McGrath RentCorp (MGRC) 2014 Q4 法說會逐字稿

Good day, and welcome to the McGrath RentCorp fourth-quarter 2014 conference call. At this time, all conference participants are in a listen-only mode.

Later, we will conduct a question and answer session. This conference is being recorded today, Thursday, February 26, 2015. Now I would like to turn the conference over to Geoffrey Buscher of SBG Investor Relations. Please go ahead.

Good afternoon. I'm the investor relations adviser 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 1-888-203-1112 for domestic callers and 1-719-457-0820 for international callers. The passcode for the call replay is 5298819. This call is also being webcast live over the internet and will be available for replay. We encourage you to visit the investor relations section of the Company's website at mgrc.com.

Our press release was sent out today at approximately 4:05PM Eastern Time or 1:05PM 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 21-E 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. 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 the 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 quarter, and the Form 10-K for 2014.

The Company also announced a 2% increase of the cash dividend to $0.25 per share for the first quarter of 2015, representing on an annualized basis a 3.2% yield on the February 25, 2015, closing stock price.

For the fourth quarter 2014, total revenues increased 18% to $111.8 million from $94.8 million for the same period in 2013. Net income increased 18% to $13.9 million from $11.8 million. And earnings per diluted share increased 18% to $0.53 from $0.45.

Reviewing the fourth-quarter results for the Company's mobile modular division compared to the fourth quarter of 2013, total revenues increased $9.9 million, or 29%, to $44.4 million due to higher rental, sales, and rental-related services revenues.

Gross profit on rents increased $3.7 million, or 32%, to $15.2 million. Rental revenues increased $4.7 million, or 21%. And rental margins increased to 57% from 52%, as depreciation as a percentage of rent was flat at 17%, and other direct costs as a percentage of rent decreased to 27% from 31%.

Selling and administrative expenses increased 17% to $11.3 million primarily as a result of increased headcount, salaries, and benefit costs. Higher gross profit on rental, sales, and rental-related services revenues, partly offset by higher selling and administrative expenses resulted in an increase in operating income of $3 million, or 51%, to $8.9 million.

Finally, average modular rental equipment for the quarter was $627 million, an increase of $67 million. Equipment additions supported growth across all regions and our portable storage business. Average utilization for the fourth quarter increased to 74.9% from 70.5%.

Turning next to the fourth-quarter results for the Company's TRS-RenTelco division, compared to the fourth quarter of 2013, total revenues decreased $1.5 million, or 4%, to $33.8 million due to lower rental and sales revenues.

Gross profit on rents decreased $1 million, or 7%, to $11.9 million. Rental revenues decreased $0.9 million, or 3%. And rental margins decreased to 47% from 49%, as depreciation as a percentage of rents was flat at 40%, and other direct costs as a percentage of rents increased to 13% from 11%.

Selling and administrative expenses decreased 8% to $5.9 million primarily due to decreased marketing and administrative costs.

Lower gross profit on rental revenues, partly offset by higher gross profit on sales revenues, and lower selling and administrative expenses, resulted in a decrease in operating income of $0.4 million, or 4%, to $10.4 million.

Finally, average electronics rental equipment at original cost for the quarter was $262 million, a decrease of $7 million. Average utilization for the fourth quarter increased from 61.2% to 63.3%.

Turning next to the fourth-quarter results for the Company's Adler Tanks division, compared to the fourth quarter of 2013, total revenues increased $3.7 million, or 16%, to $26.8 million due to higher rental and rental-related services revenues.

Gross profit on rents increased $1.5 million, or 14%, to $12.7 million. Rental revenues increased $1.7 million, or 9%, and rental margins increased to 65% from 63%, as depreciation as a percentage of rents was flat at 20%, and other direct costs as a percentage of rents decreased to 15% from 17%.

Selling and administrative expenses increased 15% to $7.1 million primarily due to increased headcount, salaries, and benefit costs.

Higher gross profit on rental and rental-related services revenues partly offset by higher selling and administrative expenses resulted in an increase in operating income of $1.1 million, or 21%, to $6.6 million.

Finally, average rental equipment for the quarter was $298 million, an increase of $23 million. Average utilization for the fourth quarter increased from 60.8% to 65.1%.

On a consolidated basis, interest expense for the fourth quarter 2014 increased $0.2 million, or 8%, to $2.4 million from the same period in 2013, primarily due to the Company's higher average debt levels, partly offset by lower average interest rates.

