Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Mobile Mini, Inc. (NASDAQ:MINI)

Q2 2008 Earnings Call Transcript

August 7, 2008 12:00 pm ET

Executives

Steve Bunger – Chairman, President, and CEO

Larry Trachtenberg EVP and CFO

Analysts

David Gold – Sidoti & Company

Scott Schneeberger – Oppenheimer & Co.

Ted Kundtz – Needham & Company

Jamie Sullivan – RBC Capital Markets

Brandt Sakakeeny – Deutsche Bank

Bob Franklin – Prudential Financial

Bardor John [ph] – Deutsche Bank

Christopher Hwerty [ph] – Oppenheimer & Co.

Philip Volpicelli – Goldman Sachs

David Manthey – Robert W. Baird & Co.

Jamie Sullivan – RBC Capital Markets

Operator

Good day everyone, and welcome to the Mobile Mini Incorporated second quarter 2008 conference call. At this time I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode. I will now turn the conference over to Mr. Steve Bunger. Please go ahead sir.

Steven Bunger

Thank you and good morning. I want to welcome everyone to Mobile Mini’s 2008 second quarter results conference call. I am Steve Bunger and with me is Larry Trachtenberg, our Executive Vice President and CFO. To start with Larry is going to read the disclaimer, outline the press release and give you his comments. Following that I will give you my comments and then we will open the call up for questions and answers. With that said I am going to turn the call over to Larry.

Larry Trachtenberg

Thanks Steve. We issued a press release this morning detailing our second quarter and six month ended June 30, 2008, operating results. This release is available on our website and can also be accessed through various web-based news services. Our Form 8-K containing the press release has been filed and is also now available. Before we get started I would like to read our legal disclaimer. This call may contain forward-looking statements particularly regarding earnings estimates and Mobile Mini’s merger with Mobile Storage Group, and related estimates of merger related and brands consolidation expenses and cost savings, which involve risks and uncertainties that could cause actual results to differ materially from those currently anticipated.

Risks and uncertainties that may affect future results include those that are described from time-to-time in the company’s SEC filings. These forward-looking statements represent the judgment of the company as of this date and Mobile Mini disclaims any intent or obligation to update forward-looking statements. Unless otherwise noted all results discussed on this call will be our non-GAAP financial results. Discussion of debt extinguishment expense which is excluded from our 2007 non-GAAP operating results and the merger related expenses that are excluded in calculating our 2008 non-GAAP operating results is included in our press release that we issued this morning.

In this conference call we will discuss certain non-GAAP financial measures such as EBITDA and free cash flow. Reconciliations of how we define and arrive at EBITDA and free cash flow are included in our Form 8-K. Mobile Mini today reported its second quarter financial results. Revenues for the second quarter increased by 3.6% to $81.1 million from $76.3 million last year. These revenues increased 3.5% to $72.8 million from $70.4 million last year.

EBITDA declined slightly to $32 million from last year’s EBITDA of $32.8 million. Net income for the quarter ended June 30, 2008, declined to $12.1 million or $0.35 per diluted share as compared with net income of $13.2 million or $0.36 per diluted share for the same quarter of last year. The company’s operating margin was 32.3% as compared with 35.3% during the same quarter of last year. Operating margins were impacted by continued weakness in our California, Arizona, and Florida branches related to the weakness in construction activity and the general economy in those states. That weakness was offset in part by continued strong growth in Europe.

As we pointed out in the past, this growth required considerable infrastructure build out. Our expense structure increased by over $500,000 per quarter between the second and third quarters of 2007 and the effects of those cost increases can be seen in our year-over-year comparisons. However, as we have stated in prior calls, margins in Europe hit their low point during the third quarter of 2007, and have been increasing since. Now that we have added the considerable operations of Mobile Storage in Europe, we would expect much stronger operating results in the U.K going forward. In addition our year-over-year comparisons were impacted by a 55% increase in the cost of fuel. These costs were offset in part by a fuel surcharge added in April.

For the six months ended June 30, 2008, revenues reached $159.6 million, EBITDA totalled $61.4 million and non-GAAP earnings per share were $0.65. During the six months ended June 30, 2008, we significantly cut back on our capital expenditures and generated free cash flow for the first time since we adopted our leasing model. We generated $11.2 million of free cash flow versus a cash requirement of $33.3 million during the same period of last year. That really shows you just – you know, it just held much of our Capex as discretionary Capex and how when growth slows down we can really change our business from a user of cash to a generator of free cash flow.

Our leased fleet capital expenditures, net of proceeds from sales of lease fleet units were $25.6 million, and only $10.8 million in the second quarter. Our PP&E Capex totaled $4.8 million. We generated $41.5 million of cash flow from operations. The company’s ratio of funded debt to EBITDA stood at 3.95-to-1 at June 30, 2008, as calculated in accordance with our credit agreement.

