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Mobile Mini, Inc. (NASDAQ:MINI)

Q4 2012 Earnings Call

February 22, 2013 12:00 pm ET

Executives

Mark E. Funk – Executive Vice President and Chief Financial Officer

Analysts

Joe G. Box – KeyBanc Capital Markets

Scott A. Schneeberger – Oppenheimer & Co.

Sean K. Hannan – Needham & Co. LLC

David J. Gold – Sidoti & Co. LLC

Sean M. Wondrack – Deutsche Bank Securities, Inc.

David J. Manthey – Robert W. Baird

Sid Panda – RBC Capital Markets LLC

Operator

Good day everyone, and welcome to the Mobile Mini 2012 Fourth Quarter Conference Call. At this time, I’d like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode. There is also a presentation that accompanies this conference call which you can access at Mobile Mini’s website at www.mobilemini.com. It is on the investors page.

Before turning the call over to Mark Funk, Mobile Mini’s Chief Financial Officer, I will read the Safe Harbor statement. This presentation contains statements about future events and expectations that constitute forward-looking statements. These statements can be identified by our use of the words, beliefs, expects, projects, should, or similar words. The forward-looking statements herein include statements regarding the Company’s future financial performance, business strategy, liquidity, future utilization, budgets, projected growth plans, debt pay down and objectives of management for future operations.

These forward-looking statements are based on current expectations, and assumptions and are not guarantees of future performance and are subject to risks and uncertainties that are difficult to predict and which may cause actual results to vary materially because of factors in this presentation, today’s press release, the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q and other filings with the Securities and Exchange Commission. We undertake no obligation to update and revise any forward-looking statements whether as a result of new information, future events or otherwise in addition to disclosing financial results that are determined in accordance with U.S. Generally Accepted Accounting Principles, GAAP. The company also discloses in this presentation certain non-GAAP financial information including adjusted EBITDA, adjusted EBITDA margin, adjusted GAAP SG&A, adjusted GAAP diluted EPS, adjusted net income and free cash flow.

These financial measures are not recognized measures under GAAP and are not intended to be and should not be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. Reconciliations to the nearest GAAP measurement are posted on the Company’s website.

Now, I will turn the call over to Mark Funk.

Mark E. Funk

Great, thank you. Good day, everyone. I want to welcome you to Mobile Mini’s 2012 fourth quarter conference call. I am Mark Funk, Mobile Mini’s EVP and CFO. For this presentation, I am going to review the slides and then I will open the call up to questions.

I am going to start with slide number three, financial highlights. This quarter is the eighth straight quarter of year-over-year growth in both total and leasing revenues. Q4 total revenue increased 5% and our leasing revenue increased 8.2% year-over-year. This growth came primarily from an increase in utilization, mix, and rental rates.

Leasing revenues of $91.6 million for the quarter were highest level since Q1 2009. Adjusted EBITDA also increased to $40.6 million and for the quarter it was up 10.5% year-over-year. From an EBITDA margin perspective, margins increased 2 percentage points from 38.5% to 40.5% for Q4 year-over-year.

As mentioned on the last quarterly call, we remain focused on our core leasing business while managing and monitoring our expenses. Q4 was our 20th consecutive quarter of free cash flow which we continue to use to pay down our debt. In addition, with current utilization levels in North America, we’ve been able to increase our leasing revenues with nominal rental fleet CapEx. This has all resulted in Q4 adjusted diluted earnings per share of $0.33 which is a 38% increase over Q4 2011 levels.

Moving on to slide four, this slide represents our customer breakdown as of December 31. We continue to see solid growth in our construction segment of our business. The increase growth with contractors is primarily from the remodeling and maintenance type projects, the results of our new projects. We are also growing the non-construction part of the business, but not as quickly as construction but we believe we'll see improvement as we continue to enhance our marketing and increase productivity at our National Sales Center.

