McGrath RentCorp (MGRC) 2012 Q3 法說會逐字稿

Welcome to the McGrath RentCorp third-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. (Operator Instructions) This conference is being recorded today, Thursday, the 1st of November, 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. Representatives on the call today from McGrath RentCorp are Dennis Kakures, President and CEO; and Keith Pratt, Senior Vice President and CFO.

Please note that this call is being recorded and will be available for telephone replay for up to 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 4568266. 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 pm Eastern Time, or 1.05 pm 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 third quarter 2012, total revenues decreased 5% to $99.4 million from $104.9 million for the same period in 2011. Net income decreased 19% to $12.5 million from $15.4 million. And earnings per diluted share decreased 19% to $0.50 from $0.62.

Reviewing the third-quarter results for the Company's Mobile Modular division compared to the third quarter of 2011, total revenues decreased $2.3 million, or 6%, to $33 million, primarily due to lower sales and rental revenues, partly offset by higher rental-related services revenues.

Gross profit on rents decreased $0.9 million to $9.8 million, primarily due to lower rental margins of 49% compared with 54% in 2011 and lower rental revenues. Lower rental margins were a result of $0.8 million higher other direct costs for labor and materials. Selling and administrative expenses increased 1% to $8.5 million.

The lower gross profit on rental and sales revenues, partly offset by higher gross profit on rental-related services revenues, combined with increased selling and administrative expenses, resulted in a decrease in operating income of $1.5 million, or 24%, to $4.6 million.

Finally, average modular rental equipment for the quarter was $527 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 third quarter decreased from 67.1% to 66.2%.

Turning next to third-quarter results for the Company's TRS-RenTelco division compared to the third quarter of 2011, total revenues increased $2.4 million, or 7%, to $33.9 million due to higher rental, rental-related services, and sales revenues. Gross profit on rents increased $1.2 million, or 10%, to $12.9 million.

Rental revenues increased $1.8 million, or 8%, and rental margins increased to 49% from 47%, as depreciation as a percentage of rent decreased to 36% from 39%. Selling and administrative expenses decreased 1% to $6.2 million. As a result, operating income increased $2 million, or 24%, to $10.2 million.

Finally, average electronics rental equipment at original cost for the quarter was $272 million, an increase of $7 million. Average utilization for the third quarter increased from 65.5% to 65.7%.

Turning next to third-quarter results for the Company's Adler Tanks division compared to the third quarter of 2011, total revenues increased $3.8 million, or 19%, to $23.3 million due to higher rental, rental-related services, and sales revenues.

Gross profit on rents decreased $1 million, or 8%, to $11.8 million. Rental revenues increased $0.8 million, or 5%, and rental margins decreased to 70% from 80%, as depreciation as a percentage of rents increased to 18% from 14% and other direct costs as a percentage of rents increased to 12% from 7%.

Selling and administrative expenses increased 13% to $4.9 million, primarily due to higher allocated corporate expenses and higher salary and benefit costs to support the continued expansion of Adler's operations. As a result, operating income decreased $1.9 million, or 20%, to $7.6 million.

Finally, average rental equipment for the quarter was $232 million, an increase of $67 million. Average utilization for the third quarter decreased from 88% to 68.9%.

On a consolidated basis, interest expense for the third quarter 2012 increased $0.3 million, or 13%, to $2.3 million from the same period in 2011, primarily due to the Company's higher average debt levels.

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

Next, I'd like to review our 2012 cash flows. For the nine months ended September 30, 2012, highlights in our cash flows included -- net cash provided by operating activities was $91 million, a decrease of $13.5 million compared to 2011. The decrease was primarily attributable to the payment of a $6.1 million income tax receivable in 2011 that did not recur in 2012; $4.4 million lower income from operations; and other balance sheet changes.

We invested $106.2 million for rental equipment purchases compared to $120.7 million for the same period in 2011, partly offset by $0.9 million lower proceeds from sales of used rental equipment.

Property, plant and equipment purchases decreased $4.2 million to $11 million in 2012.

Net borrowings increased $17.7 million from $296.5 million at the end of 2011 to $314.2 million at the end of the third quarter 2012.

Dividend payments to shareholders were $17.3 million.

With total debt at quarter end of $314.2 million, the Company had capacity to borrow an additional $215.8 million under its lines of credit, and the ratio of funded debt to the last 12 months' actual adjusted EBITDA was 1.96 to 1.

For 2012 third-quarter adjusted EBITDA decreased $3.8 million, or 8%, to $42.2 million compared to the same period in 2011, with consolidated adjusted EBITDA margin at 42% compared to 44% 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 $1.70 to $1.85 to an updated range of $1.70 to $1.75 per diluted share. For the full year 2012 we expect approximately 5% to 6% growth in rental operations revenues over 2011 and gross profit from sales to be approximately 25% to 30% lower than 2011. Rental equipment depreciation expense is expected to increase to approximately $63 million, driven by rental fleet growth.

