today, Tuesday, July 31, 2012. I would now like to turn the conference over to Geoff 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 4549057. This call is also being broadcast live via the Internet and will be available for replay. We encourage you to visit the Investor Relations section of the Company's website at mgrc.com. Our press release was sent out today at approximately 4.05 pm 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 second quarter 2012 total revenues increased 5% to $83.8 million from $79.5 million for the same period in 2011. Net income decreased 8% to $10.5 million from $11.4 million, and earnings per diluted share decreased 9% to $0.42 from $0.46.

Reviewing the second-quarter results for the Company's Mobile Modular division compared to the second quarter of 2011, total revenues decreased $2.1 million, or 7%, to $27.8 million, primarily due to lower sales and rental revenues, partly offset by higher rental-related services revenues.

Gross profit on rents decreased $0.1 million to $10.3 million, primarily due to lower rental revenues, partly offset by an increase in rental margins to 53% from 52%. Higher rental margins were a result of $0.3 million lower other direct costs for labor and materials, partly offset by $0.1 million higher depreciation. Selling and administrative expenses increased $0.5 million, or 6%, to $8.3 million, primarily as a result of higher salary and benefit costs, and higher facility rent expense primarily related to the expansion of our portable storage growth initiative.

The lower gross profit on sales, rental-related services, and rental revenues, combined with increased selling and administrative expenses resulted in a decrease in operating income of $1.6 million, or 29%, to $2.5 million.

Finally, average modular rental equipment for the quarter was $521 million, an increase of $21 million. Equipment additions were primarily to support growth in the Mid-Atlantic region and for our portable storage initiative. Average utilization for the second quarter decreased from 67.4% to 65.8%.

Turning next to second-quarter results for the Company's TRS-RenTelco division compared to the second quarter of 2011, total revenues decreased $0.5 million, or 2%, to $30.6 million, due to lower sales revenues, partly offset by higher rental revenues.

Gross profit on rents increased $1.6 million, or 16%, to $12.2 million. Rental revenues increased $1.3 million, or 6%, and rental margins increased to 49% from 45%, as depreciation as a percentage of rents decreased to 38% from 40%. Selling and administrative expenses increased $0.2 million, or 3%, to $6.4 million, primarily due to increased salary and benefit costs. As a result, operating income increased $0.5 million, or 6%, to $8.4 million.

Finally, average electronics rental equipment at original cost for the quarter was $266 million, an increase of $10 million. Average utilization for the second quarter increased from 65.6% to 66%.

Turning next to second-quarter results for the Company's Adler Tanks division compared to the second quarter of 2011, total revenues increased $4 million, or 24%, to $20.7 million, due to higher rental, rental-related services, and sales revenues. Gross profit on rents increased $0.8 million, or 7%, to $11.5 million. Rental revenues increased $2.2 million, or 16%, and rental margins decreased to 72%, from 78% as depreciation as a percentage of rents increased to 18% from 14% and other direct costs as a percentage of rents increased to 10% from 8%.

Selling and administrative expenses increased $1.6 million, or 43%, to $5.3 million, primarily due to higher bad debt expense, higher allocated corporate expenses, and higher salary and benefit costs. As a result, operating income decreased $0.4 million, or 6%, to $7.4 million.

Finally, average rental equipment for the quarter was $218 million, an increase of $70 million. Average utilization for the first quarter decreased from 85.8% to 70.3%.

On a consolidated basis, interest expense for the second quarter 2012 increased $0.4 million, or 22%, to $2.4 million from the same period in 2011 as a result of the Company's higher average debt levels, higher average interest rates.

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

Next, I'd like to review our 2012 cash flows. For the six months ended June 30, 2012 highlights in our cash flows included net cash provided by operating activities was $65.3 million, a decrease of $6.1 million compared to 2011. The decrease was primarily attributable to the payment of a $6.1 million income tax receivable in 2001 that did not recur in 2012. We invested $73.3 million for rental equipment purchases compared to $71.2 million for the same period in 2011, partly offset by $1.5 million lower proceeds from sales of used rental equipment. Property, plant and equipment purchases decreased $1.9 million to $8.9 million in 2012.

Net borrowings increased $11.5 million from $296.5 million at the end of 2011 to $308 million at the end of the second quarter 2012. Dividend payments to shareholders were $11.5 million.

With total debt at quarter end of $308 million, the Company had capacity to borrow an additional $222 million under its lines of credit. And the ratio of funded debt to the last 12 months' actual adjusted EBITDA was 1.88 to 1.

For 2012 second-quarter adjusted EBITDA increased $0.2 million, or 1%, to $38.5 million compared to the same period in 2011, with consolidated adjusted EBITDA margin at 46% compared to 48% in 2011. 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, we have revised our previous 2012 full-year earnings guidance range of $2.02 to $2.12 to an updated range of $1.70 to $1.85 per diluted share. For the full-year 2012 we expect approximately 4% to 6% growth in rental operations revenues over 2011, and gross profit from sales to be approximately 10% to 15% lower than 2011.