From a customer concentration perspective, we are fortunate that we only have one customer with more than 1% of our revenues and our top 20 customer only represents 9% of revenues.

Moving on to slide five, this slide shows our utilization and the number of units we have in our rental fleet. You can see in this chart that year-over-year we have increased our average utilization by 3.9 percentage points to 65.1% and we ended the quarter at 63.3% as holiday units were returned. Our holiday units peaked in Q4 approximately 15,000 units.

Our strategy is to best utilize our rental fleet is, to first just continue to sell storage units to customers looking to buy versus rent because they have a perceived permanent need for the unit. Historically 10% of our revenues come from unit sales.

Secondly, and the most profitable way is to put more units on rents at our existing branches and take advantage of the high incremental margins our business produces. And finally where possible, reposition storage containers from lower utilization markets to markets that need additional fleet. As an example we continue to reposition fleet out of the southwest and southeast to other markets where utilization is higher and demand is strong.

Continuing to slide six, even though we’re at low utilization levels in North America, we have made the strategic decision to not aggressively de-fleet because our assets maintain a value.

For example we can take a unit that has been in our fleet for 20 years and place it next to one we recently added to our fleet. As long as both units have been repainted, we would rent or sell either unit for the same. As you can see by the economics within the slide, these assets not only have a long life they also have a short payback period. The other positive data point is our customers are keeping our storages units for about 36 months which has been consistent over the last several years.

Turning to slide seven, this slide illustrates the power of our differentiated products and sales position it’s demonstrated in our year-over-increases in both volume and yield. Our Q4 year-over-year yield was up by over 2.1% to $594 which is our all time fourth quarter high. When our holiday rentals are excluded from both years, yields on our core rental units actually increased 4.2% compared to the fourth quarter 2011. This was the result of a greater weighting at holiday rentals in the third quarter of 2012, as customers took delivery of units earlier than they had in 2011, impacting a year-over-year yield comparison.

Our yield improvement was due to increase in leasing activity in the quarter, a higher mix of offices and stronger rental rates. Our year-over-year rental rates were up 1.5% for the quarter. We are able to maintain a industry leading rental yield because our differentiated products and our strong sales and service culture allows us to stay above the rental rate wars by selling value to our customers and only giving price when we need to.

We also systematically increase rates and then reinforce those rates with a commission plan that drives rate accountability.

Now to slide eight, in North America we now have 117 locations of which 67 are fully-staffed branches and 50 are low-cost operational yards. We believe that even though we are the market leaders, there are still tremendous opportunities within our existing branch network. We have entered 16 new markets since the beginning of 2011 and 13 were EBITDA positive for 2012.

In addition, we have identified over 50 additional markets in North America where we could open up new low-cost operational yards. In 2012, we entered four new markets and at this point we expect to enter similar level in 2013.

Turning to slide nine, in Europe we have 18 locations in UK and one in the Netherlands. Given our national footprint and critical mass in UK, there is no need to additional locations. As a result, we can take advantage of the high incremental EBITDA margins our UK business can produce. This is illustrated by our margin expansion in Europe.

The UK margin potential is slightly lower than North America, but still in process. The margins are lower because those customers do not rent higher margin 40 foot containers because of space limitations, instead they tend to rent smaller 20 foot units which rent for less and that produce lower but impressive EBITDA margins. Even though we believe the horrible storage market in North America is underdeveloped, UK is even more so, which should create additional growth opportunity in the future.

Turn to slide 11, in the financials you can see, fourth quarter total revenues increased 5% from Q4 2011 levels. This is driven by an 8.2% increase in leasing revenues. Total revenues for the quarter were approximately 100 million and Q4’s comparable lease revenue growth was our eight highest quarter increase in a row.

During 2012, we changed our revenue recognition policy for pickup revenue. Historically, the pickup revenues and the accrued estimated costs to pick up unit were recognized at the time of delivery. We are now recognizing this revenue and the related costs when the unit is picked-up.

