McGrath RentCorp Q2 2009 Earnings Call Transcript

| About: McGrath RentCorp (MGRC)

McGrath RentCorp (NASDAQ:MGRC)

Q2 2009 Earnings Call Transcript

August 06, 2009 at 5:00 pm ET


Dennis Kakures - President and Chief Executive Officer

Keith Pratt - Senior Vice President and Chief Financial Officer

Geoffrey Buscher - Investor Relations, SBG Investor Relations


David Gold - Sidoti & Company

Jamie Sullivan - RBC Capital Markets

Jim Giannakouro - Oppenheimer


Good afternoon ladies and gentlemen. Thank you so much for standing by and welcome to the McGrath RentCorp second quarter 2009 conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) As a reminder, the conference is being recorded today, Thursday, August 6, 2009.

I will now turn the conference over to Mr. Geoffrey Buscher of SBG Investor Relations. Please go ahead sir.

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 1-800-406-7325 for domestic callers and 1-303-590-3030 for international callers. The pass-code for the call replay is 4117242.

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

A press release was sent out today at approximately 4:05 Eastern Time, which is 1:05 Pacific. If you did not receive a copy but would like one, it is available online in the Investor Relations section of our website, or you may call 1-206-652-9704 and one will be sent to you.

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

All forward-looking statements are based upon information currently available to McGrath RentCorp, 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 second quarter 2009 Form 10-Q.

For the second quarter of 2009 total revenues decreased 10% to $66.5 million from $74 million for the same period in 2008. Net income decreased 30% to $7 million or $0.30 per diluted share from $10.1 million or $0.42 per diluted share for the same period in 2008.

Reviewing the second quarter results for the Company's Mobile Modular division compared to the second quarter of 2008, Mobile Modular total revenues decreased $0.3 million or 1% to $37.1 million due to lower rental and rental related services revenues, partly offset by higher sales revenues during the quarter.

Gross profit on rental revenues decreased $0.1 million or 1% to $15.4 million primarily due to 7% lower rental revenues with rental margins, increasing to 65% from 61% in 2008.

Rental margins increased as the result of reducing material and delivery costs in our inventory centers from lower business activity levels and extensive cost reduction efforts.

Selling and administrative expenses decreased 1% to $7.1 million. Higher gross profit on sales partly offset by lower gross profit on rents and rental related services resulted in an increase in operating income of $0.3 million or 3% to $12.2 million.

Finally, average Modular rental equipment for the quarter was $476 million, an increase of $22 million. Average utilization for the second quarter decreased from 82% in 2008 to 75.3% in 2009.

Turning next to second quarter results for the Company's TRS-RenTelco division compared to the second quarter of 2008, total revenues decreased $8 million or 25% to $24 million, due to lower rental and sale revenues.

Gross profit on rents decreased $4.7 million or 49% to $5 million. Rental revenues decreased $5.8 million or 24% and rental margins decreased to 28% from 41% as depreciation as a percentage of rents increased to 57% from 46%.

Selling and administrative expenses decreased $0.8 million or 12% to $5.6 million. As a result operating income decreased $4.5 million or 77% to $1.4 million from $5.9 million.

Finally, average electronics rental equipment at original cost for the quarter was flat at $248 million. Average utilization for the second quarter decreased from 69.4% in 2008 to 59.5% in 2009.

Turning next to second quarter results for the Company's Adler Tanks division, which was acquired on December 11, 2008, compared to the first quarter of 2009, second quarter total revenues decreased $0.3 million or 5% to $5.2 million due to lower rental revenues. Gross profit on rents decreased $0.5 million or 18% to $2.3 million. Rental revenues decreased $0.3 million or 7% and rental margins decreased to 62% from 71%, as depreciation as a percentage of rents increased to 21% from 17%. Selling and administrative expenses increased $0.3 million or 15% to $2.1 million. As a result, operating income decreased $0.8 million or 59% for the second quarter 2009 to $0.6 million.

Finally, average rental equipment for the quarter was $55 million, an increase of 8 million. Average utilization for the second quarter decreased from 64.5% to 53.3%.

On a consolidated basis, interest expense for the second quarter 2009 decreased $0.3 million to $2 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 second quarter provision for income taxes was based on an effective tax rate of 39.1% compared to 39.2% in the second quarter of 2008.

