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Mobile Mini Inc. (NASDAQ:MINI)

Q1 2009 Earnings Call

May 6, 2009 12:00 pm ET

Executives

Steven G. Bunger – President and Chief Executive Officer

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

Analysts

Adrienne Colby – Deutsche Bank Securities

David Manthey – Robert W. Baird & Co.

Theodor Kundtz – Needham & Company

Jamie Sullivan – RBC Capital Markets

Bob Franklin - Prudential Equity Group

Gregg Hillman – First Wilshire Securities

[Alan Weber – Frebodian Company]

Chris Doherty – Oppenheimer

[Chris Sipple] – Blue Line Capital

Phyllis Camara – Pax World Funds

Scott Schneeberger – Oppenheimer & Co.

David Gold – Sidoti & Company

Chris White with Greenstone

Operator

Welcome to the Mobile Mini Incorporated first quarter 2009 conference call. (Operator Instructions) I will now turn the conference over to Steve Bunger, President and CEO.

Steven G. Bunger

I want to welcome everyone to Mobile Mini's 2009 first quarter results conference call. I am Steve Bunger and with me is Mark Funk our Executive Vice President and CFO. To start with, Mark is going to read the disclaimer, outline the press release and give you his comments. Following that, I will give you my comments and then we'll open up the call to Q&A.

So, with that said, I'm going to turn the call over to Mark.

Mark E. Funk

We issued a press release this morning detailing our first quarter operating results. This release is available on our website and can be accessed through various web-based news services. In addition, our Form 8-K containing the press release has been filed and is now also 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 merger last June 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 in this call will be our non-GAAP financial results. A discussion of integration, merger and restructuring expenses are included in our 2008 and 2009 non-GAAP operating results. These items are included in our press release issued this morning.

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

Now, for the revenues. Revenues during the fourth quarter increased 27% to $100.2 million from $78.5 million last year. Lease revenue increased 28% to $89.5 million from $70 million last year. EBITDA increased 41% to $41.6 million from last year's EBITDA of $29.5 million, and net income for the quarter on March 31, 2009 increased $10.7 million or 9% compared to a net income of $9.8 million for the same quarter last year.

In addition to EBITDA dollars, EBITDA margin increased 4.1 percentage points from 37.5% to 41.6%. This improvement in EBITDA margin is due to headcount reductions to right-size our business given the economy, as well as the 8.1 million of cost synergies we achieved in the first quarter from our merger with Mobile Storage last June.

This merger enabled us to combine overlapping branches across North America and the U.K., and also to take advantage of the operating leverage inherent in our business model. In addition, we eliminated duplicative corporate overhead in both the U.S. and U.K.

As far as leasing revenues, leasing revenues in the first quarter of 2009 declined approximately 18% from fourth quarter 2008 levels. A portion of this decline, approximately 5%, is due to our fourth quarter seasonal retail business, which traditionally contributes to our strongest quarter of the year, meaning the fourth quarter.

The balance of the decrease is a result of the downturn in non-residential construction and the overall recession. We are hopeful that the March 2009 increase in the ABI, which is the architectural building index level which hit its highest level since last August 2008, will translate to an improvement in current non-residential activity in the near future.

Given our utilization rates in this discretionary nature of our fleet CapEx, we continue to significantly cut back on our capital expenditures, and you can see this in our numbers. For the first quarter of 2009, we had $1.4 million of net capital proceeds, not net CapEx, but net capital proceeds in excess of our capital expenditures versus capital expenditures of $16.5 million for the first quarter of 2008.

The net proceeds amount of $1.4 million was driven by our ability to sell units in our fleet at attractive margins, which more than covered all our CapEx needs for the quarter, including PP&E CapEx. Please note that we often sell storage units in nice margins regardless of age as these units do not have a model year and require very little maintenance.

The company's ratio of funded debt to EBITDA stood at 4.1 to 1 at March 31, 2009, this is calculated in accordance with a credit agreement. In addition, we believe we have the strongest balance sheet in the industry. Cash flows from operations, as well as our net capital proceeds from the sell of lease fleet, allowed us to pay down our revolving line of credit by an additional $24.5 million for the quarter, which brings the total pay down on the revolver to $74.1 million since June 30, 2008, which is right at the time of our merger with MSG.

With the first quarter of 2009 complete, we now have five consecutive reporting quarters of free cash flow. The first quarter of this year was our best free cash flow quarter ever and the free cash flow had five consecutive excludes acquisitions.

In regards to our capital structure, we have two issues of publicly held notes outstanding, as well as our $900 million revolving line of credit. The earliest of these issues to mature is our revolving line of credit, which matures in June of 2013, obviously, a little over four years from now. There is no need to finance any debt before then.

In addition, we have no financial maintenance covenants under our senior notes, and the financial maintenance covenants in our credit facility do not apply unless we have less than $100 million of excess availability. In March 31, 2008 we had over $340 million of excess availability on this facility.

Given the weakness in non-residential construction and consumer sectors, we continue to have far less visibility in our business than in prior years. As a result, we are continuing our practice of not providing guidance at this time. As we stated earlier this year, our continued focus is on sales and marketing, taking additional costs out of our business, preserving capital, reducing CapEx, and paying down debt, which we achieved in the first quarter.

Given that the bulk of CapEx is discretionary, which is evidenced by having net proceeds in the first quarter, we are well positioned to meet our net capital expenditures guidance of $15 million to $25 million for the year.

With that, I'd now like to turn the cal back over to Steve for his remarks.