Although the effect of this change does not materially impact any prior quarter or years’ results, we have revised prior period financial information to reflect these changes. This change reduced the 2012’s total revenue 0.6%, or approximately $2 million, and adjusted EBITDA 0.8%, or $1.1 million.

Continuing to slide 12, this quarter adjusted SG&A was $54.6 million and $2.2 million or 4% higher than 2011 comparable quarter primarily as a result of higher payroll cost of $600,000 related to increased leasing activity. Additional insurance expense of $400,000 due to higher claims and higher rents expense of $400,000 related to existing location price increases and well as new market locations.

Turing to slide 13, we are very pleased to report that Q4 adjusted-EBITDA increased 10.5% year-over-year. And our adjusted EBITDA of $40.6 million for the quarter is at it’s highest quarterly level since Q1 2009. EBITDA margins also increased year-over-year 2 percentage points from 38.5% to 40.5% and our total adjusted LTM EBITDA was $138.3 million.

On page 14, you can see the power of our operating leverage. As of December 31, we only had four branches with less than 500 units on rent and they were generating a 22% EBITDA margin. As you move to the right on the chart, the number of units on rent increases and the results of our high incremental leasing margins to EBITDA margins of these larger branches also increase. On the right you can see our largest locations generated LTM EBITDA margins of 41%.

On the next slide you can see North America Q4 leasing revenues increased 7% from Q4, 2011 levels. And North America represented 82% of our total revenues for the fourth quarter of 2012.

Like North America, Q4 European revenues also increased year-over-year with total revenues increasing 13% as a result of higher leasing revenues. North America Q4 EBITDA margins were up 2.6 percentage points year-over-year to 42.2% and Europe’s Q4 EBITDA margins were 32.8%.

The next page demonstrates how we can significantly cut back on free CapEx, so higher levels in prior years were driven by our rental fleet expansion. Our 2012 capital expenditures were $25.8 million and related primarily through rental fleet expansion in UK, as well as delivery equipment in both North America and the UK. And we expect 2013 net CapEx to be at similar levels through 2012.

Turning to the free cash flow slide on page 17, we generated $26 million of free cash flow for the fourth quarter and our LTM free cash flow was $65 million. This was our 20th consecutive quarter of positive free cash flow which we used to pay down debt. The debt pay down for the quarter was approximately $27 million.

Turning to the next slide, we have a very flexible capital structure with a high level of liquidity. We refinanced our ABL revolver in February of last year, and extended maturity from June 2013 to February 2017. At year-end we had approximately $450 million of excess availability on our ABL revolver. Our interest cost for Q4 were approximately $3 million or 28% lower than the prior years quarter, as a result of lower interest rate as well as our debt pay down over the last year. And our debt to EBITDA ratio at December 31 was 4.6 times.

Turning to page 19 to summarize, we believe we are well positioned for the future. With the best product and the best distribution in the industry, we continue to generate strong free cash flow. Our market position differentiated product and sales culture allows us to continue to increase rental rates. As I mentioned Q4 was up 1.5% year-over-year with sufficient lease assets to put on rent to grow the business. We entered 16 new markets since the beginning of 2011 and believe we have the ability to enter additional 50 markets in North America overtime. And we generated solid revenue, adjusted EBITDA and EPS growth in both Q3 and Q4 of this last year.

That concludes the prepared remarks. I’d now like to hand the conference call over to the operator for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) Thank you. Our first question is coming from the line of Joe Box with KeyBanc Capital Markets. Please proceed with your question.

Joe G. Box – KeyBanc Capital Markets

Hey Mark.

Mark E. Funk

Hi, good morning.

Joe G. Box – KeyBanc Capital Markets

A question for you on your fleet strategy, if you look at your fleet over the last couple of quarters, it looks like there has been a considerable slowdown in fleet sales. Can you maybe just talk to that and is that a function of the market improving and maybe you need those units or is it the used markets maybe softening up a bit, any color there would be helpful.

