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McGrath RentCorp (NASDAQ:MGRC)

Q1 2009 Earnings Call

May 7, 2009 5:00 pm ET

Executives

Geoffrey Buscher - IR, SBG Investor Relations

Dennis Kakures - President and CEO

Keith Pratt - SVP and CFO

Analysts

David Gold - Sidoti & Company

Jamie Sullivan - RBC Capital Markets

Jim Nazareth - Oppenheimer

John Gibbon - Odeon Capital

Operator

Welcome to the McGrath RentCorp’s First Quarter 2009 Conference Call. At this time, all conference participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions). This conference is being recorded today, Thursday, May 7, 2009.

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

Geoffrey Buscher

Thank you, operator. Good afternoon. I am the Investor Relations Advisor to McGrath RentCorp and will be acting as moderator of the conference call today. On the call today from McGrath RentCorp are Dennis Kakures, President and CEO, and Keith Pratt, Senior Vice President and CFO.

Please note that this call is being recorded and will be available for telephone replay for up to 48 hours following the call by dialing 1800-405-2236 for domestic callers and 1-303-590-3000 for international callers. The pass-code for the call replay is 11129304.

This call is also being broadcast live via the Internet and will be available for replay. We encourage you to visit the Investor Relations section of the company's website at mgrc.com.

A press release was sent out today at approximately 4:05 PM Eastern Standard Time or 1:05 Pacific Standard Time. If you did not receive a copy but would like one, it is available online in the Investor Relations section of our website, or you may call 1206-652-9704 and one will be sent to you.

Before getting started, let me remind everyone that the matters we will be discussing today that are not truly historical are forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, including statements regarding McGrath RentCorp's expectations, beliefs, intentions or strategies regarding the future.

All forward-looking statements are based upon information currently available to McGrath RentCorp, and McGrath RentCorp assumes no obligation to update any such forward-looking statements.

Forward-looking statements involve risks and uncertainties, which could cause actual results to differ materially from those projected. These and other risks relating to McGrath RentCorp's business are set forth in the documents filed by McGrath RentCorp with the Securities and Exchange Commission, including the company's most recent Form 10-K and Form 10-Q.

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

Keith Pratt

Thank you, Geoffrey. In addition to the press release issued today, the company also filed with the SEC the earnings release on Form 8-K and its first quarter 2009 Form 10-K.

For the first quarter of 2009 total revenues increased 3% to $67.2 million from $65.4 million for the same period in 2008. Net income decreased 23% to $7.9 million or $0.33 cents per diluted share from $10.3 million or $0.43 per diluted share for the same period in 2008.

Reviewing the first quarter results for the company's Mobile Modular division, Mobile Modular total revenues decreased $0.2 million to $35.7 million from the same period in 2008 due to lower rental revenues, partly offset by higher sales and rental related services revenues during the quarter.

Gross profit on rents decreased $0.8 million or 4% to $16.4 million from $17.2 million in 2008 primarily due to 4% lower rental revenues with rental margins, remaining flat at 66%.

Selling and administrative expenses increased $0.3 million or 4% to $7.2 million from $6.8 million in the same period in 2008. The combined effect of lower gross profit on rents and increased selling and administrative expenses was a decrease in operating income of $1.3 million or 10% to $12.1 million for the first quarter 2009 from $13.4 million for the same period in 2008.

Finally, average Modular rental equipment for the quarter was $477 million, an increase of $26 million from the first quarter of 2008. Average utilization for the first quarter decreased from 82.5% in 2008 to 78.3% in 2009.

Turning to first quarter's results for the company's TRS-RenTelco division, first quarter total revenues decreased $2.3 million or 8% to $25.4 million compared to the same period in 2008, due to lower rental revenues, partly offset by higher sales revenues.

Gross profit on rents decreased $3.7 million or 39% to $5.9 million in 2009. Rental revenues decreased $2.8 million or 13% as compared to 2008 and rental margins decreased from 43% to 30% as depreciation as a percentage of rent increased to 55% from 46% in 2008.

