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Executives

Dennis Kakures – Director, President, and Chief Executive Officer

Keith Pratt – Senior Vice President and Chief Financial Officer

Geoffrey Buscher – President of SBG Investor Relations

Analysts

David Gold - Sidoti

Amy Ruderman - Oppenheimer & Company

Jamie Sullivan - RBC Capital Markets

Joe Real - Baker Brook Capital

Alan Mitrani - Sylvan Lake Asset Management

McGrath RentCorp (MGRC) Q4 2007 Earnings Call February 21, 2008 5:00 PM ET

Operator

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the McGrath RentCorp fourth quarter 2007 earnings conference call. (Operator Instructions). I would now like to turn the conference over to Geoffrey Buscher of SBG Investor Relations.

Geoffrey Buscher

Thank you, operator. Good afternoon. I’m 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, 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 1-800-405-2236 for domestic callers, and 1-303-590-3000 for international callers. The passcode for the call replay is 11106368.

The 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

Our press release was sent out today at approximately 4:05 pm Eastern Standard Time, or 1:05 pm Pacific 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 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 21E of the Securities and Exchange Act of 1934, including statements regarding McGrath RentCorp’s expectations, belief, 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 E. 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. The company also announced for the first quarter 2008 an 11% increase of the cash dividend to $0.20 per share for the quarter, representing approximately a 3.8% yield on an annualized basis.

For the fourth quarter 2007, total revenues increased from $70.7 million in 2006 to $71.5 million in 2007. Net income increased 2% from $11.9 million to $12.1 million, and earnings per diluted share increased from $0.47 to $0.48.

Reviewing the fourth quarter results for the company’s Mobile Modular division, Mobile Modular total revenues decreased $2.3 million, or 5% to $40.3 million over the same period in 2006. Rental revenues increased $1.8 million, while sales revenues decreased $3.9 million in 2007 compared to 2006.

Gross profit on rents increased $0.8 million or 5% to $17.2 million from $16.4 million in 2006, due to higher rental revenues, partly offset by lower rental margins. Rental revenues increased 7% over 2006 while rental margins were 66% in 2007 compared to 68% in 2006.

Selling and administrative expenses increased $0.3 million or 5% to $6.7 million from $6.4 million in the same period in 2006. The combined effect of the lower sales revenue and increased selling and administrative expenses partly offset by higher gross profit on rents was a decrease in pre-tax income of $0.2 million, or 1% to $13 million for the fourth quarter 2007 from $13.2 million for the same period in 2006.

Finally, average modular rental equipment for the quarter was $446 million, an increase of $39 million from the fourth quarter 2006. Average utilization for the fourth quarter increased from 82.4% in 2006 to 82.8% in 2007.

Turning next to fourth quarter results for the company’s TRS-RenTelco division. Fourth quarter total revenues increased $3.5 million or 14% to $28.6 million compared to the same period in 2006 as a result of higher rental revenues.

Gross profit on rents increased $2 million or 24%, to $10.7 million as compared to the same period in 2006. Rental revenues increased $3.4 million, or 17%, as compared to 2006, and rental margins increased from 43% to 46%.

Pre-tax income increased $1.4 million or 27%, to $6.7 million for the fourth quarter 2007, from $5.3 million for the same period in 2006, as a result of higher gross profit on rents, partly offset by lower gross profit on sales, and higher selling and administrative expenses.

Finally, average electronics rental equipment at original cost for the quarter was $228 million, an increase of $45 million from the fourth quarter of 2006. Average utilization for the fourth quarter increased from 68.4% in 2006 to 71% in 2007.

On a consolidated basis, interest expense for the fourth quarter 2007 decreased 3% to $2.6 million, from $2.7 million for the same period in 2006 as a result of the company’s lower average interest rates, partly offset by higher average debt levels.

The fourth quarter provision for income taxes was based on an effective tax rate of 39.6%, up from 36.4% in the fourth quarter of 2006.

Next, I’d like to review our 2007 cash flows. We continue to generate strong cash flows to invest in our business and return value to our shareholders. For the 12 months ended December 31, 2007, highlights in our cash flows included: net cash provided by operating activities was $94.9 million, a decrease of $4.2 million from 2006. We invested $104 million for rental equipment purchases, partly offset by $25.7 million in proceeds from used equipment sales.

We repurchased 797,643 shares of common stock. All purchases were made during the fourth quarter of 2007 for an aggregate repurchase price of $20.2 million.

Dividend payments to shareholders were $17.7 million and net borrowings increased $32.2 million for the year, from $165.6 million to $197.7 million. We continued to have a solid low leverage balance sheet.

For 2007, fourth quarter adjusted EBITDA increased $2.8 million or 9% to $37.6 million, compared to $34.6 million in 2006.

Consolidated adjusted EBITDA margin for the fourth quarter increased from 49% in 2006 to 53% in 2007. Our definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income are included in our press release for the quarter.

