McGrath RentCorp (MGRC) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the McGrath RentCorp fourth-quarter 2013 conference call. (Operator Instructions). This conference is being recorded today, Thursday, February 27, 2014.

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

Thank you, Operator. Good afternoon. I'm the Investor Relations Advisor to McGrath RentCorp, 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 465-9462. This call is also being webcast live over the Internet and will be available for replay.

We encourage you to visit the investor relations section of the Company's website at mgrc.com. A press release was sent out today at approximately 405 PM Eastern time or 105 PM Pacific. 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 21-E of the Securities 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 related to McGrath RentCorp's business are set forth in the documents filed by McGrath RentCorp with the Securities and Exchange Commission, including the Company's most recent Form 10-K and Form 10-Q.

I would now like to turn the call over to Keith Pratt.

Thank you, Geoffrey.

In addition to the press release issued today, the Company also filed with the SEC the earnings release on Form 8-K. The Company also announced a 2% increase of the cash dividend to $0.245 per share for the first quarter of 2014, representing, on an annualized basis, a 2.7% yield on the February 26, 2014, closing stock price.

For the fourth-quarter 2013, total revenues decreased 7% to $94.6 million from $102 million for the same period in 2012. Net income decreased 1% to $11.8 million from $11.9 million and earnings per diluted share decreased 4% to $0.45 from $0.47.

Reviewing the fourth-quarter results for the Company's Mobile Modular division, compared to the fourth quarter of 2012, total revenues increased $3.8 million, or 13%, to $34.5 million due to higher rental, rental-related services, and sales revenues. Gross profit on rents increased $0.3 million to $11.5 million, primarily due to higher rental revenues, partly offset by lower rental margins of 52%, compared with 56% in 2012. Lower rental margins were a result of $1.5 million higher other direct costs for labor and materials.

Selling and administrative expenses increased 11% to $9.7 million, primarily as a result of increased personnel and benefit costs. The higher gross profit on sales, rental, and rental-related services revenues, partly offset by higher selling and administrative expenses, resulted in an increase in operating income of $0.2 million, or 4%, to $5.9 million.

Finally, average modular rental equipment for the quarter was $560 million, an increase of $28 million. Equipment additions were primarily to support growth in Texas, Florida, and the mid-Atlantic region, and for our portable storage business. Average utilization for the fourth quarter increased to 70.5% from 66.8%.

Turning next to the fourth-quarter results for the Company's TRS-RenTelco division, compared to the fourth quarter of 2012, total revenues decreased $3 million, or 8%, to $35.2 million due to lower sales and rental revenues. Gross profit on rents decreased $0.8 million, or 6%, to $12.9 million. Rental revenues decreased $0.6 million, or 2%, and rental margins decreased to 49% from 51% as depreciation as a percentage of rents increased to 40% from 37%.

Fourth-quarter 2012 results included $3.7 million in proceeds from the sale of the TRS-Environmental rental equipment at a loss of $0.4 million.

Selling and administrative expenses decreased 5% to $6.4 million, primarily due to the exit of the environmental test equipment business in November 2012. As a result, operating income increased $0.6 million, or 6%, to $10.7 million.

Finally, average electronics rental equipment at original cost for the quarter was $269 million, a decrease of $2 million. Average utilization for the fourth quarter decreased from 65.4% to 61.2%.

Turning next to the fourth-quarter results for the Company's Adler Tanks division, compared to the fourth quarter of 2012, total revenues decreased $0.2 million, or 1%, to $23 million due to lower rental revenues. Gross profit on rents decreased $0.7 million, or 6%, to $11.2 million. Rental revenues decreased $0.3 million, or 2%, and rental margins decreased to 63% from 66% as depreciation as a percentage of rents increased to 20% from 17% and other direct costs as a percentage of rents were flat at 17%.

Selling and administrative expenses decreased 9% to $6.2 million, primarily due to lower bad debt expenses, partly offset by higher personnel and benefit costs. As a result, operating income decreased $0.4 million, or 7%, to $5.5 million.

Finally, average rental equipment for the quarter was $276 million, an increase of $32 million. Average utilization for the fourth quarter decreased from 69.9% to 60.8%.