We have consistently maintained the strongest balance sheet in the industry, which has enabled us to take advantage of the Mobile Storage Group merger opportunity. Even after this merger our balance sheet remains strong as we continued to expand the portable storage industry. Today we also refined the 2008 earnings guidance first issued in December. Based on the actual growth in our business achieved during the first half of 2008, the macro trends in the economy that we are observing and the accelerated pace at which we are able to obtain the cost savings available from our merger with Mobile Storage we are fine tuning our bottom line guidance. We believe we will be able to achieve earnings per share of between of $1.50 and $1.55 this year. This earnings guidance is based on lease revenues of between $391 and $398 million and EBITDA between $176 and $179 million. As in prior years we expect to issue guidance, earnings and revenue guidance for 2009 in December. However, based up on the speed at which our integration with Mobile Storage is proceeding and the cost savings, Steve will be discussing in a few minutes, we are confident that we will obtain at least $25 million in cost synergies during the calendar year 2009, which is a bit earlier than we were thinking earlier this year.

I would now like to turn the call back over to Steve for his remarks.

Steve Bunger

Thank you Larry. The second quarter was a very hectic and busy quarter for the entire Mobile Mini team as a result of the Mobile Storage merger that closed at the very end of the quarter. Even with the slowdown in the nonresidential construction activity in the U.S. we were able to modestly grow rental and sales revenues. The other important accomplishment as Larry mentioned was our ability to continue to produce free cash flow. In the second quarter excluding Mobile Storage merger that closed on June 27, we had significantly reduced our net Capex from $32.7 million to $10.8 million compared to a second quarter of 2007. The lower Capex and the strong cash flow from operations resulted in $6.7 million of free cash flow for the quarter. And as Larry said for the first six months of 2008 instead of being a cash user we threw off $11.2 million of free cash flow.

As with the last few quarters our underperforming regions continue to be in Arizona, California, and Florida. All these markets have experienced tremendous growth over the past five plus years that have been affected by the construction and general economic slowdown. Since these are some of our larger markets the slowdown has affected our overall growth rate and company utilization. These markets and now a smaller percentage of our business now that the Mobile Storage merger is complete. On a positive note, it appears that most of these markets have leveled off and stopped contracting in most cases. In addition our other markets in the UK are holding their own or in many cases growing quite nicely.

From a pricing perspective, we continue to be encouraged by the pricing environment, which is evidenced by our 2% increase in rental yield over the prior year quarter. The pricing climate remains very positive. We also are not seeing price erosion in any of our markets that have been affected by the construction slowdown.

The overall increased leasing revenues come primarily from core rental customers and who are non-contractor and non-mass discount retailers. We are not competing in a zero-sum market place for the majority of our markets – of our customers. Most of our customers rent one container and are customers that have never used portable storage prior to hearing about our very differentiated product line. With our sales and marketing programs, we are expanding the size of the portable storage market, which has allowed us to grow past the economic downturn. We did experience lower operating and EBITDA margins but those were expected and primarily the result of the expansion into Europe via the Royal Wolf acquisition and additional costs associated with implementing our business model. Our results are also negatively impacted by the higher fuel costs almost everyone is experiencing.

Like any other new market entry transitioning the U.S. market to the new business models will negatively affect operating margins in the short run but will set the platform from much stronger rental revenue growth and margin expansion once the fixed costs are in place. As Larry said, our UK fixed costs were all in place by the end of the third quarter and we continue to see margin expansion quarter-over-quarter (inaudible).

I would now like to give you an update on the Mobile Storage Merger. As you might be aware, we are heavily into the merger integration phase. The good news is everything we continue to learn about Mobile Storage and the business combination further solidifies why we believe this transaction is so strategic and transforming. The $25 million of synergies we thought we could achieve by the end of 2009 are in fact very achievable and we will be achieving those synergies by the beginning of 2009 not the end of 2009. The hard cost synergies we have identified fall into three major categories, which are in order of magnitude, people synergies of $20 million, land synergies of $4 million, and advertising synergies of $1 million. We have now completed a detailed analysis of the 3 synergy categories property by property, person by person, branch by branch, advertising media by advertising media, and have a detailed plan for each synergy opportunity.

In the U.S. we've already integrated all the new branches, closed down the overlapping branches, closed down the Mobile Storage corporate office, hired the Mobile Storage employees necessary to our core business plan, and have converted all Mobile Storage customers and accounting to the Mobile Mini computer system. This was quite a feat that we got done basically within two weeks post-merger because of all the prior merger planning we did. We're also actively canceling property leases, buying our properties leases, are releasing all the properties we need to close to achieve the land synergies. The average of these synergies are not as significant and the yellow page [ph] portion of the synergy will take about 12 months to phase out. There are many other less material hard and soft cost synergy opportunities we are looking on which are not included in the $25 million of projected synergies, which we believe are very achievable. Our goal with the merger was not to combine – was not only to combine the two leading companies and take our cost to drive earnings but to also learn from both companies and hire the best of the best from all positions within the combined companies. I believe we accomplished both of those goals. We went through a very lengthy and time consuming process of evaluating Mobile Storage and even existing Mobile Mini employees at all branches and that all levels. As a result, we now have a deeper organization structure, we have a very strong team which is a mixture of Mobile Mini and former Mobile Storage employees and executives that allow us to take the company to the next level.