Turning next to 2008 earnings guidance, we expect 2008 financial results to be driven by continued growth in our core rental operations, with increases in selling and administrative expenses to support growth initiatives and infrastructure upgrades; and full-year earnings per share to be in a range of $1.72 to $1.82 per diluted share. Full year 2007 earnings per diluted share were $1.67.

In 2008, we expect approximately 10% growth in rental revenues compared to 2007. Selling and administrative costs are expected to increase by approximately 20% compared to 2007. A significant portion of the cost increase will result from our growth initiatives in new ERP application platform and IT infrastructure upgrades.

Looking beyond 2008, we expect growth in selling and administrative expenses to be at a lower rate than rental revenue growth. We expect an estimated effective tax rate of approximately 39.2% consistent with fiscal 2007.

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

Dennis C. Kakures

Thank you, Keith. Let’s go right to our results for our modular rental business. Mobile Modular had a strong year in rental revenue growth, rental revenues increased 7% quarter-over-quarter to $26 million and for the full year, grew 10% over 2006, breaking through the $100 million level at $101 million for the year. In 2007, we benefited from favorable educational rental activity in all of our established markets.

In California, with passage of the November 2006 statewide K through 12 school facilities bond measure, we saw an increased number of classroom rental opportunities and higher booking levels than in 2006. We should continue to benefit from this available bond funding in 2008 due to the healthy level of opportunities entering the new year.

We experienced a more price competitive school market in California in 2007, directly related to higher classroom inventory levels coming into the year. We expect continued pricing pressure in 2008 in California until the inventories are more fully utilized.

In Florida, in 2007, we benefited from the popularity of our Campus Maker classroom product, class size reduction and the phasing out of older model code portable classrooms.

In the Texas market, in 2007, we experienced favorable demand in bookings for both modernization and student growth needs. Keep in mind that the great majority of the classroom orders booked in 2007 are multi-year transactions.

Our commercial business in California and Texas had favorable growth in 2007 compared to 2006, in spite of challenges faced in the residential housing market nationally. In particular, we had healthy increases in non-residential construction rental revenues in 2007.

This was driven, in part, by increased business activity for larger buildings associated with engineering, industrial and governmental construction projects. We also had favorable levels of general and specialty office space needs.

Although, our annual rental revenues for residential construction were actually up slightly in 2007 compared to 2006, we are anticipating a reduced level in 2008 compared to 2007 due to significant reduction in new residential construction rental opportunities at this time.

Please note that historically, residential construction rental revenues have represented only approximately 8% to 10% of total modular rental revenues, or approximately 3% of total company rental revenues.

In Florida, our commercial market efforts are continuing to make headway in establishing the Mobile Modular brand name and our products in the state. In 2008, with our teams now in place, our rental revenues will also benefit from our new North Carolina and Georgia markets expansion.

Modular utilization stood at 82.8% at year-end 2007 compared to 81.4% at the end of 2006, and 82.9% at the end of the third quarter 2007. Although, we saw an improvement in utilization year-over-year, in order to return to higher levels, we need to continue to utilize our idle California classroom inventory in 2008. Fortunately, the demand in bond monies are in place today to support higher utilization of this equipment.

Now, let me turn our attention to TRS-RenTelco and their results. Fourth quarter rental revenues rose approximately 17% to $23.3 million from a year ago, and full year rental revenues rose 9% to $84.8 million.

We had a very strong conversion of pipeline opportunities in the orders in the second half of 2007, and this was reflected in the significant quarter-over-quarter rental revenue increase.

Gross profit on rent increased 24% for the quarter to $10.7 million, and for the year increased 6% to $35.3 million. The significant improvement in gross profit on rents during the quarter was driven by the increase in rental revenues and reductions in direct costs of rental operations and depreciation expense as a percentage of rents.

These factors drove gross margin of rents to 46% for the quarter, our highest quarterly result since the merger of TRS and RenTelco in 2004.

Midway through the first quarter of 2008, rental revenue levels are higher compared to a year ago. We are anticipating favorable U.S. and Canadian rental markets in 2008 with broad-based demand being driven by emerging wireless communication technologies, semiconductor and consumer electronics product development and manufacturing, and the impact of increasing volumes of broadband, wireless and video traffic on communication networks.

Although, our outlook is quite positive for electronics business in 2008, we can’t ignore the daily headlines and a potentially weaker economy in the months ahead. Therefore, we are keeping an especially watchful eye on changes in customer and supplier behaviors to make appropriate adjustments sooner rather than later.

In 2007, we had a net addition of $45 million in original cost of test equipment inventory, or an increase of approximately 24% to $231 million from ending 2006 levels. The majority of the increase was related to technology freshening and business growth.

Ending fourth quarter utilization in 2007 was 69.3% compared to 66.3% a year ago. This is a good indicator of the health of our test equipment business heading into 2008.

Our average monthly rental rate declined to 4.8% in the fourth quarter 2007 from 5.3% a year ago. The biggest contributing factor to this decline has been our push to grow our market share and to a lesser degree, the impact of products mix changes with general purpose equipment having longer lives but lower rental rates as compared to communications test equipment, and replacing lower cost TRS acquired assets.

