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McGrath RentCorp (NASDAQ:MGRC)

Q2 2008 Earnings Call

August 7, 2008 5:00 pm ET

Executives

Geoffrey Buscher - SBG Investor Relations

Dennis Kakures - President and CEO

Keith Pratt - SVP and CFO

Analysts

David Gold - Sidoti & Co.

Scott Schneeberger - Oppenheimer and Company

Jamie Sullivan - RBC Capital Markets

Operator

Ladies and gentlemen thank you for standing by. Welcome to the McGrath RentCorp Second Quarter 2008 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).

I would now like to turn the conference over to 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 for 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 11116860. This call is also being broadcast live via the internet and will 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 at approximately 4:05 Eastern Time today or 1:05 PM 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 12066529704 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 second quarter 2008 Form 10-Q. For the second quarter 2008, total revenues increased 10% to $74 million from $67.4 million for the same period in 2007 (sic). Net income and EPS increased 11% to $10.1 million, and 17% to $0.42 per diluted share respectively from $9.1 million and $0.36 pre diluted share for the same period in 2007.

First, let's review the second quarter results for the company's Mobile Modular division. Mobile Modular, total revenues decreased $1.8 million or 5% to $37.3 million compared to the same period in 2007 due to $1.2 million lower sales and $1.1 million lower rental related services revenues partly offset by $0.5 million higher rental revenues during the quarter.

Gross profit on rental revenues increased $0.2 million or 1% to $15.5 million from the same period in 2007, due to higher rental revenues partly offset by lower rental margins. Rental revenues increased $0.5 million or 2% over 2007, while rental margins decreased to 61% from 62% in the same period in 2007.

Selling and administrative expenses increased $0.4 million or 6% to $7.1 million from $6.7 million in the same period in 2007.

Pre-tax income decreased $0.7 million or 6% to $10.3 million for the second quarter 2008, from $11 million for the same period in 2007. This was primarily due to lower gross profit on sales and rental related services revenues.

Finally, average modular rental equipment for the quarter was $454 million, an increase of $37 million from the second quarter of 2007. Average utilization for the second quarter decreased from 82.1% in 2007 to 82% in 2008.

We turn next to second quarter results for the company's TRS-RenTelco division. Second quarter total revenues increased $5.1 million, or 19%, to $32 million compared to the same period in 2007 due to higher rental and sale revenues.

Gross profit on rental revenues increased $1.8 million, or 22% to $9.7 million as compared to 2007, due to higher rental revenues and higher rental margins. Rental revenues increased $3.3 million or 16% as compared to 2007, and rental margins increased from 39% to 41%.

Selling and administrative expenses increased $1.1 million, or 21%, to $6.4 million from $5.3 million in the same period in 2007, primarily due to employee additions to support business growth and hire personnel and benefits costs.

Pre-tax income increased 32% for the second quarter 2008 to $5.1 million from $3.8 million for the same period in 2007, primarily due to higher gross profit on rental and sale revenues.

Finally, average electronics rental equipment at original cost for the quarter was $248 million, an increase of $44 million from the second quarter of 2007. Average utilization for the second quarter increased from 67.5% in 2007 to 69.4% in 2008.

On a consolidated basis, interest expense for the second quarter 2008 decreased $0.5 million to $2.3 million from the same period in 2007 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 39.2% compared to 39% in the second quarter 2007.

Next, I would like to review our 2008 cash flows. We continue to generate strong cash flows to invest in our business and return value to our shareholders. For the six months ended June 30, 2008, highlights in our cash flows included; net cash provided by operating activities, was $45.4 million, an increase of $16.6 million or 58% compared to 2007. The increase was primarily attributable to the improved results of operations in 2008, lower tax payments in 2008 compared to 2007 and other balance sheet changes.

We invested $54.7 million for rental equipment purchases and $11.3 million for property plant and equipment purchases, partly offset by $12.6 million in proceeds from used equipment sales. Dividend payments to shareholders were $9.1 million.

Net borrowings increased $37 million from $197.7 million at the end of 2007 to $234.7 million at the end of the second quarter 2008. We continue to have a solid low leverage balance sheet.

There were no repurchases of common stock during the three months ended June 30, 2008. During the six months ended June 30, 2008, the company repurchased 968,746 shares of common stock for an aggregate repurchase price of $21.9 million, or an average price of $22.61 per share. There were no repurchases of common stock during the three and six months ended June 30, 2007. At this time two million shares remain authorized for repurchase.