Next, I would like to review our 2009 cash flows for the six months ended June 30, 2009. Highlights in our cash flows included: Net cash provided by operating activities was $65.7 million, an increase of $20.3 million or 45% compared to 2008. The increase was primarily attributable to reduce accounts and income taxes receivables and other balance sheet changes, partly offset by lower operating results.

We invested $33.7 million for rental equipment purchases compared to $54.7 million for the same period in 2008, partly offset by $15.2 million in proceeds from used equipment sales.

Property, Plant and Equipment purchases decreased $10.7 million to $0.6 in 2009. Dividend payments to shareholders were $10 million and net borrowings decreased $36.9 million from $305.5 million at the end of 2008 to $268.6 million at the end of the second quarter 2009. We continued to have a solid low average balance sheet.

For 2009, second quarter adjusted EBITDA decreased $4.3 million or 12% to $30.3 million compared to $34.6 million in 2008, with consolidated adjusted EBITDA margin at 46% compared to 47% in 2008. 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 the results for the six months of 2009 and our outlook for the remainder of the year, we are narrowing previous 2009 full year earnings guidance range of $1.30 to $1.45 per diluted share to an updated range of $1.30 to $1.40 per diluted share.

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

Dennis Kakures

Thank you, Keith. Let us go right to our results for our Modular rental business. Mobile Modular as rental revenues for the quarter decreased by 7% from a year ago to $23.5 million. In California during the second quarter, we continued to experience lower business activity levels in very competitive educational and commercial markets, as a result of the macroeconomic environment, underutilized equipment inventories, and the states financial challenges.

Booking activity did increase during the second quarter compared to the first quarter of 2009. However, equipment returns continued to outpace new shipments especially in residential and non-residential construction.

The most positive news from the Golden State is that the balance budget for 2009, 2010 fiscal year was approved during July. We anticipated that the state will now be in a position to resume the sale of its historical popular general obligation bonds to finance both educational facility and other state infrastructure projects.

With approximately $2 billion in voter approved school facility modernization bonds authorized for sale. This money should allow previously apportioned but unfunded projects and new project applications to begin moving forward.

Although we would expect this funding to move some projects ahead in the near term, the biggest impact in terms of portable classroom shipments is expected in the summer of 2010.

In Florida, we have had lower new educational rental activity than in past years due to the state financial challenges and its impact on implementing next stage at cross size reduction and flat to slightly lower student enrollment levels. However, we continue to be well positioned versus our competitors, so when business activity levels increase with our Campus Maker classroom product and the phasing out of older model “portable classrooms”.

As for the commercial rental market Florida, it continues to be a very challenging environment with lower demand in the very competitive pricing, especially on single and doublewide building activity.

Keep in mind that our commercial business is a very small portion of our overall Florida rental revenue base.

In Texas, commercial business activity in the quarter continued to be challenged due to decrease in oil and petrochemical related activity and general economic conditions. However, business activity levels increased toward the end of the quarter and have continued favorably thus far in the third quarter. They are declaring lower classroom booking year in 2009 in Texas due to educational budgetary matters and school districts looking to more fully utilize their existing facilities.

In our new mid-Atlantic and Southeast expansion, we are continuing to make progress in capturing new educational business particularly in Maryland and Virginia with our innovative classroom products designed for these markets. We are seeing more challenging educational markets in North Carolina and Georgia related to reductions in student growth and budgetary issues. We are also continuing to see a very competitive commercial rental markets in the mid-Atlantic and Southeast especially for singlewide building rental opportunities.

As a result of the challenges we faced across our Modular rental division during the quarter, utilization fell to 74% at the end of the second quarter compared to 77% at the end of the first quarter of 2009. Despite the 7% decline in rental revenues during the quarter from a year ago, income from operations actually went up 3% for the quarter. This was chiefly related to lower business activity levels, extent ancillary measures in particular labor and material costs and inventory centers and a large sale of equipment of rents. The significant inventory center expense reductions allow gross margin of rents to increase to 65% compared to 61% a year ago.

Looking forward, California will be the key to higher earnings for our Modular rental building division, more specifically as the California educational, residential and non-residential construction markets improved associated financial results for a Mobile Modular.

