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Executives

Steve Bunger – Chairman, President, and Chief Executive Officer

Larry Trachtenberg – Executive Vice President and Chief Financial Officer

Analysts

Adrienne Colby - Deutsche Bank

Philip Volpicelli - Goldman Sachs

Scott Schneeberger - CIBC World Markets

Theodor Kundtz - Needham & Company

David Gold - Sidoti

Chris Dougherty - Oppenheimer & Co.

Jamie Sullivan - RBC Capital Markets

Sundar Varadarajan - Deutsche Bank

Jim Harris - Bislett Partners

Mobile Mini, Inc. (MINI) Q3 2008 Earnings Call November 3, 2008 5:30 PM ET

Operator

Good day, everyone, and welcome to Mobile Mini, Inc. third quarter 2008 conference call. (Operator Instructions)

I would now turn the conference over to Steve Bunger, President and CEO. Please go ahead, sir.

Steve Bunger

Thank you and good afternoon. I also want to welcome everyone to Mobile Mini's 2008 third quarter results conference call. I'm Steve Bunger and with me is Larry Trachtenberg, our Executive Vice President and CFO, and also for a short comment later in the conversation, Mark Funk, our current Executive Vice President and soon-to-be CFO.

To start with, Larry's going to read the disclaimer, outline the press release and give you his comments. Following that I will give you my comments. Mark will give a few comments, and then we'll open the call up for questions and answers.

So with that said, I'll turn it over to Larry.

Larry Trachtenberg

Thanks, Steve. We issued a press release this afternoon detailing our third quarter and nine months ended September 30, 2008 operating results. This release is available on our website and can also be accessed through various web-based news services. A Form 8-K containing the press release has been filed and is also now available.

Before we get started, I'd like to read you our legal disclaimer. This call may include forward-looking statements, particularly regarding earnings estimates and anticipated cost savings resulting from our recent merger with Mobile Storage Group, which involve risks and uncertainties that could cause actual results to differ materially from those currently anticipated. Risks and uncertainties that may affect future results include those that are described from time to time in the company's SEC filings. These forward-looking statements represent the judgment of the company as of this date and Mobile Mini disclaims any intent or obligation to update forward-looking statements.

Unless otherwise noted, all results discussed on this call will be our non-GAAP financial results. A discussion of debt extinguishment expense included in our 2007 non-GAAP operating results and merger-related expenses included in our 2008 non-GAAP operating results is included in our press release issued this morning.

In this conference call we will discuss certain non-GAAP financial measures such as EBITDA and free cash flow. Reconciliation of how we define and arrive at EBITDA and free cash flow are included in our Form 8-K.

Mobile Mini today reported its third quarter financial results. Revenues during the third quarter increased by 59% to $132.8 million from $83.5 million last year. [Revenues] increased 61.3% to $119.3 million from $88.6 million last year.

EBITDA increased 69.2% to $55.7 million from last year's EBITDA of $32.9 million.

Net income for the quarter ended September 30, 2008 increased to $17.1 million or $0.40 per diluted share as compared to net income of $12.6 million or $0.35 per diluted share for the same quarter last year.

The company's operating margin increased to 34.7% from 32.6% during the third quarter of fiscal 2007.

Our improved results this year result primarily from the $6.4 million of cost saving synergies achieved in connection with our merger with Mobile Storage Group in June 2008. This merger enabled us to combine branch operations across the country and to take advantage of the operating leverage inherent in our business model. In addition we were able to eliminate duplicate corporate overhead. '

These cost reductions were offset in part by continued weakness in our rentals to the nonresidential construction segment. We are clearly in the midst of a downturn in nonresidential construction activity which continues to be most severe in California, Arizona and Florida.

In addition, our year-over-year comparison was impacted by a 92% increase in the cost of fuel. Although fuel costs have declined in recent weeks, most of the decline occurred after the end of the quarter.

For the nine months ended September 30, 2008, revenues reached $292.4 million, EBITDA totaled $117.1 million, and pro forma earnings per share were $1.06.

During the nine months ended September 30, 2008, we significantly cut back on our capital expenditures and generated free cash flow for the first time since we adopted our leasing model. We generated $14.8 million of free cash flow versus a cash requirement of $34 million during the same period last year.

Our lease fleet capital expenditures net of proceeds from sale of lease fleet units were $39 million, and our PP&E CapEx totaled $10.7 million.

We generated $64.6 million of cash flow from operations.

The company's ratio of funded debt to EBITDA stood at 3.98 to 1 at September 30, 2008, as calculated in accordance with our credit agreement.

We have consistently maintained the strongest balance sheet in the industry, which has enabled us to take advantage of the Mobile Storage Group merger opportunity.

Now in light of the state of the credit markets, we have received a number of questions in recent weeks regarding our debt maturities and the covenants in our various debt agreements.

We thought it would be useful to go over some of these items on this call. We have two issues of publicly held notes outstanding as well as a $900 million line of credit. The earliest of these issues to mature is our line of credit, which matures in June 2013. There is no need to refinance any of our debt before then.