Mark E. Funk

Yeah. I don’t think the used equipment market is quite as strong. Another issue is utilization rates, especially in the Midwest and North East are much higher for us and we have less if you want to say, idle equipment to sell. It’s also a matter of having excess if you want to call them commodity boxes to sell which is obviously part of our sales historically.

So I would just say it’s a combination of three that’s reduce the sales side of business that obviously we’re focused on the leasing side and we are migrating enough fleet into those higher utilization markets and definitely be – we will fine flipping in the North East for commodity boxes to sell.

Joe G. Box – KeyBanc Capital Markets

Okay, and then as we look at maybe the 235,000 units that you have in your fleet. Do you think that we’re getting closer to the bottom then and maybe we’ll even see a tick up from here or will we see it continue to move down slowly.

Mark E. Funk

We expect those to continue to move down. And obviously we won’t be adding meaningful levels of boxes. And so utilization is obviously especially in North America approaching the high 70s. Maybe the boxes that we have added are really in the UK and utilization rate there is about 75% and containers actually is about 80%. And that’s where our fleet CapEx seems to have gone.

Joe G. Box – KeyBanc Capital Markets

Can you give us a sense maybe of the sequential decline then in units that we should expect to see?

Mark E. Funk

I would just use the last several quarters as the barometer of the future.

Joe G. Box – KeyBanc Capital Markets

Okay, perfect. Can we talk a little bit about the sequential change in yield. Maybe thinking from a different angle, if you look over the last three years, your yield has typically declined by about 240 basis points. If you include the seasonal business this year, it was down 440 basis points, any color on the sequential declines?

Mark E. Funk

Well, I would say the sequential decline is – I would say the Q3 of our Q3 was if you want to say higher. The reason we had the sequential decline is, as I mentioned on the last conference call, we actually delivered 4,700 more units in Q3 this last year in 2012 than we did in 2011. So we had a pull forward and that’s why you would see more Q3 activity on the holiday sites in 2012 than in 2011 which impacted the shift between Q3 and Q4.

Joe G. Box – KeyBanc Capital Markets

Okay. So then going forward, maybe we should think about the year-over-year change maybe migrating back to the plus 4% range or so?

Mark E. Funk

Well, I mean, what I would try to do is to take out that noise of that – point those units forward. That’s why I did the quarter-over-quarter comparison to say Q4 was 4.2% on a year-over-year basis on our core unit. So I wanted to kind of show where we are performing now.

Joe G. Box – KeyBanc Capital Markets

Great.

Mark E. Funk

On a true apples-to-apples basis.

Joe G. Box – KeyBanc Capital Markets

Okay, that’s helpful. A last one real quick and then I will turn it over. I mean obviously you guys have done a great job minimizing cost creep over the last couple of quarters. When we think about the leasing and SG&A number over the next couple of quarters, obviously you guys are going to get into easy comps, should we think about that number on an absolute basis, growing in a mid single digit number or could your leasing and SG&A number actually be down year-over-year?

Mark E. Funk

We don’t provide guidance, so it’s hard for me really to answer that question. You can basically see the trend line where we have been able to actually leverage our SG&A and you can see our nice flow through this last quarter, Q4 and Q3. So obviously, it’s the top line growth so far SG&A. We are focused on getting that flow through margin. So it’s really just kind of depend on the growth we have this new year.

Joe G. Box – KeyBanc Capital Markets

Okay great, I appreciate the color and nice job Mark.

Mark E. Funk

Thank you.

Operator

Thank you our next question is from the line of Scott Schneeberger with Oppenheimer. Please proceed with your question.

Scott A. Schneeberger – Oppenheimer & Co.

Thanks very much. I guess you mentioned earlier four new market entrances in 2012 and expected the same in 2013. Is that going to ramp up in 2014, are you waiting for the new CEO in reassessing. Is the strategy right now just to focus on the existing markets, just want to become a little clear on the strategic...?