On a consolidated basis, interest expense for the fourth-quarter 2013 decreased $0.1 million, or 5%, to $2.2 million from the same period in 2012, primarily due to the Company's lower average debt levels.

The fourth-quarter provision for income taxes was based on an effective tax rate of 39.2%, compared to 36.7% in 2012.

Next, I would like to review our 2013 cash flows. For the 12 months ended December 31, 2013, highlights in our cash flows included net cash provided by operating activities was $133.6 million, an increase of $7.3 million compared to 2012. The increase was primarily attributable to an increase in accounts payable and accrued liabilities and a decrease in accounts receivable, partly offset by a decrease in deferred income, lower income from operations, and other balance-sheet changes.

We invested $132.6 million for rental equipment purchases, compared to $131.8 million for the same period in 2012, partly offset by $33.4 million in proceeds from sales of used rental equipment. Property, plant, and equipment purchases decreased $2.2 million to $12 million in 2013.

Net borrowings decreased $12 million from $302 million at the end of 2012 to $290 million at the end of 2013. Dividend payments to shareholders were $24.4 million. With total debt at quarter-end of $290 million, the Company had capacity to borrow an additional $240 million under its lines of credit, and the ratio of funded debt to the last 12 months' actual adjusted EBITDA was 1.81 to 1.

For 2013, fourth-quarter adjusted EBITDA increased $1 million, or 2%, to $41.6 million, compared to the same period in 2012, with consolidated adjusted EBITDA margin at 44%, compared to 40% in 2012. 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 2014 earnings guidance, we expect 2014 full-year earnings per share to be in a range of $1.70 to $1.85 per diluted share. For the full-year 2014, we expect 5% to 10% growth in rental operations' revenues over 2013. Sales revenue is expected to be approximately 10% lower than 2013 and gross profit from sales is expected to be approximately 5% lower than 2013.

Rental equipment depreciation expense is expected to increase to between $70 million and $73 million, driven by rental fleet growth. Other direct costs of rental operations, primarily for rental equipment maintenance and repair, are expected to increase to between $56 million and $59 million in 2014.

Selling and administrative costs are expected to increase to between $96 million and $99 million to support business growth, continued investment in Adler Tanks and our portable storage business, and higher employee healthcare costs.

Full-year interest expense is expected to be between $9 million and $10 million. We expect the 2014 effective tax rate to be 39.2% and the diluted share count to increase to between 26.2 million and 26.5 million shares.

Now, I would like to turn the call over to Dennis.

Thank you, Keith.

Although we are disappointed that Companywide net income was relatively flat and EPS down 4% from last year's fourth quarter, we continue to be pleased with the underlying business activity levels and rental revenue growth outlook in our rental business portfolio.

Now I will take a closer look at each business for the quarter. Modular divisionwide rental revenues for the quarter increased $2 million, or 10%, to $22.1 million from a year ago and $1 million, or 5%, sequentially from the third quarter of 2013.

During the fourth quarter, we experienced a 21% increase in divisionwide year-over-year first months' rental revenue bookings for modular buildings, with an increase of 104% in California and a decline of 37% outside of the state. For all of 2013, we experienced a 19% increase in divisionwide year-over-year first months' rental revenue bookings for modular buildings as compared to 2012, with an increase of 31% in California and 10% outside of the state.

Rental bookings for 2013 were at their highest annual level since 2007, prior to the Great Recession. Rental bookings for the first two months of 2014 are up very favorably as compared to the same period a year ago.

We are also continuing to see rental rates rise for various sized products as demand exceeds readily available supply. Modular division ending utilization for the fourth quarter of 2013 rose to 70.7%, compared to 66.7% a year ago and 70.4% sequentially from the third quarter of 2013.

Modular division income from operations for the quarter increased by $0.2 million, or 4%, to $5.9 million from a year ago. The lower percentage increase in income from operations, compared to rental revenues, is primarily related to the increase in divisional booking levels and the significant increase in related inventory center costs for labor and materials to prepare and modify equipment for rental.

This is compounded by the need to deploy various rental assets that have been sitting idle for extended time frames, which tend to have higher processing costs than inventory that turns more frequently. In fact, inventory center costs, primarily for the preparation of booked orders and anticipated near-term orders, were approximately $1.5 million, or 27%, higher during the fourth quarter, compared to a year ago.