Rental equipment depreciation expense is expected to increase to between $65 million and $66 million driven by rental fleet growth. Selling and administrative costs are expected to increase to between $84 million and $86 million to support business growth and continued investment in Adler Tanks and our portable storage initiative.

Full-year interest expense is forecasted to be approximately $9 million. We expect the 2012 effective tax rate to be 39.2% and the diluted share count to be approximately 25.2 million shares.

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 $19.5 million from a year ago. In our markets outside of California, rental revenues grew by 8% compared to the second quarter of 2011. However, they declined by 7% within the state. California continues to be plagued by fiscal and unemployment rate challenges.

Income from operations for the quarter decreased by $1.5 million, or 29%, to $3.7 million from a year ago. However, Modular rental operations gross profit declined only 3%. 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, as well as lower gross profit on Modular equipment sales.

Modular utilization at the end of the second quarter declined slightly to 66% from 68% a year ago. Yield on equipment on rent decreased to 1.9% in the second quarter from 1.96% during the second quarter of 2011. Division-wide Modular first month's rental booking levels for the second quarter of 2012 were up 33% over the same period in 2011. This was our highest booking quarter since before the Great Recession. Within California bookings were 38% higher, while outside of California bookings rose 30%. Although we are pleased to see favorable year-over-year increases both inside and outside of the California market, with the continuing general economic challenges that most states are facing, including budget shortfalls, school district austerity measures, and high unemployment, these results should be viewed only as directionally positive and no more.

Our Modular business will need multiple consecutive quarters of outgoing equipment rentals exceeding equipment returns in order to signal a meaningful positive change in market conditions. 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.

Now let me turn our attention to TRS-RenTelco and their results. TRS-RenTelco's rental revenues for the second quarter increased by $1.3 million, or 6%, to $24.9 million from a year ago. We are seeing favorable demand both domestically and internationally across a number of end markets, including semiconductors and communication products and networks.

We saw our yield on equipment on rent increase to 4.72% during the quarter from 4.68% 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. Divisional income from operations increased 6%, or $0.5 million, to $8.4 million. Although gross profit on equipment sales was down by $0.8 million due to $1.9 million lower equipment sales revenues, income from operations benefited from lower depreciation, laboratory, and direct SG&A costs as a percentage of rental revenues from a year ago. Depreciation and direct SG&A costs as a percentage of rental revenues declined to 37.5% and 16.1% respectively from 40.1% and 17% a year ago.

Ending second-quarter utilization increased slightly to 65.7% from 65.4% in 2011 and continues to be in a very healthy range. In producing these strong operating metrics, we continue to benefit from our disciplined approach to equipment purchases and inventory management, conservative depreciable equipment lives, and our highly skilled, efficiency-driven, and tenured workforce.

Now let's turn our attention to Adler Tank Rentals. Our tank and box division rental revenues increased a disappointing 16% to $16 million for the quarter from $13.8 million a year ago. This increase was much lower than I had projected and was directly related to continuing weakness in the production of dry natural gas in Northeastern gas field. This is reflected in our 21,000 gallon frac tank utilization level of 57% within the Marcellus gas shale region during the second quarter as compared to 78% outside of the region.

To date, we have elected to move limited quantities of this frac tank inventory to other regions due to a favorable number of rental opportunities for this equipment within the Greater Northeast region, coupled with our desire to minimize long distance transportation expenses in the redeployment of these rental assets.

Although division-wide rental revenues had a double digit increase from a year ago, utilization at quarter-end dropped to 68% from 86% at the end of the second quarter of 2011. This is assumption of favorable business activity in all of Adler's geographic markets outside of the Marcellus dry gas plays, and our need to continue to build new rental equipment to meet this demand despite the equipment off-rent in the Marcellus.

With these current market dynamics, despite the significant reduction in division-wide utilization over the past few quarters, rental revenues have remained relatively flat over the same time frame. This is further reflected in having approximately the same level of equipment on rent at the end of the second quarter of 2012 at $153 million as compared to $157 million at the end of the third quarter of 2011, our highest ending quarter utilization to date at 91%.

The mix of year-over-year rental revenues for the second quarter of 2012 compared to the same period in 2011 reflects fracking related rentals decreasing from approximately 35% to 23%, and as mentioned earlier, with a 16% increase in overall rental revenues. Adler is serving a wide variety of market segments including the industrial plant, petrochemical, pipeline, oil and gas, waste management, environmental field service, and heavy construction.

Gross profit increased 10% to $12.7 million. The lower percentage increase in gross profit compared to rental revenue is primarily related to higher depreciation and inventory center costs as a percentage of rental revenues. However, divisional income from operations for the quarter decreased by 6% from a year ago to $7.4 million. The reduction in income from operations was due to 43% higher SG&A expenses for the quarter compared to the same period in 2011.