Selling and administrative costs are expected to increase to approximately $84 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.

Before I get started with comments on this quarter's results, we realize that we have a number of Greater New York Area individuals on our call this evening, and we'd like to extend our thoughts and prayers to all of you and your families on the impact of super storm Sandy, and our hopes for a return to normalcy as quickly as possible. Thank you.

As mentioned in our press release, let me provide some additional color on the sale revenue and profitability shortfalls at Enviroplex, our California classroom manufacturing business, which accounted for approximately $0.08 of the $0.12 reduction in EPS from a year ago.

Equipment sales were $9.2 million for the quarter compared to $18.5 million a year ago. We had approximately $7 million in additional sale revenue we had anticipated billing in the third quarter. However, due to significant production line challenges these projects won't be completed until the fourth quarter of 2012, or perhaps the first quarter of 2013. Additionally, and most importantly, due to these manufacturing issues our margins on multiple projects during the quarter were negatively impacted.

So what specifically caused these production- and margin-related challenges? We had a very large and highly specialized educational structure, as well as a number of other custom projects in production during the same timeframe in the quarter. The specialty project had significant design, specification, and sourcing challenges. In turn, these issues created a bottleneck for other projects following. As a result, we had significant manufacturing inefficiencies and related in-plant overtime and subcontractor costs on all of these projects.

Additionally, in order to meet our customer delivery timeframe commitments, various work that would typically be done in plant had to be done on site at prevailing wage labor rates. We saw significant margin erosion during the quarter on the projects that we did complete, and we are likely to see considerable margin pressure on the projects from this production timeframe that are yet to be completed.

Now, let's address our core rental businesses, starting with Mobile Modular. Mobile Modular's rental revenues were down slightly at $20 million, or less than 1%, from a year ago. In our markets outside of California, rental revenues grew by 9% compared to the third quarter of 2011. However, they declined by 7% within the State.

Despite the fact that there was a further decline in rental revenues within California during the quarter and that California is still facing general economic and state budget headwinds, there is a discernible recovery occurring in the State. The unemployment rate has declined to 10.2% from 10.7% in July and from a Great Recession high of 12.6%. The housing market for new homes in the Greater Bay Area has improved, with a number of projects under construction and others in preliminary stages. There has also been an uptick in commercial construction activity. We are hopeful these trends continue and that we begin to see their impact in our California Modular numbers.

Income from operations for the quarter for our Modular division decreased by $1.5 million, or 24%, to $4.6 million from a year ago. However, Modular rental operations gross profit declined only 4%. The higher percentage decrease in income from operations was due primarily to lower gross profit on modular equipment sales. Year-over-year gross profit on sales declined in line with sales revenues for our Modular division to $1.3 million from $2.2 million a year ago. This contributed about $0.02 to our year-over-year reduction in EPS.

Keep in mind that sales revenues for our Modular business are much less predictable than for rental revenues and there can be wide swings up or down on quarterly results. Sales revenues for our Modular business are typically best viewed on an annual basis.

Project utilization at the end of the third quarter was 67%, flat from a year ago as well as from the second quarter of 2012. This is important to point out, that our Modular division quarterly average utilization over the past 8 quarters have stayed within a narrow range of 66% to 68%. Division-wide, Modular first month's rental bookings for the third quarter of 2012 were up 22% over the same period in 2011. Within California, bookings were flat compared to a year ago; however, outside of California bookings rose 48%.

We believe these items speak to a Modular business that has stabilized, with greater upside opportunity than downside risk. However, 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. This is evidenced by yield on equipment on rent decreasing to 1.91% in the third quarter from 1.98% a year ago.

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.

And finally, 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 pretax line.

Now let me turn our attention to TRS-RenTelco and their results. TRS-RenTelco's rental revenues for the quarter increased by $1.8 million, or 7%, to $26.5 million from a year ago. We're 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 4.95% during the quarter from 4.76% a year ago. This is primarily due 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 24%, or $2 million, to $10.2 million from a year ago. The significantly higher percentage increase in profitability as compared to rental revenues is primarily related to lower direct SG&A and equipment depreciation expenses, partially offset by higher laboratory costs, all as a percentage of rental revenues from a year ago. Direct SG&A and depreciation expenses as a percentage of rental revenues declined to 14.9% and 36.5%, respectively, from 16.5% and 39.3% a year ago.

Ending third-quarter utilization was down slightly from a year ago to 64.2% from 66.3% in 2011. It continues to be in a healthy range.

In producing these strong operating metrics, we continued to benefit from our disciplined approach to equipment purchases and inventory management, appropriate depreciable equipment lives, and our highly skilled, efficiency driven, and tenured workforce.