For all of 2013, these equipment preparation costs increased by approximately $7.4 million, or 31%, over 2012. Although the increased expenses approximate a negative $0.17 EPS impact, they are an expenditure that signals what we believe is a strong turnaround in our modular building rental business.

Keep in mind that almost all of our inventory center costs for building preparation and modification work are expensed in the quarter in which they are incurred. However, we benefit from the associated rental revenue stream from such expenditures in the quarters ahead.

We're beginning to see the early signs of quarterly rental revenue and utilization lift from the past few quarters of these higher-than-normal inventory center expenditures.

We also had higher SG&A expenses during the quarter from a year ago. These costs were primarily related to increased sales and operations staffing levels to support the recovery of our modular rental business, as well as the continuing expansion of our portable storage rental business.

Finally, some of these increased costs were offset by higher gross profit on sales of equipment from a year ago.

Now let's turn our attention to Adler Tank Rentals and their results. Rental revenues at Adler Tank Rentals, our liquid and solid containment tank and box division, decreased by $0.3 million, or 2%, to $17.8 million from a year ago. Quarter-end utilization was 57.7%, compared to 67.5% in 2012 and 64.6% sequentially from the third quarter of 2013.

The reduction in quarterly rental revenues and utilization from 2012 levels are primarily a result of lower overall drilling activity in the Marcellus shale region, due to increased storage supplies of natural gas, various E&P projects concluding in the Texas market, and lower equipment utilization for stormwater projects, due to drought conditions in the West.

Despite the challenges in various regional markets, new business activity, as measured by first months' rent, continued favorably with an increase of 35% from the same period a year ago. However, with a higher mix of non-fracking related rentals, we are seeing shorter average rental terms and a greater churn of rental equipment, which has put downward pressure on utilization. In fact, fracking-related rental revenues reduced to 12% of total rental revenues for the fourth quarter of 2013. This is down from 15% a year ago.

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. By design, we have pursued and been successful in generating higher business activity levels across a broader mix of non-fracking and historically less volatile vertical markets.

ATR divisional income from operations decreased by $0.4 million, or 7%, to $5.5 million from a year ago. The larger percentage reduction in income from operations, as compared to rental revenues, is primarily due to higher depreciation costs, partially offset by lower SG&A expense from a year ago.

Now let me turn our attention to TRS-RenTelco and their results. Rental revenues for TRS-RenTelco, our electronics division, declined for the quarter by $0.6 million, or 2%, to $26.2 million from a year ago. The decline in rental revenues is partially related to the sale of our environmental test equipment assets and related rental revenue stream in November 2012.

We also experienced lower business activity levels from softness in our general-purpose test equipment end markets, as well as an earlier onset of seasonal fourth-quarter equipment returns compared to a year ago. This is further reflected in quarter-end utilization of 58.2%, compared to 64.1% a year ago and 62.3% sequentially from the third quarter of 2013.

Average monthly rental rates for the quarter actually increased to 5.31% from a year ago. However, this increase is primarily due to an increased mix of communications test equipment, which has shorter depreciable lives, but higher rental rates than general-purpose test equipment.

Despite the year-over-year reduction in rental revenues, divisional income from operations increased by $0.6 million, or 6%, to $10.7 million for the quarter. This increase was primarily related to higher profit on equipment sales and also to lower laboratory and SG&A costs from a year ago. For all of 2013, TRS-RenTelco income from operations rose to $38.8 million, or 8%, compared to 2012.

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 from a year ago. Rental revenues for the fourth quarter of 2013 grew by 35% from a year ago, as well as 17% sequentially over the third quarter of 2013.

Income from operations also continues to grow favorably as we increase our topline rental revenues in critical mass by market. We are continuing to execute on our plans for a larger geographic footprint for our storage container rental business. We are also continuing to explore fleet acquisition opportunities to accelerate our growth.

It should also be noted that we have favorable room to grow rental revenues within the current cost structure. As the economy continues to improve and with the infrastructure and quality team we are continuing to build, 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.