Mark E. Funk

Yes, fair enough. Yes I think we’ve done a really good job of executing on the four markets we went into in 2012. I do think the timing of the CFO – and also the CEO coming in will play into that. The one thing we’re focused on is getting growth in those 16 new markets we’ve entered since the beginning of 2011 plus our other 120 markets to get the growth there to pay for the expansion and not have it be really kind of if you call it headwind to our results as far as EBITDA or EBITDA margins. So obviously we’re looking forward to the new CEO joining. We’ll sit down and look at – it will be obviously be driving strategy here but at the same time I think the overall prospective probably from the CEO and balance of the management team is, to leverage our infrastructure and not have these new markets be a headwind to the overall performance.

Scott A. Schneeberger – Oppenheimer & Co.

Thanks Mark. Could you speak a littlie bit the trends on – timing really, you pulled forward in the 3Q this year some of the holiday container rentals? What is the anticipation for them coming on our front? When did they or I assume they’ve all done by now, but could you just refresh us on the timing and if this year is like all others?

Mark E. Funk

Yeah, it’s similar actually. I would say, probably 45% of them came off by the end of the year. And then the balance obviously come off primarily in January and the beginning of February.

Scott A. Schneeberger – Oppenheimer & Co.

Okay, thanks guys.

Mark E. Funk

And it’s totaling showing historical levels over the last several years.

Scott A. Schneeberger – Oppenheimer & Co.

Okay. I appreciate it. Two more if I could. It sounds like some nice growth occurring in the UK. You’re feeling that growth. Could you give us or quantify a little bit and I am sorry if I missed it, but I didn’t hear any metrics with regard to what type of growth you’re getting and how does that compare to past quarters.

Mark E. Funk

So yeah, the growth for Q4 on a year-over-year basis for the UK was approximately 14%. It was high single digits part of that. The utilization has been ticking up as I mentioned it was about 75%. I said that on last quarters call as well. So as we continue to add fleet there, it’s getting deployed. And if you look at really our CapEx spend about 16 million of our CapEx spend for 2012 was in the form of lease fleet in the UK. And that’s across containers and offices.

Scott A. Schneeberger – Oppenheimer & Co.

Okay. So I infer from all that that you’re expecting momentum for the next few quarters certainly with what you’re seeing?

Mark E. Funk

Right I am obviously look at what’s going on in the business on a weekly basis, and allocate capital based on that demand.

Scott A. Schneeberger – Oppenheimer & Co.

Okay I will turn it over there.

Operator

Our next question is from the line of Sean Hannan of Needham & Company. Please proceed with your questions.

Sean K. Hannan – Needham & Co. LLC

Yes, thanks. Just wonder it just looks like a follow-up on some of the questions around market expansion. Mark just to try and get a sense, you’ve I think over the last few years, certainly expanded into markets purely carefully in terms of the more of an operational yard focus versus branches. Wanted to see if that is also the thought process that continues. And then to what degree or is there any additional cost sensitivity, I know that some of the market, the aggressive market expansion that you have had at times is something that created a little bit of a headwind to the cost structure, I realized there is some sensitivity to that today? Thanks.

Mark E. Funk

Right, right. So, yeah, we would still look to open these locations on an operational basis and – or operational yard basis I should say. And what we do is, we leverage our existing branch managers, so those locations still have a driver, a yard person, a sales person. It’s just you’re not adding that big cost of an additional branch manager.

So it reduces the fixed cost on that basis. Just to put in perspective, we’ve priced that somewhere around in 2011, $2.4 million in the form of starting up branches and repositioning fleet into those locations, where we spend about $1.4 million in 2012. And obviously we added just four locations in 2012. So that’s what we’re expecting for the 2013, so it’s a little less than the 2000 levels. What’s nice is we’re getting nice growth in our core business that is offsetting if you want to call it just additional cost and you can see the same margin expansion, for example the EBITDA margins being up 200 basis points year-over-year for Q4.