Now, let me turn our attention to TRS-RenTelco and their results. TRS-RenTelco rental revenues decreased 24% quarter-over-quarter. There are also less continuing downward pressure on run rates due to lower business activity levels during the quarter. However, the rate of equipment returns declined and order activity increased during the quarter as compared to the first quarter of 2009.

In July, this trend continued as our electronic business had its highest rental booking and lowest equipment return month of the year.

We continue making good progress during the quarter in selling underutilized equipment and reducing depreciation expense. Monthly depreciation expense stood at $3.3 million in June 2009 and is down from a high of $3.9 million in October of 2008.

Our gross margin on sales for the quarter increased to 31% compared to 29% a year ago.

Ending second quarter utilization was 58.6% compared to ending first quarter utilization of 59.9%. Our average monthly rental rate declined to 4% during the second quarter from 4.2% during the first quarter. Both of these metrics are indicators of the difficult market conditions we continued to face during the second quarter of 2009.

Although, the first six months of 2009 reflect a very challenging rental environment for electronics business, with May and June being relatively flat in rental revenues and with our increase business activity levels in July, we are hopeful that we will see rental revenues begin to increase from our June results.

Although we paid back our purchases in the first half of 2009, we have been more active during the first part of the third quarter in adding newer technology equipment models where we are seeing increasing demand.

Now let us turn our attention to Adler Tank rentals. Adler Tank rental revenues declined to $3.7 million during the quarter from $4 million in the first quarter of 2009 and income from operations for the quarter declined to $0.6 million from $1.4 million in the first quarter of 2009. Adler faced lower business activity levels and a very competitive market environment during the quarter.

The markedly larger reduction in income from operations compared to rental revenues during the quarter was chiefly related to planned expenditures associated with expanding Adler Tank rentals into the Northern and Southern California and Pittsburgh markets and rental equipment purchases and transportation expenditures to support all branch locations.

Although, the difficult macroeconomic environment and some seasonality factors negatively impacted Adler’s top line during the quarter, business activity levels picked up materially during the later part of the quarter and have continued into the third quarter. In fact, June’s rental billing level was approximately 20% higher than May’s level and we shipped our highest level of tanks and boxes in July thus far in 2009.

We feel very good regarding the increased rental demand we are currently experiencing, the new markets we entered during the first half of 2009 and overall prospects for growing Adler Tank rental business going forward.

We believe this will be reflected in the stronger financial performance for Adler Tank rental business in the second half of 2009 compared to our first six month’s results.

Finally, during the second quarter, we continued to work on these integration elements and our progress to date is in line with our expectations.

Now, let me take a minute and update everyone on our two newest organic initiatives, environmental test equipment and portable storage. First our environmental test equipment initiatives continued to make good strides during the quarter second in growing its number of customers, opportunities, orders booked and rental revenues sequentially from the first quarter.

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, I shared on our first quarter 2009 call that we have now expanded this business in the Southern California, Texas and Florida office locations for our Modular business. We have leveraged our existing Modular sales and inventory centers in these regions to reduce our cost structure and ramping our portable storage business.

We are also benefiting in these new markets from synergies between our legacy Modular building customers and their portable storage needs. We have been pleased with our business levels to date and the fact that we have increased rental revenues each quarter since we launched the initiative in 2008.

To broadly emphasize that the rental revenue levels associated 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.

Now, for a few closing remarks, today, in effect we have five rental businesses compared to a year ago, when we only had 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.

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. The year 2009 and the next few years are all about the recovery of our core Modular and electronics businesses in getting these additional investments and both new rental products and geographies increasingly successful.

Our greatest strength as a Company has always been our rental operations products. We understand the value 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 believe we are well positioned today to become a larger and more profitable company as economic conditions improve. However, for as long as the general economy in the California marketplace in particular remained challenged, we would expect the difficult earnings environment.

That being said, we would also 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.

We also continue to manage our expenses tightly and look to take more cost at our businesses if activity levels warrant.

As to the strength of our cash flows, during the first half of 2009, we decreased debt by $36.9 million, increasing unused capacity under our lines of credit to $110.4 million and reducing our key borrowing metric of funded debt to EBITDA to 1.99 to 1.

Longer-term, we believe that our strategy of investing a new earnings engines in more diverse business-to-business rental market segments 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.

With respect to our dividend, while we are working hard on increasing the value of our shares. At today share price we provided a dividend yield of approximately 4.5%.