Selling and administrative expenses decreased $0.1 million or 2% to $5.8 million from the same period in 2008. As a result, operating income decreased $4 million or 67% for the first quarter 2009 to $2 million from $6.1 million for the same period in 2008.

Finally, average electronics rental equipment at original cost for the quarter was $253 million, an increase of $18 million from the first quarter of 2008. Average utilization for the first quarter decreased from 68.8% in 2008 to 61.4% in 2009.

Turning next to first quarter results, for the company's Adler Tanks division, which was acquisition on December 7, 2008. Total revenues were $5.5 million and rental revenues were$4 million. Gross profit on rents was $2.8 million with rental margins of 71%, selling and administrative expenses were $1.9 million, operating income was $1.4 million for the quarter. Finally average rental equipment was $47 million and average utilization was at 64.5% for the quarter.

On a consolidated basis, interest expense for the first quarter 2009 decreased $0.6 million to $1.9 million from the same period in 2008, as a result of the company's lower average interest rates, partly offset by higher average debt levels. The first quarter provision for income taxes was based on an effective tax rate of 39.1% compared to 39.2% in the first quarter of 2008.

Next, I would like to review our 2009 cash flows. We continue to generate strong cash flows to invest in our business and return value to our shareholders. For the three months ended December 31, 2009, highlights in our cash flows included: Net cash provided by operating activities was $31.9 million, an increase of $6.3 million compared to 2008. The increase was primarily attributable to reduce account receivable and other balance sheet changes, partly offset by lower operating results.

We invested $20.4 million for rental equipment purchases compared to $21.6 million for the same period in 2008, partly offset by $4.9 million in proceeds from used equipment sales.

Dividend payments to shareholders were $4.7 million. Net borrowings decreased $11.8 million from $305.5 million at the end of 2008 to $293.7 million at the end of the first quarter 2009.

We had total debt at quarter end of $293.7 million. The company had capacity to borrow an additional $97.3 million under its lines of credit. And the ratio of funded debt to the last 12 month suggested actual EBITDA was 2.1. We continued to have a solid low average balance sheet.

For 2009, first quarter adjusted EBITDA decreased $2.3 million or 7% to $32 million compared to $34.3 million in 2008, with consolidated adjusted EBITDA margin at 48%. Our definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income are included in our press release and form 10-Q for the quarter.

Turning next to 2009 earnings guidance. At this time based on first quarter 2009 results and our outlook for the remainder of the year, we are reconfirming our full year earnings per share guidance to be in a range of $1.30 to $1.45 per diluted share.

At this time I would like to turn the call over to Dennis.

Dennis Kakures

Thank you, Keith. Let’s go right to our results for our Modular rental business, Mobile Modular. Our rental revenues for the quarter decreased by 4% from a year ago to $24.9 million. In California during the first quarter, we continued to experience lower business activity levels in very competitive educational and commercial markets, as a result of the macro economic environment, underutilized equipment inventories, and that states financial challenges.

The good news is that in February California passed the budget and as a result, the State sold over $6.9 billion in tax-exempt bonds in March and another approximately 7 billion taxable bonds in April. These monies will allow previously a portion but unfunded school or other public works type projects to move forward.

However the flow of these monies as well as scheduled stimulus funds have been slow in reaching the school district level. As a result in 2009, we expect commencement delays for a number of school monetization projects beyond the traditional summer delivery window.

Keep in mind there will continue to be challenges to California having a balanced budget in that five of the six initiatives on the May 19th, Special Election directly related to the budget passed in February are behind in the opinion polls.

Its important to mention that there was a noticeable change in rental reporting activity towards the end of the first quarter and into April for both our California commercial and educational markets. Although it remains a very competitive marketplace in California, we are hopeful that we have seen the bottom of business activity levels during the first quarter

In Florida, we have had lower new education rental activity than in past years due to the state's financial challenges and its impact on implementing the next stage of class size reduction and class size slightly down due to enrollment levels. However, we continue to be well positioned versus our competitors for our business activity levels increased with our Campus Maker classroom product and the phasing out of older model “portable” classrooms.

We're also experiencing a very challenging commercial rental environment in Florida with lower demand in the very competitive pricing environment, especially on single and doublewide building activity.