Now let's turn our attention to Adler Tank Rentals. Adler Tank Rentals, our tank and box division, rental revenues increased $0.8 million, or 5%, to $16.9 million from a year ago. As with our second-quarter 2012 results, the weakness in year-over-year rental revenue growth was directly related to continuing reduced production of dry natural gas in the Northeast. This is reflected in our 21,000 gallon frac tank utilization level of 56% within the Marcellus gas shale region during the third quarter, as compared to 75% outside of the region.

During the quarter we made good progress on shipping a number of Marcellus-based tanks to other Adler geographic regions, primarily to fill orders. We'll continue to evaluate additional inter-regional movement of our tank inventory based upon current and projected demand levels within and outside of the Northeast.

Although rental revenues grew 5% during the quarter, period-end division-wide utilization stood at 69.4% compared to 90.5% a year ago. This is a function of favorable business activity in all of Adler's geographic markets outside of the Marcellus and our need over the past year to continue to build new rental equipment to meet this regional demand despite the level of off-rent equipment in the Marcellus. This is further reflected in the average equipment on rent during the third quarter of 2012 being $15 million greater at $160 million than a year ago at $145 million.

We are building the Adler brand across the continental US and it is essential that we have the right mix and depth of inventory on the ground in all of the markets in which we operate in order to respond to a variety of end market needs. In fact, Adler's industry mix of rental revenues for the third quarter of 2012 compared to the same period in 2011 reflects fracking-related rentals decreasing from approximately 35% to 19% while overall rental revenues increased 5%. Adler is serving a wide variety of market segments, including industrial plant, petrochemical, pipeline, oil and gas, waste management, environmental field service, and heavy construction.

Divisional income from operations decreased by $1.9 million, or 20%, year over year to $7.6 million. The decrease in profitability was primarily due to lower utilization driving higher rental equipment depreciation as a percentage of rental revenues and higher inventory center costs from a year ago.

As discussed earlier, in our efforts to more fully utilize our off-rent tank assets in the Northeast, we incurred significant interregional transportation costs in moving a portion of this equipment, primarily to southern US rental markets. The one-time costs to transport these tanks were a material portion of the increase in inventory center expenses compared to a year ago and, along with higher depreciation expense on a larger sized, but lower utilized, fleet contributed to the overall Company decline in EPS from a year ago.

Overall, Adler division-wide business activity levels have remained favorable. In fact, booking levels during the third quarter of 2012, based upon first month's rent or billing rate, were 39% higher than for the same period a year ago, and was Adler's highest ever quarterly booking level.

Although we are somewhat disappointed in our financial results for Adler thus far in 2012 from the expectations at the beginning of the year, we believe this shortfall is a near-term growing pain dynamic. I want to emphasize that we are only in the early stages of ramping the Adler geographic footprint and customer following. I have every confidence that we will grow favorably going forward.

Now let me take a moment and update everyone on our portable storage business. Mobile Modular portable storage continued to make good progress during the quarter in building its customer following, increasing booking levels, and growing rental revenues. Rental revenues grew 46% 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 also are beginning to realize critical mass in our installed base of customers and related profitability in some of the markets in which we operate. And we have favorable room to grow rental revenues within the current cost structure. At the same time, we are actively investigating additional geographies for expansion.

I'm very pleased with what we have accomplished in growing our portable storage business, starting in 2008, and in an economy that has had an average annual real GDP growth rate of less than 0.5% over this timeframe. As the economy continues to improve, and with the infrastructure and quality team we are building, our portable storage business should benefit very favorably. Looking forward, we continue to believe that we have an excellent opportunity to become a meaningful player in the portable storage rental industry.

Let me transition to various other strategic planning and positioning items. Our second-quarter 2012 call, I shared our plans to exit the environmental test equipment business. We have had interest from multiple parties in acquiring the assets of the business and we are presently managing this process. I want to reiterate that we are committed to rental businesses in our portfolio that can produce healthy margins and can be scaled such that they can become a material contributor to overall Company EPS.

We recently added a full-time corporate development associate to our team in order to provide greater bandwidth in our review of a continuum of strategic growth opportunities.

Looking forward, we are keenly focused on leveraging the significant opportunities that Adler Tank Rentals provides us in building a much larger and more profitable tank and box rental business. There are numerous end markets and new geographies for Adler to develop going forward. I again want to emphasize that we believe Adler has a long runway for domestic growth and that we're in the very early innings 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 franchise 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 tanks off rent in one region of the country as we have had over the past few quarters in the Marcellus. However, the multiyear contiguous rental streams earned 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 to 2011 was 56%, 76%, and 86%, respectively. We are still learning what normal utilization levels will look like over time for a tank and box rental business. Utilization rates are likely to not be in as narrow a range as for other rental businesses until we reach a much more mature state of growth.

In summary, our $0.12 reduction in EPS from a year ago is primarily a function of sales revenue reductions in our classroom manufacturing and modular businesses, as well as related significant margin compression for Enviroplex. I believe the challenging events that played out at Enviroplex during the quarter were a unique set of circumstances.