And now Keith and I welcome your questions.

Question-and-Answer Session


(Operator Instruction) Your first question comes from the line of David Gold - Sidoti & Company.

David Gold - Sidoti & Company

A couple of questions for you, one, just looking at the three businesses, I guess just the quick peek in the queue shows utilization down at the end of period for I guess all three a little bit. For me, I am just curious on thoughts on basically you have the rest of your sheets. I do not know it sounds like from Adler’s perspective and from the RenTelco perspective things are maybe picking up a bit in July. Would that be about the right based on my comments?

Dennis Kakures

That is a fair comment, yes.

David Gold - Sidoti & Company

Okay. Then the other question or I think maybe you can help us here a little bit is what happens from here to say for the next few months for Mobile Modular. I guess we note, California now has a budget in place but presumably I guess you said basically some of next year would be the big movement for you I guess because you have the bookings season has sort of passed a little bit.

Dennis Kakures

That is accurate. We would expect assuming the state begins to start selling bonds which is what our expectation here in the very short timeframe that because of the schools are starting in late August to early September that the window for most modernization projects will get bumped to next summer. Although we do expect some off season work to commence. We have heard that from some districts.

So, the good news is there is a budget. They will be able to start selling bonds again and there is an adequate supply of bond money to support the backlog of projects, the dynamics revealing that they were just timing.

David Gold - Sidoti & Company

Okay. So from here to there, I guess you see some project completions and more returns from let us say boxes go out.

Dennis Kakures

Well, what we ship here typically you will see most of your returns toward at the end of the second quarter and the beginning of the third quarter. So, once the school year starts you typically do not see a lot of returns in school because they are in session.

So, we will learn more here with our third quarter number but certainly can be some further erosion to the utilization and from Modular. I do not think we believe that it will be very significant related to schools because most of that has trend part of the rezone in the third quarter and then it is really more of the dynamic with residential and non-residential construction activity and if there are pickup there or is there further erosion in that market.

So, it should be challenging between now and probably next spring and time will tell here.

David Gold - Sidoti & Company

Okay, right. But I mean I guess the other side of that is the guidance implies a step up from an EPS perspective presumably in the second half from here, anyway. With Mobile Modular coming in some, would it be more of function of say further cost reductions to get there?

Dennis Kakures

Actually, there are a number of factors and I also let Keith speak to you.

Keith Pratt

I will speak a couple of things, David. One thing is I think you have got a sense of some of these challenges and opportunities across the different businesses on the rental revenue side. Generally, we find sales activities on the Modular side of the business are a bit stronger in the second half of the year and we would expect that this year as well and then Enviroplex which had a very strong year last year. This year, it is much tougher climate for them and their sales will be considerably lower than a year ago but the sales that we are expecting are going to be occurring in the second half of the year. We have had very low sales from Enviroplex in the first half.

We know we will be [Audio break] a significant uptake in the second half and so that is another factor as you look at the mix. And then the other thing, in terms of cost reductions across our divisions, we have been working on cost reduction throughout the year and even during the second quarter. So, we should be able to keep cost in check as we roll into the second half of the year and we have a couple of particular items such as some furloughing activity in parts of our business that will happen later in the year which again will help us on the cost side.

David Gold - Sidoti & Company

I got it. One just last quick, if I may, anything I guess I noted was you negotiated some covenant relief in the senior notes and took those up to 2.5 from two in a quarter and I did not seem like you are getting that close there. But I am just curious what brought that on and what cost it would come.

Keith Pratt

Yes. Well, first of all, you are absolutely right. We are not putting pressure on the covenants in fact the leverage covenant was 2.15 on December 31 and it was 1.99 at the end of June. So, we have actually been increasing the cushion on our covenant.

I think the key here is to note, that it is relatively small amount of capital, $24 million but it did have a slightly different alignment of covenants. So really what we wanted to do was align with our revolver and that provides more flexibility if we face any future volatility and operating performance or if we want flexibility such as in area like M&A.

So, the covenant changed. You are correct. It is moving from two in a quarter to two and a half for the note agreement that aligns with the revolver agreement that we put in place last year. The other change that we have is we can include EBITDA from an approved acquisition. We already have that under the revolver and we do not have that under the note agreement but with the amendment we will and then we have also modified the limit on priority debt. Previously that was a calculated number, 15% of tangible net worth under the note agreement. It is now straight 30 million and again that aligns with the revolver agreement.