The most restrictive financial covenants are contained in our line of credit; however, these covenants, which include an earnings to fixed charge covenant, a leverage covenant, and a utilization covenant, are springing covenants, which means that they only apply if our available credit falls below $100 million. As of September 30, however, our available credit had increased to $302 million from the $293 million level of June 30, and it's actually increased substantially since September 30 as we continue to generate more free cash flow.

Today we are also adjusting our 2008 earnings guidance. Due to the credit crunch and related economic decline being experienced, we're seeing a slower than anticipated level of business activity. Although most of the decline is being offset by synergies from the merger and cutbacks in expenses, we believe that our earnings will be slightly below the range we originally anticipated.

We believe we can achieve earnings of $1.45 to $1.50 per share this year. This earnings guidance is based on leasing revenues of between $382 and $385 million and EBITDA of between $174 and $177 million.

We expect to issue earnings guidance for 2009 in December of January; however, based on the speed at which integration with MSG is proceeding and the cost savings Steve will be discussing in a moment, we're not confident that we will be able to obtain at least $30 million in cost synergies during calendar year 2009.

I'd now like to turn the call back over to Steve for his remarks.

Steve Bunger

Thank you, Larry.

The third quarter was another very business quarter for the entire Mobile Mini team as a result of the Mobile Storage merger that closed at the very end of June. Our rental revenue, sales revenue, operating income, EBITDA and earnings have all significantly increased as a result of the merger.

Our average rental rate and utilization were lower compared to prior periods due primarily to the merger. The lower rental rates were a result of a different product mix. Mobile Storage did not have mobile offices and has a lower percentage of security offices than Mobile Mini. Both of these product rent at higher rates than storage units.

In addition, Mobile Storage had lower rate van trailers in their fleet. These units, which comprised 1% of our fleet prior to the merger, now comprise 5% of our fleet after the merger. The lower utilization rate results in part from the addition of the mobile storage fleet, which had a lower utilization rate compared to our merger date utilization rate.

Our rental activity and utilization were also affected at many of the branches by the slowdown in the economy and, most noticeably, the nonresidential construction. The merger innovation also negatively affected our growth rate as were diverted integrating two companies and also bringing on and training new salespeople and branch managers. That was expected. The good news is we've completed most of the integration phases of the merger and are onto the execution phase.

From a pricing perspective we continue to be encouraged by the pricing environment, which is evidenced by our rental yield increase compared to combined pro form 2007 Mobile Mini to Mobile Storage results. The pricing climate remains very positive. We're also not seeing price erosion in any of our markets that have been affected by the construction slowdown.

The overall increased leasing trends come primarily from our core rental customers, who are noncontractors and non-mass discount, seasonal discount rentals. We are not competing in a zero sum marketplace for the majority of our customers. Most of these customers rent one container and are customers that have never used portable storage prior to hearing about our very differentiated product lines. With our sales and marketing programs, we are expanding the size of the portable storage market, which has helped us grow during past economic downturns.

I also want to give you a short update on the U.S. seasonal holiday rental business. As we stated in prior conference calls, our goal over the last couple of years has been to deemphasize the seasonal business because it's the lowest margin and highest service segment of our business. In the past seasonal mass retailers like Target and Wal-Mart would rent storage containers for three to four months to store seasonal and layaway inventories. They would then return those units in late December and into January. Mobile Storage has historically done a fair amount of seasonal business with some of their national account customers.

Our plan is to continue servicing those national account customers, but focus our local branches to rent to seasonal users in cities and to customers where the seasonal business is most profitable. What we have been seeing over the years is that large retailers are building larger stores with larger warehouses and thus not needing as much seasonal storage. In addition to that trend, the retailers are taking the units much later in the cycle and therefore only needing them for two or three months instead of the traditional four months. We are also being told by some of these retailers that they are cutting back on seasonal storage because of the anticipated weak retail season.

With that said, we expect our seasonal rentals to peak out at about 10,000 units, which is down from about 12,000 units last year if we combine both Mobile Mini and Mobile Storage seasonal rentals. As with prior years, seasonal rentals will become a smaller and smaller portion of our revenues. Instead we are concentrating on our core storage customers who are much more profitable, longer-term uses and a much better use of our capital.

I would now like to give you an update on the Mobile Storage merger. As you might imagine, we're heavily into the merger integration phase. We continue to be very encouraged by our progress, what we are learning and the level of synergies we can attain with the merger. Everything we continue to learn further solidifies why we believe this transaction is so strategic and transforming.

We have broken the merger and integration process really into three main phases. The first phase is the planning stage, which is well behind us now. The second phase was the integration phase, which is basically employee consolidations, branch consolidations, corporate and back office consolidations, computer conversions, and implementing best practices within the new organization. That has also been pretty much completed.

The next phase is the execution phase, which is more the sales and marketing, training new salespeople and branch managers, repositioning and rebranding inventory, a further focus on customer service, delivering on time, picking up on time, accurate and timely billings. And also setting, really, a kind of culture of scrappy sales and marketing.