Steven G. Bunger

This is definitely a very difficult economic environment in the U.S. and in the U.K., but I believe we are doing a good job of right-sizing our business to current demand, obtaining the MSG cost synergies, maintaining our margins, investing in process improvements, substantially completing our best practice implementation we started at the beginning of the merger, and most importantly making these changes without compromising our sales and marketing practices.

For the quarter, our rental revenue, sales revenue, operating income, EBITDA, and net income have all significantly increased as a result of the merger. One of the other bright spots has been our ability to maintain average rental rates for our core rental products without losing business to competition. Our overall rental yield declined by 6% quarter-over-quarter, which was primarily results of rental mix and to a lesser degree lower rental rates for our mobile offices.

The rental mix has been negatively affected by the slowdown in the portable office rentals in both the U.S. and the U.K. The average rental and transportation rate of an office unit is significantly higher than a storage unit. From a current rental rate perspective in the U.S. and U.K., we are also experiencing lower rental rats for offices, which are commodity-like products but not experiencing lower rental rates for our differentiated office units, which comprises 79% of our total fleet today. The rental rates for storage units remain strong.

We are not using unusual pricing pressures and we do not believe we are losing any more business to competitors than we have in the past. On the year-over-year basis, our rental yield is lower as a result of three major categories which are the acquired Mobile Storage rental fleet mix, foreign exchange rates, and the post-merger rental fleet mix.

Mobile Storage's overall rental yield was much lower than Mobile Mini's because Mobile Storage did not have any mobile offices and had a lower percentage of security offices compared to Mobile Mini's mix. Both of these products rent at a higher rate compared to storage units. In addition, Mobile Storage had lower rate van trailers in their fleet. These units comprised 1% of our fleet prior to the merger and now comprise about 6% of our fleet post-merger.

The year-over-year rental yield decline also related to the foreign exchange rates. A year ago, the exchange rate of the British pound to the U.S. dollar was about 2 to 1. Last quarter the exchange rate went down by 33% to about 1.5 to 1.

On the year-over-year basis, our fleet utilization dropped from 76.4% to 64.6%. The lower utilization was due to the general economic slowdown and also the addition of the Mobile Storage fleet, which had lower utilization rates than our prior utilization rate.

We are trying to mitigate the lower utilization by selling units out of our rental fleet. We have been successful so far with strong gross profit margins on these sales and the initiatives have resulted in a net negative CapEx for rental fleet during the quarter. Our plan is to continue selling idle units and especially non-core assets out of our rental fleet. We are taking a more measured approach with selling storage containers out of our rental fleet, because they are such an unusual asset class.

They are unusual because they are steel and can be stacked three and four high in a low cost storage yard, do not require ongoing maintenance, do not become less valuable over time to our rental customers, do not become obsolescent, do not wear out or need to be replaced every 10 or so years, and we also do not want to sell these differentiated assets to our competitors. These assets will produce very high returns once the economy turns positive.

In our press release, we announced that we have taken significant steps to right-size the business for the current economic conditions. Between the U.S. and the U.K., we have reduced our headcount by over 630 employees since mid-December.

At quarter end, we employed 1,845 total employees, of which 1,425 were in the U.S. and 420 in Europe. Of those, about 425 are dedicated sales people that receive the vast majority of their commissions on the compensation from commissions. The reduction in employees related to eliminating variable cost positions in our strategic decision to eliminate manufacturing at the vast majority of our branches.

Going forward, our capital expenditure needs will be very low for some time because of the excess inventory we obtained as a result of the Mobile Storage merger, which is also somewhat offset by the sales of containers out of our rental fleet. In addition, as I mentioned before, the holding cost of containers are quite low.

On our last conference call, I noted that we had converted some of our branches from standard branches to operational branches. Standard branches are staffed with branch managers, office personnel, sales people, drivers, and yard people. An operation branches is staffed only by drivers and maybe a dispatcher. The sales people would be located at a nearby standard branch. With an operation branch, we eliminate the need for the branch manager and many of the office positions.

The advantage of this type of branch is we leverage the cost of a nearby branch for sales, marketing, and management but still offer our customers local delivery pricing and service out of the operational branch. Since the merger, we have converted 25 branches into low cost, high customer service operational branches. Our plan is to continue to review our existing branches and possibly convert even more to operational branches where it makes sense.

The merger with Mobile Storage and the exiting of the majority of our manufacturing businesses has transformed Mobile Mini into a free cash flow business. These moves have already started producing free cash flow because of the combined profitability of the business and the elimination of the manufacturing cost overhang we had prior.

The business will produce even more excess cash flow when the business starts growing again and with the idling of fleet and the increased profitability of the business. We will use that free cash flow to pay down our line of credit or we could buy back a portion of our high-yield bonds. Our strategy going forward is to continue to focus on sales and marketing and customer service, but to also continue taking cost out of our business as needed and significantly reduce our capital expenditures to maximize cash flows.

We continue to be encouraged by the fact that our storage business seems to be holding up very well compared to the general shorter term rental industry, which are experiencing rental declines and rental rate deteriorations. Fortunately, a lot of our constructions customers, which now represent only 34% of our units on rent at quarter end are related to maintenance and remodel type projects, which typically continue even during an economic slowdown.

That's compared to the end of 2007, when construction costs represented 42% of our units on rent. In addition, approximately 53% of our customers typically rent only one container with an average rental rate of about $100 per month. These types of customers have historically kept their units on rent during past economic downturns.

With that said, we are managing our business with the anticipation that things will get worse before they get better in the U.S. and the U.K. This is not the first time we have been faced with a difficult economy. In fact, today we are much better positioned than in prior slowdowns because we have much better market diversification, production diversification, customer diversification, a strong balance sheet, fewer national competitors, and now in a free cash flow position that will allow us to further deleverage our balance sheet.