David Gold - Sidoti & Company

I got it. And just was there a cost to it?

Keith Pratt

A very minor administrative fee.


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

Jamie Sullivan - RBC Capital Markets

I wanted to just ask about the returns. I think you said a lot of those were still coming from the non-residential and residential side of the business. Some of your comments that you get some returns from your education customers as well during this time of the year.

Dennis Kakures

That is correct. We saw some further erosion between the second and first quarter in both residential and non-residential construction. So those two segments which make up about 20% of our rental revenue base have still seen that challenges on the return side and lower business activity and what is going out. So, we were looking to see those declines start to diminish here. That is our hope.

The school season in terms of returns typically most returns occur between the months of late May and July and into early part of August, but typically that is when we see returning equipments for the most part.

Jamie Sullivan - RBC Capital Markets

Okay. And on the cost cutting side, is there any way that you can quantify some of those efforts whether it is where your workforce stands today versus where it was at the beginning of the year, anything to help us out on the extensiveness of those efforts?

Dennis Kakures

Yes. I can give you a feel for some of those statistics. If we look at our headcount, just to give you an order or magnitude feel. If we went from the beginning of the year, we are about 10% lower in total headcount in spite of the fact we have been increasing in some parts of the business including Adler. And if you were to look at it on the year-over-year basis, we are down about 15% excluding Adler that we added in December.

So, we definitely not only reduce the total of heads which is obviously a difficult thing to do and we have done it very selectively largely based on business volumes but we also have a broad range of austerity measures, that we outlined in February, did impact all employees and obviously we are not alone in that in Corporate America but we have definitely tightened our belt.

Jamie Sullivan - RBC Capital Markets

Right, and a lot of those measures done at this point or you expect more to roll-in in the second half?

Dennis Kakures

Well, we get a number of things to start the year that are in place that will continue to benefit from the second half of the year and as Keith mentioned earlier, some of the furlough dynamics are such that will benefit more in the second half of the year than the first half. So that is kind of the best way to describe things. So, when we continue to look to take cost out of the business as appropriate.

Dennis Kakures

Yes. I think our feeling is we are appropriately stuff based on the business volumes were seeing today.

Jamie Sullivan - RBC Capital Markets

Okay. And just a couple quick ones on TRS, you talked about some of the stabilization uptick there, any particular type of customer that you are seeing or type of equipment or trends that you are seeing there? Is it the communications’ customer general electronics, any comments there will be helpful?

Dennis Kakures

No specific cause, it was fairly broad base which is I gave you what we like to see.

Jamie Sullivan - RBC Capital Markets


Keith Pratt

We did see some evidence where orders that were in the backlog pipelines where customers were really ready to act but had not acted. We saw some of that business actually take place in the recent past.

Jamie Sullivan - RBC Capital Markets

Okay. So that is loosening up a bit.

Keith Pratt

A little bit.

Dennis Kakures

Very reluctant.

Keith Pratt

And I again with all these, it is still very hard to forecast and to some extent we have to take each month as it comes.

Jamie Sullivan - RBC Capital Markets

Sure. Lastly on the M&A strategy, if you can just update us there, you have multiple rental legs at this point, are you looking to make those bigger through acquisitions or are you looking to broaden the portfolio from what you have today?

Dennis Kakures

Really, you are right. If there are opportunities at appropriate valuations for our existing five rental businesses that is what we are most interested in, we are not really spending any significant time or resources on additional rental like we have put enough on our plates that we have got enough to work on. This is also a good window from a valuation standpoint to be able to spend time looking for those types of opportunities and businesses that we already have knowledge in the base of business and that is why we are really trying to focus.

Jamie Sullivan - RBC Capital Markets

Okay. And the pipeline pretty active, I know a lot of companies have talked about valuation as being difficult to negotiate between the buyer and the seller. There seems to be disconnect. What are you seeing in your experience?

Dennis Kakures

Well, you certainly have those dynamics that occur in various types of transactions and sometimes you can get something down and other times you cannot. So that is the natural course of negotiating and we did take those one at a time and this is a window in which unfortunately for buyers you can be selective and we are not apt to pay EBITDA multiple premiums that are higher than we think we should.