In Texas, we are seeing lower commercial business activity related to the decrease in oil and petrochemical related activity. We are also anticipating lower rental classroom booking levels in 2009 as schools look to more fully utilize their existing facilities.

In the new mid-Atlantic expansion we are continuing to make progress in capturing new educational business in North Carolina, Maryland and Virginia with our innovative classroom products designed for these markets. We’re also continuing to see very competitive commercial markets in the mid-Atlantic and Southeast especially for single wide buildings rental opportunity.

Due to slower new rental business activity levels for the Modular division overall for the quarter, we experienced a quarter-over-quarter reduction in average equipment utilization to 78.3% from 82.5% a year ago and 81% at the end of 2008.

Now, let me turn our attention to TRS-RenTelco and their results. Rental revenues decreased 13% from the year ago. During the quarter we experienced higher equipment return and lower new booking levels compared to the first quarter of 2008.

Our pipeline activity remain healthy, but opportunities continue to age longer and our order conversion rate slowed considerably from the year ago, reflecting project delays and broad uncertainty in the current economic environment. There also continues to be downward pressure on rental rates as conversion of pipeline activity has slowed.

We continue making good progress during the quarter in selling underutilized equipment and reducing depreciation expense. Monthly depreciation stood at $3.4 million in March, 2009 and it is down from high of $3.9 million in October of 2008.

Although, sales revenues rose to $4.9 million for the quarter compared to $4.5 million a year ago, gross profit on sales dropped to $1.4 million from $1.8 million a year ago, due to our need to reduce inventory levels sooner rather than later in order to take cost out of the business.

Ending first quarter utilization was 59.9% compared to yearend 2008 utilization was 64%. Our average monthly rental rate declined to 4.2% from 4.5% at yearend 2008. Both of these metrics are indicators of the difficult market conditions we faced during the first quarter of 2009. Although, our first quarter results reflect a very challenging rental environment, we are hopeful that the start of the second quarter is a sign of stabilizing market conditions in electronics.

In April, our rental billing rate finished fairly flat as compared to the start of the month. Hopefully, we are close to or at the bottom of the market. If so, business may remain at current lower levels for some time before we experience growth again.

In the meantime, we continue to manage our expenses tightly and look to take more cost out of the business as activity levels warrant.

Now, lets turn our attention to Adler Tank rentals first full quarter results. Adler Tank rentals generated $4 million of rental revenues and $2.8 million in gross profit on rents with the 71% in gross margin on rents during the first quarter, which met our expectations.

During the first quarter we continued our work on a number of integration elements, including transitioning various back office accounting and administrative functions to our team in Livermore, upgrading the Adler web site, developing marketing materials, building customer and prospect databases, and creating information system and other connectivity between Adler's locations and our corporate offices.

We also continue to assess facility needs and added sales positions in various regions. We also expanded Adler's growing national footprint into both the California and Western Pennsylvania markets during the quarter. The expansion in the California can be done very cost effectively by leveraging our existing Modular facilities and certain personnel and incrementally building the sales organization.

We also placed orders during the quarter with a variety of manufacturers and began receiving additional rental equipment into the different Adler operating regions.

Finally, its very important to note that the operating cultures in the various systems of Adler Tank Rentals in McGrath Rent Corp are very similar and this has made for a smoother integration process. I am very confident that we see Adler's capable leadership and with ample capital now available for additional rental assets, Adler Tank Rentals is well positioned to grow its business even in today's challenging market environment.

Now, let me take a minute and update everyone on our two newest organic initiatives, environmental test equipment in portable storage. First our environmental test equipment initiatives made very good strides during the first quarter in growing its number of customers, opportunities and orders booked.

We are feeling more confident each month that our centralized sales and inventory operating structure in Dallas is optimal for lowering per order transactional costs as well as in creating a better customer experience. We believe we can become a significant rental provider in this industry over the next few years.

For our portable storage initiative, we've now expanded this business into our Southern California, Texas and Florida regional modular locations. We're able to leverage our existing module sales and inventory centers in these regions to reduce our cost structure and ramping our portable storage business.