From our vantage point today, in 2008, we are expecting rental rates to decline minimally from fourth quarter 2000 levels.

Now, for some comments on 2008 and our future. As we turn the corner into 2008, we are feeling very good about the health of our core modulars and electronics rental businesses. In our 2008 guidance, we are forecasting company-wide rental revenue growth of approximately 10%.

For our modular rental business, we are looking forward to favorable growth in our educational business and our legacy school markets of California, Texas and Florida.

In looking at our classroom business, it’s always good to keep in mind that even in challenging macro economic cycles, student populations typically don’t change much and having adequate classroom space is still required.

Although, we expect the residential housing market to be highly challenged in 2008 and that we may be seeing early signs of a trailing impact in commercial construction for general retail and office space projects, we have also been experiencing a very favorable increase in a number of larger buildings serving major infrastructure construction projects.

This is especially evident in the California market where we are beginning to see monies from the $30 billion in infrastructure bonds approved over a year ago, turning to project opportunities in wastewater treatment plants, dams and other large infrastructure projects. The additional good news in these larger engineering type projects is that they are typically multi-year rental transactions.

Beginning in 2008, we expect our investments in Florida commercial and in our North Carolina and Georgia start ups to collectively provide increasingly valuable rental revenue growth on top of our legacy operations.

I also wanted to mention that at the end of 2007, we purchased the remaining equity in Enviroplex from the minority shareholders and founders for approximately $3.8 million.

We also installed a new leader of the business, Glen Owens, who we believe has all the necessary skills to increase both revenues and profitability beginning in 2008. As we move into 2008, Enviroplex’s backlogs of both new and pending orders are at very favorable levels.

For our electronics business, we believe we made good progress in 2007 in expanding our market share in growing rental revenues. Over the past 12 months, we’ve talked about our continuing investment in later generation technology equipment, and transitioning earlier generation equipment out of inventory over a period of time.

Due to this dynamic and lower than anticipated order activity in the first half of 2007, we carried somewhat higher depreciation levels as a percentage of rents in the first nine months of the year than we would have liked.

Beginning in the fourth quarter of 2007, we were much better positioned to support a faster turn of earlier generation technology equipment. Being highly efficient in selling inventory in a timely manner is one of the keys to maximizing cash, absorbing less depreciation expense and increasing earnings. We expect to be much improved in this area in 2008 and beyond.

I also want to mention that in January 2008, we launched online ordering for our test equipment business. We believe the quality of the process we’ve created and our online innovation capabilities will become an increasingly important competitive advantage.

We are also staffed for online support, product application and order taking on a 24 by 5 timeframe. This allows us to support inquiries and transactions from additional time zones.

In 2007, our expanded corporate development resources investigated a number of potential new growth opportunities including further geographic expansion, additional product lines and true third leg rental products.

We have narrowed in on two initiatives that we are planning on moving forward in 2008 and will have more to share on each opportunity before mid year.

In 2008, we will see investments in phase I of our new modulars ERP application, and other IT infrastructure related expenses coming on line. Our SG&A expenses will also reflect a full years impact from key management positions hired in 2007, as well as increased staffing levels, mainly in revenue generating positions to support our existing rental businesses.

Our new Florida inventory center will come online in 2008 and its related depreciation expense. Our expenses for 2008 also include SG&A costs associated with our two new initiatives that I spoke to a moment ago.

Although these investments in infrastructure and new initiatives will put some near term pressure on earnings, they are essential in positioning McGrath RentCorp for more significant shareholder returns over the long-term.

As we look at our SG&A expenses beyond 2008, we anticipate leveraging the investments made this year so that future SG&A expense growth is at a lower percentage than our rental revenue growth rate.

With slower general economic growth expected in 2008, we believe that should a moderate or more significant recession occur, we’d make some short-term adjustments, but there would be no change in our long-term plans.

With the countercyclical nature of many of our rental products, especially classroom rentals, we believe we are well-positioned to weather such an event.

Over the years, we’ve viewed recessions opportunistically in that there can be a broader selection of potential investments, at better values, to support our long-term earnings growth.

We are also in the process of expanding our credit lines to support growth. With the strength of our balance sheet and strong cash flow businesses, we are well-positioned to invest in our future.

We’ve repurchased over 1.3 million shares of the company’s stock since our third quarter earnings call in November. We will continue to be opportunistic in increasing shareholder value through buying back our shares as market conditions warrant.

The company’s management team is very pleased with the help of our core businesses, and highly enthusiastic about our new modular market launches in 2007 and the long-term potential earnings contributions from the new initiatives we are planning to bring on line in 2008.

Finally, considering the significant amount of investment we are making in 2008, and general concerns with the economy, we feel our guidance range of $1.72 to $1.82 per diluted share for 2008 as compared to $1.67 for 2007 reflects solid progress in 2008 while laying the ground work for higher earnings levels in 2009 and beyond.

And now, Keith and I welcome your questions.

Question-and-Answer Session

Operator

Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions).

Our first question comes from the line of David Gold - Sidoti.