If you look at Company-wide gross profit on rental operations, we were nearly flat at $37.3 million compared to a year ago at $37.7 million, despite the decline in Adler's Marcellus region business. This is a much more accurate report card on the health of McGrath RentCorp.

And now Keith and I welcome your questions.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Andrew Gadlin; [CGS] Securities.

My first question is in regards to the TRS segment. If you could talk a little bit about the intra-quarter trend. There's [somewhat] of a slowdown in a lot of the tech space in Q3. I'm curious if you saw some of that in TRS as well.

For the most part, we did not. And, in fact, our October booking levels have been very strong. In fact, they were our highest booking level for the year in October, and we're about 20% higher than September.

Wow.

So it's been very strong. We have not really seen any decline. Now, keep in mind that we're entering the fourth quarter here and there is some seasonal dynamics with the business, to where it's a question of when does it start tailing off in the fourth quarter, as companies kind of wind down and manage their equipment pools. So that's to come. Our hope is it's later in the quarter rather than earlier. We've had a good first third of the quarter to start with.

Historically when has that slowdown come?

You know, I've been with the business a number of years, as you know, and I've seen it sometimes come the beginning of October, sometimes in November, sometimes not until the last two weeks in December. So it's all over the board. And thus far we've got a strong first month of the quarter and hopefully that continues as far into the quarter as possible.

Absolutely. Just one more question on Adler Tank -- you had talked in the past about moving equipment around the country. And you had been a little reticent to do that before. What changed your thinking this quarter?

Well, what happens is that you get opportunities. We've had a very good pipeline with the greater Marcellus region, and what you have to do is really see how that materializes over time. And if it's not moving as quickly as you like to see it, then you need to be moving equipment. So fortunately we had a need for -- it was a win/win in the fact that although we're doing new rentals in the Marcellus and the greater Northeast area, we're not utilizing as much equipment as quickly as I'd like to see it. But we have needs in other regions, and particularly the southern region in Texas and other states that cover that southern region and we were able to ship. But most of the equipment we did ship was for orders that we had, which is a good thing.

So looking forward, we're going to continue to be evaluating that situation. Ideally, we don't want to be moving any more equipment than is absolutely necessary. At the same time, we're realistic. And even though the MBtu of gas -- gas was at a low of about $1.82 an MBtu in the middle of April. It's at $3.70 today. Even though that's doubled, that doesn't mean that that market's coming back anytime soon in a robust manner.

So we're being proactive. And you'll again see in the fourth quarter, likely, expenses associated with moving more equipment. But that's all for a very good reasons.

So if you're moving equipment specifically for an order in hand, how long does it typically take to get the payback on the cost of moving the equipment?

Well, first of all it depends on where the equipment's moving to, how far away. If it's a move to Texas it's typically going to be about a three and a half to four month timeframe. So you're dealing with a 20-year asset. It's a small price to pay to be able to get it into a market that is going to have more rental opportunities in the near term. And our goal over time as we build the business is to get the right mix and depth of equipment in markets so these interregional transfers are much less frequent.

But this is one of those growing pains, and I'm not sure if I would have changed much up to this point. But we have to manage this and we're managing it well. And we'll need much more equipment, new equipment, as we move forward than what we have sitting currently today in the Marcellus.

And Texas is one of the longer moves that you could possibly have, right?

It is. It is one of the longer moves, but it's also a very healthy market, with multiple end user segments.

Okay. Thank you very much.

Scott Schneeberger; Oppenheimer & Company.

I apologize if I missed it. I think a question I have on Adler would be on CapEx. Could you give us a little color on that, please, Dennis? You mentioned the movement and building the business in the Southwest, I believe. Can you just speak a little to CapEx and to geographical needs?

Scott, I'm going to let Keith speak first and I'll add in color after that as necessary.

Sure. Scott, as we indicated at mid year, we had invested fairly heavily in capital for the Adler business in the first half of the year. Q3 we throttled back a bit. We added approximately $12 million of new equipment. That compares with a year ago we added $19 million in the third quarter.

So last year really over the course of the year we were ramping production of equipment and really carried that rate of production into the first half of this year. We've throttled back a bit. We'll be much more selective with the spend. It's mainly some specialty tanks that we need and some box inventory. And as Dennis discussed, we're looking at ways to move equipment around to meet needs beyond the Marcellus.

And were you investing at all in the Marcellus? I wasn't sure if I heard that or not. You said you see longer-term opportunity. I know you're moving from that area. Was there anything new into that region?

No. If there was anything new that went into that region, it was just some equipment that may have been sitting at a local factory. But we're not shipping any really equipment into that region. And at the same time, keep in mind the Marcellus is still a very active play and it will be for a very long period of time. But we've really -- things are exiting that region. As rigs move in particular -- and it takes a while for rigs to move and then get reset up, et cetera -- then equipment follows.