The fourth-quarter provision for income taxes was based on an effective tax rate of 42.7% compared to 39.2% in 2013. The higher tax rate was driven by the full year 2014 effective tax rate rising to 40.3% as compared to 39.2% for 2013, primarily as a result of higher business levels in states with higher tax rates, and the resulting repricing of deferred tax liabilities.

Next, I'd like to review our 2014 cash flows. For the 12 months ended December 31, 2014, highlights in our cash flows included net cash provided by operating activities was $123 million, a decrease of $10.6 million compared to 2013. The decrease was primarily attributable to an increase in accounts receivable, partly offset by an increase in deferred income and other balance sheet changes, and higher income from operations.

We invested $152.2 million for rental equipment purchases, compared to $132.6 million for the same period in 2013. Property, plant, and equipment purchases increased $0.7 million to $12.7 million in 2014.

Net borrowings increased $32.5 million from $290 million at the end of 2013 to $322.5 million at the end of 2014.

Dividend payments to shareholders were $25.6 million.

With total debt at quarter end of $322.5 million, the Company had capacity to borrow an additional $227.5 million under its lines of credit. And the ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.89 to 1.

For 2014, fourth-quarter adjusted EBITDA increased $6.6 million, or 16%, to $48.2 million, compared to the same period in 2013, with consolidated adjusted EBITDA margin at 43% compared to 44% in 2013.

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 2015 earnings guidance, we expect 2015 full-year earnings per share to be in a range of $1.75 to $1.95 per diluted share. For the full-year 2015, we expect 6% to 11% growth in rental revenues over 2014.

Sales revenue is expected to be approximately 10% lower than 2014. Rental equipment depreciation expense is expected to increase to between $76 million and $79 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 $60 million and $63 million in 2015. Selling and administrative costs are expected to increase to between $104 million and $107 million to support business growth.

Full-year interest expense is expected to be between $10 million and $11 million. We expect the 2015 effective tax rate to be 39.5%. And we expect the diluted share count to increase modestly from 26.2 million to between 26.3 million and 26.5 million shares.

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

Thank you, Keith.

Now let's take a closer look at each rental business for the quarter. Modular division-wide rental revenues for the quarter increased $4.7 million, or 21%, to $26.8 million from a year ago. This is the seventh consecutive year-over-year quarterly rental revenue increase for our modular division.

During the fourth quarter, we experienced a 3% increase in division-wide year-over-year first month's rental revenue bookings for modular buildings, and a 33% increase for all of 2014 over 2013.

We're also continuing to see rental rates rise for various sized products as demand exceeds readily available supply. Modular division average and ending utilization for the fourth quarter of 2014 reached 74.9% and 75%, respectively, and increased from 70.5% and 70.7% a year ago. This is the highest modular division fourth-quarter average utilization level since 2008.

Modular division income from operations for the quarter increased to $8.9 million, or by 51% from a year ago. This strong increase in profit was driven primarily by higher rental revenues and rental revenue margin expansion.

Gross margin on rental revenues increased to 57% for the quarter from 52% a year ago.

Direct cost associated with readying equipment and inventory center operations as the percentage of rental revenues decreased to 26.8% from 31.2% for the same period a year ago, and from 36.3% during the third quarter of 2014.

Although our year-over-year quarterly building preparation expenditures continue to be at a high level due to favorable market demand, we are now beginning to see the benefit of an increasing base of rental revenues.

During the quarter, we also benefited from higher profit on equipment sales and rental-related services, partly offset by higher SG&A expenses. The higher SG&A 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.

Now let's turn our attention to Adler Tank Rentals and their results. Rental revenues at Adler Tank Rentals for liquid and solid containment tank and box division increased $1.7 million, or 9%, to $19.5 million from $17.8 million a year ago. In fact, this was Adler's highest quarterly rental revenue level attained to date.

It's important to note that only approximately 14% of total Adler, or 4% of total Company, rental revenues for the fourth quarter of 2014 were derived from upstream, or wellhead oil-related projects. Although our exposure to upstream oil-related projects is limited, over the next few months, we are cautious of any potential related negative impact to both midstream and downstream vertical markets.

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.

Average utilization was 65.1% for the fourth quarter of 2014, up from 60.8% a year ago. Ending utilization for the quarter was 63.9%, compared to 57.7% a year ago.

Further, fourth-quarter average equipment on rent reached $194.2 million, a 16% increase over the same period a year ago.

During the first half of 2014, we experienced project delays that have contributed to the higher utilization levels over the last four months of the year.