Sean K. Hannan – Needham & Co. LLC

I am assuming that of the markets that you had mentioned, the 16 that you’ve entered in the last two years, 13 being EBITDA positive, I think about 12 and generally how the process will work with you. I am assuming that one of the new markets that you entered in 2012 is EBITDA positive because we’re nearing that threshold.

Mark E. Funk

That’s correct. So usually the time line for us especially when we’re doing these operational yards is somewhere around 12 months. If we take on that cost, we get enough units on rent to cover those fixed cost and then we start adding our high incremental margin on top of that.

Sean K. Hannan – Needham & Co. LLC

Great.

Mark E. Funk

That’s correct.

Sean K. Hannan – Needham & Co. LLC

Great, that’s in line with the thoughts here. Okay, so – and then in terms of sales, did I interpret some of this correctly. It sounds like that you’re perhaps loosing some sales opportunities in some of those regional markets where instead it’s a matter of choice and availability with many of your containers really kind of out at customers?

Mark E. Funk

Right. So we have if I would say less idle fleet there to sell, part of it is, we have if you want to call it less commodity boxes meaning non-Mobile Mini boxes that are – those are portion of what we sell. So we just don’t have if you want to say all times that level of fleet there and that’s actually depressed the sales levels a little bit. We are actively trying to buy units in the market to what I would call buy and flip, if somebody is looking for a commodity type box.

Sean K. Hannan – Needham & Co. LLC

Right. But is there a sense so of how much perhaps you kind of conceded within some of those regional markets.

Mark E. Funk

It would be difficult to really calculate. I think we’re assuming we’re going to be at similar levels of sales over the last several quarters. It’s just hard to say opportunities lost to be quite honest.

Sean K. Hannan – Needham & Co. LLC

Okay.

Mark E. Funk

Hard to quantify.

Sean K. Hannan – Needham & Co. LLC

Okay, thanks very much and congratulations on some pretty decent work around the cost controls there.

Mark E. Funk

Thank you.

Operator

Our next question is from the line of David Gold of Sidoti & Company. Please proceed with your question.

David J. Gold – Sidoti & Co. LLC

Hey, Mark.

Mark E. Funk

Hey, David.

David J. Gold – Sidoti & Co. LLC

Sorry, a couple of questions for you. One, I haven’t heard as much as I would like to on the call center, so want to open that up to hear just sort of where we are and what kind of progress we are making there?

Mark E. Funk

Okay, great question. So on the call center, what I shared on the last conference call is for the month of September, the team there was averaging somewhere around 12 units per head per week. That was at September. For Q4, we are actually 11.2 for the quarter. It’s slightly down. But that’s not really – because the teams aren’t as good. They are actually better than they were in September. The issue has to do with just the seasonality of our business and this last quarter activity, Q4 versus Q2 and Q3 for us. So teams continue to do an excellent job there. I would say the team has progressed nicely on a sequential month by month basis as far as durability is – it’s just is a function of seasonality.

David J. Gold – Sidoti & Co. LLC

Got you. Okay, and so for the most part, everything sort of in place there. Now it’s just a function of folks maybe maturing at this point?

Mark E. Funk

I would say they are mature, yeah, they’ve matured a lot. I think they continue to mature, but I think it’s just a function of the timing here. And what we’ve been spending a lot of time on it internally is getting organized better around the non-construction verticals, quality oil and gas, industrial type companies and hotels are getting organized from a sales perspective and marketing mix perspective which will drive demand and increase productivity for those people.

David J. Gold – Sidoti & Co. LLC

Got you, perfect. And then when you are speaking about rates, you mentioned higher mix of offices going out. Can we take that to mean you’re seeing more demand where we have a number of construction?