Now for a few closing comments. Although our EPS results for 2013 were $0.11 below our 2012 results, on closer review of various contributing factors the Company's financial outlook is brighter. First, and most importantly, due to the resurgence in our modular building rental business, we spent $7.4 million more on building preparation-related expenses in 2013 than we did in 2012. This equates to approximately $0.17 negative EPS impact.

If there is such a thing as good expenses, these qualify. As I have spoken to on many occasions regarding exiting the Great Recession, our idle and favorable cost-basis modular building rental inventory has significant earnings horsepower. These building preparation expenditures are necessary on the front end in order to realize increasing rental revenue and utilization levels from these assets in the quarters and years ahead, as our modular results have begun to demonstrate.

To the extent that we continue to experience elevated inventory center expenses for modular building preparation, it would likely mean that market demand is staying very strong and that rental revenue and utilization levels are recovering very favorably. At some point in the quarters ahead, these inventory center modular building preparation costs should normalize as we benefit from equipment turns that do not require the extended work that some of the sitting inventory has over the past year.

We should also benefit from equipment returns that were initially placed on rent at very low rates during the Great Recession. As this equipment is rented going forward, we should see favorable rental rate gains.

Finally, we should see increased profit on rent and margin expansion later in 2014 as we benefit from the rental stream associated with our heavy inventory expenditures over the past year.

The second contributing factor to a brighter financial outlook for the Company is its dilutive share count. Our dilutive share count for 2013 increased to 25.9 million shares from 25.2 million shares in 2012. This equates to approximately a $0.05 negative EPS impact for the full year and a $0.02 negative EPS impact in the fourth quarter.

Higher Company share prices throughout 2013 were responsible for the increase in dilutive share count in two ways. First, the higher share prices drove an increase in option exercising during 2013. Second, with the higher share prices, virtually all unexercised and outstanding option grants were above their strike prices and included in the dilutive share count.

Now, the better news. Beginning in the second half of 2013 and going forward, employee exercises in almost all cases, whether for time-based options or earned performance-based equity grants, will be settled in net shares after taxes. This is a material counterdilutive policy that we believe will reduce the impact of future exercised or earned grant shares entering the public equity market by 75% or more. We are just beginning to experience the benefit of this policy change.

With respect to 2014 full-year EPS guidance, our range of $1.70 to $1.85 is wider than we typically provide. However, there are many moving parts to our portfolio of rental businesses today that make it challenging to narrow guidance further at this time. The most material variables include, one, the strength of the recovery underway in our modular building division; two, the potential for continuing softness in general-purpose test equipment rental demand in our electronics division; and three, increasing utilization levels of our ATR liquid and solid containment tank and box rental assets.

Last, please keep in mind that McGrath RentCorp has a very strong balance sheet with a funded debt to last 12 months' actual adjusted EBITDA ratio of 1.81 to 1 and with a current capacity to borrow an additional $240 million under our lines of credit. We can be very opportunistic in growing our business lines with the availability of such funding.

We are committed to making each of our rental businesses meaningful in size and earnings contribution and with the best operating metrics by industry. We plan to continue to make favorable strides during 2014 towards achieving these goals.

And now, Keith and I welcome your questions.

(Operator Instructions). Scott Schneeberger, Oppenheimer.

Looking at modular, it does look like this is -- that the ship is turning here, gradual but occurring. I am curious to get your take on what you would expect to see in a seasonality quarter-by-quarter progression if the trends and bookings or what's implied by these trends and bookings persists throughout 2014. What do you expect to see on a quarter-by-quarter basis? Thanks.

Scott, I would look at 2014 this way. It is likely we will have elevated inventory center processing costs minimally for the first half of the year, because our backlog and strength of the order book is so good. And those are very good expenses to have.

At the same time, we will start benefiting from all the equipment we put on rent this past year as it comes into 2014 and even turns the corner to 2015. So, those are the dynamics in play.

How much margin goodness we get above current levels and absolute betterment in terms of total profitability, we will have to see, because that will really be dependent on the second half -- on two factors, the second half of the year and how much spend occurs in the inventory center.