For 2008, second quarter Adjusted EBITDA increased $2.7 million or 8% to $34.6 million compared to $31.9 million in 2007 with consolidated Adjusted EBITDA margin at 47%. Our definition of Adjusted EBITDA and our reconciliation of Adjusted EBITDA to net income are included in our press release and Form 10-Q for the quarter.

Turning next to 2008 earnings guidance, at this time based on second quarter 2008 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 $1.72 to $1.82 for diluted share.

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

Dennis Kakures

Thank you, Keith. Let's begin with some color on our modular rental business for the quarter. We experienced a very challenging residential construction market in California during the second quarter with a significant level of returns and very limited opportunity for new sale office rentals.

We also saw lower demand in a more competitive environment for new non-residential construction projects in California that utilize singlewide modulars. However, we are continuing to see healthy demands for larger non-residential construction projects in California emanating from $30 billion in bond measures passed in late 2006 for the building of wastewater treatment plants, dams, levies and other infrastructure.

The additional good news about these engineering type projects is that they typically utilize larger modular complexes and have multiyear rental terms. Keep in mind that residential construction represents less than 4% of companywide annual rental revenues historically.

Commercial business activity in the Texas market continued to be favorable during the quarter and is supported by a strong oil industry sector. In Florida we saw favorable levels of commercial opportunities and booking activity during the second quarter of 2008.

For the sake of clarity, we define our commercial rental business for modulars as everything other than education. In other words, it includes general office, display and workspace for residential construction, non-residential construction, commercial and industrial businesses, the petrochemical industry, healthcare and a large mix of other specialty needs.

In the Educational rental business during the first half for the year, we saw respectable classroom booking levels for the 2008, 2009 full year in the California, Texas and Florida markets. However we also experienced continuing pricing pressure in the California Educational market during the first half of 2008 as rental companies competed to utilize their idle classroom inventories.

Our revenue returns to the first half for the year were in line with our expectation. Keep in mind that the great majority of the classroom rental orders booked during the first half for the year will not ship and begin billing until the third quarter of 2008, and that virtually all of these orders will be multiyear transaction.

In the first half of 2008 in our newest modular markets, North Carolina and Georgia, we generated favorable levels of both commercial and educational opportunities. We got off to a slower start than anticipating in the conversion of opportunities to orders. However, our momentum has been building.

Our modular product offerings in these new markets provide end users with improved floor plan designs, higher building material standards and back the improved aesthetics in our competitor's legacy pleas. There was a higher cost associated with this product, and thus there is more pick-and-shovel work to be done with decision makers in getting the Mobile Modular brand and its value proposition established in these markets. However, we believe that overtime our product and service innovation efforts will reward Mobile Modular with increased market share.

At the end of the second quarter utilization for modular fleet stood at 82% compared to 83% a year earlier. The reduction in utilization level relates predominantly to residential construction returns and a more competitive commercial construction market in California. It is important to note that approximately 30% of our modular rental revenues today are generated outside of California.

Although the California market is experiencing various challenges today, it will always be a significant contributor to our earnings. However, our efforts over the past two years to increase our modular business levels in both Florida and Texas in particular, is serving us very well today and helping us balance our exposure to regional events. We believe our expansion into both North Carolina and Georgia more recently will further serve this dynamic in the years ahead.

Now, turning to Enviroplex, our wholly-owned California classroom manufacturing subsidiary, they had sale revenue of $4.6 million during the second quarter, up from $1.5 million a year ago. For the six months period sale revenues were $6.5 million in 2008 compared to $2.6 million in 2007.

In addition, Enviroplex's backlog at the end of the second quarter was at a very favorable level. Our team at Enviroplex has done a very good job thus far in 2008 in both booking activity and in their execution of orders. We are looking forward to a favorable second half of the year for Enviroplex.

Now let us take a closer look at TRS-RenTelco, our test equipment rental division. TRS-RenTelco had a strong increase in rental revenues of 16% to $23.6 million from $20.3 million a year ago. We benefited from favorable market demand across a fairly broad based of customer segments, including communications network, aerospace and defense applications, and semiconductor and consumer electronics product development and manufacturing.

Our pipeline of opportunities has continued favorably into the third quarter. Although there was a slight reduction in the rental rate yields sequentially from the first quarter of 2008. This reduction is mainly due to changes in our equipment mix versus market pressures or the replacement of lower price TRS assets.