That concludes our prepared comments. Now, I'd like to turn the call over the operator for the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Adrienne Colby – Deutsche Bank Securities

Adrienne Colby – Deutsche Bank Securities

I was hoping you could give us a little bit more color around the quarter-over-quarter decline in yield. Just trying to understand what would have changed so much, particularly since the comp from the year ago period shouldn't have been as difficult this quarter.

Steven G. Bunger

The quarter-over-quarter decline in yield is primarily was almost all a mix. The part of our business that has fallen off the fastest is our mobile offices, and our mobile offices are much higher rental rate and delivery rate. As an example, like a storage container the average might be $100 a month and a mobile office might be $280 a month. And then when you look at the delivery, the delivery of a storage container might be $95 and a mobile office might be $1,000 or pick up.

So, when that business falls off faster, just the raw mix changes significantly faster. So we did analysis by product type to say what's going on with mix and rental rates of each product class, and mobile offices definitely fell off the fastest. Had a little bit lower rental rates, not significant lower rental rates, but the storage container was the same almost exact rental rate.

Mark E. Funk

That actually was 50, I'm sorry, 0.5% higher in the first quarter than the fourth quarter last year as far as the pricing on the container side.

Steven G. Bunger

So, it's 100% mix.

Adrienne Colby – Deutsche Bank Securities

And I guess, can you give us any idea then of the order of magnitude then of the falloff in offices I mean as a percent, because it seems like, again, it's pretty significant.

Mark E. Funk

I would say as far as a mix, it's probably, call it 3% change down as far as the combined mix.

Adrienne Colby – Deutsche Bank Securities

And then I guess I was wondering, how many times a year is your lease fleet actually appraised?

Mark E. Funk

It's appraised one time a year, and we're in the process of doing that currently.

Adrienne Colby – Deutsche Bank Securities

And so will the results of that be in your second quarter?

Mark E. Funk

Yes, those will be done for, yes, by the end of June, that's correct.

Adrienne Colby – Deutsche Bank Securities

Do you anticipate any major changes there? I mean, I guess I would imagine if you're selling off more of the mobile offices and keeping more of the storage containers that that might actually the [inaudible] would actually go up then as a percent?

Mark E. Funk

Yes, I mean the margins that we're making, that we highlight in the press release, are still very nice. Call it 31.5%, 32%. And historically in downturns, there has not been much in the way of volatility in the pricing of our fleet as through the appraisal process.

And I think that is because of what we kind of highlighted in our prepared remarks is that there's not the model year, there's not the maintenance required, we continue to make great margins when you sell the units regardless of how old they are. So that I think adds to the stability versus maybe something that's more, you might call, rental equipment related that has a model year and timing is related to it.

Adrienne Colby – Deutsche Bank Securities

And just a housekeeping question, could you tell me what stock option expense was for the quarter?

I think it was like $1.2 million in the fourth quarter, but just wondering if it's turning around that.

Mark E. Funk

I think it's turning towards that. I think it might be slightly less than that.

Adrienne Colby – Deutsche Bank Securities

I'll follow up with you afterwards.

Operator

Your next question comes from David Manthey – Robert W. Baird & Co.

David Manthey – Robert W. Baird & Co.

Could you discuss how much you save per standard branch that you convert to an operational branch in terms of the cost that you would take out?

Mark E. Frank

Yes, it depends how far we go, but anywhere from $150 million of EBITDA to $250,000 of EBITDA per year.

David Manthey - Robert W. Baird & Co.

Per year, per location?

Mark E. Frank

Yes

David Manthey - Robert W. Baird & Co.

Okay. And if I heard you correctly, you said that the year-to-year change in yield was 100% mix that means that the pricing on your core differentiated storage containers was flat year-over-year, right?

Steven G. Bunger

On a year-over-year basis, no, I'm not sure. I know quarter-to-quarter it was up by a half a percent, fourth quarter to first quarter.

Mark E. Funk

And then if you look at it, the pricing actually is up if you look year-over-year as well for first quarter of '07, I'm sorry, first quarter of '08 to '09. It is up as well.

David Manthey - Robert W. Baird & Co.

Okay. And then in terms of the pickup costs that you discussed, the low cost of pickup for storage unit verses a mobile office. How much of that do customers offset through fees that they pay. I would imagine there's some component of it. Is that correct?

Steven G. Bunger

Yes. I mean, we pretty much would run that as kind of like, it is a profit center but it's pretty much a breakeven profit center.

Mark E. Funk

So that higher cost mobiles offices get built.

David Manthey - Robert W. Baird & Co.

Okay. And then final question, could you just break down, I think you gave the percentage of your mix that's construction. Could you break down the rest of the segments that you compete in, and then maybe just give us one statement about how you see that playing out over the next, say 12, 18 months, just thinking construction, retail, industrial, that sort of thing?

Steven G. Bunger

Okay. I got the information kind of broken out between, I don't have a combined number, but I have the North America and the UK. In North America, construction is about 33%, homeowners and consumers are about 5%, industrial and commercial is 18%, institutions and government like schools and government is 23%, and then what we call consumer services and retail is 21%. In the UK, construction is 21% it's smaller, industrial and commercial is 26%, school and governmental agencies is 45%, consumer services and retail is 8%, and I think that's all of them.

Kind of the way we think it's playing out is we're starting to see stability in the construction segment of our business. What we saw at the beginning of the slowdown is a huge drop off of the number of deliveries from construction by 30% or so, and we're still seeing a lower level of deliveries. But the problem at the beginning was we still had to same level of pickups as we had in past quarters.