David Gold - Sidoti

Few questions for you. First, just following up on your comment both last quarter and this quarter about classroom inventories and presumably inventories that are out there that maybe are putting some pressure on price.

When you think about that and maybe the right way to ask is when you thought about your guidance, how long do you expect for that pricing issues to subside? Is that a second half event or is it too hard to tell or what are you thinking there?

Dennis Kakures

I think every month as we move along and utilize more equipment it becomes less significant. So, I would expect by mid-year. Typically, all the booking occurs in the first five months, the great majority in the first five months of the year.

And by the way it’s not across the board. You have many school districts that order directly off their existing piggy backs but you also have other ones that are shopping pretty competitively. So, those are the dynamics that we see today and I would expect to see improvement in that towards the end of the second quarter.

David Gold - Sidoti

Okay. That’s helpful. And then, on TRS you pointed to the successful conversion of opportunities for bookings and revenue. Can you point to or speak about any particular areas where you had particular success there?

Dennis Kakures

Actually it’s a very broad-based on the areas I spoke to that are strong in 2008. 2008, when entering that year looks very much like ‘07. But it really was across the board in terms of order conversion, so, nothing specific there other than very broad-based.

David Gold - Sidoti

Okay. And then, talking about two other things, one, the economic view that you have baked into your guidance?

Dennis Kakures

In terms of the low-to-high range? I want to make sure I understand your question; in other words, what is the economic macro picture that we have in our guidance?

David Gold - Sidoti

Right. What is that based on?

Dennis Kakures

If you look at the low end of our range, that pretty much bakes in that we are in a recession, there is recessionary pressure. If it’s a very severe recession, that’s another dynamic but certainly in the lower end of the range, that as a picture of recessionary pressure.

Keith Pratt

And that we would be responsive in making adjustments in the business to meet those pressures.

David Gold - Sidoti

Okay. And then just lastly if you can give a little bit of an update on, initially the thinking was that you might have an answer for what that line expansion is by now, now it sounds like it’s a little further out but if you can give us an update maybe on how far you would you stray from your existing businesses, has anything changed there?

Dennis Kakures

We’ve given a picture that when we look at our abilities in the rental business, business-to-business rentals and today we have electronic test equipment and we have modular buildings, they are pretty much at the end of the spectrum from one another. So, it’s really everything in between.

You certainly would like to be able to line-up items that are either complementary to existing customer bases, ideally or items in which you can utilize existing infrastructure. And that’s where you get greater opportunities for success.

But we’ll have more to say here shortly. We are in the works now of getting both of those initiatives going. And we don’t want to be too premature until we are further down the highway here.

Keith Pratt

And David, it might be helpful to point out that as we developed our guidance there is expense in our selling and administrative totals that allows us to do both the investigative work and the launch work associated with things that we are planning to do during 2008.

David Gold - Sidoti

So, in that case is it fair to say then that the business expansion would be launched and not an acquisition?

Dennis Kakures

At this point in time, I’m just going to hold on everything. Currently, I would say that these are both organic based. Obviously, we always hold open opportunities on an acquisition front but these are organic based.

David Gold - Sidoti

Perfect. Thank you both.

Operator

Our next question comes from the line of Amy Ruderman - Oppenheimer & Company.

Amy Ruderman - Oppenheimer & Company

I’d like to walk through the utilization especially since it’s down sequentially over last quarter. Can you give me a break out, how much of that is attributable to education? And how much is attributed to the commercial side of the business?

Dennis Kakures

We don’t have that break out for this call. It’s 82.9% versus 82.8%, pretty flat. It’s not uncommon to see sometimes fourth quarter slightly below third or fairly flat. That’s not uncommon.

Amy Ruderman - Oppenheimer & Company

Okay. But then specifically let’s go back to some of the things that occurred during third quarter. You said in Florida, specifically, that you had some units that came off of rent on the education side. How long will it take to get those units back on rent?

Dennis Kakures

I’m not sure what comment specifically you are referring to on what came off rent in Florida.

Amy Ruderman - Oppenheimer & Company

The education units in Florida?

Keith Pratt

There may have been some units that were coming off rent and didn’t give us sufficient time to put those same units back out to customers in Florida, so we would have been using some new assets for that. That we did comment on.

Amy Ruderman - Oppenheimer & Company

Okay.

Dennis Kakures

But, Amy for any units which are off rent for education in Florida, typically they would go back on rent in the next busy season for school ordering which will be the summer months of 2008.

Amy Ruderman - Oppenheimer & Company

Okay. Then going back to California, you mentioned that the commercial units were slower on the industrial side, on the single wide. How much of a pick up do you see that returning for the $30 billion bond that’s coming on board?

Dennis Kakures

The $30 billion bond should impact mostly larger complexes and buildings for wastewater treatment plants and other engineering type projects. So, if there’s a downturn in residential construction, typically you can see a lag in then commercial construction turning down in strip centers, general infrastructure that supports new communities.

So there is potentially some pressure there. But the good guy in it all is this large complex opportunities that we are seeing with all these bonds monies in California. And also large complex work that we see in the Texas market with the oil industry and modernization and expansion of plants. That’s also a very good area for us.