The higher SG&A expenses are chiefly due to increased bad debt expense, a higher allocation of corporate overhead expense as Adler's total revenues continue to grow at a faster rate than our other rental businesses, and employee and facility-related expenses associated with growing our tank and box rental business.

Overall division-wide business activity levels have remained favorable. Booking levels during the second-quarter of 2012, based upon first-month's rent or billing rate, were 16% higher than for the same period a year ago, and was Adler's highest quarterly booking level ever. We believe the anticipated shortfall in our results for Adler in 2012 is a near-term dynamic that will resolve itself in the quarter's ahead.

I also want to emphasize that we are just in the early stages of ramping the Adler geographic footprint and customer following. I have every confidence that we will continue to grow favorably in the future.

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 in building its customer following and rental bookings. Rental revenues grew 60% for the quarter from a year ago. We're working hard at expanding our Portable Storage business in the California, Texas, and Florida markets and we are continuing to explore smaller fleet acquisition opportunities to accelerate our growth. We're beginning to realize critical mass in our install base of customers in some of the markets in which we operate. And we have ample room to grow rental revenues within the current cost structure. Looking forward, we continue to believe that we have an excellent opportunity to become a meaningful player in the portable storage rental industry.

I also wanted to share that in early July we made the decision to exit from the environmental test equipment rental business either through a sale of the business or winding it down over the next few quarters. Creating a profitable business model with the potential to become a meaningful contributor to the overall company earnings was elusive. This is primarily related to the extremely short average rental term of less than one month that is the norm for the environmental test equipment industry today.

We are committed to rental businesses in our portfolio that can produce healthy margins and can be scaled materially over time.

Now for a few comments on SG&A. SG&A expenses rose 14% to $21.2 million over the same quarter a year ago, and were down 1% from the first quarter of 2012. The year-over-year increase relates primarily to employee, IT software and hardware, and facilities infrastructure costs.

A significant portion of the employee costs relates 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 on 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 and to a lesser degree amortization of improvement costs of owned properties to support the expansion of Mobile Modular Portable Storage and Adler Tank Rentals' geographic footprints.

We continue to be very focused our overhead costs tightly to ensure that we meet or are below our annual SG&A targets.

Now for a few select closing remarks on Adler Tank Rentals. First, it's important to acknowledge that my timing outlook for redeployment of our off-rent Marcellus gas field rental assets was substantially off the mark. The logistics and dynamics associated with the rigs moving from dry gas to wet gas or oil shale plays, the drilling process, and then the positioning of frac tanks for the completions work is complex and time-consuming.

The good news is that when you look at the collective Adler offered in regions today there is no shortage of wet gas and oil shale play, industrial, environmental, and construction-related opportunities to redeploy this equipment. And this doesn't include various new domestic markets that Adler has either just entered or will be entering over the next 12 to 24 months.

We believe Adler has a long runway for domestic growth and we are in the very early stages of ramping the business. As I've learned over my 30 years in the rental industry with McGrath RentCorp, the cardinal sin in building a rental business is not having enough assets on the ground when demand hits. Granted, in a more perfect world we wouldn't have as high a percentage of frac tanks off-rent in one region of the country as we do today in the Marcellus, however, the multiyear continuous rental streams from the majority of this equipment over the past few years has served our earnings growth and return on capital of these assets very favorably.

Although a dry gas glut exists today, especially in the Northeastern US, and the natural gas market has a history of volatility, I believe the Marcellus will be producing natural gas in large quantities for many, many decades to come.

Finally, it's important to keep in mind that Adler annual utilization for the three-year period from 2009 and 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. Utilization rates are likely not to be in as narrow a range as our other rental businesses until we reach a much more mature state of growth.

In summary, our tank and box rental business continues to perform well except for the significantly lower business activity in the dry gas areas of the Marcellus. We believe that our current offering inventory of 21K frac tanks in this region will be favorably absorbed into both existing and new geographic markets in the quarters ahead. Our electronics businesses continue to produce very strong results and our Modular rental business has stabilized with favorable booking levels during the quarter.

Our reduction in guidance range is primarily a result of lower than projected Adler rental revenues in the Northeast to date and our reduced outlook of this region for the remainder of 2012. And now Keith and I welcome your questions.

Thank you very much. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions). Our first question does come from the line of Joe Box with KeyBanc Capital Markets.

Good afternoon. So, between the Modular and the TRS business alone, it looks like the product sales were actually done by about $4 million versus last year. How should we read into the change in product sales? Is it a function of just timing given it's lumpy, or is it a function of just a broader change in the Modular or electronics business?