At the end of the second quarter utilization stood at 70% compared to 67.2 % a year earlier. The high utilization level was driven by a healthy rental marketplace as well as improvement in our sales of earlier generation test equipment inventory.

Gross profit on rents increased 22% to 9.7 million for the quarter compared to a year ago. In addition gross margin on rents increased to 41% versus 39% last year. Higher rental revenues and lower equipment depreciation as a percentage of rents drove the higher margin well. Going forward we strive to increase gross profit and gross margin rents as we grow our business levels, better manage our asset pools and create greater leverage of our centralized sales and equipment processing infrastructure.

Now for some additional comments on our strategic growth efforts. Earlier this year we announced our entry into the market for renting portable storages units. Our goal is to incubate this organic effort at our Northern California location at Livermore and if successful move it out to other locations over the next few years.

We have had good success to-date benefiting chiefly from synergies with existing Mobile Modular customer relationships. We are focused on creating a differentiated product that should serve us well going forward. We should emphasize that it will take sometime before our portable storage rental business becomes meaningful to earnings. I am hopeful that with our learning's and success thus far. We may be able to move faster in expanding this business into other modular markets that we operate in today.

At our annual shareholders meeting in June, we announced our entry into the environmental test equipment rental business. We will be running this new initiative out of our Dallas based electronic test equipment facility and leveraging our order processing, inventory control, and equipment maintenance and handling systems.

We are also hiring various staff to support this new initiative. Environmental test equipment business provides rental products for air, soil, and water monitoring and sampling, and other products including noise and vibration measurement, thermal imaging, and GPS survey and equipment.

The products are typically rented to environmental consulting firms, industrial companies and industrial 15-1.21. We are just getting started in this business and our humble learners but believe that we can ramp our knowledge and our results fairly quickly.

We continue to be interested in potential acquisitions to help accelerate the growth of each of these new rental initiatives as well as for establish rental businesses. We are also continuing to explore additional rental product businesses that we have the potential to enter through strategic acquisition organically.

With respect to our new ERP applications platform, we are now in position to launch Phase 1 in early October directly following our busy season for modulars. Phase 1 by far is the largest and most complicated component of our IT application investment.

In closing, it is important to keep in mind that there is a countercyclical dynamic to our rental products that can service during more challenging economic and tighter credit environments. In our modular business, we have experienced significant challenges in residential construction and more competitive non-residential construction and educational markets in California.

However, in spite of various negative macroeconomic data, and more regionalized concerns, we have had a good first half for the year. Our earnings results reflect the benefit of both rental products and geographic diversity in our business makeup today.

Additionally, we believe that economic downturns can potentially create attractive opportunities for well-focused and financially healthy enterprises. Downturns can also create opportunities for good companies to either gain on, or put greater distance between themselves and their competitors when general economic conditions improve. We are hopeful of being able to take advantage of both of these dynamics.

As always, we aspire over the long run to produce strong financial results in order to return value to shareholders through both share appreciation and the payment of dividends. We will also continue to be opportunistic in buying back our shares in order to return value to shareholders. Now Keith and I are available to address any of your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Our first question comes from the line of David Gold with Sidoti & Co. Please go ahead.

David Gold - Sidoti & Co.

Hey, good afternoon.

Dennis Kakures

Hi David.

Keith Pratt

Hi, David.

David Gold - Sidoti & Co.

When, the last I guess around your call in April, you had commented about the California booking season being fairly favorable. It sounds like the update today is that may be things sort of continued for pricing was a lot of tougher there. Had something changed or is my memory wrong or what's sort of the big difference?

Dennis Kakures

I don't think there is a great deal of difference between the Q1 call results and what we are at today. It's been a competitive six months in terms of the pricing. We had to work hard for every deal. We have been successful in a great majority of them. It hasn't been as strong as Europe as certainly in some past years. But we certainly held our own and quite frankly we think we took market share in the educational side this year as well as on the commercial side. It was tougher markets, but sometimes in those markets you create much greater focus with your sales force and you are really on half a step. So, I don't think any real difference there from where we were in May on the Q1 call.

David Gold - Sidoti & Co.

Okay. So, looking forward now again sort of booking seasons progressing. We look at over can you say the next 12 months, do we expect growth from that market?

Dennis Kakures

When you say it's on that market, the California market.

David Gold - Sidoti & Co.

Yeah, California specific, yes.