Overall fleet average monthly rental rates for the quarter declined to 3.35% from the 3.55% a year ago. This is reflective of a continuing highly competitive market for 21K tank rental assets. We are likely to see continuing downward pressure on 21K tank asset rental rates during 2015, primarily due to the supply and demand dynamics associated with a weakening upstream oil market.

Original cost of total rental equipment increased to $303.3 million at the end of the fourth quarter of 2014, up less than 7% from $284 million at the end of 2013, and up less than 2% during the second half of 2014.

Despite having meaningful earnings horsepower potential from our existing pool of unutilized rental assets, we are selectively purchasing boxes and specialty tank products, primarily to support our newest markets, and longer-term contracts with well-established customers.

Adler Tank Rental's income from operations for the quarter increased $1.1 million, or 21%, to $6.6 million from $5.5 million a year ago.

In addition to the increase in rental revenues for the quarter, other factors contributing to the increase in income from operations from a year ago included higher profit on rental-related services, lower inventory center-related expense, offset by both higher SG&A cost related to employee headcount, salaries and benefit costs, as well as higher depreciation expense.

Now let me turn our attention to TRS-RenTelco and their results. Rental revenues for TRS-RenTelco, our electronics division, declined by $0.8 million, or 3%, to $25.4 million from $26.2 million a year ago.

Income from operations for this quarter declined by $0.4 million, or 4%, from the same period in 2013. Although full-year first month's rental bookings were 2% higher for 2014 over 2013, first month's rental returns were up 3%. The combination of relatively flat net first month's rental booking growth, coupled with shorter average rental terms in 2014 compared to 2013, drove the quarterly year-over-year and annual declines in rental revenues of 3%.

We believe the increased churn of rental equipment is chiefly driven by a larger mix of communications versus general-purpose test equipment rental business in 2014 compared to 2013. Communications test equipment rentals typically have shorter rental terms than general-purpose test equipment.

Average utilization was 63.3% for the fourth quarter compared to 61.2% for the same period in 2013. Period ending utilization for the fourth quarter was 59.8%, compared to 58.2% a year ago.

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, as it has throughout 2014 in building its customer following, increasing booking levels, and growing rental revenues over 2013.

Rental revenues for the fourth quarter and full-year 2014 grew by 42% and 41%, respectively. Individual branch as well as overall business segment profitability is continuing to grow. We entered the greater Chicago and Charlotte markets during 2014, and are targeting further regional expansion during 2015.

We are on track towards building a meaningful size portable storage rental business with attractive operating metrics.

Now for a few closing comments. As we turn the corner into 2015, the Company's historically most profitable modular building rental business has significant momentum. The California market is only in the early stages of recovery, especially Southern California.

As our modular rental business in the Golden State struggled from the onset of The Great Recession through 2013, we were able to build a very significant modular business in both Texas, and in the Mid-Atlantic, as well as see our Florida business improved markedly.

Our electronics business is an industry leader with very strong operating profitability and metrics. However, it is not immune from periodic high tech, aerospace, and defense, or communications sector softness.

Our liquid and solid containment rental business is a national player today with solid earnings and significant long-term growth potential.

Despite Adler's success over the past few years at greater diversification of its rental revenue mix in the vertical markets outside of upstream E&P projects, the recent steep decline in the price of oil creates an uncertainty going forward.

This uncertainty is not only related to wellhead opportunities, but also to both midstream and downstream business levels due to reductions in capital spending as energy companies look to manage the reduced cash flows.

Lastly, our portable storage rental business is growing favorably in rental revenues, earnings, and geographic footprint. We're looking forward to continuing to turn the flywheel daily in building each of these enterprises.

As we begin the year, our guidance range of $1.75 to $1.95 per diluted share for full-year 2015 is broad, in particular due to the uncertainties with both our electronics and tank and box rental businesses.

Please keep in mind that McGrath RentCorp has a very strong balance sheet with funded debt to last 12 months, an adjusted EBITDA ratio of 1.89 to 1, and with the current capacity to borrow an additional $227 million under our lines of credit. We can be very opportunistic in growing our business lines and pursuing new strategic opportunities with the availability of such funding.

Last, the Company has just declared a quarterly cash dividend of $0.25 per share for the quarter ending March 31, 2015, an increase of 2% over the prior-year period. This marks the 23rd consecutive year in which McGrath RentCorp has raised its dividend.

On an annualized basis, this dividend increase represents a 3.2% yield based on yesterday's closing stock price. We are very pleased to continue our practice of providing a quarterly return on investment to our shareholders.

And now Keith and I welcome your questions.