We discovered from our initial launch in Northern California that there can be a material level of synergies between our legacy modular building customers and portable storage usage. We've been pleased with our business levels to-date and the fact that we've increased rental revenues each quarter since we launched the initiative in 2008.

To broadly emphasize that the rental revenue levels with both of these organic initiatives are small relative to our Modular and electronics business, as well as to our new tank rental business. However, we expect both rental legs to become increasingly important to our earnings in the years ahead.

And now for a few closing remarks. Today in effect we have five rental business compared to year ago, when we had only two, Modular buildings and electronic test equipments. We also now operate our Modular building rental business in seven states as compared to only three states two years ago.

Our electronic business also has a broader international footprint with our 24x5 Dallas based operation center coverage window, online ordering, and sales representation in Southeast Asia. 2009 and the next few years are all about getting these additional investments and those new rental products and geographies increasingly successful.

Our greatest strength of the company has always been our rental operations dollars. We understand the value of proposition of getting the operating details of each rental business just right. This includes the customer experience, smart marketing, asset management, equipment processing and regional specific issues.

We understand inherently, how each turn of flywheel is cumulative in its effect and can ultimately create meaningful comparative advantages. We believe we are well positioned today to become a larger and more profitable company as economic conditions improve. While we expect the next 12 to 15 months to be a very challenging operating environment, we would expect McGrath RentCorp to fare better than many companies due to the countercyclical nature of portions of our rental businesses, our strong cash flows, and low leverage balance sheet.

Longer-term, we believe that our strategy of investing a new earnings engines in more diverse business-to-business rental market segment will generate growth in income and share value, while maintaining our financial strength, protecting our balance sheet, providing attractive dividends, and making the company more resilience to future economic cycles.

And now Keith and I welcome your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instruction) Our first question comes from the line of David Gold with Sidoti & Company. Please go ahead.

David Gold - Sidoti & Company

Good afternoon.

Dennis Kakures

Good afternoon.

Keith Pratt

Hi, David.

David Gold - Sidoti & Company

Just a couple of follow-up questions. First, can you walk us through a little bit of the guidance. What's embedded it may or by way of California budget? Is that predicated on the five proposals that you are looking for to pass?

Dennis Kakures

Actually if you look at the California budget situation currently we feel for the remainder of 2009 this impact whether that passes or not or probably minimal of the key item for us thus far is in the fact that bonds were able to be sold in March and April. And what that did was fund about $2 billion worth of about $2.5 billion of school construction related project that had been put on hold.

They were either “shovel ready” projects or projects that were just starting off as they have frozen. So when we look at the rest of this year, although we would love to see the initiatives pass on May 19th, its less critical to this year than it is to the 2010 school year in our mind.

David Gold - Sidoti & Company

So presumably the bonds that have been sold basically provide all the funding that you would need to sort of to get to that range?

Dennis Kakures

Let's put it this way, the fact that the December 18th stalled projects are now up and running, at least the great majority of them. That was a very important item.

David Gold - Sidoti & Company

On that note, I guess if we go back a quarter ago on that call you pointed to looking for the budget to pass and basically without it, I think you said something along the lines, there were some [stalled] projects like you said, presumably with some [retained] projects? So now that the dollars are out there, you are withholding guidance. Is that to say that your money hasn’t come through maybe as quickly as a matter of -- in other words if the situation is better why wouldn’t guidance be given now?

Dennis Kakures

Well the situation I'd say is better. It turned out that having those initiatives passed in May became less important once the bonds were sold. The bonds were the key to be able to fund the 50% that the state needs to provide for these modernization projects. So that was what was most critical and I would still say that fact of the initiatives passing on May 19th, that also important buts it’s a longer term, that has a longer term dynamic until -- and if they don’t pass, we'd expect they've got – they will sit down and figure out another approach.

So, I would just say that what occurred with the bond being sold was -- we believe that the state would find a way to make things work. Now, it turned out that it was a fact that they sold bond before they had a formal balanced budget with the initiatives passing. So, one happened before the other and that really satisfied what we were looking for in our plans for this year.