If we continue to spend at these high rates, that is actually best thing that can happen, because it means that we will continue to get further rental revenue and utilization lift. If that turns off and changes significantly, if the market cools, in many ways we will actually be more profitable this year than we would be otherwise, because those costs will come down pretty quickly. And we will benefit from that that way.

But if I had my desire, we would continue to be growing rental revenues and utilization to come out of the lower levels sooner, rather than later. But that gives you an overview. Those are the push/pull that we have there.

The other item that I should mention is that none of this takes into consideration a very robust California school market. We are still -- those dynamics are still working out with budget and bond issues and so forth. We plan to have a better year in educational rentals from what we are already seeing and booked, and we will have to see how that plays out towards the second half of the year and our bookings in spring and how much equipment goes out in the three to four months after the middle of the year.

But the good news is that's a big item there that we have not yet seen a big uptick on, but we have certainly seen a very strong commercial uptick in California, commercial strong in our other markets, and educational rentals are strong in Texas, Florida, and the mid-Atlantic, by market. So, the only real weakness in the business today is California schools, but even that is markedly better than it has been over the last couple of years.

Thanks, Dennis. Two follow-ups in modular. I would like to [shook] up the segment for a second. But I noticed in the fourth quarter very strong increase in California, but I believe it was down outside the state, a decline. Could you just speak to that? Is that an anomaly? Is that a comparison issue? Just is there anything to read into on that, and a quick follow-up, still modular, but I will let you do that one.

Yes, and that's not based on bookings, first months' rental bookings. So, it's really just how the order flow came in for one market versus another throughout the year, and I wouldn't read anything into that.

When you look at the overall numbers for the year, we had a strong year in 2012 in our markets outside of California and they still increased 10% overall in 2013. So I think you look at that total year number, it gives a very good picture, and, of course, California had a great second half of 2013 and is going very strong.

All right, thanks. That's helpful, just to clip it out. The -- going back to my prior question and your response to it, I realize you have a pretty big range and there are a lot of variables that you mentioned, but that progression through the year, you had mentioned first half, should I take away that it is still going to be probably a headwind, although a good thing conceptually for the long term, but probably still a headwind in the first half, and then a TDD in the back half?

(multiple speakers). I think that's a very fair assessment. It is a good way to characterize it.

Okay, thanks. I am going to shift it up now. In TRS-RenTelco, general-purpose equipment, you also listed that as an uncertainty going forward. Can you take us a level deeper on just -- that's a fairly broad category, but your puts and takes on what is occurring there and your confidence that there will be a rebound versus this recent hiccup? Thanks.

General-purpose test equipment really started slowing towards the latter half of 2013, and coming around the corner in 2014, it is weak. Even when you look at Agilent's most recent earnings call and other industry information, it is fairly weak across the board. And that's related to the semiconductor industry, general electronics, and businesses that tend to use that type of test equipment more.

We are not -- there is some aerospace and defense weakness in there as well, and what's interesting is if you look at our pipeline, our pipeline still looks pretty favorable in those end markets. However, we have not seen -- and again, we are just about at the end of February, we just haven't really seen much strength coming back in that. In fact, it's actually probably gotten a little weaker since the start of the year.

However, again, looking at the pipeline, the pipeline tells a slightly different story, but again, pipeline is just that. That has to materialize.

Okay. Thanks on that. Then one more and I will turn it over. Within Adler, could you speak a little bit to the CapEx plans for 2014 specifically? You see that -- I think you said down -- the fracking percentage may be down to, was it, 12%, I believe. Just curious what type of tanks you are purchasing, how aggressively, and any more color or feel you can provide to each of the end markets which you serve there. Thank you.

With respect to CapEx, we really have not, in the last probably 18 months to two years, purchased in effect a standard frac tank. What the equipment we have been buying has been, different types of specialty tanks or boxes -- everything from vacuum boxes to stainless steel tanks, double-walled tanks, dewatering boxes. So it's equipment that is not really used in the fracking world, but it is really used in the industrial environment. It's used in landfills. It's used in waste collection processes.

So from that standpoint, that equipment tends to be shorter term in nature, but higher price. So we get -- utilization tends to be lower in that product, but we get better rental rates. But there is more churn, and we get -- it is not like a fracking project where it goes out and it stays for eight to 12 months, which is a lot of what we experienced over time in the Marcellus, et cetera. So you don't have that really contiguous rental stream as much as you have shorter terms, either a couple of months or a couple of weeks.