Amy Ruderman - Oppenheimer & Company

Okay. Can you give us some color as far as on education in California? Has the ‘07 and the ‘08 school year, that’s pretty much been completed, right?

Dennis Kakures

The ’07-‘08 school year, yes, it is, that’s typically by the end of the third quarter we put out on rent what’s going to go on rent for the school year.

Amy Ruderman - Oppenheimer & Company

Right, are you starting to see orders now on the ‘08 versus the ‘09 school year?

Dennis Kakures

What’s happening now as we entered 2008, our pipeline was actually quite favorable coming into the year, and it now being mid-February, we are starting to book orders. And actually, I’m very pleased with what we’ve seen in the way of opportunity flow as well as some of the bookings we’ve had to date.

Amy Ruderman - Oppenheimer & Company

Okay. Can you give us the break out on that SG&A, how does that 20% break out? How much is attributable to the different segments?

Keith Pratt

Sure, let me try and be helpful here, and give you a couple of lenses to look at it. Let’s start with our investments in ERP and IT infrastructure and if we stand back and look at the increase in selling and administrative, as you will have seen our total costs in 2007 were just over $50 million, and as we look at the increase of 20% that will take us to somewhere around $60 million in 2008.

If we look at the contribution coming from the ERP, that will be around $1 million of additional expense in ‘08. And then additional IT infrastructure projects add another $1 million. So I think those are both significant and notable.

As we go beyond that, you’ll recall that we late last year got started with some of our modular geographic expansion, particularly in North Carolina and Georgia. That initiative and the costs associated with it add somewhere in the region of $1 to $1.5 million to the cost structure in ’08.

Then as we mentioned earlier, we do have other growth initiative work related to investigative work and activities we’re planning on launching organically later in the year. That also adds around $1.5 million.

So, if you take those four items together, that is somewhere between $4.5 to $5 million of incremental expense. We view that as largely being out of the norm and of significant impact in ‘08.

And if you just stand back for a minute and look at our overall increase in rental revenues of 10%, if we saw the cost structure increase also by 10%, that would have added about $5 million to the $50 million in ‘07 and the initiatives I just described really account for the balance.

Operator

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

Jamie Sullivan - RBC Capital Markets

I was wondering if you could just talk a little bit about the budget environment in California for the schools and where that stands?

Dennis Kakures

Currently the governor has come out and indicated roughly that there’s a $14 billion shortfall in the state budget and this is for the fiscal year beginning July of ‘08. And he has also indicated that potentially that relates to a $4 billion impact to public school K through 12.

So, that’s what’s been put on the table. I actually heard another number today, about $16 billion instead of $14 billion on the statewide. But what we’ve learned over time and I’ve been in this business in California for over 25 years now, is that early on in the budgeting process there’s a lot of posturing and it’s not to say that those deficits are not accurate or in the neighborhood.

But in terms of what actually then occurs and how they bridge the gap is always a negotiated process between the legislature and the governor, and this year will be no different. So, right now, we don’t know of anything specifically that impacts our business negatively. Obviously, tighter budgets can be positive and negative for us. Tighter budgets can mean that perhaps we rent more and we don’t make other capital outlays, as well as, if that were to impact operating budgets, does that create an issue for rental payments?

Historically, we haven’t seen that be the issues, but we’ve seen $25 and $30 billion budget shortfalls before under other governor’s administrations. So, we typically have stayed close to what goes on in Sacramento. We have legislative support there full time in terms of our lobbyists, and we stay very informed. But right now, from our vantage point we can’t see anything of a negative impact of any significance.

Jamie Sullivan - RBC Capital Markets

Okay. And does that hold true in combination when there are budget shortfalls and looming recessionary talk?

Dennis Kakures

The looming recession side of things, there is a countercyclical nature again to our modular rental projects in particular, and especially classrooms. So, as capital gets tighter and economy slows, the dynamic is that school populations don’t change. But they still need to be housed.

And then with respect to the commercial side of things, although, you can see some downturn in construction a lot of companies that would perhaps otherwise build or do an addition may decide to rent to provide themselves with the additional space that they need.

So, I’ve seen that over time in my experience in California. I don’t think a recessionary dynamic playing in with a budget shortfall doesn’t worry me greatly just because of the nature of our products. Not to say that we wouldn’t like to see a stronger economic cycle but we should weather this fairly well if there is a moderate recession.

Jamie Sullivan - RBC Capital Markets

Okay. Thanks. And then just a little more on the Prop 1D bond monies. Are all of those bonds issued and the state is deciding when to dole it out within the budget or where is the flow of funds sit there?

Dennis Kakures

Currently of the $3.3 billion, there is about $2.7 billion that’s available for modernization for public school K through 12.

The other question you have in there is, how did the bond process work. And typically it works like this. The state will go out and issue bonds as necessary, and what they typically do is they borrow money on a short-term basis or interim basis, and then if they create enough of a bundle of those short-term borrowings they go out and they issue a bond. And they roll that short term financing into the bond.