Keith Pratt

David one comment I'd like to make is when we talk guidance, as I'm sure you'll appreciate many companies have not even offered guidance this year, We've done that to the best of our ability. We felt that was important, particularly in light of the addition of Adler and some of our new organic rental initiatives and so there is still a lot of uncertainty and lot of a challenge that we’re wrestling with

I think if you look at the business as a whole, Dennis has outlined for you some of the factors in the modular business, but we have to look across all the businesses as we reaffirm our guidance and I think at the margins things are probably a little better in Modulars than we might have feared they could be. Although again we have long way to go and similarly in the electronic side of the business, its been a tougher start to the year than then what we would have liked and we have work to do there to see that situation turnaround.

So, I think you have to look all across the business when you really asked the question, where is guidance at and do we think it's still reasonable.

David Gold - Sidoti & Company

Okay. All right. That's fair. And then sort of another piece of that, the way of G&A I can tell that you're managing that quite tightly? And just curious, if there is more potential progress there or would you use the first quarter as the good run rate?

Keith Pratt

Yeah. I go back to what we've said in February, I think it still holds true. What we said in February was to remind everyone where we spend $58 million in SG&A for the total business in 2008. We said our goal was to really hold the line at SG&A in spite of the fact that we are funding some new organic initiatives and really see the incremental SG&A just be tied to Adler. And you’ll see in the press release, Adler was appropriately $1.8 million of s incremental SG&A in the first quarter.

And what we said was for the full year '09, we were expecting SG&A somewhere in the $8 million to $9 million range for Adler. I think that still holds true. We are going to be adding incrementally some additional personnel at to Adler over the course of this year, some of that we've already begun.

But I think, in short what we try to beat that goal and manage cost to tightly as we can, absolutely. So if we can do better then the $58 million of last year with another eight or nine added to account for the addition of Adler which takes you into the $66 million to $67 million we are in for the year. If we can beat that, we will and we are very focused on careful management of cost and we are very focused on looking at business activity levels in all areas and making adjustments if we need to.

David Gold - Sidoti & Company

Very good. Thank you both.

Operator

Thank you. Our next question comes from the line of Jamie Sullivan with RBC Capital Markets. Please go ahead.

Jamie Sullivan - RBC Capital Markets

Hi, guys.

Keith Pratt

Hi there.

Jamie Sullivan - RBC Capital Markets

Wondering can you talk a little bit about Florida. It sounds like, that market was holding up a little bit better commercial, construction was actually doing fairly well and giving you a new entry. You just commented on what you've seen change in the marketplace and also in the class size reduction initiative; I think you had a comment that there have been some delays or some non-renewals of that initiative, could comment there?

Keith Pratt

Certainly, first on the commercial side, I think the prepared remarks really centered around what a difficult market it's been this year especially on single and doublewide type rentals. So just to be clear on that, that was a very tough market in Q1. commercially.

On the educational side, what occurred with class size reduction for the 2009, 2010 school year is the constitutional amendment on class size reduction with having the ratio is being met on the classroom level rather than on a school level. They went from district to school to classroom by design when they initially put together the legislation and what the state did because of that very tight budget situation in Florida is, they differed districts having to go to that until of the 2010-2011 school year. So class size reduction is still fully in place, they just got a one year reprieve so to speak and next year, in 2010-2011 they would have to go to make those reductions at a classroom level.

Jamie Sullivan - RBC Capital Markets

Okay. And how much of Mods today is in the Mid-Atlantic, is it less than 5%?

Dennis Kakures

Yes. It's very small although I will say that we’re making some good initial steps there with our new product introductions. Its small buts it’s a longer-term growth item for us but again good progress to-date in terms of getting the seed planted and getting the few nice orders here recently.

Jamie Sullivan - RBC Capital Markets

Okay and then just I guess on cost measures, have you -- what have you done to-date is that part of how you're able to maintain the outlook here based on little bit deeper cost control then we talked about a few months ago.