What we're seeing now is that those pickups are significantly reducing by 25%, 30% segments are actually starting to increase again. So I don't see it changing tremendously from where we're at today and maybe slightly down. We are seeing a pickup in government. We are seeing a pickup in homeowners. And we're seeing a pickup in some of the institutions.

Operator:

Your next question comes from Scott Schneeberger - Oppenheimer.

Scott Schneeberger – Oppenheimer & Co.

I guess, back on the rate question. On the core containers, could you speak to, you mentioned it's up year-over-year now at half a percent, quarter-over-quarter. Could you discuss a little bit of how you're pricing new containers that go out on rent today verses those that are up for renewal. I know you had initiative of pricing up those that you knew that would be extended, just a breakout of the two, please.

Steven G. Bunger

We haven't really changed our pricing. We've done some things to try to increase pricing by changing our terms, our rental terms and our delivery distances, but if you look at what we're renting out today compared to a year ago for the same type of container, we're at the same price it's not less. We are seeing a little raise because a year ago, Mobile Storage had lower rates on some of the products and we had some differentiated products.

So, in that case we're not renting that same container to the new customer, we're renting our new differentiated container at a higher price. But if you look at it fourth quarter to first quarter, there's been no real difference in the rental rates that we give it to our sales people and in actuality, it's actually gone up a little bit.

And that's kind of a, I call it a bargain for a condition. We have kind of like in a hotel, we have our posted rates. And then our sales people will then sell value and use different things as call to action, so usually when we do better pricing, it means we've done a better job of not selling just ourselves.

Mark E. Funk

And tying into that slight increase, I said it was like half a percent to the first quarter on the container. And as you know, we had a price increase last September that we installed, and then we also had a second price increase that kicked March 1st. We're seeing a little of that in the first quarter, and between those two price increases, it's generating call it about $225,000 of incremental revenue per month in total, but that was a U.S. price increase.

Operator:

(Operator Instructions) Your next question comes from David Gold - Sidoti.

David Gold – Sidoti & Company

Can you give a little bit more of a sense on the SG&A side basically, what we should expect there going forward, and have it presumably to take a number. A large part of the headcount reduction was during the first quarter.

Mark E. Funk

Right. To be honest, headcount started at the end of December, rolled through the first quarter. We have a couple that kicked in, in April, as well. I would say that a lot of that savings, most of it is in the first quarter numbers. So you will see some benefit from this headcount 630, as far as incremental improvement or reduction in SG&A, I should say, in the second quarter on out.

Steven G. Bunger

And our goal even in the second quarter is we're actually monitoring our headcount based on activity on a month-by-month almost week-by-week basis. So, we've identified the variable costs position, like the driver, like the sales person, like a yard person, and if demand continues to weaken or levels off, we're still taking costs out and will continue on until, just based on the variable cost model, if I don't have as many deliveries to make, I don't need as many drivers, nor do I need as many sales people.

David Gold – Sidoti & Company

Okay. And then on the utilization that you sort of alluded to presumably you'll be selling containers to get that back. Two questions, one, the goal there for utilization maybe by year end could we get back to 70%, and two, can you give us a sense for, I'm not sure, I guess we have a sense, but tell me where the fleet is and where you think you'd like it to be?

Mark E. Funk

I'm sorry, what are you….

David Gold – Sidoti & Company

Fleet size versus where it should be.

Mark E. Funk

I mean, I think ideally we'd like it to get back into the high 70s over time, but to be quite honest, we're not going to opine by when we're going to get there. We're not providing guidance on utilization right now, but optimally that's the level we like to run at. I think what we're doing is being selective and selling units at a nice margin.

We're going to be, continued to concentrate on that, but given the nature of our assets in the last literally 25 to 30 years we've had some in our fleet, and the nice margins they have produced, there's no real reason unless you get nice margins to worry about utilization, the storage cost is extremely low and they don't depreciate.

David Gold – Sidoti & Company

What was the total number in the fleet at the quarter end?

Mark E. Funk

The total lease fleet was call it 270,000. We are aggressively we have a different approach towards some of our non-core assets where we're trying to sell those out much faster. Like an example, a van trailer or a timber unit in the U.K., something that probably is not core and doesn't maintain value like our 78% of our fleet which is the steel container.

David Gold – Sidoti & Company

Just one last one, if you looked at the different segments of your business, would it be safe to assume that construction was the piece that got hit the hardest in the first quarter year-to-year?

Steven G. Bunger

You know what, when you look at it year-over-year it is the part that got hit the hardest. Retail, the other area that we saw probably the biggest hit was our larger retail customers like Home Depot was a big customer of ours, it still is, but it kind of speaks to our business model, which is really the national accounts are a nice upside and gravy when you get it.

But the customers who rent one container are still keeping those units on rent so that customers that had a whole lot of containers and had a line on their P&L statement that said storage units and that part of the business was hit, and I think we sort of felt the brunt of it, because most of those companies have already gone through their cost cutting processes and most of those units have been returned, and now it's more just our core customers.

So, it's primarily construction but late last year and the very beginning of the year, I do know some of our larger retailers were taking costs out as well.

Operator

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

Theodor Kundtz – Needham & Company

Could you comment maybe just looking at the business over the last four months on a monthly basis, maybe you can just comment on what you're seeing in terms of trends there? Do you feel like we're in a stable position here or are you still seeing pockets of weakness and maybe you could also throw in a geographic comment if you're seeing any areas of particular weakness?