So, they really try to be very smart about how they manage their borrowings. But it’s on a short-term basis, and then again the issue bonds as they get enough there and then they go out to the market and issue the bonds.

My most current information is that the bond market for school facility bonds remains favorable and at favorable rates for the state. And that, at this point, we are not seeing any changes in those dynamics with respect to these facility bonds.

Jamie Sullivan - RBC Capital Markets

Okay. And you said there is $2.7 billion issued and unused?

Dennis Kakures

There is $2.7 not issued; of the $3.3 billion that was approved, there’s $2.7 billion that is yet to be utilized. So, there is a significant amount of funding available for school districts to do their projects. But they typically are issuing bonds on a as-needed basis as they go along.

Jamie Sullivan - RBC Capital Markets

That’s helpful. If you can just talk about the ’08-‘09 school year and how the bookings are trending versus the ’07-‘08 school year?

Dennis Kakures

Thus far it’s a healthy pipeline and it’s early in the first half of the year. So we’ll have a much better read by the time of our first quarter call in May. But in my opinion it’s as good if not better than it was last year at this time.

Jamie Sullivan - RBC Capital Markets

Okay. So that the timing of decisions hasn’t really changed?

Dennis Kakures

It takes a lot to get school projects done and they’ve got to start early and there’s a lot of hurdles and not the least of which is plan approval at the state level, pulling together their on local monies, et cetera. So it’s a process.

Operator

Our next question comes from the line of Joe Real - Baker Brook Capital.

Joe Real - Baker Brook Capital

My first question is are you including any share buybacks in the EPS guidance that you provided and secondly assuming the stock price stayed down in this neighborhood, would you expect to utilize the remainder of the authorization that you have in place?

Keith Pratt

A couple of comments. First of all our guidance includes the impact of share buybacks that we have made since our early November conference call. And that’s the total of just over 1.3 million shares that have been repurchased. So that activity, which continued through earlier this month, is reflected in our guidance.

And I think as Dennis mentioned earlier, we are very open to doing additional share buybacks. We do monitor obviously the stock price. We do analytic work around valuation and when we think the stock is attractively priced from a buyback point of view and we’re are certainly very capable of doing additional buybacks when the stock is at low levels.

Joe Real - Baker Brook Capital

Okay. Just to clarify, so you include all the buybacks you’ve done to date in your guidance but you are not assuming that you will do any additional buybacks in order to meet that guidance?

Keith Pratt

That is correct.

Operator

Our next question comes from the line of Alan Mitrani - Sylvan Lake Asset Management.

Alan Mitrani - Sylvan Lake Asset Management

How many shares were outstanding as of the ends of the quarter? I know on the press release it gives you the average, but what was the diluted share count as of the end of the quarter? And maybe you can give us what that count is now?

Keith Pratt

Actually Alan, let me come at that little bit differently and maybe this will help you as you look forward. We were really for the third quarter at a diluted number of about 25.4 million shares.

And the way I would look at it is, in the absence of a buyback we would have seen an increase of somewhere between 300,000 to 400,000 shares added to the fully diluted number in ‘08. But with our repurchases we’ve offset that by about 1.3 million. So as you look at where we are going to be in ’08, given the buyback activity to-date, it’s right around 24.5 million.

Alan Mitrani - Sylvan Lake Asset Management

So I can assume there’s around 24.5 million shares outstanding right now?

Keith Pratt

Yes. And keep in mind for the outstanding, if you role in the fully diluted options you have the impact of the share price, which as that moves, it can make that number go up and down accordingly.

Dennis Kakures

In the money (inaudible).

Alan Mitrani - Sylvan Lake Asset Management

I understand that. Also, what’s your expectation for capital spending for ‘08?

Keith Pratt

We don’t give an explicit number there but just to give you a feel for what we’ve seen over the last couple of years, at a gross level and this doesn’t take account of the fact we sell some rental equipment and that essentially offsets the cash flows on new equipment purchases, but at a gross level we spent $104 million last year, $110 million in ‘06, $106 million in ‘05.

I would look at those order of magnitude numbers as an indication of where we have been spending and that’s supported the growth rate in the rental equipment revenue stream that we have seen over the last couple of years and consistent with what we are projecting for ‘08.

Alan Mitrani - Sylvan Lake Asset Management

Okay, so similar types of levels. The issue is you are spending basically more than double the depreciation and now your stock has come down significantly to its lowest level over the last few years.

And in looking at it, it seems like you just raised the dividend and your dividend yield is around 4% and last I checked your borrowing costs are and maybe somewhere in the 5%ish range.

So after tax it actually pays for you to be buying back stock and maybe slowing down the growth a little bit. Can you just comment on your thoughts on that?

Keith Pratt

I think we look for the ‘and.’ I think we always invest in rental equipment where we see an attractive return and that continues to be our philosophy. And as we stated earlier we are very open to buying back stock. I think the fact we bought 1.3 million shares in the period since our November earnings call indicates that we can be highly responsive when the opportunity presents itself.

Alan Mitrani - Sylvan Lake Asset Management

Okay. Yes, that is true.