Dennis Kakures

We're highly focused, as Keith mentioned a moment ago, I mean without -- based upon our volume driven for each division, we take cost out as we need to on the production side and processing side based on volume. I mean I spoke to some of the cuts on our call earlier this year about salary freezes, reduction in bonus levels, a reduction in equity grants and those types of items. So, we've taken a very surgical approach to things and really tried to do things smartly and we’re continuing to monitor this very tightly to take cost out of the business as warranted.

Jamie Sullivan - RBC Capital Markets

Okay and I guess just on interest rate, not the interest rate, the interest expense that came in a bit lower than expected, is that at a level that could be sustained for the year. Do you expect to continue to pay down debt, how that creep down assuming interest rate stays the same.

Keith Pratt

They key to it is LIBOR. Most of our borrowing through a revolving credit lines and essentially we pay a margin over LIBOR. We're typically borrowing one or three months LIBOR. And over the really the last couple of months, there are at historical lows, that's benefiting us. So interest expenses was around 2.5% in the aggregate for the first quarter. Really if LIBOR stays low, if credit markets conditions do not deteriorate, we do not see a tightening or a spike. It is possible we could stay right around door levels that we saw in Q1.

Jamie Sullivan - RBC Capital Markets

Operator

Thank you. (Operator Instructions) Our next question comes from the line of [Jim Nazareth] with Oppenheimer. Please go ahead.

Jim Nazareth - Oppenheimer

Good afternoon everyone. I guess I will pick in the other state, Texas where you have some business there. I am wondering was the drop in activity, you said it was tied to oil. But could you just give us a little bit more granularity as to what you are seeing in that market. I guess on sequential basis?

Dennis Kakures

Well in Texas a great amount of our commercial side of the business there are tied to oil industry. We provide the structures in office space for a lot of the plants, when they are doing projects, different turnarounds at the plants and those type of items. And when their business gets slower and they get most cost conscious and so forth, that impacts our business directly. And also if it is slower in that area, they are going to be slow in petrochemical plants and other related industries.

And in the educational business that we have in Texas is much smaller than in the other states where we believe we had good last three or four years. This year we expect that there is going to be some more economizing in those market. They are just because of the tightness of the budget situations in Texas, I think 40% of the school districts in Texas are running a deficit in the school budget. So, there are some challenges there.

Jim Nazareth - Oppenheimer

Okay. Thanks. And just to better understand the dynamic in California as far as -- you mentioned that money has been at least deployed the $13 billion or so of bonds that have been issued. But they've been slow to reach the school districts. Exactly -- is that eminent or is that -- what exactly is driving the holdup there?

Dennis Kakures

Yeah. Its just administratively just how things work in the state and I am not sure about all the $13 billion, I am sure of -- I am aware of that the $2 billion of funding --about a $2.4 billion of school related. It just takes time sometimes and also now the federal stimulus monies, the first are batch of those monies, my understanding is are to be out to the school districts by May 15. So that's another --.

California on the education side, I think its looking at about $6 billion and they are going to get a certain percentage of that here by in the middle of May, at least what's been planned. But this is all administrative processes that just take time.

Keith Pratt

And I think one consequence Jim, maybe the start date on projects, which typically are in the June, July, August timeframe. Some of those may start later than that and beyond the typical summer season and so we’ve also had to factor of that into our thinking for the balance of the year.

Jim Nazareth - Oppenheimer

And for California the budget issues does that at all affect stimulus dollars coming into the State or is it and we should think of them completely separately?

Keith Pratt

I believe there are separate items. Now the fact here, the dynamic is such though that the school district is receiving federal stimulus monies and for whatever reason the May 19th initiative don’t pass they may decide to spend those monies on different types of items. So it may alter some of their spending behavior but there are other independent items.

Jim Nazareth - Oppenheimer

Okay, thank you.

Operator

Thank you. Our next question comes from the line of [John Gibbon] with Odeon Capital. Please go ahead.

John Gibbon - Odeon Capital

Hi Dennis.

Keith Pratt

Hi John.

John Gibbon - Odeon Capital

Just walk me through, I got two, three questions about how these different states operate. Just walk me through the initiatives that are in trouble?

Keith Pratt

There are only six initiatives and about five are the ones that are really key.

John Gibbon - Odeon Capital

Right.