(Operator instructions)

Scott Schneeberger, Oppenheimer.

In modular, just anecdotally, what are you hearing from the school districts? It looks like some really nice momentum. I'm just a little bit more curious on what you're hearing on the street with regard to commentary and the pipeline for (inaudible).

Well, you really have to look at school markets by geography. And first of all, we've had some -- we continue to have good success in the Mid-Atlantic. The Florida market has turned very favorably. Texas market was very strong this year.

The California market -- in Northern California, we saw some uptick, a better year than last year, but certainly not back to the standards we've been accustomed to. And Southern California, quite frankly, which was in effect the largest portable classroom rental market really in the country, still lags well behind.

So there's a lot of potential opportunity in California with classroom rentals going forward based upon how the funding dynamics get resolved.

Great, thanks. Switching over to Adler, specifically with regards to oil and gas exposure, could you tell us what you're hearing from customers in the oil fields, essentially? How has pricing been affected also, thus far? Are you still in early innings of people reacting to the lower oil prices, or do you think there's more yet to come -- the bigger piece more yet to come? Just curious on where we are through it, and what the pricing discussions are. Thanks.

Well, let me start with the second part of the question on pricing. Pricing, needless to say, with E&P companies and oil field services companies being impacted negatively, you know, the E&P companies squeeze the gas and oil field services companies, and of course they squeeze their suppliers. So there certainly is a downward pressure on pricing to lower costs, obviously because the cash flow and revenue stream is down due to the precipitous drop in the price of oil.

But let's remember something here. Every company has its own set of variables that really drive its economics. And then also by shale region, some shale regions are less expensive to be able to extract shale, oil, and gas, and also get it to market -- transportation costs, et cetera.

For instance, the Bakken is likely the most expensive region in the country. But then if you look at areas like the Permian and some other plays, it's less expensive. So individual company capitalization, and the various dynamics of shale plays, and the infrastructure to get oil to market, or gas to market, plays a significant -- has a significant impact on the economics for each individual company.

So we have found out some are -- they will continue to not only drill, but complete the wells. And they're still sending product to refineries, et cetera. Whereas others may just drill the well, not complete the well, and be ready to go as soon as the economics get better on oil prices, to go ahead and extract those fuels.

So it's really different by company. And needless to say, we are monitoring by region the different dynamics, and also by customer based upon where we think we're likely to get our best opportunities, and also understanding those that are perhaps holding back some, their time frames in which to go ahead and complete wells, et cetera.

So that kind of gives you an overview. But I think we're sitting here today at about $50 a barrel on West Texas intermediate crude, and of course the Brent crude price is in that similar neighborhood, and I'm not sure if anybody has a good long-term view of what the dynamics are going to be.

But we all understand if too much production is cut back, at some point, that's got to reverse itself. So the best we can do is try to stay close to each company, understand their balance sheet, understand their -- from a credit quality standpoint, make good decisions there, and then monitor a variety of variables, everything from rig counts to other dynamics -- hedging.

You can look at some companies have already hedged into 2015, and they can continue to drill and complete wells, and it's favorable. Other ones have to pull back. So there's quite a few variables that we give attention to in assessing things. But we're in the early innings here. I don't think anybody really has a good grasp on how this is all going to play out this year.

All right, great. Thanks for the color, Dennis. I'll turn it over.

Yes.

David Gold, Sidoti.

I have just a couple of questions. First, there was some commentary there and in the release on repair and maintenance step-up for next year presumably embedded in the guidance and -- on the mobile modular side -- wanted to get some color there. What's pushing that? Is it specifically California classroom? So product types and geography, I guess, is where I'd start.

Yes, I'd say California is a big market where we've improved utilization, but we still have a long way to go. And both on the commercial side, and on the classroom side as we get opportunities to put more of that equipment out, we will encounter some elevated costs to prepare the equipment.

We saw some of that during 2014. In our plans, we're expecting to see more of it in 2015. And our initial assessment is it could easily be 5% to 10% higher spend in that area for the modular business. And I would say California will be a significant market for incurring those costs.

Got you.

David, I would just add a comment to Keith's. That assumes that demand continues as strongly as it has been. If for whatever reason that tapers off, et cetera, we're going to be able to pull -- that's one area we can flex very quickly in reducing our cost, and we get some very significant benefit by doing that.

But our outlook is that we are going to have a very favorable year in growth in rental revenues.

Got you. So presumably if you're doing repair and maintenance on containers or classrooms that have been on the beach, if you will, or on the sidelines for some time, presumably that implies a pretty -- a commensurate increase in utilization?