Sure. The comment I would make is the sales part of the business is hard to forecast and can be fairly volatile year-to-year. So, if you look back over the last couple of years you will see 2011 was actually a pretty strong year for sales. This year it's turning out to be lighter. It's been lighter in the first half and our best assessment at this point in the year is those trends will continue for the balance of the year. So, again, it can move around year to year.

Our primary focus, as you know, is getting our assets on rent and running the rental business. The sales are really a byproduct of those rental activities. And this looks like it's going to be a softer year in terms of the gross profit contribution.

Understood. That's good color, Keith. Dennis, I'm hoping you can help me just shore up all the different moving pieces in the modular business. For California, it looks like bookings are improving yet revenues are still relatively weak. Based on the pipeline that you guys have right now, can you just help us reconcile growth or top line revenue over the next couple of quarters.

Yes. First of all, when you look at bookings during the second quarter of 2012, X amount of that is related to school work. And some of it also additional larger complex work that really has not hit the rental cycle yet. So a lot of that equipment will ship over the summer and will go on rent. And we may during the third quarter get anywhere from one to two months worth of rental revenue. But you wouldn't see the true run rate for the business until the fourth quarter of 2012.

So, there's no question that in California in particular business activity loads have picked up. In fact, we've had our third -- we've had three consecutive months of over 200K and first month's rent in bookings which we haven't experienced since before the Great Recession and July may be along on the same track. So, there's some -- that feels very good. We haven't seen that type of pace in the business for some time. But, again, it's only three to four months and it's not a tell tale. But, again, know that a lot of the bookings that have occurred from April forward, that equipment would ship -- most of that equipment is not shipping until the third quarter.

And then we'll just have to really gauge that against what are the returns, because that's the other piece of things that we don't control. So, and if you look at the other regions of the country, we grew very favorably in Texas during the second quarter in terms of bookings. A lot of that equipment, too, won't be going out until the third quarter. A lot of good petrochemical work there as well as some school work. Florida is down a little bit, but we are expecting based upon the pipeline to have more activity over the summer and hopefully hit their goal numbers, their internal goal numbers.

And the Mid-Atlantic is up slightly. Good booking levels and good momentum it looks like going into the summer and the second half of the year. So that's the state of things. It certainly is a better, if you compare this to last year at his juncture, the business is in a considerably better position in terms of business activity, and it's just not one month, so that's the good news. Hopefully it will continue and returns will be lighter than last year.

Okay. And then on the Florida market, I think last quarter you talked about a large modernization project in Florida. What quarter did that pretty much fall in? Was that mostly in Q2 or was it also in 3Q? I'm just trying to understand (multiple speakers).

I think we talked last year, or in the first quarter about various modernization probably coming off-rent, and we had actually gotten more of those bookings last year in the first quarter. So, those are the dynamics there. And we are expecting kind of later activity in Florida this year just due to what we're hearing from school districts. So I think there's still some booking level to go here in August. And obviously there have been obviously some additional bookings in July. So we'll just have to see how that all nets out relative to returns as well.

Although, I will tell that the momentum feels better there in the second quarter than it did in the first quarter.

Okay. Great. And maybe just changing gears to Adler, one, can you talk about the markets that you either just entered or plan to enter over the next 12 to 18 months? And, two, can you talk about the decline in Adler's yield? I guess I would have thought with the 21,000 frac tanks going to be softening up a bit, and boxes potentially becoming a bigger component, I would have actually expected a little bit of a yield benefit.

So, you know, are you seeing any sort of price degradation or is the mix shift not that significant?

You know, the mix shift has stayed pretty consistent. We have a higher percentage of frac tanks today than we did when we bought the business; it's well north of 50%. So, the dynamic with frac tanks is that they have typically longer -- they're higher utilized and they have lower rental rates. And with boxes and specialty type, even specialty type tanks, they have shorter lives but higher -- I should say shorter rental terms but higher rental rates.

So, the mix is pretty consistent and if you look at the dynamics of the market place, pricing has been very solid. The only place where pricing may be weak at all is in the Marcellus. And that's on some of the -- and that's on a customer-by-customer basis. But elsewhere our rates have held up very nicely. Adler is a wonderful product. And all things being equal, you know, people love to have that product. And we haven't really seen any pricing issues in any of the markets other than, like I said, some of the excess inventory dynamics within the Marcellus.

And, Joe, to be clear, the big driver in yield for Adler year-over-year was utilization, the significant drop in utilization.

Okay, great. Thanks guys. One last question and then I'll hop back in queue. 2Q was a pretty strong quarter for Enviroplex. And 3Q last year was extremely strong. Can you just tell us what's baked into your new guidance for Enviroplex over the next quarter?

Yes. The comment I would make is the team at Enviroplex has done a phenomenal job of securing business opportunities in what is really still a very tough challenged market. And I think you're right to say last year they had a great year in terms of top line and actually did a very nice job delivering a solid bottom line. I think if we look at this year and look at the balance of year and what we're assuming in the guidance I think there will still be a healthy contribution in terms of top line, but I think the profit profile may be more challenged. And it's just the mix of projects, the market conditions we're seeing.