Keith Pratt

And the best way to break it down here is because I am going just go through my notes just to make certain I don’t miss any salient points here. But if you look at propositions 1A and 1B which are really critical, they really established this rainy day fund for the State and in effect what it does is 1A would extend -- there are three new taxes that were put in place. We have a license fee tax, there was a state personal income tax increase and the sales tax increase.

So those three items are in place but they were temporary. This would extend that for I believe four years and then it creates additional revenue in 1B then provide the shot in the arm to school districts to basically get -- it’s a one time infusion of $9.3 billion that's paid over five years beginning in the 2011-2012 school year. So, needless to say those are very, both of those are tied at the hip and if 1A doesn't pass it, 1B doesn't matter.

John Gibbon - Odeon Capital

They were somewhat in trouble?

Dennis Kakures

What's that?

John Gibbon - Odeon Capital

You said they were behind in the pool?

Dennis Kakures

Yeah, they are behind on the pools, but all five are behind in their pools now. If you want to hear about the others, I'll summarize the other three very quickly. The other is three 1C, 1D and 1E in effect provide more of an immediate pop here and the fact that it allows -- 1C basically is a securitization of the state lottery system. And allows a base of about $5 million in one time event for the state to be able to use right away. And then 1D and 1E are some other mixing the math in borrowing. Its very smaller relative, so that's an immediate pop and whereas 1A and 1B are longer term, but…

John Gibbon - Odeon Capital

Let me kind of turn to other states, I think I've always understood California, but this is usual California awareness but Florida, they don't have anything quite like this. I know a lot of those schools are still funded by local funding.

Dennis Kakures

I'm sorry, in Florida?

John Gibbon - Odeon Capital

Florida yeah. What’s happened in Florida which is very unusual.

Dennis Kakures

Its both in Florida. They have local sales tax revenue there and you also get operating funds from the state.

John Gibbon - Odeon Capital

But there's nothing based on real estate taxes right, Florida?

Dennis Kakures

Now which state would your be?

John Gibbon - Odeon Capital

Because you are saying that in Florida, they're reducing the valuations for both commercial and residential real estate dramatically, so it's going to reduce the tax base, which funds all kinds of services in every community there. I am stunned to what's happening. Now let me ask you about Texas. Does Texas have both a state and a local funding situation, because you say, that 40% of the school districts in Texas are running deficits. How they make up deficits in Texas? Taxes do quite….?

Dennis Kakures

While Texas -- that is three years ago, lower property taxes is down to quite a low level, and that's really starting to impact the school districts there. So they both -- they get state funds and they have local fund so.

John Gibbon - Odeon Capital

And presumably both of these states will get something, not as very large, but something from the stimulus program?

Dennis Kakures

Yes.

John Gibbon - Odeon Capital

That's perfect, okay.

Dennis Kakures

Yeah. They will definitely get something, but it's challenging. Texas right now, in fact their numbers increased, they are adding about 80,000 new students a year. And they are basically -- I think their funding levels are currently at about 2006 levels if I am not mistaken on the most recent articles that I have read. So, based upon the property they will when they lowered property taxes.

John Gibbon - Odeon Capital

Eventually this has to play right in your hand, eventually?

Dennis Kakures

Well, we've seen an uptick in our Texas business over the last three to four years, so there are some impact there, we'll have to see what happens going forward.

John Gibbon - Odeon Capital

Just so s you have this and this is more anecdotal than anything else, but I gather, this stimulus money is effecting other kinds of business, they may affect -- eventually affect your commercial [total] rental business. Because I have already heard from a couple of companies that projects, which are having to do with asphalt concrete structure, they have already started and their prices have firmed up on those things. So that, it will infrastructure part of the spending even though it has not arrived yet, the suppliers are beginning to see the signs of that. Now you hear that's early than what you see, but they are signs of it anyway?

Dennis Kakures

We very well are benefit from some of the federal money but perhaps more importantly the $30 billion in state infrastructure bonds that was passed November of 2006, we saw some impact from that last year and we would expect if the state is able to sell bonds, we'll see more of those types of infrastructure projects in a reserve waste water treatment plants, dams, bridges. Those types however, are in fact good for our commercial business and larger complexes.