In the U.S. we've already integrated all the new branches, closed down the overlapping branches, closed down the Mobile Storage corporate offices, hired the Mobile Storage employees necessary for our business plan, and have converted all Mobile Storage customers and accounting to Mobile Mini's computer system.

In the U.K. we are about 60 to 90 days behind the U.S. as it relates to the integration of the two companies. The main reason for the delay is the U.K. unemployment regulatory requirements. These requirements are very time-consuming processes related to redundant employees, new job requirements, job eliminations, branch shutdowns, and much more. We have finally completed the legal merger process in the U.K. in late August, consolidated all the branch locations, closed down the corporate offices, and have recently completed the computer conversion.

From an execution point of view in the U.S., we have completed the initial sales training stages and begun the ongoing training, monitoring and coaching stages. We've also begun the rebranding stage.

In the U.K. we are just beginning the initial sales training next week, and that will take about three weeks to complete.

So where does that put us today? I'm very happy to report that we're officially out of the integration stage and aggressively engaged in the execution stage. The U.S. and the U.K. are now on the same computer system, renting units, accounting, billing, reporting and contact management systems for our sales people, which is a very important milestone to cross. We've also achieved $6 million of cost saving synergies during the third quarter of 2008.

I want to compliment everyone on the Mobile Mini team for completing such a huge project in only three to four months, realizing the synergies, coming together as a team, and still serving our customer. Everyone has worked tremendous hours with great professionalism.

One of the biggest risks in a merger like this is obtaining synergies but losing those synergies because we lose customers. To measure our success and identify areas for improvement, we are now tracking and monitoring how our customers rate our service in the U.S. using a method called the Net Promoter Score. This is a process used by many of the great customer service companies whereby they have a third party call most of the customers.

We actually had a third party call all of our customers after they have delivery and pick up and then ask the customer if they would recommend our products and services to a friend or colleague. The results are scored and weighed based on which customers were completely satisfied and reduced by those customers not satisfied. I've been told that anything above a 50% Net Promoter Score is considered very good. We have been tracking our Net Promoter Score results for three months and our current score is 73%. This is a huge vote of confidence from our customers for our products, services and employees, but we all feel like there's a lot more we can improve upon.

As mentioned in the press release, we've increased our estimate for hard cost synergies we will obtain from the merger in 2009 from $25 million to $30 million. The hard cost synergies we have identified fall into three major categories, which are in order of magnitude - people synergies, $25 million; land synergies, $4 million; and advertising synergies, $1 million.

We are actively executing on each of the strategy opportunities property by property, person by person, and advertising media by advertising media. We continue to actively cancel property leases, buy out existing property leases, and re-rent some of our properties we can't buy out. The advertising synergies are not significant and the Yellow Page portion of the synergy will take about 12 months to phase out. There are many other less material hard and soft cost synergy opportunities we're working on which are not included in the $30 million of projected synergies, which we believe are very achievable.

Our goal with the merger was not only to combine the two leading companies and take out costs to drive earnings but to also learn from both companies and hire the best of the best for all positions within the combined company. I believe we accomplished both of those goals. We went through a very lengthy process evaluating Mobile Storage and existing Mobile Mini employees at all branches and at all levels. As a result, we now have a deeper organization structure and we have a very strong team with a mixture of Mobile Mini and former Mobile Storage employees and executives that will help take the company to the next level.

One of the things I am most proud of is the fact that we've been able to pick the best of the best from both organizations while treating everyone with dignity and respect, but also without causing cultural clashes between Mobile Mini and former Mobile Storage employees.

As I mentioned earlier, I believe that this merger will be a positive transforming and strategic event for Mobile Mini for many reasons, which include we are combining the number one and number two competitors in our industry. As an example, in the U.S. we believe we are now at least four times larger than the number two national competitor, which is Williams Scotsman. We are now able to offer our customers local delivery rates and localized service in 20 markets in the U.K. and 80 markets in the U.S. In addition, we have 100% coverage in the U.K. and are in virtually every major city in the U.S., which will greatly benefit our national account customers.

The ability to combine Mobile Storage's growth by acquisition expertise with Mobile Mini's ability to grow a branch with our differentiated products and our sales and marketing expertise, the ability to leverage the Mobile Storage national account relationships and expertise, which we've already started doing, the opportunity to add significant critical mass to our U.K., which has been a huge improvement to our operating margins, and with the overlapping markets, we have an excess number of containers that we will be transferring to nearby branches where we can better utilize those assets. This will have the effect of significantly reducing our CapEx requirements for many years to come.

The critical mass, the cost takeouts, the CapEx rationalization have created a free cash flow model. We'll use that free cash flow to reduce the total debt and delever the balance sheet over time. In addition, Mobile Storage has low market share in markets that Mobile Mini had strong market share and especially the markets that are being affected by the most recent nonresidential slowdown in California, Arizona and many markets in Texas.

Lastly, we have combined the best of the best of both companies and created a very strong organization with a strong balance sheet, strong cash flow and many growth opportunities. We have now looked under Mobile Storage's hood and are still convinced that the fundamental reasons for the merger are unchanged and even more strategic and compelling, especially considering the current uncertain economic environment.