Dennis Kakures

Well, the benefit we are going to get now is Q3 we have the educational, a great majority of that comes online. We should get the benefit from these larger complexes which are typically multiyear transactions. It will really play out on the side of how much more impact there is to the residential construction piece of things as-well-as to commercial construction. The residential areas where we really saw the downturn in terms of significants in the California market in the first half for the year or so.

David Gold - Sidoti & Co.

I see.

Dennis Kakures

Where we really have to see what's going to play out with respect to those dynamics I just mentioned.

David Gold - Sidoti & Co.

Got you. And then just you had made a comment about the contracts or the bookings, that you are getting a generally multiyear with tougher pricing out there. Have succumbed to the pricing to get the units out there, so you know actually we see tougher pricing on these multiyear contracts or did you hold the line on the pricing and basically take what you could get?

Dennis Kakures

When I talked about a multiyear contract they really they fall in the two areas; one is certainly on the educational side most of everything we booked there is a multiyear term. And that's been a more competitive market, but where we have also seen longer term transactions or in the larger complexes, for this larger commercial construction type projects or non-residential construction projects. X the amount that's coming from the bond measures passed in California.

The good news about that is that those assets we've actually had to buy assets in the market with that demand. So that means pricing is done very well with that product. It's an interesting mix of dynamics in the market at any given time when you have diversity a group of end users as we do. But that's actually been a good healthy market for us.

Keith Pratt

Yeah, the pricing seems to be more challenged in California in parts of the education market and then on parts of the commercial. And I don't think we are seeing those same pressures in Texas or Florida.

David Gold - Sidoti & Co.

Okay and then if I can just switching over to RenTelco. I think your comment was that the pricing was more an issue of mix than say competitive pricing arena?

Dennis Kakures

That is correct. And we monitor that very closely quarter-over-quarter and sequentially.

David Gold - Sidoti & Co.

Some fairly impressive strength there on that side of the world. What are we doing differently these days, presumably I would guess that we are picking up market share, it's not a function of the market growing, not aggressively, right?

Dennis Kakures

Yeah, I think it's the combination of both, the market is growing some, there is new technology demand out there, and at the same time, we made a decision a couple of years ago, valuing international opportunities and we made a decision that although we will continue to work the America as a whole, we were going to really focus on our backyard and that was US domestic and Canada and we have had very good growth there. I don't think there is any question and we are definitely taking market share, and it's not insignificant, but there is good business level there.

David Gold - Sidoti & Co.

And then on the pricing due to mix, are we pushing more equipment, then that's sort of a lower value proposition or…

Dennis Kakures

It's only that we are seeing general purpose test equipment, which is about two-thirds of our inventory and communications test equipment. General purpose has a longer life but it has a lower rental rate. So when you buy more of that equipment, put more of that on rent, it has the impact of lowering the overall rental rate yield on equipment on rent. So that's the dynamic.

David Gold - Sidoti & Co.

Gotcha.

Dennis Kakures

It's only buying for the demand, that's there in both sectors.

David Gold - Sidoti & Co.

Gotcha, terrific. That's all I have. Thank you both.

Dennis Kakures

Thank you.

Operator

Thank you. Our next question is from the line of Scott Schneeberger with Oppenheimer and Company. Please go ahead.

Scott Schneeberger - Oppenheimer and Company

Thanks. Good afternoon guys.

Dennis Kakures

Hi Scott.

Keith Pratt

Hi Scott.

Scott Schneeberger – Oppenheimer and Company

Just following up on David questions. The, I got the sense, I think from Dennis you said that, and I believe it was on the TRS side that you were seeing momentum flowing through into the third quarter was I accurate on that?

Dennis Kakures

I did make that statement in the prepared comments that our pipeline of activity specifically through July continue to be very healthy.

Scott Schneeberger - Oppenheimer and Company

So, pretty bullish outlook through the end of the year in TRS?

Dennis Kakures

The one comment I would make is that we feel very good right now. The pipeline looks good. I mean, we had a very good year. My expectations are that we will finish the year strong but again there are macroeconomic dynamics out there that we always have an eye on, but I think as a whole the markets are pretty healthy that we operated.

Scott Schneeberger - Oppenheimer and Company

And could you just take us a little bit deeper there. We are seeing broadly an economic slowdown. You alluded to elements of your business being countercyclical. Can you take us a little bit deeper there why you think that you could see sustained strength and as we do see the economy really turn?