Steven G. Bunger

Overall, the trend is becoming more of our friend. As I said earlier, the number of deliveries is sort of stabilizing at a certain level. The number of pickups is actually declining quite a bit, so we're getting more and more stability every single day and it's still dropping off about, let's say 500 units a week, but that's down from 1,200 units a week earlier in the year.

So, we feel like we're seeing some stability. There are segments across the U.S. that continue to be hurt and that's primarily like the Phoenix and Vegas markets are tough, the Florida market is tough. Southern California surprisingly isn't pulling back as fast as the other ones. Northern California is doing well. The Northeast is doing well. The Midwest is doing well. [Inaudible] is doing well, they're finding stability and some of them are actually growing.

Theodor Kundtz – Needham & Company

Okay, yes, the first three you mentioned were ebb and weak for some time. Are they continuing to weaken?

Steven G. Bunger

If they continue at that level, they're not getting weaker.

Mark E. Funk

I think the point is that we're seeing stabilization as far as any rate of decline is stabilizing.

Theodor Kundtz – Needham & Company

Okay, but your trends here monthly have been better, is that what we can take away from this that April was better than March and you're seeing a nice, I don't want to put words in your mouth, but you're seeing some stability or gradual improvement. You said the trend is your friend here so it seems like it sounds like things are trending upwards.

Steven G. Bunger

Yes, if you look at over the last year it was a steep downward trend, and then we're kind of at the bottom of that curve at the bottom. Still going down slightly, but almost at a spot where we're teetering between going up and going down.

Operator

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

Jamie Sullivan – RBC Capital Markets

I wanted to ask you a question on I guess the run rate here exiting the first quarter and if you expect somewhat of a seasonal uptick. It sounds like we should see an increase based on the run rate, just wanted to make sure I'm kind of hearing that correctly.

Steven G. Bunger

I'm sorry it's very hard to hear you. Would you repeat the question please?

Jamie Sullivan – RBC Capital Markets

Sure, can you hear me okay now?

Steven G. Bunger

It's still low but okay.

Jamie Sullivan – RBC Capital Markets

Let me try it, okay I wanted to ask a question about the run rate exiting the first quarter and I know you have a normal seasonal uptick, do you expect to see any of that and it just sounds like the run rate exiting the quarter is a bit higher so we should see some uptick. So I guess just sort of, am I hearing that correctly and should we expect the seasonality?

Steven G. Bunger

It's really hard to, we still don't feel like we have tremendous visibility in our business, but we're seeing stability and to me a month of stability is not enough to say you have a good trend. So, in essence what you say could be true, but we're not putting a stamp on it and saying that we're out of this.

Jamie Sullivan – RBC Capital Markets

Right, okay, and it sounds like where you're seeing the most stability is government, homeowners, institutions, and then construction kind of remains where the lowest visibility is in the business right now?

Mark E. Funk

Price construction and maybe just all retail as well.

Jamie Sullivan – RBC Capital Markets

Right, okay.

Mark E. Funk

And going back to the prior point, I would just say in certain markets that seasonal element to it call it the Midwest and the Northeast given just the kind of weather, when projects start and that kind of thing. So, you are seeing some of that it's just harder to gauge the other markets that have had more drop off historically, and just kind of what that overlay looks like, and that's the way it cloudy.

Jamie Sullivan – RBC Capital Markets

Okay, you talked a little bit about the variable cost structure and you've been able to keep the EBITDA margins maintained, do you see that you can control the variable costs enough to kind of continue that trend?

Mark E. Funk

I mean our model and the way we've modeled it says yes.

Jamie Sullivan – RBC Capital Markets

Okay, great and then one last one on the mobile offices, just wondering what the geographic distribution or where you're most exposed to where you have most of those geographically distributed.

Steven G. Bunger

They're probably, I don't know, but I can tell you that they're probably in the fastest growing parts of the United States, which would be Southern California, Arizona, Texas, Florida

Mark E. Funk

And Southeast and Southwest.

Jamie Sullivan – RBC Capital Markets

Okay, great and then maybe I'll just squeeze one more in, I'm wondering when you're selling units just if you can comment on the demand, who's buying, and any trends there?

Steven G. Bunger

You know there's no real trend, just customers call up and say I know I have a long-term need and I'd like to buy one and we sell it to them, so there's no place we can send them to an auction, so it's kind of our normal sales business.

Mark E. Funk

I guess the good news is we sold 24% more than we did last year at the same quarter so.

Operator

Your next question comes from Bob Franklin - Prudential Equity Group.

Bob Franklin - Prudential Equity Group

I want to go back to the comment you made, if you would, on Home Depot. Are you saying that there was a period there where you were getting units returned and that's stabilized at this point.

Steven G. Bunger

Yes, Home Depot obviously went through some big cost cutting measures and they returned quite a few of their units, so now we're not really getting any more returns because we pretty much returned most of them. But that's the part of the business that we always knew would be cyclical because it's higher profile for bigger customers.

Bob Franklin - Prudential Equity Group

How about your retail sector in general, was that across most of them or just the big names?

Steven G. Bunger

It's mainly the big names, Wal-Mart, well actually Wal-Mart would be an exception because it's more seasonal, but the Home Depot's, the Targets, the Michael's, all those ones that were doing big cutting, returned a lot of their units that we pretty much got those. If you look at those types of customers in our mix, they're definitely stable now.

Bob Franklin - Prudential Equity Group

Okay and when did most of those returns come back?

Steven G. Bunger

Fourth quarter, first quarter.

Bob Franklin - Prudential Equity Group

Okay, so the stability could we say what, as of March or April, or?

Steven G. Bunger

Probably, as of March – for that type of customer.