This is not the first time we've been faced with a difficult economy. In fact, we are much better positioned today than in prior slowdowns because we have a much more diversified customer mix, branch locations, strong balance sheet, and now we're in a free cash flow position.

Our plan is to complete the transition of our new branches to our sales and marketing model, focus on customer service, but to also continue taking operating costs out of the business, significantly reducing our CapEx, maximizing pricing where possible, and paying down debt.

I look forward to what the future will bring to Mobile Mini as a result of this merger.

Before we transfer the call over to the operator, right now I'd like to transfer the call over to Mark Funk to have him give some comment as well.

Mark Funk

Thanks, Steve. I'm very excited to be joining Mobile Mini. For me, this is a terrific career opportunity. I've worked closely with Mobile Mini's excellent management team and watched the business model play out over many years and over a much larger organization and I'm a true believer.

As many of you know, I've worked in several key Mobile Mini transactions, including several acquisitions and numerous debt offerings. Most recently I was heavily involved with Mini's new $900 million [inaudible] revolver, which made the mid-year merger with Mobile Storage possible.

I'm using the time between now and year end to learn as much as I can from Larry and his finance team, who've been very helpful and welcoming. And I plan to speak with the analysts who follow Mobile Mini and research, and I hope to meet with many of our institutional investors at upcoming investor conferences, the next being held in January and New York. And it's the Needham Annual Growth Stock Conference.

I guess with that, let me hand it back to Steve and Larry.

Larry Trachtenberg

And I'd just like to welcome to Mark on board and thank you for coming over. And I'd like to turn the call over to the operator for the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Adrienne Colby - Deutsche Bank.

Adrienne Colby - Deutsche Bank

It looks like SG&A came down considerably in the quarter and I'm just wondering what we should be using for the fourth quarter, if we can assume that it'll stay around this level or return to some of the levels we were seeing earlier this year?

Larry Trachtenberg

Well, Adrienne, SG&A is down as a percentage of lease revenues primarily because of the synergies involved in the Mobile Storage transaction. We've been able to close a lot of branches and spread the revenues that we have. Really have the same revenues and just lower operating expenses because we have the same - you know, the same number of branches can support a much higher level of revenues. And so we should be able to maintain the same kind of operating margins and the same kind of SG&A going forward.

Steve Bunger

And on top of that there were some period costs related to Europe that we couldn't consolidate that will be further reduced in further questions as well.

Larry Trachtenberg

And further, we're also hopeful that we'll be able to get some help in SG&A in the fourth quarter with lower fuel prices.

Adrienne Colby - Deutsche Bank

And I noticed in the past downturn revenue growth troughed around 7% and I was just wondering if you could comment on what your end market exposure was like then versus now, particularly what your nonresidential construction exposure was like then.

Larry Trachtenberg

You know, we don't have the exact data right now. We're in the process of compiling that. But I would anticipate our exposure is very similar to what it was before. The difference between last time and this time is we didn't have the piece in the United Kingdom, and this time we're in more geographic markets.

Operator

Your next question comes from Philip Volpicelli - Goldman Sachs.

Philip Volpicelli - Goldman Sachs

Just looking at the price increase you had in the third quarter, can you give us a sense of how big that was?

Steve Bunger

You know, it was a combination of a price increase and a continuation of our mix. How would you clarify it as far as between the two pieces, Larry?

Larry Trachtenberg

Well, probably primarily price at this point. And the increase third quarter year-over-year on a pro forma basis was about 1.5%. We did put through a price increase in September on a portion of the fleet in the U.S., but it's basically a - probably averaged about 5%, but it was only on a portion of the fleet so it was probably like maybe a 1% price increase.

Philip Volpicelli - Goldman Sachs

And are there plans to roll it out to other segments within the fleet or is that - you're going to keep it there and see how things are in '09?

Steve Bunger

We're going to review it every three or four months to look at customers that have had the unit longer than their rental term. So we're looking at that. We're also looking more effectively and aggressively and with better matrixes at units going on rent compared to the company average to see where we can even raise the rate at the front end as opposed to waiting until the back end.

Philip Volpicelli - Goldman Sachs

And are you going to change your contract where it says, you know, if we have a 12month period where we're renting it, after the 13th month we're allowed to put a 2% increase or something like that? Is that something you're contemplating?

Steve Bunger

It already says that. And that's what we just did.

But what I was saying is like we were basically working on - I call it less discounting to ourselves. So the salespeople feel more confident and we hold them more accountable around rental rates, more focused around better rental rates as the units go on rent.

Philip Volpicelli - Goldman Sachs

And when we look at the guidance, it came down a little bit. What was the change? Is it a change in rate outlook? Is it a change in utilization? And can you give us a sense of what your assumptions are for rates and utilization in the fourth quarter?

Larry Trachtenberg

The reduction in guidance, you can see it's primarily in revenues and it's a reduction in utilization.

Steve Bunger

It's also a slight reduction in seasonal business.

Philip Volpicelli - Goldman Sachs

And then in terms of free cash flow and targets for '08 and '09 and possibly leverage, any comments you're willing to make on what kind of CapEx you're looking to spend in '09 or what the '09 leverage target might be?