But the dynamics of how we are spending on CapEx really relates to non-fracking equipment that is serving a number of these other verticals that we have developed.

Okay, thanks a lot.

Just in terms of numbers, we spent $56 million with Adler in 2012, and that dropped to $31 million last year, so based on what Dennis described for those specialty units, a lower rate of spend, and we would expect to continue in that mode as we enter 2014.

Okay, thanks, Keith. And any greater feel on a vertical-by-vertical level on how things are going? You covered it fairly well on a general basis, but are you able to take us any deeper or want to leave it at that? Thanks.

In my prepared remarks, I talked about a number of different verticals that we participate in, and over -- I won't give any one of those any particular commentary, but we are very broad based. Based upon what region we're in, some of those are more pronounced than others, but we are participating in all those verticals, and I think we're doing very well with those opportunities that are out there.

But from a competitive standpoint, I will limit my remarks to that.

And Scott, as we indicated in the comments, the real challenge area has been the fracking business. It was a very tough year in 2013, continued to decline, and for the full year, the rentals we're getting from fracking were down 41%, compared to the non-fracking business growing 19% for the year.

All right, guys, that's good color. Thanks very much and thanks for taking all my questions.

Joe Box, KeyBanc Capital Markets.

Just want to go back to the Mobile Modular business. Dennis, I appreciate the comments earlier regarding the California K-12 business that you mentioned is somewhat weak. I'm guessing that is going to move up with the budget looking a little bit better, but my question is really in regards to mix. What tends to be more beneficial to McGrath? Is it just a budget increase that we are seeing now, or is it a bond funding that would come back and we would eventually see more construction of schools, or are you basically indifferent to that mix?

Let me answer that by saying that historically the way -- first of all, modernization work today, there are really three buckets of -- I will take it all the way back to this. There are three buckets that we run into in school environments.

One is student population growth, where it happens fairly rapidly and they don't have permanent facilities to house the students and they need to rent modular buildings, typically for multiyear terms. Second is modernization, which is schools that are being reconstructed for asbestos abatement or seismic retrofitting, et cetera. And third is class size reduction. So those are really the three buckets.

Now if you look at California, they have had austerity in class size reduction. That's the first area, as the severe budget pressures -- they cut back on that dramatically. So that's an area which I know is high in a lot of people's lists in the state to be able to bring back down -- or should say bring back down those ratios of students to teacher. That's one area.

The other area that's probably the most significant is modernization work. The way modernization work historically has gotten funded in California is 50% comes from local districts funding, either through bond measures or parcel taxes or other sources, and the state's 50% comes from statewide bond initiatives. And California constituents -- I should say the California population has always supported both local bond issues and statewide bond issue facilities for schools, very high passage rate.

During the Great Recession, local districts were able to pass parcel taxes, bond measures, et cetera, very favorably. So they had -- that money is on the sidelines. The state hasn't passed a facility bond measure since November of 2006. So eight years, it's been eight years, and that's highly -- it is the first time in my 31 career with the Company that we've ever not had a bond measure passed every two years, for the most part.

So, the dynamics of such is the state doesn't have money at the state level, the budgets are getting better in school districts, and a lot of local districts are well funded. But what's playing out here now is the governor has said it may not be business as usual going forward. You shouldn't be looking potentially to the state to fund your school projects.

Now we don't know how all this is going to play out because there is a lot of pressure to put another bond measure on the ballot for November of this year, because it is sorely needed. Now, how the funding landscape changes over time, we don't know at this point, but the next window here really to get a bond measure from the state level is in November, and we will have to see how it plays out. There is some competing agendas. The governor has a state water project, and potentially a high-speed rail system that I believe is going to be paid through bonds.

So this is all a bit up in the air. I will say this, though. Some school districts have gotten tired of waiting and have moved ahead on their own projects because they have enough of their own funds to pay 100%, and they plan on getting reimbursed at a later date for some or all of that.