Keith Pratt

And we do not view ourselves as being constrained from a capital point of view as we look forward.

Alan Mitrani - Sylvan Lake Asset Management

Can you talk about that a little bit? You mentioned in your press release, that you are looking to redo your lines of credit. Can you may be just give us a sense as to how much leverage you are comfortable with and what are the restrictions right now and maybe what you think you can get and what your borrowing cost could be? Could you talk a bit about that?

Dennis Kakures

I would rather talk in general terms and not specifics and that’s because we will be either renewing or changing our revolving credit line by the middle of this year. And we are already underway and exploring that.

In terms of leverage, our leverage today is relatively low for the kind of business that we have and compared to a lot of peer group companies. At year end we had $45 million of available credit on our existing lines. And we would see it as potentially prudent to increase the size of our revolver both to support our strategic growth initiatives and to take advantage of any additional buyback opportunities.

So I think we are well-positioned in the near term and as we look forward and look at changing our financial structure it will most likely be to add more capacity.

Operator

Our next question is a follow-up question from the line of Amy Ruderman - Oppenheimer & Company.

Amy Ruderman - Oppenheimer & Company

Could you refresh us again on the break out of your education versus commercial revenue? And then within commercial, construction and then non-residential versus residential?

Dennis Kakures

It breaks down about roughly 60% is educational based rental revenues for modulars and about 40% is we term as commercial. Within the 40% that’s commercial, about 8% to 10% of that has historically been a residential construction and roughly the other 9% to 10% is commercial construction.

Amy Ruderman - Oppenheimer & Company

Okay. And then my next question is on California. I know another caller had asked about the bond money. It’s been since November ‘06, since the bond was approved. And how long does it take for these municipalities to actually spend this money? How long will it actually take for them to spend what’s available?

Dennis Kakures

It really depends on what the backlog is at the time in which the bond measure passes, how much money is still available from bonds that preceded it. And really highly dependent upon school districts getting their projects approved through the state. And it’s not just approval, but you’ve got to get your estimates in, and there’s contractual work with contractors, et cetera.

So there is a lot of pieces to it. Right now, looking at least today in February and in my most recent discussions with people that we know at the state level, our sense right now is that these monies could support us going into 2009, but that’s really a function of how quickly it moves from here.

The pace from November of ‘06 through today in terms of if there’s still $2.7 billion of $3.3 billion available, hasn’t been real fast. So the good news is there’s a lot of money available and we know the demand is there, just a matter of how quickly it comes on line.

Amy Ruderman - Oppenheimer & Company

Right. Will there be additional money that will be added in ‘08?

Dennis Kakures

As you know, bond issues are only on the even years; ‘08 being an even year. Where we stand today, it’s too early to tell. It certainly wouldn’t be before the November ballot, and that’s primarily because of the available amount of bond monies today.

Typically, when there’s still an ample supply of bond monies available, it’s very tough to get the electorate to pony up, so to speak, and support additional bonds monies. But we’ve seen that picture change pretty quickly based upon where things stand in the middle of the year.

So, I think it’s too early to tell and I’m certain the state is willing to support additional bond monies as they have every even year based upon what’s available to support current projects and then, what they anticipate going forward.

Amy Ruderman - Oppenheimer & Company

Okay. And then on D&A, can you give me an idea of what would be an appropriate run rate for that? I know that with electronics, D&A is coming down, but then you also have the Florida center that’s coming on line, which should boost up D&A. Where would that appropriate run rate be?

Keith Pratt

I’ve looked at the historical trends. We don’t see any fundamental change in the business. I would look at the full year numbers of ‘07 and ‘06 to really make a start of that.

Clearly, as we’ve noted in the case of electronics, depreciation and amortization can move around a little bit more quarter-to-quarter depending on how well we’re utilizing equipment, and we saw some shift in the second half of last year that was favorable compared to the first half.

But really to give you general comments, I would look at that metric again on a full year basis and look at the last couple of years, and I think that’s a reasonable place to start.

Operator

Our next question is a follow-up question from the line of Jamie Sullivan – RBC Capital Markets.

Jamie Sullivan - RBC Capital Markets

I was wondering if maybe we could talk a little bit about the infrastructure bonds as well and where those stand?

Dennis Kakures

I don’t have a current status on how much of that’s been spent. I don’t think it’s very much. We’ve just, in the last four to six months, have started seeing projects gear up. I think there’s a lot of dry powder there.

Jamie Sullivan - RBC Capital Markets

Okay, great. And then, just in mods, I was just wondering in this year in particular or an average year, how much new business typically needs to be won to meet your rental revenue targets? Is it 10%, 20%? What’s a good way to think about that?

Dennis Kakures

It’s really hard to say because it’s highly dependent upon the returns of what is going to cycle back in. If you’re going to have a year in which you’re going to have lower returns and you’re getting a lot of horsepower from prior year’s equipment that went on rent, then you don’t need to book as much to grow that percentage.