Larry Trachtenberg

Well, you know, we're going to have to wait until December or January when we put out our '09 guidance, but I can tell you right now, with our utilization rate where it is, we wouldn't see a big change from this year's CapEx level. If anything, we would see it probably coming down a little bit.

Steve Bunger

Our focus is going to be on very little CapEx and focused on maximizing cash flow.

Operator

Your next question comes from Scott Schneeberger - CIBC World Markets.

Scott Schneeberger - CIBC World Markets

It looks like that $5 million delta from last time we spoke was employees. Are we maxed out? It's an impressive number, but are we maxed out now that you've moved from integration to the execution phase?

Steve Bunger

You know, probably maxed out on big upsides, but there are still lots of opportunities. I mean, that was a conservative number that we feel comfortable putting in the press release and talking about, but we're still looking at other areas of the business to possibly increase that, especially considering the economic environment we're going into.

Scott Schneeberger - CIBC World Markets

You've talked in the past about soft costs, but would it be hard costs as well?

Steve Bunger

There's still some opportunity for some hard costs.

Scott Schneeberger - CIBC World Markets

Could we get a bit of a breakdown on what you're seeing across both verticals and geographies with regard to the business, just where the pockets of strength and weaknesses are?

Steve Bunger

I think Larry hit on it. By far the weakest markets we're seeing are in Arizona and California and in Texas. Texas is probably the worst. They're - I'm sorry, Florida. I'm sorry. I was thinking of something else. Thank you for correcting me. Florida. Texas is actually doing pretty well.

Florida's been by far the hardest hit. They're down over 20% year-over-year if you look at the Mobile Storage and Mobile Mini. You look at California, down maybe 5%, and Arizona down about 11% or 12%. The other markets, you know, for the most part - there are pockets here and there - are still growing or holding their own.

And as far as by customer types, probably the only one I can really speak to is more of the seasonal rentals, the pure retail. I mean, our core retail is a strip center that rents one container and it's out there forever. And it's $75 a month. And the savings for them is they don't have to rent additional warehouse space or office space next to them.

But we're definitely seeing a slowdown in the seasonal business, companies like Target and Michael's and Wal-Mart are definitely really focusing on reducing the spend they do on storage, which is why we reduced our guidance in the fourth quarter and why we've sort of seen a slowdown in that part of the business.

But at the end of the day that's pretty much only a one-quarter effect. It's not a full year effect. That's a three-month rental. And obviously the slowdown we're seeing in Florida and Arizona is related, almost identically, to nonresidential construction.

The other pieces of our business continue to do well. There are even segments in construction that's doing well, the hotels that are remodeling, the restaurants that are remodeling, and the strip shopping centers that are remodeling. That's a great piece of our business that we continue to have during good and bad economies.

Scott Schneeberger - CIBC World Markets

So really it's a mix of the seasonal retail and nonres and much less so the traditional single-container customer?

Steve Bunger

Yes.

Scott Schneeberger - CIBC World Markets

And then, shifting gears a little bit, could we talk a little bit about where you see utilization going in the fourth quarter with the seasonal rentals and with Mobile Storage being included now?

Steve Bunger

Maybe Larry can add something, but I don't see utilization increasing tremendously from where it's at today. Obviously, we bought a business that has lower utilization than we had premerger, so we've inherited that utilization.

We'll put some of them on rent. We're taking some of the non-core assets like van trailers and [inaudible] offices in the U.K. and selling those out of our fleet, but that's going to be a slow process. So it's just purely a function of demand over time, and I don't really see huge utilization increases unless we see big demand increases.

Scott Schneeberger - CIBC World Markets

So really sequentially into the fourth quarter usually we see a bit of an uptick in utilization, but you don't anticipate it this year?

Steve Bunger

And the reason I don't is because of the seasonal slowdown.

Operator

Your next question comes from Theodor Kundtz - Needham & Company.

Theodor Kundtz - Needham & Company

Maybe you could talk a little bit about the U.K. and Mobile Storage over there. Two things - one, are they seeing any change in their utilization rates? Are things starting to slow over there or are they fairly stable?

Steve Bunger

You know, the Mobile Storage business in the U.K. was quite heavily skewed towards what they call accommodation units, what we call in the U.S. office units. And there is a slowdown in the [inaudible]. The U.K. is about, you know, 60 days behind the U.S. in the economy, is the way I visualize it. If you look year-over-year, they're flat to 5% down.

What we're hoping to do - and we've been successful during the same time that their growth has maybe gone down a little bit - we've been able to grow our business we're renting one container to one customer that's primarily storage, which is a much higher margin business.

Theodor Kundtz - Needham & Company

So what you're saying is that - are they slowing a bit? Is that what you're saying? But not much?

Steve Bunger

Well, if you look at lease revenues, total lease revenues are about 5% slower than the prior year, so they are slowing. But we haven't changed the business model. The business model that Mobile Storage had there was more what I would call - there was some renting of big offices and accommodation units to large contractors, and so that will run off and slowdown, as we've been seeing in the last three to four months in the U.K.