But we're also at the same time, as I mentioned in my prepared remarks, trying really to diversify the base. We like the fracking business. At the same time, for us to do more industrial, heavy construction, those types of end markets, is very good for us. And that's what we're trying to accomplish.

Thanks. A few more, if I could, across a few other segments. The production line issues, I believe it was specifically in Enviroplex, and correct me if I'm wrong.

That's correct.

Could you speak to that a little bit? What specifically is occurring, or has occurred, as far as the deliveries and what you had to work on in field, and how long that dynamic may persist?

Well, this is really an anomaly in my mind, without question. I've been associated with that business since we acquired it in the early 1990s. And this is a very unique event. We had a very highly specialized structure moving through the plant. We had some significant challenges with some specifications that couldn't be sourced properly. That slowed down the line as a result and we had to put a lot of resources on that project.

In turn, everything behind it, which was also the custom nature, got bogged down. And we didn't have adequate resources to manage the slowness that the line was moving at and [also] some of the rework that needed to be done. From there we were behind the eight-ball. We had to start shipping the equipment to be able to meet deadlines in the field. So you ship equipment so the customer can start doing their work on the building while you're trying to complete it, which is the most -- it's not an ideal situation, certainly for us. I've done a lot of project management in my early days with the Company, and it's much less than ideal.

So those were the dynamics. When we're done with these projects, we will sit down. We're going to do a postmortem on everything and look at it and assess what went wrong and hopefully learn from it. But, like I said, this was an aberration from Enviroplex's capabilities, without question.

Thanks. And a follow-up on that, Keith. Can you just remind us -- I know you had a robust quarter last year in Enviroplex which you're comping against. What's implied in the guidance for Enviroplex in fourth quarter? And just how does third quarter this year and fourth quarter this year compare to last year?

Sure. Let's just start with, to level set, the Q3 comparison. Of all the business we did with Enviroplex last year, the vast majority was recognized in the third quarter. We actually had $18.5 million in revenue. We were 50% lower in the third quarter of this year, $9.2 million.

And, as Dennis mentioned in his remarks, we also had the margin compression. Typical margins at Enviroplex are somewhere in the low- to mid-20s. A year ago we were at 24% gross margin in the third quarter, this year 17%. And for all the reasons Dennis outlined we think there will be significant margin pressure at Enviroplex in the balance of this year and potentially into the first part of next year. So that's just to level set with Q3.

I think for the full year, for this year I think Enviroplex -- there will be some additional revenue in the fourth quarter, but on a full-year basis, probably not as much revenue in total as we saw last year. And, again, the forewarning here is, for all the reasons Dennis said, significant margin pressure at the gross margin level for the remaining projects that were impacted.

Okay. Are you able to get any more granular on revenue and margin in the fourth quarter? Or did you give enough for us to back into there? I hadn't thought it through. Or is that as far as you want to take it here?

Yes, the way I'd look at it is, as I think you might have gotten a sense, some of these projects, when they'll actually be turned over to customers and revenue recognized, there are some timing issues there. We can't even tell today whether some of this will be late in the fourth quarter or potentially early in the first quarter. There's very likely to be a few million in revenue in Q4 and being precise about that number is hard. It's a timing issue. But either way, those orders won't bring a whole lot of gross margin into the financial result.

Okay, thanks. And then, on your portable storage initiative, sounds like that's going quite well. Two questions in that category. One, how is pricing -- as you go to market, are you using price as a way to go in, or are you being fairly disciplined there and you are seeing improvement in that market?

And then the follow-up question is, it sounds like you're advancing your investment in that. Is that a case where we're going to see elevated SG&A versus your prior plan, as you expand or -- ? As we think about modeling for next year, just how should we think about that? Thanks.

Sure. Let me address the market pricing to begin with. The way we've grown that business to date -- and I'll speak specifically to pricing in a moment -- the way we've grown that business to date has been on our ability to execute. And with the largest player in the industry having gone through digesting making a major acquisition, our ability to execute and -- even though on a small regional basis -- that's really what's made a difference for us as we've been building that business.

Of course that's a hallmark of all of our rental businesses, is that we believe we provide the best customer experience in the industry. And we say that very proudly. So it in large part has to do with the way we operate our businesses.

Second, we have a fabulous leader running the business, who really knows how to grow things.

But I'll also add -- let's talk about pricing for just a second. Then we'll get to SG&A. The pricing on it from when we entered the business in 2008 until right through current timeframe, we have not really seen any degradation in rental pricing. It's been in a very stable, healthy range during that entire timeframe. So we've been very fortunate. At the same time, we're also executing and delivering a good experience for people.

Now, with SG&A, what's interesting now is if you look quarter over quarter in the modular business, we didn't have the kind of SG&A spike that we've had in past quarters, because we're starting to -- those shoes that we built for ourselves, we're starting to be able to get, as I mentioned, some critical mass in revenues. And so we're not having to spend as much SG&A because we're growing into what we've already -- our spending on an annual basis.