So, if we look at it year-over-year in terms of the profit contribution for the full year that we're expecting it's going to be lower than last year is our current thinking. And that's reflected in the guidance.

Okay. And was there any sort of full [ford] into 2Q? How should we think about it over the next quarter because typically you don't get too much business in Q2?

Yes. Really it's just timing of when projects are shipped to customers and we recognize revenue. You can get some starting in Q2. Generally Q3 is the bigger quarter. And then you may have some other projects fall into Q4. So, it's not uncommon to have some projects recognized in Q2 as we just did this year. But, Q3 is generally a bigger quarter for that business. And we would expect that this year.

All right, guys. I'll turn it over. Thank you.

And our next question does come from the line of David Gold with Sidoti & Company.

Good afternoon. So a few questions for you. First, can you give some insider color on the shift in, or the reduction in guidance? Essentially, you know, obviously second quarter was soft and Adler has been a little soft, but the change is a little bigger than I might have expected. So I'm just curious if you can give some color around that and sort of what the big things that have changed are.

David, I'd tell you two things. It's a change in outlook for the Northeast region of the Adler business. And to a much lesser extent a lower contribution in terms of sales gross profit. So, when we look at the Adler business, and Dennis gave a lot of color in the prepared remarks, when we look at what we've achieved year-to-date in the Northeast versus what we would have expected, we're behind what we planned. And when we look at the trends and the outlook for the balance of the year -- that part of the business, that region, will fall far short of what we'd expected earlier in the year. And so that's really the dominant item in changing the guidance range.

And then I'd say the secondary issue, and I touched on it in response to Joe Box's question, but the sales gross profit that we're expecting for the whole business, the outlook for that for the year is lower than what we'd expected earlier in the year.

David, I might also add that in rental business like ours there's a dynamic. If you miss early in the year on rental revenues in the rental stream, or in building your base in revenues, it's very tough to make that up each month that goes by that you don't have that. So you may end up getting all the equipment on rent that you wanted to for the year, but it's how soon you do it within the year, because otherwise you just don't have the earning power over the remainder of the year, so.

Sure. Sure. Fair. Okay. And then on Marcellus, is there a way that you guys could put some -- and you give a utilization number, but some other metrics around that as to maybe how much of the Adler business is revenue wise maybe a year ago was spending for Marcellus?

We don't break out by region how much business we're doing for competitive purposes. Obviously we gave the metric of 35% last year of being gas or gas and oil shale play related versus 23% now today. I think what's important to note in this dynamic is that this is one region of the country in one end market. And although it's significant for us in terms of where we would have liked rental revenues to be for the second quarter, this is not an issue with, you know, this is one area. The rest of the business is performing very well and we'll get this equipment redeployed. It's just taking us longer than we had anticipated to do so.

We're also trying to be prudent in not moving equipment sooner than we need to and not incur the expense, you know, transportation expense if we can get it redeployed in either, within the Northeast region or within regions that are more adjacent to it.

Right. Right. And actually I think last quarter you spoke about the high transportation costs of sort of shifting it around, or shifting around these tanks. I'm curious, I guess at what point, how much time do you give for sort of recovery, redeployment in the same general area before you say, you know what, rather than buy it starts to make sense economically to shift -- to transport the tanks?

Well first of all we have moved some equipment. So just be clear on that because you want to hedge your bets and we've got -- and this is for orders that we had in other regions, including the southern region and Texas, etc. So, we've already moved some.

And we've incurred those costs even in the second quarter.

Right. The other dynamic is that, you know, when you have a pipeline of opportunities, and if we didn't have a pipeline today we would already have moved quite a bit more. But, we've got a pipeline of opportunities that are a timing issue where we're looking at it each month and saying, okay, has that come to fruition, is it likely to occur, etc? So we're constantly analyzing the pipeline against not only the timing on that within the region, but also, too, what else is happening in other regions.

Because, rather than build equipment for another region, even though we continue to do that to date on some of those 21K frac, it makes much more sense to get it out of region if it's a long-term contract, etc. And we don't see as much occurring within the Marcellus.

So, this is a continuum of monitoring it weekly, and like I said, we've already moved some. We'll probably, without question, move some additional units. But the more the more we can do locally within the existing markets, the better.

David Gold. Got you. One last, if I can, then I'll let you off. It sounds like on the sales contribution side you have essentially to the extent that reduces guidance, it sounds like that is coming out of Enviroplex sort of year-to-year. I guess correct me if I'm wrong, but then B, it sounds like that's not as much an operational problem, it's more a sort of pricing or tough environment for pricing issue?