If we are spending those kind of dollars, that's exactly correct. There should be a material increase in utilization for the year.

Okay, perfect. And then, talk a little bit if you can about -- I know you gave some color on your upstream exposure. But you also noted, I guess, the uncertainty on downstream and midstream. Can you give a sense for what the revenue base looks like today if we thought about oil and gas in its entirety?

Yes, the way I'd frame it, David, is there's about another 7% or so of the Adler rental revenue mix related to upstream gas. And as you heard us mention in the prepared remarks, 14% related to upstream oil. So if you take those together, you're right around 20%, 21% neighborhood.

Okay. And then, as to downstream and midstream?

Yes, we don't generally break those out. They're probably smaller percentages. But we don't generally break those out.

Okay. All right. Got you. I guess, as much -- I'm trying to get a sense for was there's that wide variability, and some of that's attributed to the risk from oil. So just wanted to sort of get a better sense of if -- maybe there's another way to get there -- as to how we should think about what plays out to bring the $1.75 versus the $1.95.

Yes, and David, I think that only way any company today can really look down the road here is we've got to wait for the next few months to play out and continue to learn from the different variables that are out there.

And demand on one side, and just how much pullback is there going to be on production, et cetera. So that's why our range is so broad. We don't have a good compass -- we're not good prognosticators on determining the future here. And if somebody is, if you'd certainly have them give us a call. We'd love to chat with them.

Got you. Okay, one other just quick one. When we think about trends, I think both mobile modular and Adler spoke -- there's commentary in the release about increased employee headcount in both of those businesses. And I'm curious if you can give some color as to what areas you've been adding headcount. In other words --

Primarily it's in the sales area. We actually are short sales people in multiple businesses. And obviously we're selective on who we hire, and we want to get the right people. But it's really on being able to field the opportunities. We need more people to be able to manage the demand side.

Perfect. Perfect. That's helpful. Thank you both.

Thank you.

(Operator Instructions)

Joe Box, KeyBanc Capital Markets.

So Keith, I appreciate you walking through some of the individual guidance components earlier. I'm just curious because if you add back the tax benefit this quarter, your guidance for next year is really only looking at flat to up 11% earnings growth. Can you maybe just walk us through some of the assumptions that you've made to get to that flat earnings number? And then maybe what you need to do to get to that 11%-plus?

And I know we've already talked about a couple of them in terms of rate and [contagion], maybe a little bit more inventory center cost, but I'm just hoping you can maybe frame it a little bit better for us.

Sure, I'll try and be helpful in a couple of ways. I think the first thing to start with is look for 2014 at where we saw growth in operating income. And if you look at the business as a whole in 2014, we had 6% growth in operating income, but quite a disparity in where that came from.

The modular's operating income was up 53% year over year. We were down 2% at Adler. We were down 6% at TRS. So as we enter 2015, the way I would sort of frame the thinking is we still see the modular business as having the greatest potential to contribute to growing operating income.

And if you look at the other two divisions, first of all, this is seasonally a tougher time of year to really get a read on the health of the business. It's seasonally slow at Adler. It's seasonally slow at TRS. That's typical for this time of year. So there's a little bit of caution. We've seen a slower start, particularly at electronics. We've seen that in the past as well, but that's what we're dealing with when we look at it today.

If you look at what gets you to sort of the goal posts on the range, we entered the year knowing it's a more difficult climate for oil and gas. And I think that's based in, if you will, the middle neighborhood of how we're thinking about Adler.

But there are certainly some scenarios where there are some new opportunities for business there that could give us a bit of a lift. There's also a lot of risk and uncertainty that could pull us the other way, as Dennis commented earlier. So that's the way to think about it there.

If you look at the business as a whole, look at 2014. We had a nice uptick in the sales side of the business. Modular sales in particular were up from, I think it was $21 million in 2013 to $29 million in 2014. We're not assuming we're going to get that level of sales activity.

Now again, if we were fortunate and did get very healthy sales, that gives us an opportunity to push higher in the range. But as we enter the year and sort of look at the middle zone and what our expectation is, we're really discounting some of the sales that we achieved in modulars. And again, that's always a very hard part of the business to forecast, particularly this early in the year.

Clearly with all the cost elements, we have plans in terms of how we're going to run the business, the headcount, et cetera. It's always, there's going to be some play in those numbers. A lot of it's tied to opportunity. If we're hiring, it's because we see a reason to have a bigger team and pursue more opportunity in the market. If not, we can throttle back the other way.