Dennis Kakures

Well, I think you are talking overall the countercyclical dynamic and I can to both product groups. In modular certainly a lot companies its interesting to work, not every company is experiencing a downturn just because of the economy, since which you can use customers rather than make large capital expenditures for office space might beside to go ahead and rent something and wait until they see a more favorably economic environment then to make investments.

So, the rental industry especially for office space and for those types of needs is the least expensive and fastest way to accommodate space needs. For electronics a lot of companies that would otherwise maybe buying. The great majority of test equipment is purchased. But when credit gets tight and people want to be a little more cautious with the dollars expense they may elect to rent more. And so, we benefit from that. So, that's how I kind of speak to the countercyclical side of things.

Scott Schneeberger - Oppenheimer and Company

Okay. And I think I've heard from you in the past, that you do benefit cyclically and countercyclic, I think if you had your way, you'd like to do see every, the tide rising, but you still do well in this timeframe?

Dennis Kakures

We are very fortunate that our rental products worked both ways and even on the electronic side, when demand picks up, and people want to buy more in a lot of cases, the manufacturers can't produce the equipment fast enough, but because of our placement with them and orders. We're able to have equipment sooner, rented to people on an interim basis until they can get the goods they are purchasing. And then of course all the other dynamics about rent scene in that market are even better when the economy is good. So…

Scott Schneeberger - Oppenheimer and Company

Great. And then just want to try to poke one hole at the comment on the countercyclicality of modulars. I'm jumping around here. You are saying that you are seeing some softening in obviously residential and then in commercial in California, correct. But I guess you are mitigating that by moving around to the type of customer you are serving?

Dennis Kakures

Well, the residential piece, certainly we've seen a significant decline in rental revenues, year-over-year in that business Q2-over-Q2. And then on the other, if you look at commercial construct, look at non-residential construction it's really two buckets. It's really the single wide fleet which is more, they are particularly smaller construction projects that a lot of what our competitors have. That's a much more competitive environment. But on larger complexes we've served a lot of engineering type of projects or much longer-term type of projects. We're seeing that being a quite favorable market today. And we've always been a real leader in that market sector in all the states in which we operate. In California, we are seeing a real benefit there from those bond issues that support that kind of business.

Scott Schneeberger - Oppenheimer and Company

So, things that are coming off and you are able to put into place on the infrastructure. Where, that's picking up.

Dennis Kakures

Large complexes that are in California, we are able to utilize whatever is coming off rent and like I said before we are even having to buy assets to support that demand. And we love that kind of business because it's multiyear contracts and it's for fairly standard equipment that we can in our inventory centers modify fairly readily when we turn it back from a customer. So we have that in-house capability that is definitely a competitive advantage, more so than other folks.

Scott Schneeberger - Oppenheimer and Company

Sure. With the modular, I guess we were looking for a little bit more out of utilization and obviously you have already addressed, why pricing was off a little bit. Is it the commercial side or the education side that's somewhat holding utilization back. It's not bad, but it's by no means robust?

Dennis Kakures

Well know a couple of things, the residential construction market, those are the assets that are in the residential construction market, particularly have a pretty high unit cost. There are sales developer offices, and the way we calculate utilization is the original cost of assets utilized versus total original cost assets. So that's a higher unit cost asset. So when you have a slowdown in that, sector of the market you are going to see that in the numbers. The other dynamic is that we feel still have X amount of shipments to ship here in both Florida and California for the school market for this year.

Scott Schneeberger - Oppenheimer and Company

And that's taking me where I want to go next. So, I got the sense as you were answering David. That basically pricing is very competitive but you were getting more than, you think you are taking share, you think you are doing well there, but you made comments that it is a weaker year. I want to understand that. Is it going to be a solid year? You've taken share pricings a little weaker and that's what you meant when you said weaker, or is this relative to past year as a weaker year for the summer up ramp in California?

Dennis Kakures

It's not a strong booking year overall as past years, but it's still a very respectable year. We've had a year that's decent. Now at the same time there's pricing pressure there, which impacts rental revenue levels. So if you look back on what we projected for the year I think we feel pretty good about things and I think the other dynamic is you talked about market share I think this year really demonstrated the success we are having in Florida and Texas.

We're definitely taking market share in those markets both in educational and commercial and it's good to have diversity. California, will continue to be a very big market for us, it can have some ups and downs but overall it's going to continue to do very well over time. So the great news is, is that we've done some very healthy diversification and we're getting considerably larger in the other markets that we're in today.