Mark E. Funk

Yes, that’s definitely correct. We’ve had nice increase in construction, you can see the early leading indicators, the ABI that was up to 54 and change that was just released, but I think activities picked up and I do think we’ve just done a very good job over the last year, two years, I would say of really working the Dodge leads, the opportunities that are out there, we’re very focused on and actually getting on. But I would say that the environment is definitely stronger for us on the construction side and that was 12 months ago or definitely 18 months ago.

David J. Gold – Sidoti & Co. LLC

Got you. And then just one last R&M during the quarter?

Mark E. Funk

Yeah, we’re slightly down just because of the timing here. For the year, it averaged around 4%. It was closer to 3.2% for Q4. As I mentioned previously on Q3 call, I expected it to be a little bit higher from the 4% into the New Year as we continue to redeploy assets that we haven’t put that on for three or four years. So I would directionally push it more to about 4.5% of lease revenues.

David J. Gold – Sidoti & Co. LLC

Perfect. That’s all I have. Thanks so much.

Mark E. Funk

Sure.

Operator

Thank you. (Operator Instructions) The next question is from the line of Sean Wondrack with Deutsche Bank. Please proceed with your question.

Sean M. Wondrack – Deutsche Bank Securities, Inc.

Good afternoon this Sean sitting on for (inaudible). Congratulations, how are you doing?

Mark E. Funk

Great.

Sean M. Wondrack – Deutsche Bank Securities, Inc.

Congratulations on a solid finish for the year. You guys continue to generate a substantial amount of free cash flow that you’ve been applying to reduce your outstanding debt. I believe you have indicated in the past that you’ll begin buying back shares once net leverage decreased below four times. Historically and has your view changed in time?

Mark E. Funk

I mean obviously that’s one of the obstacle I have to see, where the share price is. Our goal is to try to get down to four times, obviously we have a lot of momentum as far as free cash flow right now, it’s coming in the from of paying down debt as far as leverage ratio and the EBITDA increase. So, yeah that topic I would say is in much more topical of what we’re going to do once we get to that level. Obviously we want to get our new CEO on Board and have them very involved with that discussion in conjunction with the Board, but yeah I was very pleased with our debt ratio at this point and is some really nice momentum to it, so that’s one of the options I think it is one of the several things that we can do.

Sean M. Wondrack – Deutsche Bank Securities, Inc.

Okay great. Also anecdotally, can you comment a bit on how the competitive environment in U.S. sales now versus a couple of years ago, and is it relatively similar? Do you see competitors emerging? What’s going on here now that we are coming out of it?

Mark E. Funk

Yeah. As far as the competitive environment I would say it’s very much the same as it was a year ago, three years ago, five years ago, I mean that’s the duty is we do have such a great distribution platform and just such a great product and if you look at the markets, it’s really the mom and pops in each market that we are competing with.

The second largest player is Williams Scotsman, but they are really mobile office focused. And you ask any branch manager, they are going to say it’s, Falcon in Austin, or Southwest Mobile Storage in Santiago, (inaudible) in New York, so it’s fragmented. The competitive landscape is not changed, which is great and during this last several years, we put a lot of money into our platform as far as tools for our sales team go into salesforce.com. On the operational side, we just installed Telematics that monitors idle to bring down fuel cost. We did our route optimization as far as the car that makes our deliveries more efficient. So at anytime, the competitive environment hasn’t changed, but we are better than we have ever been operationally.

Sean M. Wondrack – Deutsche Bank Securities, Inc.

Good to hear. I appreciate the color and good luck in 2013.

Mark E. Funk

Yeah, thank you.

Operator

Our next question comes from the line of David Manthey of Robert W. Baird. Please proceed with your questions.

David J. Manthey – Robert W. Baird

Thank you. Hi, Mark.

Mark E. Funk

Hi, how are you?

David J. Manthey – Robert W. Baird

Good, great. Could you talk about the difference between storage containers in mobile offices in terms of incremental margins and that should be over talked, but – and obviously there is a price difference, but if you are renting more of one than the other, could you talk about what the impact is on the contribution margin and then the trends that you are seeing right now, we see an uptick in non-res construction, for example does that lean mix one way or the other?