The interest expense, you'll probably have noted, is up from what we incurred in 2014. That reflects a couple of things. One is we start the year with a slightly higher debt level than we entered 2014. Even though we think the debt will be flattish for the year, it will still mean the average debt level is up slightly from 2014.

And we do expect to see a combination of both Fed policy resulting in higher variable interest rates for us as the year progresses, as well as the prospect that we might put in some more fixed-rate debt in our capital structure.

So I know there's a lot of factors to consider. But big picture, if we look at operating performance in the business, modular's had an excellent year in 2014. We see that business as having the most potential as we enter 2015. The other two businesses, we're just being a little bit more careful around the dynamics there, both in market and in terms of visibility that we have this early in the year.

Understood. Thanks for the color on that. Let me just dig into one minor point of that. In terms of the inventory center costs, and correct me if I'm wrong here, but it does sound like maybe demand is coming in a little bit better than you were expecting on the modular side, and maybe we're not getting those costs, or those costs aren't abating like we were expecting.

So can you just remind us what was the inventory center headwind on an EPS basis in 2014, and are we thinking about that being flattish in 2015, or even a headwind again?

Yes, I would say it's a headwind in 2015. And I remarked a little earlier in our sort of middle ground thinking, we're expecting it could be as much as 5% to 10% higher for the modular business than it was in 2014. And 2014 was up materially from the 2013 level.

And Joe, you have to take that in the context -- if we truly come in on that budget range, that means that the market is pretty much on fire. I don't know [how to] put it, because we're not going to be spending those kind of dollars unless demand is very significant.

Plus there's a wild card in this is that whatever equipment [returns up] rent that we've already touched, and doesn't need as much maintenance, repair, et cetera, or was at a lower rental rate due to going out during The Great Recession, we may get some additional benefit and lift there.

But no, if we're going to spend that amount of money in our inventory centers again with a little uptick there, that can only -- the only basis for that would be continuing very strong demand.

Understood. Thanks. Switching gears over to your Texas exposure specifically within the modular business, can you maybe just give us a sense of where your modular assets are in that market geographically? I mean, are they pretty dispersed throughout the state? And just remind us of what your commercial versus you education exposure is.

Well, in terms of our footprint in Texas, we are everywhere, from obviously the greater Houston market, which with refineries, petrochemical plants, et cetera; Dallas; San Antonio; East Texas -- Beaumont, Port Arthur, where obviously we do work with petrochemical plants as well as refineries, et cetera, which we don't see any slow-downs there at least in our world thus far.

Obviously the construction industry and a variety of other mixed-use needs. Remember that Texas is a very different economy than it was in the 1980s when it was primarily energy-based, and banking-based. It's much more diversified, many more different industries.

If you just look at the corridor -- the I-35 corridor from DFW to San Antonio and Austin, I mean, there's a significant high tech element there now, et cetera. And Texas has become a much, much more diversified economy.

Right. One question on Adler, and I apologize if this was somewhat addressed earlier, but clearly there's a lot of new players in the market. There's a lot of new supply that's come on. Do you think that these are fungible tanks and fungible assets that they've brought online recently?

And are you starting to see any of those assets move into maybe some of your environmental markets, or your downstream markets that you're in? And is it having any sort of impact on pricing? Or is that all just potentially down the road?

Well, there's been downward pressure on 21K tank pricing for some time now. Other assets, not so much. And as you know, Adler builds a different asset than virtually anybody else in the industry -- a smooth wall product with very state-of-the-art safety features, et cetera. So we spend more dollars on our product.

And the reality is in that business, it has much more to do with how well you serve the customer. If you have a very good rental product like Adler, and you really, really have done your work with the customer in serving their needs, that's what makes the most difference in terms of gaining market share and building market share.

Just an inexpensive product, and somebody going in on the cheap, yes, they can get some business. But over the long term, you don't tend to build a lot of loyalty that way. That business, we've been in it six-plus years now. We've learned that those relationships really matter, and doing those little extra items. And hopefully that's where we can continue to excel, and take market share, and also expand as markets grow.

Appreciate it. Thank you both.

Thank you.

And this does conclude today's conference -- today's Q&A session. Gentlemen, I'll turn the call back to you for closing remarks.

We'd like to thank everybody for joining us this afternoon on the Q4 2014 call. And we'll look forward to chatting with everybody on the Q1 2015 call in very early May. Thank you so much.

And this does conclude today's conference call. Thank you again for your participation and have a wonderful day.