Scott Schneeberger - Oppenheimer and Company

So tying it back to the guidance, you maintain the EPS guidance and you didn't talk about it, but I assume that the 10% organic revenue growth that you kind of gave with the original guidance at the beginning of the year, that is I assume still intact. Are we going to see it swing a lot more to TRS? Is it going to be TRS plus 10 and modular significantly below 10 just any color there?

Keith Pratt

Scott, I think the best thing to do is just look at the numbers today and I think in general we're very pleased with the results in the first and second quarters. This has been a good first half to the year. Typically as you've seen with the business we get more EPS in the second half of the year. For all reasons Dennis discussed we are a little bit more cautious for parts of the modular business in California particularly that developer side on the commercial side.

So that's why we are not going to make a change in the guidance we feel very comfortable with the guidance range where it is today. The other thing we've got to keep in mind is Q3 is an important quarter for sales particularly in the modular side and we just need to see how that plays out during the course of this quarter and into the early part of next quarter.

So, where we stand today great first half to the year, feel good about the business. Little cautious in some of those macro economic risks that are out there and let's see how the next quarter plays on.

Scott Schneeberger - Oppenheimer and Company

Okay thanks. You may now want to keep but any further insight with regard to sales you just mentioned it, anything you saw in the second quarter that will lead you to believe that it should be a concern into the third quarter?

Keith Pratt

Yeah, I would say nothing specific. As you look in detail at the numbers you will see modular sales were down a bit compared to the second quarter of last year. Again third quarter is an important quarter for that business Enviroplex was up nicely. So, you know, that's another indicator that buildings or classrooms are being purchased here in California, and Enviroplex had a very nice Q2.

Scott Schneeberger - Oppenheimer and Company

Sure thanks. If I can just, so one or two more and on different topics. I missed what you had said on the IT spend something about, Dennis it being tough in the first stage. I am sorry. I just didn't hear could you kind of give us an update there?

Dennis Kakures

What I indicated is that we in effect now have the Phase 1 of our IT initiative on the shelf and ready to launch in October at the end of our modular, the business season for modulars. And what I indicated was that that is by far the largest spend and the most involved development work of all the IT investment that we are making. So the good news is that the hardest part of that initiative, is in effect on the shelf now and we are ready to roll out that in October.

Scott Schneeberger - Oppenheimer and Company

I guess, Keith, I should ask you. Is that going to have some type of 3Q impact in the financial, that's worth noting?

Keith Pratt

Yeah, it will be more in the fourth quarter Scott. And as you know we have a lot going on in the ERP arena and IT infrastructure upgrades. I would say that this is all baked into the guidance that we laid out for the year. The ERP specifically, just to give you a feel for it, when we churn that on and start to amortize the capitalized cost that's somewhere around $0.50 million of incremental expense per quarter. So it's one example of one of the important elements of the increase in SG&A that we had planned for during the course of 2008.

Scott Schneeberger - Oppenheimer and Company

Okay, and then it sounds like tracking to [poem] thus far and no surprises going forward. Just that projects are going so long one or two more I want to throw in. You have two million shares still authorized, you did not do repurchases in the second quarter, but appeared to be fairly aggressive in the first. Just wanted to get a sense of what you are thinking there, what we may, should be expecting?

Keith Pratt

I think really, what we did speaks for itself. We were very active in the market at the end of 2007 and in the early part of 2008. We kind of characterize our approach here as been analysts of the stock the stock price and what we view to be fair value, and then we are opportunistic when we see an attractive purchase price and I think you'll see us continue to do that.

We did get our authorization renewed from the Board, so we have a full two million share repurchase authorization in place, and you'll also note that in May we refinanced our revolving credit lines and that allows for additional capacity both to grow the business and to take advantage of repurchase opportunities as we see them. So we feel very well positioned and will in our normal way we'll take advantage of market opportunities when they arise.

Scott Schneeberger - Oppenheimer and Company

Sure. Obviously you mentioned the cost basis for the repurchases were something in the 22 range and I would agree that that's a great price to get your shares. In the second quarter not doing any are we to infer that mid to high 20s means you're fully valued?

Dennis Kakures

We really don't comment on how we make those determinations.

Scott Schneeberger - Oppenheimer and Company

Okay. Thanks. And then finally on the, both new businesses just curious to hear a little bit about the new one but also on the storage containers, I guess more of a focus on that, how is that progressing? How rapidly is that ramping?