Operator

Your next question comes from David Gold - Sidoti.

David Gold - Sidoti

In the release you talked about some cost cutting or examining the cost structure. Can you speak a little bit more on that, on what you've done and where else you might be looking?

Steve Bunger

Yes. I mean, obviously the easiest ones are the direct synergies. But the ones we're looking at right now is looking at opportunities to make yards that are fully staffed and make them more operational yards.

And as an example, in L.A. we had a branch in L.A. that serviced the whole L.A. market and yet Mobile Storage had two branches. Instead of making it two branches, we made one an operational yard where we didn't have salespeople - we just had like one person that sort of dispatched the trucks - so we could save on trucking costs and driver efficiencies, but not have the full overhead of a branch. So we're going to look at all of our branches that we have today that are nearby the cities and possibly even shift some that are existing branches and make them into operational branches.

What we're trying to do is really analyze our cost structure compared to revenue to make sure that we're getting a good return on all of our assets.

David Gold - Sidoti

How significant a savings do you think we could see from that?

Steve Bunger

You know, I haven't quantified it. I can tell you there are about 15 of them that we've already set up as operational yards and there's still more, you know, that are former [inaudible] branches and there's probably another 10 or so that we've looked at that have the possibility.

I think if you did a real quick analysis, you know, back of the envelope, it's about $100,000 to $150,000 of EBITDA each one.

David Gold - Sidoti

Of savings?

Steve Bunger

Yes, that's correct.

David Gold - Sidoti

And then, Larry, can you give us a sense on fleet purchase plans for fourth quarter? Based on everything we know, would we expect it to be fairly modest like it was in the third quarter?

Larry Trachtenberg

The lease purchases of fleet?

David Gold - Sidoti

Yes.

Larry Trachtenberg

Yes. We don't expect to have a large amount of CapEx for lease fleet.

Steve Bunger

If you look at last quarter there was a little bit of security offices, very little in mobile offices, and primarily just rebranding of existing Mobile Storage fleet.

David Gold - Sidoti

With category shifting as it has, particularly in the U.K., how might we expect that to affect things in the fourth quarter?

Larry Trachtenberg

It shouldn't have a large change on us in the fourth quarter. It did actually reduce our debt balance as of the end of September by about $15 million because we had about 90 million of pounds sterling debt that became $75 million. If this change in the value of the pound continues, that debt will become even less.

David Gold - Sidoti

So it's a positive effect for you?

Larry Trachtenberg

Right.

Operator

Your next question comes from Chris Dougherty - Oppenheimer & Co.

Chris Dougherty - Oppenheimer & Co.

Larry, just a couple of clean up questions. Can you tell us what the gain on the sale of equipment was that's in the cash flow for the quarter?

Larry Trachtenberg

We have - in the quarter we have $8 million of sale of units and I'd have to get back to you with that, but it's probably about $2.5 million.

Steve Bunger

It might have been a little bit over skewed because we sold a lot of van trailers during the quarter.

Chris Dougherty - Oppenheimer & Co.

Yes, that's what it sounds like. That's what I'm trying to see. It looks like your fleet units were down from like 276,000 down to 272,000 or 275,000 to 272,000. So that's what I'm just trying to get at, then.

Steve Bunger

On an account basis, a lot of that was van trailers. And what was going on was the price of the aluminum was so high that we were selling to people who were just scrapping them. And now the price of aluminum's reduced by 75%, so that was kind of a one-time anomaly.

Chris Dougherty - Oppenheimer & Co.

And then can you talk about - I think sort of in general you said before that on a like-kind basis you were charging more than Mobile Storage was. How can we think about the roll off on that? I mean, where do they stand in their contracts? Were their contracts typically the same time of length where hopefully you should be able to increase those rates going forward and more your price structure or the historic Mobile Mini price structure?

Steve Bunger

You know, what we've learned is - I hate to get too much into this for competitive reasons, but the biggest areas of opportunity would probably be [inaudible] and national accounts, you know, where we were competing heavily for national account business and we won't have that competition going forward.

And then on existing customers we're going to do the same thing that we - obviously Mobile Storage was looking to increase their rates, so prior to the merger they'd done a few rate increases prior to the merger that are baked into our number. But there is opportunity to raise rates. There's areas where we were lower and they were higher, to raise them the other way in certain markets.

So we're looking at everything really on a skew by skew, city by city, type of customer by type of customer basis.

Chris Dougherty - Oppenheimer & Co.

Can you also tell us what the fuel charge was, the fuel hit was for the quarter?

Steve Bunger

How much the fuel surcharge impact was?

Chris Dougherty - Oppenheimer & Co.

Yes.

Steve Bunger

Do you know what that number is, Larry, because I don't.

Larry Trachtenberg

It was about $900,000.

Chris Dougherty - Oppenheimer & Co.

That's the actual expense. How much were you able to charge through on that or pass through?

Steve Bunger

Fuel surcharge revenue.

Larry Trachtenberg

[inaudible]

Steve Bunger

That was the revenue, not the expense.

Larry Trachtenberg

Yes.