So what we're seeing here is we've gotten to profitability in a couple of regions. And we're building on that. And then, as we get more regions profitable, and even though we're adding potentially additional ones, the whole division should be profitable overall. And we're just about there really currently. The last two quarters have been slightly profitable overall on a division-wide basis for the portable storage, which was a big step, when you consider what we've come through to be able to get to where we're at.

So we're growing the top line handsomely and we're also at the same time making I think very intelligent decisions about building the team and picking smart locations in which to add to the geographic footprint. So I feel good on a lot of fronts there.

Thanks. And one more, a two-part question. First, the environmental test equipment, are you expecting -- I know that's up for disposal. Are you anticipating material proceeds from that? Just any thoughts on that.

And then you mentioned hiring a corporate development associate. Is that for that process? Or is that to explore alternative strategic advancement? Just curious what the thinking is there. Thanks.

Yes. With respect to your first question on the TRS-E, that's really a nonevent, up or down. So it's really going to be -- if we're successful in having someone acquire the assets, then we expect it to be a very de minimis impact up or down. So it's really immaterial.

With respect to our new corporate development associate, that individual has been brought in not for the TRS-E opportunity to sell the business, but really because Keith and I are the two chief people to date that really look at all the different opportunities that cross our desk. And both with operating and other responsibilities, we want to make certain that we have an appropriate level of bandwidth. So our new individual, a very sharp young man from the University of Denver, spends full time in looking at not only new rental opportunities in new products, but also in our core businesses on geographic opportunities as well as other opportunities for ancillary products, et cetera. So he's really got a broad platform of items that he is working on.

And the very good news in all of this is we've got somebody who is spending 100% of their time every day, day in and day out, on these other items. Not that we don't have a broad team that spends time on it, but it's 20% here, it's 30% there, et cetera. So we need to build this infrastructure, and so we're very pleased with this addition.

Okay. Thanks for taking all my questions.

David Gold; Sidoti & Company.

Just a couple of question for you; you covered a lot of ground. Can you call out if possible the amount that you spent during the quarter moving containers or units for Adler?

Yes, our direct costs of other operations for Adler, if you look at that number year over year, it's up by approximately $1 million. And I would say half of that is related to moving equipment.

Okay.

It's about half the $1 million.

Okay. And then, couple of other things. Further plans there as far as movement, is there more that you have planned to do?

Well, we're actively evaluating opportunities within the Marcellus and the greater Northeast. I'll give you an example. Obviously with the super storm that you just had there there's a high demand for tanks in the area currently to be able to serve the extraction of water out of the subway system or other areas in the region that have been adversely affected. So those are more short-term needs, but those are the type of things you continue to evaluate. Plus, projects coming on line early next year that make sense to keep a certain amount of equipment there.

And, at the same time, wherever we're growing we're going to for the most part be shipping equipment from the Marcellus to support that growth rather than build new. Although for a state like California it's a much more expensive haul all the way to the West Coast and we have other manufacturers much, much closer. And it makes sense -- especially when you look at the overall footprint needs that we will have with the business over the next couple of years in new geographies, that it doesn't make sense to incur that expense to ship it across country versus building new because we will utilize all this equipment at favorable utilization levels.

Got you. And then, one more -- you've obviously had some good success shifting away from fracking, right, to other demand. Can you give a sense for where the big demand is coming from and if you have any other big exposure now that -- from a demand [or root] standpoint now that so much movement's gone on?

Primarily in the industrial and refinery markets and also heavy construction, infrastructure-type projects. So those have been all good end markets for us over the last 6 to 12 months and they continue to be, so that specifically there.

And I just want to emphasize that the E&P market is still a very important market to Adler. And we're going to have peaks and valleys because we all know it's a more volatile type of market. But it's still a very viable one. We get long-term rentals in that end market segment on a lot of rentals, so a lot of good news there.

But from an exposure standpoint, I think we've done a very good job of redistributing assets. And at the same time, when various gas fields pick up you're likely to see more equipment heading that direction, or just being utilized from within the region. And we'll need to monitor that over time, just to see how the whole energy policy associated with US resources in the continental US plays out.

Also, too, there's a huge dynamic with the exporting of LNG, of gas -- as LNG, that will not come on line until about 2015. But that can create all the more demand for even inexpensive priced gas in the Marcellus and other plays.

Helpful. Thanks. And then just one last. On the Modular side, commentary as to increased business activity in Texas -- I'm curious if you can add some color on that as well.

Yes. You know, right in line with the Adler business, refineries, industrial work, et cetera, Texas is a very busy market, very energy driven. You have the building of these LNG terminals, pipeline, reversing pipelines, turnarounds at plants. You can go down the list, the whole petrochemical industry. So it's been a very healthy market. And let's not forget, Texas is still adding about 70,000 new students annually, so there's educational demand, et cetera, not to the levels we saw in the heydays in California, but there's a lot of infrastructure needs within the State. And it's a very -- the economy in Texas comparably to other states is very healthy.