Dennis Kakures

Well, my outlook or should take to-date and I feel very good about where we're at. The outlook feels very good. We've received I believe a very nice impact from customers that have been contacting us historically about to re-rent this product, because we also -- they were renting modular buildings from there so. I think we benefited from that and we're able to serve those customers and we really just recently started a fuller marketing effort on the web and with a website and so forth so. I'm very excited about the potential to grow that business. And not just organically but also being able to be opportunistic in regional acquisitions going forward, should they present themselves.

For our environmental test equipment business. The beauty of that is access an up and coming test equipment environment, no pun on words here. But its one in which we've been able to build into the infrastructure, utilize the infrastructure in Dallas and be able to add kind of the personnel to support the additional products here today. But we're able to utilize existing systems procedures, some of the senior management. So, from a cost structure basis, it really is something we believe that's going to be serviced in the long run and it's going to take us time to get our new group of customers for us. It's going to take us time to get to know that group more fully. But we feel that it's very similar to our test equipment business in terms of how it operates and that we should be able to ramp that successfully overtime. And again, should there be acquisitions, opportunities we would certainly look at those very closely.

Scott Schneeberger - Oppenheimer and Company

Okay. Thanks so much and thanks for answering all my questions.

Operator

Thank you. (Operator Instructions) And our next question is from the line of Jamie Sullivan with RBC Capital Markets. Please go ahead.

Jamie Sullivan - RBC Capital Markets

Hi guys, good afternoon.

Dennis Kakures

Hi, Jamie.

Keith Pratt

Hi, Jamie.

Jamie Sullivan - RBC Capital Markets

So, a quick question on the residential, you said that's 4% of total?

Dennis Kakures

What I've said it's historically it's less than 4% and if you look at this quarter actually, its right around 3% of our total rental revenues for the quarter.

Jamie Sullivan - RBC Capital Markets

Okay, so I guess, and that sort of, that includes TRS?

Dennis Kakures

Yes, the total company rental revenues, its right around 3% in the second quarter.

Jamie Sullivan - RBC Capital Markets

Okay, alright. And just wondering on the residential return to things like there is a bit of lag there, with returns, and when we have seen weakness in the market, is that what typically happens?

Dennis Kakures

Well, what we use the dynamic with the residential drop. When the residential construction market started having its problems, the units we had on rent because they could sell homes they actually stayed on rent longer. So the dynamic was, the poorer the sales were, they needed the sale offices to stay in place longer, because they weren't able to move the homes. So, but finally once these projects started ending they are coming back and of course on the opportunity side, it's extremely limited. So what you saw as the delay in equipment coming back because homes were not moving. Once they do come back, there is not a large amount of volume of new opportunities in the first half of the year to support turning those assets back out.

Jamie Sullivan - RBC Capital Markets

Right. Okay and then I guess, in California is it the construction market weakness that is driving surplus inventory, which is then leading the price competition in education. Is that kind of the main dynamic that's going on in the market?

Dennis Kakures

I wouldn't say its surplus, it's certainly not surplus equipment and, because the equipment in the educational market, that equipment has been highly utilized for a long time. There was a delay in bond money, between bond, over a period of time and districts are ramping up, and…

Keith Pratt

And its different assets

Dennis Kakures

New different assets and they are getting utilized. So, the educational market assets are just, so happens when there is X amount at a given point in time, companies are going to make certain they'll try to get those utilized, but there is certainly know in my opinion no over supply for what the market needs are overall.

Jamie Sullivan - RBC Capital Markets

Okay, so that the commercial market is unrelated then?

Dennis Kakures

They're really independent markets and even within commercial we talked about residential, we talked about non-residential, only within non-residential construction there's both the complexes and the singlewide and then there's another roughly 20% of our business, 25%, that is a broad mix of other industry sectors, healthcare, general office space adjacent to existing facilities, industrial manufacturing, petrochemicals, they're all independent and they have their own little economies and shifts to them.

Jamie Sullivan - RBC Capital Markets

Okay. And just wanted to ask, no funding concerns on the education side from California tax revenues or budget gaps and some of that discussion that going on?

Dennis Kakures

One thing that everyone should be clear on that, budget stalemates in the State of California are more common than less common. So this is not unusual to us, and the executive branch and the legislative branch have arm wrestled for years over the things. We've never historically seen any impact to us negatively from that arm wrestling for people to get what they want, and I would expect the same this year. There's nothing that I've read or heard and through our very good lobbies Sacramento that we're seeing that's negative based upon either the budget shortfall or the fact that there is no budget in place today.