Chris Dougherty - Oppenheimer & Co.

Were you able to pass through everything or almost everything?

Larry Trachtenberg

Fuel expense actually increased by more than that amount year-over-year.

Steve Bunger

I can tell you that, you know, like the airlines, I doubt we'll be taking away the fuel surcharge anytime soon.

Operator

Your next question comes from Jamie Sullivan - RBC Capital Markets.

Jamie Sullivan - RBC Capital Markets

A quick question on the macro picture. You talked about the weakness in construction. Just wondering how you saw that play out over the course of the quarter?

Steve Bunger

You know, it's hard to be real specific about it because we had two things happening. We had that happening plus we had a slower retail season. And I think if you look at it, since our rentals are two-year rentals, it's a very gradual process. It's not very speed inclined. So it's probably more an issue of really the slower retail season, which was really significantly lower than the prior year when you combine the two companies.

If you look at it market by market, some markets have stopped going backwards. Some markets are just starting to go backwards. There are a lot of markets that are still growing, so it's hard to be really specific around it.

Jamie Sullivan - RBC Capital Markets

It sounds like in the comments that there was further weakening in some of the weak areas of Florida, Arizona, California that we talked about before. Is that the case?

Steve Bunger

You know, I don't know if it's further weakening on a year-over-year basis, but it's continued weakness. In California, it's probably leveled off at about minus 5% - 6%. And in Arizona it's leveled off at 10% to 12%.

Jamie Sullivan - RBC Capital Markets

And what is the total for Arizona, California? What percentage of total is that in the combined company now?

Steve Bunger

California, I just did that, California is about 14% of our revenues. Arizona is 5.5% of our revenues. And Florida for the quarter - and when I say revenues I'm talking about lease and ancillary revenues and it's including the United Kingdom in those revenues - it's 7%, Florida's 7%, so 26.5%.

Jamie Sullivan - RBC Capital Markets

And in the guidance, what are you assuming for your interest rate in the fourth quarter? What does that include?

Larry Trachtenberg

It's based on a blended interest rate, but interest is running around $6 million a month.

It's actually a little bit more than 60% that's fixed. We have about $350 million that's floating that's at prime plus one right now.

Jamie Sullivan - RBC Capital Markets

And when will you decide whether you'll give guidance in December or January?

Larry Trachtenberg

We'll give guidance as soon as we have our internal budget completed. And normally we've got it done in December but, you know, this is - obviously the economy's in a state of flux right now. We want to make sure that we're comfortable with the numbers.

Steve Bunger

And we're complicated by the fact that we're having to look at different comparisons with the significant MSG merger.

Jamie Sullivan - RBC Capital Markets

You mentioned a couple of small acquisitions in Texas and California. Is there more opportunity to do some of those smaller rollouts?

Steve Bunger

Yes, I think, you know, we're going to have to review these. If it matches, where it makes sense for us in terms of the right asset group, the right type of customers and the right market and we can get it for the right price; I think it makes a lot of sense. We have the availability of capital to look at adding market share in some of those markets.

I doubt we'll structure any deals going forward. Anymore they have to basically fit into our six holes. If they fit in the six holes, we'll do them. If they don't, we'll wait for another time.

Operator

(Operator Instructions) Your next question comes from Scott Schneeberger - CIBC World Markets.

Scott Schneeberger - CIBC World Markets

What percent of revenue was fuel and how does that break out as of, say, June 30 and September 30?

Larry Trachtenberg

It's generally about 12% or 13% of lease revenue, pick up and delivery charge.

Steve Bunger

As far as fuel, he's asking about fuel specifically.

Larry Trachtenberg

Well, we don't charge fuel as a percentage - you know, we don't charge specifically for fuel in revenue.

Steve Bunger

I think he's asking for expense, fuel expense as a percent of revenue, which we don't have right here.

Larry Trachtenberg

No. No, we wouldn't have that available.

Scott Schneeberger - CIBC World Markets

But can I [circle] with you later on that, Larry?

Larry Trachtenberg

Sure.

Scott Schneeberger - CIBC World Markets

And then just a little bit of clarity. I might have taken something wrong on utilization. So I think, Steve, you mentioned seasonal units will be up about 10,000 quarter-over-quarter, is that accurate?

Steve Bunger

No, it'll actually be down quarter-over-quarter by 2,000 to 3,000 in total. So our total seasonal will be about 10,000 units whereas if you looked at what we did last year for seasonal, what Mobile Storage did for seasonal, we're probably about 13,000 units - 12,000 to 13,000 units.

Scott Schneeberger - CIBC World Markets

So instead of 13,000 this year you're doing 10,000?

Steve Bunger

Correct.

Scott Schneeberger - CIBC World Markets

And then as far as where you see the other hindrance and no seasonal uptick in utilization, is that primarily from nonres areas?

Steve Bunger

That's our speculation. It's primarily - it's interesting. We've looked at our businesses - and I've done more analysis on the U.S. than I have in the United Kingdom - but if you look at the number of pickups per week compared to the two companies, we're tracking the same number. There's not more pickups or less pickups. The issue is less deliveries to nonresidential contractors because they don't have financing.