(Operator Instructions)Your next question comes from the line of Jim Giannakouros - Oppenheimer.

Jim Giannakouro - Oppenheimer

Just one follow up question on TRS, I would have assumed a higher level of sales in the second quarter given the level of utilization entering the quarter. However, as things stabilized, how should we be thinking about your strategies as far as selling going forward in that segment to kind of lift it out and your commentary about sales going forward?

Dennis Kakures

Well, I think we will continue to be very active in selling to both end users and to the broker network and that is the natural part of that business as you have got return assets such as you are trying to keep the metric of depreciation as a percentage of rents in line at 45% to 50% across the rents. That is a very critical element to the business.

So, we continue to be proactive. We have been able to maintain still good margins on the sale side. We are being, I would say, responsibly aggressive to be able to take that cost out of the business and also I will say that I think our team at TRS has done a very good job of keeping us clear of impairment as well as our financial, Keith and Dave Whitney, our controllers.

So, we were very studious in that regard. That is another right of item [Audio break] majority that we concerned about during the down market. But I think we have got that well managed as well as really starting to take cost out of the business. But you cannot do with that business just do fire sale type of sales. It is not the way to do things and you try to be as aggressive as you can be. You know what you may take some losses on certain equipment but you really try to get way ahead of the curve.

I think out team did it from last September 4 when we got on and really looking and trying to come out from under higher level of depreciation expenses. We saw some forward looking market condition changed and I think done a very good job. We will continue to be highly focused on that so we will keep part of the management of that business.

Jim Giannakouro - Oppenheimer

Okay. Is demand actually does stabilize relative to July level? Should we expect similar levels of sales?

Dennis Kakures

Well, it is a function of the technology, of new equipment coming out in which you need to then turn in your asset pool. It is a function of what assets are being lower or more fully utilized. There are a number of different variables there but what you really are trying to do is when you look at your asset by model number, as you are looking at each one and looking at the utilization level, you were able to achieve over a period of time and the extents that you have too much equipment, which is not the right technology. You have really created a game plan for each model to move as much of that and get that balance just right and what you need to have to maintain an appropriate utilization level.


You have a follow up question comes from the line of David Gold - Sidoti & Company.

David Gold - Sidoti & Company

Sorry, just one more question, on CapEx from the second half of the year given the utilization levels, how should we think about that I guess sort of place in what you are saying one moment ago the different certain models that we saw in the TRS side. But, yes, when you look at the business presumably, I guess relative to last year, would you expect that to be down pretty decently maybe give us some numbers around the different segments?

Keith Pratt

David, I will try to be helpful. The first thing I do is just to look at what has happened in the first six months and to give you some context, just gross equipment CapEx is down to $34 million in the first half of this year and that compares to $55 million in the first half of last year and more than half of what we spent this year went into Adler and again that is by design as we start to build that business side and expand into some new geographies.

So, total CapEx is well done. If you actually look at net CapEx and take account of some of the proceeds from used equipment sales, that is actually $19 million in the first half of this year and that compares at $42 million in the first half of last year. So from a net CapEx we are well done and even PP&E where we were making investments a year ago in our Florida inventory center and some computer system upgrade that is well done from where it was a year ago.

So, we are on a run rate already that is much lower than the past year. That reflects the fact we are really putting very little capital into the existing Modular and electronics businesses compared to what we would have done in the past.

Having said that, the outlook for the second half of the year, it is all going to depend on business conditions. We may put some more into Adler if we feel it is appropriate. TRS, you can sometimes feel a little bit of capital in to address specific product needs for parts of the portfolio. But I think overall, CapEx will come in for the year as a whole substantially below what it was a year ago.


Thank you. Gentlemen, there are no further questions at this time. Please continue within the closing remarks.

Geoffrey Buscher

I want to thank everybody for joining us this afternoon for our Q2 call and we will look forward to have you and join us again for our Q3 call in early November. Thanks all very much.


Alright, thank you. Ladies and gentlemen, this does conclude the McGrath RentCorp second quarter 2009 conference call. If you would like to listen to a replay of today's conference, you can listen by dialing 1800-406-7325 or 303-590-3030 and put the access code 4117242. I would like to thank you much for your participation today and you may now disconnect. Have a very pleasant rest of the day.

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