Jamie Sullivan - RBC Capital Markets

Okay, great. And then I guess just as we look into the third quarter should we see that business start to return to growth mode.

Dennis Kakures

When you say that business just to clarify?

Jamie Sullivan - RBC Capital Markets

Modular?

Dennis Kakures

Okay. Are you talking of the California market, are you are talking the division.

Jamie Sullivan - RBC Capital Markets

Well we saw as the rental operations declined 2%, just wondering if that turns back into growth as soon as this quarter?

Dennis Kakures

It will be a function of, we have of course the third quarter it's a big shipping quarter. And in the third quarter you get, you don't get a full months with a rental revenue like you were in the fourth quarter for which ships in the third.

So it's a lot of good news that's potentially is coming here from shipments not only in California, but also Florida and Texas as well as in the third quarter. And then as a function of you know the other dynamics the residential housing market how much is that does that deteriorate further how significant it does the commercial or should the non-residential construction market does that continue to be challenged and singlewide the good and larger complexes. We are going to get the benefit of those larger complex rentals coming into the fourth quarter and next year, they are multiyear.

So it's a number, plus the macro dynamics out there. But I think we feel pretty good about the overall modular business and the diversity that exists today. Texas and Florida are very strong and growing market for us. Like I said California will continue to do well overtime but it can certainly have quarters here and quarters there that are more challenged.

Jamie Sullivan - RBC Capital Markets

Sure and what's your sense so far this quarter on the construction markets in California. Has it kind of stabilized or any thoughts there would be helpful?

Dennis Kakures

Residential is very hard to get a read on the quarter-over-quarter reduction was fairly significant and it just depends on where that's going to bottom out, but again it's not a large percentage of our overall company revenues. And then on the non-residential construction side, we have got a lot of good news going on in the large complexes, but again it's more challenged on the singlewide side. So, I like the dynamics of the multiyear transactions, getting those in place, those are income churners overtime, and then the singlewide market will take care of itself over time. You're still building in California and you certainly are building in other markets that we are in. so…

Jamie Sullivan - RBC Capital Markets

Right, okay. And I guess, switching to TRS wondering at utilization at 70%, do you see that going much higher?

Dennis Kakures

That's very high.

Keith Pratt

Once you get in the upper sixties, upper sixties in fact is high, seventy is very high. But I think if you look at it over, the last 8 to 12 quarters you will see that periodically we hit a 70% or there about level and it tends to be for just a briefer period of time. It is certainly will be strived for, but I wouldn't bake into your assumptions as a long-term number.

Jamie Sullivan - RBC Capital Markets

Sure, Okay. Just curious on the environmental test equipment market. Can you give us a flavor for how big that market is, or how big it is relative to the existing TRS business, in terms of market opportunity?

Dennis Kakures

When we get our homework on the market, and again there is not a lot of great information out there, but we targeted it somewhere between $125 million and $200 million in rental revenues annually. And we also think it's a fairly flat to better churn. It's a market, the product there what we think that we can bring a lot of professionalism and efficiencies for doing that type of rental business. So, we think that we bring very strong skills into that market arena. And that we think we can do very well overtime. So, I would answer the question like that.

Jamie Sullivan - RBC Capital Markets

Okay, thanks. One last one, on SG&A, are you still expecting about 20% growth on that line?

Keith Pratt

We are pretty much on track. I would say we have been executing on the initiatives that we planed earlier in the year. Obviously, we have announced the portable storage and we have announced environmental equipment and our electronics division. That's all playing ice, the thing that will met out the final number we are a little bit latter on rolling out the ERP then we had at first plan at the beginning of the year. So, there is a slight benefit there, but there are also some parts of the new initiatives where we were if anything going to spend a little bit more in the second half of the year. So, I think we will still be in that zone that we forecast back in February.

Jamie Sullivan - RBC Capital Markets

Thanks a lot.

Dennis Kakures

Thank you.

Operator

Thank you. Gentlemen there are no further questions. I would like to turn the call back over to Mr. Kakures for the closing remarks.

Dennis Kakures

Well, I would like to thank everybody for joining us this afternoon for the call and we'll look forward to speaking with you again in early November on our Q3 calls. Thank you all very much and have a very nice evening.

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