Mark E. Funk

I would say non-res will help momentum of the offices, because if you look at our overall business, two-thirds of our business is non-construction, one-third is construction. I would say in the container side, it’s probably if you want to say it’s 70-ish percent. I mean these are just kind of rough numbers and then because we’d be skewed more on the mobile office towards the construction sector. I mean, our offices do end up as sales offices, coast guard use those types of things. But yes I would say with the uptick in non-res, we’ll get more of a lift in offices than containers. With that said, going back to the margin question, really the difference there for the most part is it requires maintenance, it’s just people are in there.

We’re conditioning that kind of thing. So those tend to have 2 to 3 percentage points higher earn on them than our containers. The good news is, it’s only 17% mobiles are only 5% of our fleet, security offices are 12%, so total of 17%. So there would be slightly lower margins on that business but still very attractive.

David J. Manthey – Robert W. Baird

Okay alright, thank you and then speaking of the cash flow, is there any point during 2013 that you would anticipate becoming a net cash tax payer or is that in 2014 or where does that according to you model in.

Mark E. Funk

I don’t expect much of a cash tax payer for the next couple of years and then it will obviously depend on our rate of growth and other assets that we can do accelerate tax on that. But in the next couple of years it don’t look like we would have much in the way of cash taxes.

David J. Manthey – Robert W. Baird

Okay and when you look at I guess best case scenario, if the markets pick up and your utilization ramps up and you start spending on CapEx again. Is there a scenario that you ramp up CapEx, looking to a point where that never becomes a reality or is there a doughnut hole in there somewhere?

Mark E. Funk

That’s a good question. Obviously, we expect to grow both by adding units at our existing markets going into new markets. I think you could look at either scenario where we started paying some cash taxes or we are able to continue to grow at that pace, the turnaround if you want to call it and it continue to push out the cash taxes basically.

David J. Manthey – Robert W. Baird

Okay. Right, thank you.

Mark E. Funk

Sure.

Operator

(Operator Instructions) The next question is from the line of Sid Panda of RBC Capital Markets. Please proceed with your questions.

Sid Panda – RBC Capital Markets LLC

Hi, good afternoon.

Mark E. Funk

Hi, Sid.

Sid Panda – RBC Capital Markets LLC

The question that I had was regarding the future strategy, I mean at some point in the past, you were focused on growth and then the focus sort of shifted to EBITDA improvement have seen so, how should we think about future growth strategy versus focusing on EBITDA improvement?

Mark E. Funk

I would say it’s both. Obviously, we are very fixated on growth and at the same time, preserving our cost to get the closure or so. We are not trying to inhibit growth. Most of our growth is going to come from existing markets. We are in 136 markets and that’s where most of the growth is going to come from. So it is definitely a growth driven business.

Sid Panda – RBC Capital Markets LLC

Okay. And then looking at the incremental EBITDA margins, it was sort of pretty high this quarter. I guess the appropriate runway would still be in the mid-15 range or in conventional margins or would be expected to be higher?

Mark E. Funk

If you look at – we back ourselves, obviously the last two quarters, we have had very good incremental margins. Obviously, we probably can do it. That’s our goal as to continue to have high margins at similar levels.

Sid Panda – RBC Capital Markets LLC

Okay and then just a question on the sales of units during the quarter, it seems like the average price was pretty high for the units sold in this quarter, am I doing something wrong or was there something specific in terms of what was sold in the units?

Mark E. Funk

A lot of that had to do with mix, what we’re selling out, the fleet if we are selling in office or in container, so if you want to call it’s a special outlier there.

Sid Panda – RBC Capital Markets LLC

Okay thank you, that’s all.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back to management for closing comments.

Mark E. Funk

Great, I’d just like to thank everybody for joining today’s call and look forward to speaking with you in the future. Take care, bye.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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