Well first I would say, David, Enviroplex is part of it, but when we look at equipment sales related to Modulars and also TRS, we're still, we've seen a tough first half to the year. And I think when we look at the balance of the year I don't think it's going to be as good as it was last year. And we've reduced our expectations there. So, it's partly what's the market demand in terms of demand for used equipment; and in the case of Modulars we sell some new equipment.

That's really -- we can only react to the market opportunity that's out there. And it's very -- it moves year to year. We had a very strong year in 2011, up significantly from 2010. You know, 2012 may be somewhere between the two.

I might add, David, in our electronics business, the flip side of not doing as many sales, especially if you look at these margins we're creating on depreciation as a percentage of ret. The more fully utilized equipment that you have that continues to rent, those are wonderful metrics. And I just soon as see sales decrease and keep renting the same equipment so we don't have to buy new equipment to support those rental needs.

So, there's kind of a double-edged sword to the electronics business. And as long as we're keeping the inventory fresh I'd just as soon try to run as much fully depreciated equipment as we can for as long as we can.

Yes. And I would agree with your comment, David, for the Enviroplex business and that, as a reminder, that is purely new equipment being sold directly from that factory. It's a tough pricing environment. It has been and continues to be.

David Gold. Got you. Okay, thank you both.

And our next question comes from the line of Scott Schneeberger with Oppenheimer.

Thanks. Good afternoon. Could you guys speak to -- it sounds, Dennis, I think caught you a little off guard how much of a slowdown you had in Adler in the Northeast and the challenge of redeployment and making that decision. Could you speak to the month-by-month-by-month in the quarter of what you saw April, contrasting April, to May, to June? Thank you.

Scott, are you saying just in terms of the amount of activity booking wise, or the health of the region?

Maybe in both. Kind of an all encompassing question. But, yes, in covering both please.

Okay. Well what we've had is we've had actually a very healthy pipeline for some time in the greater Marcellus area. And a lot of it is timing. And there wasn't as much that went out as soon as we thought it would. And we have X amount of projects that we thought would go out in the second quarter that didn't that are now targeted for the third quarter or later. And at the same time you have equipment coming off rent in normal fashion because those projects are finishing. So, and then coupled with all that, I think there's 35% fewer rigs in the Marcellus today than there were a year ago. And those rigs are migrating to other either wet plays within the Marcellus or wet plays or oil shale plays in other parts of the country.

And it takes time to have all those logistics play out and to be able to be in a position to re-rent that equipment. Also, too, in some of those regions there we don't have the same customer contact, etc, and we've got to create the business. But overall if you look at the pipeline of opportunity, not only within the Northeast but if you look at Texas, if you look at other parts of the country for us, it's very favorable.

I'm not very concerned with being able to redeploy this equipment over the next few quarters. And when you're a growing business like Adler is and you're early in your life, you want to make certain you have ample equipment to meet market demand, especially spot demand that hits pretty quickly.

So, we're in a very good position to have that equipment utilized and to be adding to the fleet over time here.

Okay. And I've noticed that purchase of rental equipment for the company increased year-over-year. And you had mentioned on last quarter's call that you were going to work to slow down the spend. And I presume it's predominantly in Adler for both years. It is a matter of this is going to continue -- is it something you can stop on a dime, or how long out are your contracts or purchase orders? Thanks.

We can typically stop things very quickly. But the equipment we're adding as you're building out this national fleet for Adler, it's not 21K that are standard product. It's double wall tanks. It's weir tanks. It's mix tanks. Also our box inventory. We do watering boxes and other types of debris boxes. So, there's a variety of equipment other than standard frac tanks, even in the Bakken region, those require anterior manifold tanks, which is a different product than an external manifold tank.

So, it's a variety of specialty equipment coupled with box inventory, etc. And, again, because the geographic opportunity for Adler is so significant in building out the business that even though we may have underutilized in 21Ks currently, etc, that really when you look at the long-term rollout here and the needs of the business, it isn't anything that we're losing sleep over.

Okay. I know you don't provide guidance on CapEx, but how should we think about that going forward? Will it be higher in year 2012 versus '11, just on needs in other regions outside of the Northeast?

Yes, Scott, just to try and be helpful, if you look at the company's total equipment purchases, back in 2010 it was $123 million. If you look last year it was $155 million. Last year was obviously a big year for the business and a big year for Adler. So far this year we're at about $73 million year-to-date, so on a pace quite similar to last year.

At this point I would expect the second half of the year, it will be a lower level of CapEx, predominately because we'll be spending less on Adler given the utilization of the fleet. So I would guess when you get to the end of 2012 the total number is probably going to look more like 2010 than 2011, so probably closer to $123 million than $155 million.

But some of that CapEx, particularly for our electronics business, it's just ongoing replenishment of equipment in the pool, and ongoing turnover of the technology. So, that number can move around a bit, but that's how I'd characterize it. I think we'll be lower than last year and closer to the 2010 number.