Bob Franklin - Prudential Equity Group

How about the smaller retailer?

Steven G. Bunger

The smaller retails we're not really seeing a trend either way.

Mark E. Funk

It's that $100 cost to them as part of their business and 53% of our customers have a single unit and that's the most stable side of our business.

Bob Franklin - Prudential Equity Group

Right, and do you have the pro forma revenues what they would have been a year ago, if you had been combined.

Steven G. Bunger

The thing is we kind of go back and forth on that. We look at them, but the issue with that is that we've so integrated the business and closed down a number of branches and overlaid it that it's probably not a good barometer to look at as far as year-over-year between the two businesses.

Bob Franklin - Prudential Equity Group

When we want to see how you did versus a year ago, you're saying there's no real way to do it?

Steven G. Bunger

I'm saying it's probably best, especially in this environment, to look at how we're doing as far as fourth quarter to first quarter, especially with their pro forma business.

Bob Franklin - Prudential Equity Group

Okay, and then this anniversary is in June, right?

Steven G. Bunger

That is correct.

Operator

Your next question comes from Gregg Hillman – First Wilshire Securities.

Greg Hillman – First Wilshire Securities

Could you talk about first the depreciation schedule, how has it changed over time since when the company was first started and also whether you think it will be changed again in the near future?

Steven G. Bunger

I think when you look at our office units it stays the same since day one. Our van trailers have stayed the same since day. Our storage units, we have extended the life we basically depreciate those a percent a year, and I think right now we're at…

Mark E. Funk

Twenty-five years at 65% residual.

Steven G. Bunger

And so my guess is, I can't be sure, but my guess is when we get assets over 25 years, we'll probably do the same. We'll probably extend the depreciation schedule out even further because we're still, those assets that are 20 years old or 23 years or however old we are right now, are still renting at the same price. We're still selling them at the same price. They're not costing us any unusual repair maintenance.

So at the beginning it was difficult to say they would last as long as they've lasted, but they continue to last so we don't really, we don't have any plan to call units out of our fleet. We have no organized plan because they don't wear out. So we'll probably extend the life but continue the same 1% depreciation a year.

Mark E. Funk

We've also got some that are just graduating in that 25 plus year category.

Greg Hillman – First Wilshire Securities

Steve, what was it to begin with?

Steven G. Bunger

I think it was 20 years to a 70% salvage value is what I think it was. It might have been 15 years or something. I can't remember.

Greg Hillman – First Wilshire Securities

And then do you have a large number of storage units coming off depreciation any time soon?

Steven G. Bunger

Mark had an assay. We've got a couple that are becoming 25 years old but we're probably just going to extend the depreciation schedule out because it's probably a fair way of valuating assets on our balance sheet.

Mark E. Funk

We're getting very close to that, just call it a handful at this point. That's something that we're visiting right now but it's not a large class at this point, but as time marches on it will be.

Greg Hillman – First Wilshire Securities

And then, Steve, could you also talk about, you mentioned best practices earlier. Could you talk about the best practices you adopted from Mobile Storage and visa versa, and who came up with the idea to go from the standard of the operating branch?

Steven G. Bunger

What was the last question? Going to operational yards? When we looked at the two companies probably the strengths of Mobile Mini have always been their ability to have a different shade of product, unbelievably strong and robust sales and marketing culture. And Mobile Storage is more M&A driven and more probably financial driven than Mobile Mini, even though we were financially driven.

But what Mobile Storage brought to the table was a new way to financially look at the business at the most basic operating level that empowers branch managers to understand their cost structure better than they did before, before our focus was more on revenue. We'd look at expenses but we probably didn't empower the branch managers as much as we do, which was at the level they could affect it.

So we've been rolling out lots of new reports that are very powerful and easy to see and easy to understand and easy to manage and more quick to happen sooner so they can make changes and it's definitely affected our business looking at trucking margins, different parts of our business. And as far as the operational yard, that's something we've actually done in the past when we startup a yard a new branch [inaudible] we do it as an operational yard.

But as the economy slowed down we just looked for, we're looking everywhere we can cut costs. And we said to ourselves hey the reason we need a yard is so that we can offer local service to our customers, but we don't necessarily have to have all the costs and sales people at that yard if there's a branch close by, so it's been an evolution over the years.

Greg Hillman – First Wilshire Securities

And just another thing, in terms of your target capital structure in like a three to five-year time horizon, what do you think that might be and what opportunities would you have to invest cash flow in let's say in three to five years from now?

Mark E. Funk

Yes, I think a couple of things obviously we'll do is our focus is to pay down debt, reduce the leverage. Ideally I think we'd like to have a low three handle on total debt to EBITDA. But I think what we'd obviously do probably in the short-term reference we'd probably buy some bonds back. But ultimately I think the structure that works in a form of bonds an asset-base structure. And then what we would also do is probably look to repurchase shares as well over time.

Greg Hillman – First Wilshire Securities

Would you ever do a dividend or turn the whole company into like a limited partnership or like a tax thing to pay out dividends more?

Mark E. Funk

We don't believe so at this time.

Operator

Your next question is from [Alan Weber – Frebodian Company].

[Alan Weber – Frebodian Company]

Can you talk about why instead of buying back bonds in the open market you've paid down the bank debt of the revolver?

Mark E. Funk

I think what we've tried to do is focus on liquidity and that's why we're referencing now. I think that's something that we will continue to look at. We just wanted to look to where the business was see the stabilization and then use our liquidity to do that. I think we're just being cautious there.

Operator

Your next question comes from Chris Doherty – Oppenheimer.