So, it's really a mixed bag right now, but again, I want to emphasize, our school business in California is much better this year than it was last year. It certainly hasn't returned to pre-recession levels. And we feel at some point, push has got to come to shove here. You got class size reduction that hopefully will be turning around. You have got schools that are continuing to age and need to be modernized. And you have also got growth now. The California student population has started to grow here for the first time in over a decade.

So all those will put pressure on state government to address matters. So I am sorry for my long-winded answer, but it's kind of a -- you can't really do it without knowing some of the history there, but we feel when you look at our rental fleet today and our low-cost rental assets and our standing with school districts in the state -- there is about 900 to 1,000 school districts in the state, we are really well positioned for any additional new rental business, which we've started seeing an increase in.

So, we're in a very strong position to benefit from these different areas or buckets I mentioned earlier as they begin, hopefully, to uptick.

Great, I appreciate the comments there, and it's good to hear it's coming back even without a bond measure.

Switching gears over to TRS, can you maybe just talk about some of the levers that you have to pull to drive growth in the business? Are you still seeing an international opportunity, and maybe can you grow the communication business more to offset some of that weakness in general purpose?

When you look at our electronics business, we are one of two of the largest rental companies really in the Americas, ourselves and a competitor, REX. And when you look at the US as a growth market, as we have talked about, it is low to middle single digit on rental revenue growth. And even though this year we were fairly flat, maybe up just a little on total rental revenues, obviously we grew profitability more than that because we have got a well-oiled machine.

So I think the US market, very healthy, but it is slow growth, for the most part. And if you look internationally, we have, obviously, made investments in various countries, some in southeast Asia, some in Mexico and South America, and we have actually -- at one point about a year ago, a year and a half ago, about 14% of our total rental revenues were from outside the US and Canada, and that has shrunk some, really, here over the past year or so.

Now we just entered in the last year India, which we feel is a wonderful market for us, and primarily to do business initially with US multinationals. So we only really set up a lot of infrastructure to be able to conduct business there. So that's an entirely new market that it has taken us about a year to get in. We have set up our facilities there. We have hired people, and we are just now really starting to see some of the rental revenue flow from that -- from the India market.

But overall, we will grow faster outside of the US and Canada on a percentage basis in the years ahead, and that's a great opportunity, especially with our prowess and success that we have done really in the Americas. And remember, it's a highly capital intensive business. There are technology obsolescence dynamics. It's not an easy business to enter and be successful in, but we certainly have been able to do that.

So there's some natural barriers to entry, in my opinion, to be highly successful, and not the least of which is the expertise that our sales engineers have on test equipment that they have grown over the decade.

Great, thanks for that. Now that you guys have built up some scale in the portable storage business, can you maybe just give us a little bit more color on the strategy there? Maybe are you focusing more on short-term rentals versus long-term rentals? Any specific end markets that you are targeting, and any commentary that you might have on the pricing front? It looks like one of your competitors is doing a pretty good job of pushing prices up.

I think pricing ever since we have entered the industry in 2008 has been very stable, and really never eroded, and it has stayed very healthy.

With respect to rental terms, yes. Longer rental-term projects, we target those just like our competitors do, and obviously having that longer contiguous rental stream and less churn of the product is a good guide from a profitability standpoint.

As for new markets, we plan on entering three new markets in 2014. I won't, for competitive purposes, mention what those markets are. But we are very excited about the opportunity. We are pretty selective. We do our homework. And of course, in 2013 we entered the greater New Jersey market, leveraging the Adler name for our portable storage business, and so we are pleased with the progress they have made thus far.

So, we are starting to get a larger national footprint. It will be larger by the end of 2014, and we love the business and love the metrics of it and the asset class.

Great. Thanks, guys.

David Gold, Sidoti & Company.

Just a couple of follow-ups for you. First, I'm not sure if you called it out, or if you can, but similar to the sense you gave us of the $0.17 for 2013, can you give a sense for what is embedded in the guidance by way of, let's call it, repair and maintenance costs or costs for the mobile modular units that you are prepping?

Yes, David, let me try and address that, and I would say with the guidance we have given for that category of expense, we think it will be at or slightly above what we experienced in 2013. So I would think an increase of perhaps 5% is possible.