John Gibbon - Odeon Capital

Somebody is expecting that money for sure, because I am hearing it around in the infrastructure companies?

Dennis Kakures

I would agree with your thinking.

John Gibbon - Odeon Capital

Thank you.

Operator

Thank you. Our next question is a follow-up question from the line of Jamie Sullivan with RBC Capital Markets. Please go ahead.

Jamie Sullivan - RBC Capital Markets

Hi. Couple of quick questions. On the income statement rental related and other lines that was up year-over-year. Is that related to returns and pick ups and things like that?

Keith Pratt

Not specifically. When we have the rental for modulars, the rental related services, those revenues are recognized ratably over the term of the initial contract. So it might be over one, two or three years whatever the appropriate time frame is. So when you see movement in that line item particularly from modulars it can simply relate to the ebb and flow of particular projects being really running their course in terms of the initial contract and the revenues associated with them being recognized.

Jamie Sullivan - RBC Capital Markets

Okay.

Keith Pratt

And we also announced line items for modulars. We'll periodically have a customer request that we move some buildings or classrooms to a new location and you can think of that as a project where there is no new units put on rent but there are revenues that are come to us to do that work.

Jamie Sullivan - RBC Capital Markets

Okay. So if I look at the line did you combine, those were 15% year-over-year?

Keith Pratt

Yes, keep in mind there is some dollars in this as well for Adler. So you will see in the segment reporting, we've broken that out for you.

Jamie Sullivan - RBC Capital Markets

Okay. Alright and then just how much is Texas of the modular business?

Dennis Kakures

We don’t break it out. What we have done here. Well we'll just tell you historically and currently probably about 65 to 70% of business is California based and the balance of Modular's is outside of the state and that's in a trend that's been moving lower -- that percentage of California business has been lower. It's been impacted by the California business level as well as increases in other states.

Jamie Sullivan - RBC Capital Markets

Okay. And the increases will be coming mostly from Texas

Dennis Kakures

Well actually its Texas and the mid-Atlantic is kicking and some in Florida.

Operator

Thank you. Our next question is a follow-up question from the line of David Gold with Sidoti & Company. Please go ahead.

David Gold - Sidoti & Company

Hi. Can you give a little bit more detail on the CapEx in the period? I guess, it sounded like it was pretty close to last year?

Keith Pratt

Yeah David, for the first quarter just looking at the cash flow statement we spent 24 and .4 million on capital and that's comparable to last year, a little bit lower. The thing I would say about our outlook on capital spending, first of all, as we had suggested in the past, our capital spending would be diverted more to the new initiative areas.

So, that would include Adler Tank rentals, it would also include portable storage and environmental test equipment and well over half of what we spent in the first quarter was directed towards those new initiative areas.

The other thing is because they are new initiatives, I think the capital spending will be more [towards] in the first half of the year for those and then probably tapering off a bit in the second half of the year. Really the capital we need to put in what I call the traditional modular and electronics businesses, that is very low and it really reflects the fact that utilization of the equipment pools is low compared to where we would like it to be.

David Gold - Sidoti & Company

Okay. Okay. Yeah, that's what I would have expected you to clarify that. Thanks.

Operator

Thank you. And there are no further questions in the queue. I would like to turn the call back over to management for closing remarks.

Geoffrey Buscher

All right. Well, thank you everybody for joining us today. I want to remind everyone that we have our Annual Shareholder Meeting that's coming on June 4th, beginning at 2 O'clock here in Livermore, California, there are many of you that can join us. We'd love to see you and otherwise we'll be webcasting it, so you can listen it that way, if you are not going to travel. And so we look forward to chatting with everyone then and again on our Q2 earnings call sometime in early August.

Thank you all very much. Have a good afternoon or evening.

Operator

Thank you. If you would like to listen to a replay of today's conference, please dial 303-590-3000 or 1-800-405-2236 please enter in the access code of 11129304. ATT will like to thank you for your participation. You may now disconnect.

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Source: McGrath RentCorp Q1 2009 Earnings Call Transcript
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