Chris Doherty – Oppenheimer

I was just wondering if you look at the mix and you said that it was negatively affected by the decline in mobile offices. Is that product a construction product in general? Is that where that usually gets sold into?

Steven G. Bunger

Yes, I mean it's not 100% construction but I'm guessing its 75% construction related. The other 25% would be an office that's used as a temporary office, but usually they are temporary offices at construction sites, especially home builders.

Chris Doherty – Oppenheimer

And where do you think we are in the cycle in terms of non-res construction. I mean are we, as you start to see these units come back, do you think we're just starting the decline or are we well through it do you think?

Steven G. Bunger

I think we're 80% through it. I mean we've already taken a hit from the home builders and they're still coming back. But I think we're probably about 80% through and just speaking mainly to the mobile offices I assume. I mean I don't know exactly but that would be my guess, 80%, 85% through it.

Mark E. Funk

And also what we're hearing obviously and I'm referencing the ABI index obviously it looked like it troughed at the beginning of this year and it's now starting to pick up again. I mean obviously there's a delay as far as architectural plans and then projects getting started. But at least so far the trend looks like its picking back up, so we're cautiously optimistic on that.

Steven G. Bunger

I mean I saw one piece of data last night that showed that, and it's so small now, but home builders are actually picking up bit it's from a very small number, so it's not going backwards it actually plussed out in one month.. That's not the majority of them on rent today though.

Chris Doherty – Oppenheimer

And just back to the potential bond repurchases. Are there any covenants that limit your ability to buy back bonds?

Mark E. Funk

We can do it under our credit facility but the most restrictive covenant is really the restricted payments in the MSG indenture. And I just had that calculation updated it's approximately $25 million of bonds that we could repurchase.

Operator

Your next question comes from [Chris Sipple] – Blue Line Capital.

[Chris Sipple] – Blue Line Capital

Can you talk about the, given 94 branches or so, can you talk about how many have already been converted into operational and how many are left to go?

Steven G. Bunger

We've done 25 so far and there's probably two to five more that we're looking at and evaluating right now.

[Chris Sipple] – Blue Line Capital

Do you think those will be done this calendar year?

Steven G. Bunger

Yes.

Mark E. Funk

And just to clarify we had the 94 branches plus 25 ops yards.

[Chris Sipple] – Blue Line Capital

Of the 94 branches, two to five of them could be converted.

Mark E. Funk

There's ops yard incremental and then call it two to three incremental of the branches could migrate to the 25 ops yards.

Operator

Your next question comes from Phyllis Camara – Pax World Funds.

Phyllis Camara – Pax World Funds

I was just wondering in talking about trends, can you tell me if the trend in the U.S. is different than the trends you're seeing in the U.K.? Are they further behind us? Are they still declining? And then also how much of your business if you can remind us, is U.K. verses the U.S.?

Mark E. Funk

Okay, It's from a mixed perspective, let's see if I have this data here.

Steven G. Bunger

About 15 % of revenue.

Mark E. Funk

It's about 15% of revenue is in the U.K. and I think about 20% of our fleet is in the U.K. just off the top of my head. As far as the trend goes, at the beginning of the year I would have told you that U.K. was doing better than the US, but now I would have to say the U.S. is doing better than the U.K. The U.K. had a three week spell where it seemed like it was falling off a little bit faster than usual but seems to hit stability.

The area in the U.K. that's probably the most troublesome is the business we bought with Mobile Storage had a lot of office units, and just like the U.S. those are the types of units that come off rent. So, it's stabilizing but not as stable as the U.S.

Phyllis Camara – Pax World Funds

…U.S. did or was it about the same time?

Mark E. Funk

Excuse me?

Phyllis Camara – Pax World Funds

Did it start the decline later than the U.S. or was it about the same time?

Mark E. Funk

It actually started about the same time but was steeper

Phyllis Camara – Pax World Funds

Okay. In general, are the rents that you get similar in the U.S. verses the U.K.?

Mark E. Funk

The answer is no. For the offices about the same, for the storage units, just because of the congestion in Europe, in the U.S. we we're bout 50% 40-foot containers and 50% smaller units. In the U.K. it's probably only 10% or 15% 40-footers. And obviously a 40-foot would rent for a higher rental rate. So, it is slightly different if you look at the returns of the pure assets they're somewhat similar. The cost structure of the U.K. is somewhat different because the cost of real estate is quite a bit more expensive than in the U.S.

Operator

Your next question comes from Chris White with Greenstone.

Chris West

So your liquidation value is getting looked at by your lenders in June in light of steel prices per pound dropping off. The fact you can buy containers for $1,900 to $2,100 for later models 40-foot containers now, are you concerned at all about your liquidation value?

Mark E. Funk

No, we're not. We actually, obviously, are active and looking at pricing in the market and following the 20 and 40-footers both in the new and used. One of the things that really sets us apart is our fleet is differentiated so there's really not a great comp as far as call it the liquidation value to it other than what we sell our containers to in the market historically and ongoing.

So, like I said, there wasn't really, obviously there was a downturn with 2002 and that would impact container prices slightly, which has now and that wasn't impactful to the liquidation of the fleet because of the differentiated featured on what it's used for.

Chris White – Greenstone

Right. Also, could you talk a little bit about your debt to EBITDA number? If I took your net debt of around $880 million and annualized your EBIDTA 42, that would be about a 5.2 debt to EBITDA. Could you explain how you got your debt to EBIDTA of 4.1 I think you, in your release?

Mark E. Funk

Right, and that's according to our credit facility which gets us credit pro forma for the acquisition that was baked in early in the deal. That 4.1 is in accordance with our creditor agreement.