Okay. Thanks. And then on storage containers, can you just speak to -- it sounded pretty upbeat in the press release that you're getting some nice penetration in a bunch of markets. Could you speak to, one, CapEx, and two, more importantly, how you are doing in those markets and how broadly, how geographically broad you are now? Thanks.

Sure. On the CapEx side we continue to put more capital into that business. You know, it's still a smaller scale business compared to our other activities. So, for that business, even spanning a handful of millions of dollars in a three to six month period, that's a pretty big number for that business. But we have ample opportunity to continue feeding capital into that business as we grow our branches. And we are continuing to do that.

But it's not a huge driver of the overall corporate CapEx number.

And then I would add in terms of the markets that we've made very good progress in growing the top line of that business and really getting smarter about managing the costs associated with it. In fact, in a couple of our markets we've reached profitability. And overall as a business unit we just got over profitability, went to profitability this quarter.

I'm not saying that we may not have some ups and downs here over the next couple of quarters, but it's a good sign. And know that we've accomplished all of this growth, really the great majority of it through the heart of the recession. And as we have picked up momentum here coming out of the recession we feel very, very good about the business. We have a wonderfully capable leader of the business in Kristina VanTrease and she's a very, very dynamic leader and we are really looking forward to the continued growth of that business unit.

Okay. Thanks for all the color, guys.

(Operator Instructions). And our next question does come from the line of Andrew Gadlin with CJS Securities.

Hi. Good afternoon. On some of the demand that you're seeing within Adler and in the box business, can you talk about what industry that's within?

The box business is really a variety of industries, everything from superfund cleanup sites to general debris, or I should say petrochemical plants when you have soil that needs to be excavated and taken to an appropriate landfill, etc, because of a contamination, etc. So it's a pretty broad end market of users.

You gave a number earlier that 23% of revenues were in fracking. I assume that's this most recent quarter versus 35% a year ago?

That is correct. If you look at the total mix of rental revenues where they were generated from, the main dynamic there is the fact of what's related to really the E&C fracking world.

Just applying that percentage to the revenues at Adler in the quarter, it kind of tells you that fracking is down on the order of 20%. The other businesses are up on the order of 40%. So, what's driving 40% growth, if that number is right?

Well, you got to also understand that 40 -- that the tank business, it's not just boxes but the tanks are deployed to other than E&C. So the tanks are used primarily in the other areas of industrial waste cleaning, petrochemical plants, turnarounds that's used for dewatering of construction sites, environmental type remediation. So those are -- if you look at the frac tank product, those are the big markets for that product.

And regionally, outside of the Northeast for the rest of the business we've seen good growth.

And so are you seeing that growth from increased demand or just from rolling out more equipment into the field?

The -- I don't think there's any question we're taking market share. If you look at inventory levels in the rest of the country I think we're still building equipment to serve markets. Now standard 21Ks we aren't because we have plenty of those and we're either going to redeploy them in the Northeast, as I said earlier, or we're going to ship additional amounts to other areas.

So, business is healthy other than the one region of the country and the one market segment.

And then on the Modular business, you used to break out some of the other growthier markets there in terms of the growth you were seeing there. Do you have that number?

Are you talking about what I had in my prepared remarks?

I may have missed it. What was the growth outside of California?

The growth outside of California, let me just go to my-

There were a couple of newer markets in the past few years, North Carolina, Florida.

8% for the markets outside of California and a decline of 7% within the state.

That's on rental revenue.

On rental revenues. Yes.

And so as we look at year-over-year flat revenue, does it seem like the inflection point? Or do you think that's a ways away?

You know, having been in, it's really different by market. So, Texas had a very strong second quarter this year over last year. I mean, very, very strong, and it's really driven by the oil and gas industry plus some additional school work, etc. So it's really market-by-market.

We're very reserved in our comments, no different than my prepared remarks about we have to be very measured. This is one quarter and what we need are multiple consecutive quarters where we have outgoing equipment exceeding returns. And that's when we're going to know that we're in some kind of a trend line and there's really been an overall change to the market in terms of moving the numbers up, i.e. utilization in particular. That will be your first tell-tale once utilization starts climbing.

Okay. Thank you very much.

And our next question does come from the line of John Krulock with Bluefin Investment Management.

Hey guys. So my question was, it's related to what Scott asked in Adler, but I know bookings was up good sequentially, and I'm just wondering kind of what you're seeing as far as quote activity picking up related to natural gas going higher. I think it ended -- right now it's at $3.20. I think the second quarter average was like $2.25.

Right.

But can you kind of -- a little bit more visibility into that and then is that more of, I know when you're talking about your opportunity in the Northeast region and you're mentioning your pipeline, how your pipeline is large, is that stuff that is kind of irrespective of price or..? Just trying to figure out how this is going to roll up in a few quarters.

Well, as you know, every E&P company has different dynamics, whether or not they were hedging. And they've got futures contracts at certain pricing. Other ones are held by lease where they've got to start drilling within a certain window or they're going to lose their lease rights.