Perfect. Perfect. That's helpful. Thanks.

Rick D'Auteuil; Columbia Management.

Just some follow-ups on some questions that have been asked. So after you've redeployed some of the Marcellus assets in the Texas and surrounding area markets, and there's more to come -- so where does Marcellus stand from the point of view of excess equipment today? How much have you whittled down on the underutilization issue there?

I would just -- I won't give any hard numbers. I'll maybe give you percentages here, because from a competitive standpoint. I would say -- and also, with what I know we've already shipped in October. We probably when you kind of look at the excess, perhaps we're 30 -- a third to a half of what I might expect to ship. Of course, that's a function of the demand level in the Northeast and it could be that come the end of the year we're not going to ship anymore, just based upon what we're seeing in the first part of 2013.

So it's really -- it's difficult to say at this point, but we have certainly through the end of October made good progress. And as I said before, the great majority of that equipment that's shipping is for orders.

Okay. And I know you said you expected more in Q4. So you think it'll be largely behind us by the end of the year?

You know, I would love to see the Northeast as a whole, the Marcellus and also all the needs in our growth in the Northeast and the Mid-Atlantic -- because I kind of look at the Mid-Atlantic as pretty adjacent -- be able to absorb the rest of what's there. That's not an unrealistic forecast with what our point of view is today, although we have to see how that plays out.

So I don't know -- how much -- if you look at utilization with that group, you expect it to be, I don't know, 10% higher over the next couple of quarters? Is that fair?

It's hard to say, because we're also entering a seasonality period for Adler. The Q4 can be a slower time of year and also into Q1 because of colder climate issues, et cetera. But the good news in all this is that we're expanding into the Ohio area. We're building out our industrial business in the Northeast. We're building in the Mid-Atlantic.

So we're trying to do everything that's appropriate around even the additional shale play in Ohio to where we can deploy those assets more regionally and utilize them at a higher level much more quickly. But there's so many variables there, it's just very hard to say. But I feel good about the number of different opportunities, either within the Northeast region or in adjacent regions, plus what we'll need elsewhere in the country.

The player that -- I know there was a very large player that said -- multiple energy companies that said -- basically dumped their whole position back on you. Are they out of the market or are they still a source of potential demand?

Are you talking about an end user of ours?

No, I'm talking about a re-renter, I guess, to the -- sort of a middle man that sold -- that --

Yes. That --

-- would put the equipment -- okay.

Yes. That is one of the -- that was probably the largest impacting item to the Marcellus. And we have a very good relationship with a gas and oilfield services company there, and have a lot of equipment on rent to that party who in turn re-rents it to multiple other end users, or multiple end users. And that was -- they also own X amount of their own fleet. So they did what any good business person would do, they returned our assets before they take theirs off rent. So still a good relationship there. But that was the biggest piece of why the Marcellus utilization level dropped in the past 6 to 9 months.

Okay. So on the other issue that came up this quarter on Enviroplex. I guess I'm scratching my head. You guys have been in that business for a while. Did you take on a piece of business that you shouldn't have taken on? And I know you said you're going to do a post mortem on this thing, but I mean, you must have already learned some lessons from this. Did somebody mis-bid it or was it a piece of business that really wasn't in your sweet spot and you should have passed on?

I would line up behind your comment that it was a new piece of business that wasn't in our sweet spot. We thought we could manage it. We didn't manage it and we're paying the price. So --

But was it a project management issue or was it a this-isn't-our-skill-set issue?

I have great confidence in our skill set to manage this type of project. However, I was -- we did not step up as we needed to in the way of having all of the appropriate resources in place to manage it appropriately. And we could have done a considerably better job in executing on project management.

Okay. Thank you.

Andy [Dunn]; KeyBanc Capital Markets.

Just wanted to start off with a quick question on Mobile Modular. Dennis, you mentioned sort of signs of a recovery in California. If we look at the numbers, it looks like rental revenues were still down about the same amount as in 2Q. And it looks like bookings actually flattened --

[Correct.]

-- compared to some of the markets outside California that appeared to kind of see an uptick in both. Just speaking from your experience in the business, can you kind of just elaborate on maybe expectations on timing or how signs of an uptick now might impact that business down the road?

I would say that we've been in this now for five years, of challenges in the California market. And anecdotally, obviously there's some hard facts that are provided on unemployment rates. There's no question there is somewhat of a mini-boom in new home development, especially in the Bay Area. When I drive to work every day and I drive home, I see the projects. So that's a good thing.