So, it’s really a combination of the both, and each year is different based upon the cycle of where classrooms are at in modernization, in particular. If they’re early in their life, we have a lot of equipment that went out in ‘07. We’ll have more equipment that goes out in ‘08 so it’s early in their project life cycle, so we get that benefit, and that perhaps, especially important if we’re entering a slower economic window.

Keith Pratt

Certainly a large percentage of our modular rental contracts are multi-year and many of those contracts go beyond the initial agreed to contractual rental period. And so a large body of the business tends to stay in place and the turnover tends to be a smaller proportion of the total.

Jamie Sullivan - RBC Capital Markets

Okay. So just because of the newer equipment that went out last year, visibility should be a little bit better this year than it was entering ‘07?

Dennis Kakures

It’s hard to say based upon how significant the economic slowdown is because that speaks to other new rentals in the commercial side of the business and so forth so. A number of variables that come into play without question.

Jamie Sullivan - RBC Capital Markets

All right. And then are you already taking orders in North Carolina and Georgia? Wondering how that’s been ramping?

Dennis Kakures

Actually we’ve designed product, we’ve produced product and we’ve started renting. So it’s all good news and we are very excited about things. Again, they’re start up initiatives but we are very pleased with our potential opportunities there to grow.

Jamie Sullivan - RBC Capital Markets

Can those markets, do you think they can ramp something like Florida did?

Dennis Kakures

Just to be clear, Florida is a pretty unique market. And hopefully, we’ve shared in our past calls over the last year or so that we don’t expect a Florida dynamic in North Carolina or Georgia.

However, that being said, the long-term potential for educational based growth there is very favorable based upon demographics, but certainly very different situation. But we also expect those markets to be favorable commercially as well. But Florida is a pretty unique opportunity.

Jamie Sullivan - RBC Capital Markets

Okay. That’s helpful. I just wonder if I could switch over to TRS for a second. And just on the utilization, I know that was pretty high in the quarter. Do you think it can be maintained at that level or are you expecting that that should tick down a bit in ‘08?

Dennis Kakures

It really depends on projects where equipment is out, how long it stays. Typically with that business toward the ends of the year you start getting in returns. The returns weren’t as significant in December as we’ve seen in some past years so that’s some good news going into the new year. We are getting that horsepower in the first quarter.

So it really depends on how strong the business activity is in the first half of the year and how that continues throughout the year. Those assets turn about on average about every five to six months. So you’ve got to have a consistent flow thereof new opportunities coming in the pipeline. So we feel very good entering the year.

Jamie Sullivan - RBC Capital Markets

Okay. I know you talked about in a downturn you might change some of your strategy. Can you talk a little bit more specifically about what options you have in managing the business if a recession hits harder than expected?

Dennis Kakures

First and foremost would be two areas and that’s really you would gear back on your purchases of equipment and then also you would gear back on your hiring, especially in revenue generation areas or production. So if you are going to be entering slower times, you don’t need as perhaps many salespeople or marketing staff, as well as production or people that are going to process products.

Operator

And our next question comes from the line of Amy Ruderman – Oppenheimer & Company.

Amy Ruderman - Oppenheimer & Company

Going back to the Florida market, you’re definitely still ramping up there and doing some hiring in Florida and the near markets. What’s going to happen there in those markets? Are you going to continue to hire?

Dennis Kakures

For Florida in particular our new inventory center is coming on line in mid year, we’re estimating at this point. And we are gearing up with staff there to be able to support the turn in of product as it comes in. And certainly for commercial we are adding to the sales force commercially because of the demand we are seeing. We’ve had a very good start to 2008 in bookings on the commercial side. So we are definitely hiring in both revenue generation, as well as in production areas.

Amy Ruderman - Oppenheimer & Company

Can you give us an idea of what the revenue contribution will be from the new markets in Georgia and North Carolina?

Dennis Kakures

We are very humble and we are very conservative in the way we go about speaking about it. They are start up areas and we are going to learn more as we go. We expect them to be small contributors.

I would say this though. A couple of years ago, California contributed about 90% of rental revenues. That number today is probably more in the 75% range in rental revenues for modular. So we are getting more contributions out of California than we have historically and Florida being the biggest contributor there, but Texas has grown very nicely as well.

But with respect to North Carolina and Georgia we feel good about their prospects, but they are going to be small to start with and hopefully we can ramp those fast or as fast as the markets will allow us to.

Amy Ruderman - Oppenheimer & Company

That 90% to 75%, that was overall rental revenue?

Dennis Kakures

If you look at the modular rental revenues and where they are derived from, 90% a couple of years ago was coming from California, 10% from outside of the state. And now that shift is about 75%, 25%.

Operator

And management, there are no further questions at this time. Please continue with any closing remarks.

Dennis Kakures

Thank you all for joining us today and we will look forward to speaking with you again on our upcoming Q1 call in early May. Thanks so much.

Operator

Ladies and gentlemen, this concludes the McGrath RentCorp fourth quarter 2007 earnings conference call. If you would like to listen to a replay of today’s conference, please dial 303-590-3000, or 1-800-405-2236, entering passcode 11106368.

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Source: McGrath RentCorp Q4 2007 Earnings Call Transcript
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