Scott Schneeberger - CIBC World Markets

And then shifting gears one more time, with regard to the lag in the cost takeout with systems and such in Europe, what do you see as far as duplicate costs that were in third quarter in the U.K. that will go away in the fourth quarter?

Steve Bunger

I haven't quantified it for the conference call, but we did the merger in September, beginning of September, so there was September, October -

Larry Trachtenberg

There could be up to $1 million in more cost takeouts which we could get all of it in the fourth quarter or we may not get some of it until the first quarter of '09.

Operator

Your next question comes from Sundar Varadarajan - Deutsche Bank.

Sundar Varadarajan - Deutsche Bank

You guys have often talked about the forgotten rental and how that kind of helps you extend the average duration of the rental from the 12 months to kind of well into the 20 - 23 month type range. Given that we're kind of going into a down cycle and everybody's extremely conscious about costs, have you seen any kind of increase in the return of these forgotten rentals? How did they kind of play out last time around when there was a slowdown? Are you seeing any kind of, you know, how do you factor that in as we go into the next year?

Steve Bunger

I'll try to answer this based on - not specifics because I don't know exactly how to answer it. But I can tell you that our average term continues to increase, increased during the last slowdown, during that period of time.

We're tracking the number of pickups by branch compared to last year to see if that's increasing, and it's not increasing.

And looking back, a very high percentage of our customers, you know, pre-merger it was like 65% of our customers rented one container on an average cost of $75 to $100 a month. What we usually find is those businesses don't return until something really significantly changes, like they have to move.

So I don't believe - in fact, what we usually find in slowdowns in the economy is that's the part of the business that probably grows, and it's the individual store, like in a strip shopping center, that's still doing pretty well, scared to death to add onto warehouse space or office space but, if they knew of our prices and services, would rent another container.

So I think net of those two numbers we actually increased business.

Sundar Varadarajan - Deutsche Bank

So you think that could actually be an opportunity?

Steve Bunger

I mean, it's not, you know, like waters rising. But it's definitely what we've seen in the past, a slight increase in our business.

Operator

Your next question comes from Jim Harris - Bislett Partners.

Jim Harris - Bislett Partners

On capital spending, how much of the CapEx in the recent quarter relates to one-time items, maybe to get a Mobile Storage Group fleet to where you want it to be? And how much might that be going forward in the next year or two?

Larry Trachtenberg

Most of the CapEx going forward for the next couple of years is going to be rebranding and upgrading Mobile Storage containers into Mobile Mini containers.

Steve Bunger

And last quarter, almost all the PP&E was related to the new branches and getting those trucks and trailers in place. And the fleet CapEx was - almost all of it was rebranding and relocking of inventory. There was a little bit of mobile office and a little bit of security offices, but there were, I mean, from a scale of what we used to do before, they're rounding errors.

Jim Harris - Bislett Partners

You mentioned maintenance CapEx as just a few million in the past. If the economy stays kind of pokey, do you foresee once you get the Mobile Storage Group units where you want them, can you foresee actually having CapEx of $10 million or something like that?

Larry Trachtenberg

Conceivably you could; practically, no. It would have to be a conscious decision because there are areas where, if you look at our CapEx requirements, we really don't have CapEx requirements for delivery trucks and trailers. There'd be a little bit for a couple that were out. There'd be a little bit for computer-type stuff. But we can conceivably have very little CapEx if we decided we did not want to rebrand or relock inventories.

Jim Harris - Bislett Partners

How many years out before you think you'll pay much in the way of cash taxes?

Larry Trachtenberg

As of now it would probably be, assuming this growth, not adding to the fleet this way, it would probably be 2010 or 2011 we would start paying. But we're looking at ways to defer that further.

Jim Harris - Bislett Partners

And even at that year it would be, I assume, still pretty well level for a couple of years in terms of the percentage tax rate?

Larry Trachtenberg

Yes.

Operator

Your next question comes from David Gold - Sidoti.

David Gold - Sidoti

Just a quick follow up on the, call it $29.9 - $30 million, that you generated of cash in October. What fueled that? I guess the release said that in October in the first 29 days you've generated $29.9 million or used that to reduce outstanding borrowings and just curious. It's a strong number, so I was just curious where that was coming.

Larry Trachtenberg

Well, if you look at the cash generated in the third quarter, it would have been a lot higher but for the fact that we made payments on our - we made interest payments on our two debt issuances and we paid down quite a bit of accounts payable. So October was more -

Steve Bunger

Severance and properties.

Larry Trachtenberg

Yes, we also had $6 million of non-GAAP expenses, cash expenses like severance and rental payments on properties. So October was a more normalized month and without debt payments on any of our debt issuances so we generated a lot more cash flow.

Operator

There are no further questions. I will now turn the conference back to management.

Steve Bunger

Thanks. I want to thank everyone for participating in this conference call and wish everyone a great day. Thank you.

Operator

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

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Source: Mobile Mini, Inc. 3Q08 (Qtr End 9/30/08) Earnings Call Transcript
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