At the same time, the recovery in the State is very disparate between regions. You still have the 15% to 17% unemployment rate in the Central Valley and certain cities. And yet you have in the heart of Silicon it's 5% or 6%. So it's disparate, but when you weigh hard facts on the unemployment rate coming down, you look at the amount of new homebuilding, you look at the commercial uptick that we've seen and anecdotally you talk to your sales people or sales management, et cetera, it's a much different atmosphere than it was six months ago.

So there's no doubt in my mind that we're on the right path here. I think utilization having been as stable as it has for some period of time is a good reflector of that, and obviously we're having good increase outside the State. So California has a huge shortage of funding for public schools. There's no money available to build them. There's no money currently to modernize them. Those potentially are all areas of goodness for our business. And there's been so much austerity to date that it's hard to know where they could cut further. But you never say never.

So I just think when you go down the list of factual items, statistics, and anecdotal type items, which I do pretty contiguously with -- or consistently with different people, it feels like we have definitely hit the bottom. We are coasting along. There's upticks here and there from time to time. But I think the upside potential is very material. But the question will be is, what's the timing of that recovery? And, again, I'm very much a realist. I've been in this for five years now and I'm not going to prognosticate as to how quickly. But it certainly feels like there's enough goodness out there that things should be lifting and hopefully will be reflective in our numbers for California in future quarters.

Okay. That's good color there. I appreciate that. I guess just switching over to some extra questions on Adler, maybe to ask a previous question a different way, you gave good color on where some of the assets are going. Can you give us any sort of sense on how many assets have moved? Basically just trying to see -- I think utilization at quarter end was down about 1% sequentially. I'm just trying to figure out how much the asset moves played into that number seeming sort of stable.

If I'm not mistaken, I thought utilization at the end of the quarter was up approximately 2 percentage points from Q2.

Yes. I'll give you the numbers, Andy. And you can see these in the Q which was filed this afternoon. But quarter-end utilization at the end of Q2 was 67.5%. End of Q3 it had risen to 69.4%. And, perhaps even more importantly, the fleet was bigger at the end of Q3, so our equipment on rent went from $153 million at the end of Q2 to $166 million at the end of Q3. And that actually is an all-time high for equipment on rent at quarter end.

Sure. I apologize. Let me clarify. I guess I was mostly just looking within the Marcellus region. I think you said utilization in the region was 56%, I believe.

Okay.

Yes. Yes, so it's pretty flat compared to it was -- I mean, there's not a significant difference there between quarters. But I don't -- it's moving in the right direction. For competitive purposes I won't share any hard numbers about equipment movement. I can just tell you that of the excess -- as I mentioned earlier when Rick was asking or some good questions -- that excess I'd say we're probably a third to a half of what potentially could be moved. But we're also evaluating what's within the region as well as what's in really adjacent regions, Mid-Atlantic as well as the greater Ohio and Midwest market for movement.

Okay. And I guess just one additional question there. I think someone had done the math last time. Looking at the fracking revenues, you said they declined from 35% to 19%. But that was on 5% growth in the segment. I guess just kind of back-of-the-envelope math there, it looks like a bigger decline in fracking revenues this quarter compared to last quarter. Is there any sort of material decreases in demand that's driving that? Or is that still just a function of the movement of assets?

Oh, no, I think it's a combination of both. I mean, it's a combination of certainly if you look at the rig count in the country, which I know a lot of individuals on the call today follow, there's not as many rigs working and certainly not as many working in the dry gas area. So it's a combination of both factors.

And, Andy, I would just say you're absolutely right with that math. Based on our disclosure, rental revenues were up 5% year over year. The fracking portion of the mix was down 43%, whereas the nonfracking was up 31%. So I think it's just this sort of lingering midyear challenge in that part of the business that we observed a little earlier and continue to feel some impact in the third quarter.

Okay. I appreciate that there. And then, just a couple of housecleaning issues with Enviroplex. I thought you had mentioned $7 million was the expected sales that got deferred. Can you just clarify that?

That's correct. Some of that may hit in Q4 or in Q1 or split between the two.

And is that -- should we think about that as all just a push to the right? Or is there any risk to actual lost revenues there because of the delays?

No, at this point we think we'll make a positive gross margin, but it will be much lower than what we've achieved historically. Again, historically in that business, normal projects we get somewhere in the low- to mid-20s percentage gross margin. For these particular projects, it will be significantly below that. That's our current expectation.

Andrew Gadlin; CJS Securities.

Actually, my question's been answered. Thank you.

Thank you. At this time there are no additional questions. I'd like to pass the call back to Dennis Kakures for closing remarks.

Thank you, Operator. Let me thank everyone for joining us on the call this evening. And we're looking forward to chatting with everyone again for our Q4 results, which will be coming out in February, as well as at that time we'll be providing full-year guidance for the 2013 financial and calendar year.

Thank you so much and take care.

Ladies and gentlemen, this does conclude the McGrath RentCorp third-quarter 2012 conference call. We'd like to thank you for your participation. You may now disconnect.