Chris White – Greenstone

Would you be able to break that down the EBITDA number and the debt number multiple that you're using there to get to that multiple.

Steven G. Bunger

The question, how do you get the 4.1.

Mark E. Funk

I'm going to have to get back to you on that number but it's literally, like I said, it accounts for the pro forma EBITDA of the combined entity giving it's credit for EBITDA in the first part of last year for the MSG business.

Chris White – Greenstone

Okay, and then just, from looking at your lease fleet now 270,000 containers and a liquidation value of just under around 920 million that would be like 3,400 per container. So, you think that is still a realistic liquidation value relative to the current market and price of steel and everything?

Mark E. Funk

Well, 79% of our fleet are containers, and the others ones are mainly offices, which have a much higher value.

Chris White – Greenstone

And what is the date on the liquidation, the date on the next liquidation appraisal?

Mark E. Funk

It's currently happening and it will be part of our call in the second quarter.

Steven G. Bunger

I can reiterate with a lot of confidence that we are not worried about this at all.

Mark E. Funk

One of the things that I would highlight as well is that we have $340 million currently under how the borrowing base is calculated. Even, say it does 5%, that's a $40 million impact approximately.

Chris White – Greenstone

Yes, you've definitely got good flexibility. Is there any concern that the line will be reduced with some other companies?

Mark E. Funk

Why would it? There's a five-year commitment and we're working off a financial covenant so why would there be a reduction in the line?

Chris White – Greenstone

Well, just like I said, with your net debt to EBITDA.

Chris White – Greenstone

It could be up to the banks discretion as well. If you don't have any concern that's fine.

Mark E. Funk

Right. The only time our covenants get tested, which I highlighted earlier, is if the excess availability falls below $100 million. So, we're at 340 today. Even with your point of view may be, you do a huge haircut to it would take a huge devaluation for the fleet to basically drop below $100 million.

Steven G. Bunger

Plus, we're doing more and more free cash flow which will increase that availability as we pay down debt.

Mark E. Funk

We just increased to $20 million this quarter.

Steven G. Bunger

So, to answer your question specifically is that's not a concern and that's not something that's tested because we have the [strength] in covenants.

Operator

You're next question is a follow-up from Scott Schneeberger - Oppenheimer.

Scott Schneeberger – Oppenheimer & Co.

Mark, I got cut off when you were mentioning the September and then March price increase. These are on renewals only, right, and not on across the board new rentals?

Mark E. Funk

Right, that is correct. I think when Steve mentioned that the new were still going out at same rates but the price increase was four units that had been out for more than a year at that time. So we had a clasp and we didn't, the first price increase of September of last year we did not touch MSG name just because the merger had just closed.

And then this time we did include MSG former customers in the price increase and going back to stats its generating call it $225,000 of incremental revenues as a result of two price increase per month. And the one thing I'd highlight as well is one thing that we track is the attrition trend on those and literally the attrition rates are lower than our normal attrition rates for customers not receiving the price increase. So that was a smart decision on our part to put those through.

Scott Schneeberger – Oppenheimer & Co.

You got my next question on that one, one more if I could. This conversion of branches sounds like a great cost efficiency effort. How are you tracking on your synergistic benefits from the merger and you addressed in the past of some additional opportunities you'd like to pursue. Could you just update us on what other initiatives what might be in store?

Steven G. Bunger

As far as the synergies for the mergers, we have achieved those. Those are achieved and the future synergies are just things that we're talking about, which are standard branches to operational branches. We're looking at other pieces of our cost structure to try to take costs out. Just like any business, we're going down to the level of looking at our trash pickup at our branches to say can we do it every other week as opposed to one a week and reduce that cost by 50%? We're really managing every cost line on our P&L statement.

Mark E. Funk

And just to highlight the synergy, which is in the press release and I mentioned as well, it's 8.1 for the quarter and we had 7.7 last, so that really shows that we have that synergy at $30 million. We talked about it over and over again.

Operator

Your final question comes from Gregg Hillman – First Wilshire Securities.

Gregg Hillman – First Wilshire Securities

Concerning maintenance CapEx to maintain your EBITDA where it is right now. I know you said it was between like 15 and 25 for the year, but could you comment on that, please.

Mark E. Funk

As far as maintenance CapEx for truck fleet and that type of thing, that's usually like $2 million a year so it's minimal. Repairs and maintenance to our fleet itself goes through the P&L, and let's call it 1.5% of revenue. So, that's not in the CapEx number that actually gets hit and incurred on the P&L.

Gregg Hillman – First Wilshire Securities

So, the capital expenditure is that expansionary CapEx to buy more mobile offices, for example?

Mark E. Funk

Well, at this point I don't think we're focusing really on expansion at all. That 15 to 25 really is for, call it re-branding of MSG units adding our vaulted Tri-Cam Locking System to them, putting on premium doors, putting on new signage over time. So, a portion is that and then a portion is just infrastructure build out as far as IT and the like to build a stronger platform for when the economy returns. So, it's not really adding units, if that's your question.

Gregg Hillman – First Wilshire Securities

And then finally, just the seasonality of the quarters, I take it the first quarter is not representative of the four quarters of the year.

Mark E. Funk

Historically it has not been. It's historically been our weakest quarter. Just to put things in perspective, as far as the revenue line call it Q4 of '07 to Q1 of '08 dropped about 6%, utilization rate dropped about 5%. I think what just makes this environment unique is the economy, but traditionally the first quarter is the weakest.

Operator

I will now turn the conference call back over to management.

Steven G. Bunger

I want to thank everyone for participating in the 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. Q1 2009 Earnings Call Transcript
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