And, of course, the price is right, on a percentage basis high, but still at a depressed price level. So everybody's got a different circumstance and even my -- I was surprised by how much activity there might be in the Marcellus.

Also, X amount of that pipeline, as you might imagine, is for wet gas within portions of the Marcellus. So, we don't have a breakdown project-by-project that I have in front of me. Our sales force would be much more closer to that. But I can tell you it's a variety of mix of dynamics that each E&P firms faces. And, again not the least of which also is the movement of rigs within the Marcellus from dry to wet gas.

Okay. Thanks. But so have you seen kind of a pickup in quote related activity as natural gas has -- the price has risen in the last couple of months? Is there a correlation or is it...?

I wouldn't say that there is a definitive move on that, although any time the rice of natural gas has gone up it's a good thing, and especially from the dynamics in the Marcellus. So, I'll be conservative and say I'm not seeing a direct correlation; at the same time, there is likely some of that that is occurring with people also betting on the count that is' going to continue to rise.

You know, that market tends to self-correct pretty quickly.

Still a lot in storage.

Yes, still a lot in storage. So, you know, we had a pretty light winter this past winter, but anyway there's all kinds of variables that impact that. But if nothing else going from $2.25 to $3.25 in the MBtu pricing, that's a good guy.

Okay. Great. Thanks guys.

And our next question does come from the line of Carson Yost with Yost Capital.

Hi there. I thought you guys actually did a really good job with Adler despite all these people on the call taking about it compared to what we see here in Fort Worth and the Barnett. That was pretty darn good, so I say congrats. I guess the question that I have and I wanted to ask you all about is what are you seeing in your markets with the large concept Poseidon type concept frac tanks, number one. Is there a secular shift away from traditional frac tanks?

And number two, just looking at the number of tanks that these guys are building, my back of the envelope shows these guys are kind of adding 30% to 40% capacity to the market this year alone. And, anyway, just open for your thoughts and good job for what you did.

Thank you. Poseidon, I'll say, there's the Poseidon product and there are also some additional products similar to that modular tank product. So, they're going to be a certain part of the market. I don't think there's any question about it. YOU have to have the right topography to use that product. You have to have the clear space to do it.

And it's certainly a part of the rental environment and we've been aware of it for some time now. And it's not applicable in all applications. The other thing I might add is that it doesn't meet the needs of mix tanks or other weir type tanks for the affluent coming out of the wells, etc.

So there's always opportunity to rent tanks even in those environments that serve other needs on a drill pad. But, again, viable product. We know it's a competitive product and to date we've been fortunate that we haven't really seen it displace any of our existing product. Perhaps our opportunity pipeline would be more full if that product wasn't in the market place, but, it is. But it doesn't seem to be something we're running into too often.

And last question, with respect to that. Why not -- if you can't beat them, why not join them? Any thoughts about an Adler lookalike because the paybacks are phenomenal?

You know, it's like anything else with oil and gas. It's always ebb and flow and there's obviously peak markets and there's good times and bad times, especially in the E&P world. And the way we manage our rental business is we want assets that when the next downturn occurs in E&P we can redeploy those assets into other markets.

When we're buying a 20-year asset we want that product to be able to serve many, many different end markets over its lifetime due to ups and downs in the E&P world.

And the other product is not really amenable to any other application, to the best of my knowledge, other than the fracking world. And even within that, the storage of water for the initial frac work.

So, needless to say we have opportunity to do that and we've had opportunity to date to build that product or rent that product. And it hasn't been our desire to do so because there are a lot of people that are easily producing product in that market, different designs, different products. And what I wouldn't want to do is be stuck with assets in a down market that I couldn't redeploy.

Thank you.

And our next question is a follow up question from the line of Joe Box with KeyBanc Capital Markets.

Just one quick follow up, Keith. Are you guys expecting a write-off with the planned divestiture or wind down of your environmental business? And if so, is that included in your guidance?

Yes. At this point, and we're really in the early innings of looking at how that business will wind down. But at this point the guidance assumes neither a gain nor a loss on the winding down of that part of the business. Obviously if that was to change either positively or negatively it might have a small impact. I would emphasize it's a small part of the business.

If you look at the fact we have $1 billion worth of equipment at original cost on our balance sheet, the environmental test equipment portion of that is less than 1% of our asset pool. And so as we unwind it I don't think it's going to be a large impact, but we'll know a lot more over the next couple of months.

And at this time there are no further questions. I'd like to turn the call back over to management for any closing comments.

Well thank you all for joining us this afternoon and this evening for our Q2 call. We look forward to chatting with you again on our Q3 call which will be in early November. Thanks so much.

Thank you. Ladies and gentlemen, that will conclude the conference for today. We do thank you for your participation. You may now disconnect your lines at this time.