As Dennis said earlier, it is all really going to depend, particularly the middle and second half of the year, whether we continue on the current pace of spending, but that's how we're thinking about it, up slightly over what we spent in 2013.

Got you. And so, forgive me, I know you hit on this a little bit, but so then, if that's the case also -- I guess presumably better than your guidance is for that to really anniversary as we get to the second half or really start to anniversary anyway. Is that --

Yes, I think that's right. That is correct.

Okay, okay. Perfect. And then, one of the things that you haven't yet -- you haven't spoken much on, so maybe you could talk a little bit, is a couple of comments in the release about being opportunistic and willing to do things meaningful in size. I wanted to see if we can get more of a sense of -- more color on that, by way of potential capital plans for the year?

Yes, let me address the capital plans first of all, and just to go back to looking at last year, we spent $133 million on rental equipment. Particularly given where utilization is on the TRS equipment pool, and also at Adler, I think as we look at 2014 as a whole, I would expect that the rental equipment CapEx will be slightly below what we spent in 2013, and so it may well be 5% below. It could be a little bit more than 5% below, depending on how the year plays out, but we have a lot of equipment available, and so that will be our focus.

And I will just mention PP&E for us. Land purchases and owning some of our own branch facilities is generally how we operate as we build out the business, and PP&E last year was a total of $12 million. We do have some likely activities we will do this year around land and buildings and development of land that we could spend twice that in 2014. So that gives you a feel just for the current business, our organic activities, what's in our thinking and in our plans.

Perfect, perfect. And then, just part two, speaking to what we might be thinking by way of opportunistic spending?

David, what -- let me share this with you. What I will say is we have a very active corporate development group here, and Keith and I are both a part of that in terms of officers, and we also have some people that spend 100% of their time on it.

And we are continually looking at all different types of rental businesses, primarily business-to-business rental businesses, and they vary broadly. We have no shortage of people that bring potential opportunities to us, either in a whole new rental leg or in a business that we are already in, for acquisition and to be able to roll in and have synergies and create something bigger and more profitable. But we are very active in our review.

As you know historically, we are very selective, and we like to get it right and know that we can really hit a home run. So that's our mode of operating, but we are very, very rigorous in the amount of material that we review and how deep we go to understand these businesses before we make a step. And of course, you also know, historically we don't speak to anything until we have actually executed any particular scenario.

Got you, got you. But I guess all that's to say that eyes are wide open right now.

That is fair to say. Absolutely.

Got you. Perfect, thank you both.

(Operator Instructions). Michael Caputo, Cramer Rosenthal.

Can you just remind us the dynamics on the sales side of the business? Is there a divestiture of some environmental business in there or is that just -- I know you had a big year on the sales side in 2012. Did that roll over into 2013 and that's why it is going to be down in 2014?

Yes, there are two things I would point out on sales. The first is you are completely right with the environmental test equipment business. We exited that in November 2012, and that resulted in a sale of $3.7 million, so that made the numbers in 2012 a little higher.

The other thing was in 2012 and it also straddled into 2013, within our Enviroplex business, we had what we characterize as a nonstandard project. It was new for us. That contributed about $6 million or $7 million in late 2012, and then there was another $6 million in the first quarter of 2013 related to that business.

So as we look going forward with Enviroplex, I would exclude that from the run rate in the Enviroplex business. So to put it in simple terms, as we enter 2014, there is $6 million of Enviroplex revenue that was in 2013 that we wouldn't expect to repeat. It is related to that special project, and we are not pursuing projects like that as we go forward.

So, that's the first comment. Those two items definitely mean that as we build our plan for 2014, our starting point is a lower volume of sales.

The other thing I would just say is the sales part of the business in terms of sales of used rental equipment, it's one of those harder to estimate items. We generally start the year trying to be conservative on that front, and timingwise, they can happen in any particular quarter. It's a harder piece of the business to forecast. We don't like to bet the plan on it at the start of the year.

Okay, thank you. That's helpful.

Thank you, and that does conclude the question-and-answer session at this time. I would now like to turn the call back over to management for closing remarks.

Thank you, Operator. Thank you all for joining us today and your continued support. And we will look forward to chatting with everyone on our Q1 call in early May. Thank you so much.

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation. You may now disconnect.