One of the things I'm most proud of is the fact that we're able to pick the best of the best from both organizations while treating everyone with dignity and respect but without causing cultural clashes between Mobile Mini and Mobile Storage employees. From a best practice perspective we have implemented many of the things we believe Mobile Storage did much better than us but kept the things that we believe allow us to grow in the long term which is primarily our aggressive sales and marketing culture.

In the UK, we're about 60 to 90 days behind the U.S. as it relates to the integration of the two companies. The main reason for the delay is the UK employment regulatory requirements. These requirements generally called TUPE are very time consuming processes related to redundant employees, new job requirements, job eliminations, branch shutdowns and much more. We believe we will complete with the TUPE and legal transfer process in the UK by the end of the month – end of this month. Our goal is to start the branch integration process at the beginning of September and complete the computer conversion at the end of September. As a result most of the UK payroll managed [ph] synergies will not be achieved until the end of September and into October.

As I mentioned earlier, I believe that this merger will be a positive transforming and strategic event for Mobile Mini. We've now looked under Mobile Storage's hood and are still convinced that the fundamental reasons for the merger are unchanged and even more strategic and compelling, especially considering the current uncertain economic condition. These reasons include we're combining the number one and the number two competitors in the industry. The number three competitor is very far behind. Our ability to achieve the synergies we thought are very significant synergies we're now able to offer our customers local delivery rates, localized service in 20 new markets in the UK – in 20 total markets in the U.S. and over 80 markets in the U.S., sorry 20 markets in the UK, 80 markets in the U.S.

In addition we have 100% coverage in the UK and our virtually every major market in the U.S., which will greatly benefit the national account customers. Also the ability to combine Mobile Storage's growth by acquisition expertise and Mobile Mini's ability to grow a branch with our differentiated and price right products and our sales and marketing expertise. The ability to leverage the Mobile Storage national account relationships and expertise, the opportunity to add significant critical mass to our UK platform, and also with the overlapping markets we will have excess number of containers that we can be transferring to nearby branches where we can better utilize them. This will have the effect of significantly reducing Capex requirements for the next couple of years. The critical mass, the cost takeouts, and the Capex rationalization will create a free cash flow business. We will use our free cash flow to reduce total debt and delever the balance sheet over time.

In addition Mobile Storage has low market share in many markets that Mobile Mini has very strong market share especially in the markets that are being affected by most of the recent non-residential slowdown in California, Arizona, and many markets in Texas. And also we're able to combine the best companies of both – the best employees of both companies to create a very strong organization with a strong balance sheet, excess cash flow and many opportunities for growth.

Before I turn the call over to the operator I would like to take this opportunity to publicly thank the entire Mobile Mini and Mobile Storage team for all the long hours, hard work, difficult decisions, strong integrity, and loyalty everyone has put into this transforming merger.

That concludes our prepared comments. I would now like to turn the call over to the conference operator for the Q&A session. Operator.

Question and Answer Session

Operator

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

David Gold – Sidoti & Company

Hi, good afternoon. A couple of questions for you, first can you give a little bit more color on the integration process and what is happening faster there then say you had anticipated earlier?

Steve Bunger

This is Steve. When we're doing the modeling it was – as we looked at it we were unclear how quickly we could integrate the branches because there was a lot of uncertainty, but now actually looked at it branch by branch, and identified branches, and we were also uncertain about the computer conversion, how quickly we can convert the two companies under one computer system, but we were able to get done that much quicker meaning that we could take that two branches combined really right after the merger and really take out the payroll costs and also make a plan to take out the land costs which are well underway.

David Gold – Sidoti & Company

On the computer side, what is the timing for having your systems rolled out of the Mobile Storage locations or vice versa?

Steve Bunger

We've actually got that done a 100% now and that is one of main difference, at least in the U.S. In the UK, the computer conversion is anticipated at the end of September.

David Gold – Sidoti & Company

Okay, and Steve did you say the $25 million in synergies would be evident by the beginning of the year or for the year?

Steve Bunger

They would be on a – for the year we would achieve those synergies and many of those synergies were already kind of run rating in right now.

David Gold – Sidoti & Company

Okay, I mean I – I guess I'm trying to get a sense for is that something that progressively gets better through '09, so in other words as we get onto 2010 you find more than $25 million or is it more a function of by the beginning of the year we will have far more synergies and you know, that is sort what we will see?

Steve Bunger

What we're saying is by the beginning of the year we will have found at least $25 million of the synergies.

David Gold – Sidoti & Company

Okay that helped me. So that you've mentioned a quarter ago the gas surcharges you're putting in place and just sort of curious if you guys might have handy what the contribution was for the top line for that during the quarter?

Larry Trachtenberg

The contribution was about $900,000 during the quarter, but we began a surcharge in the UK after the quarter.

David Gold – Sidoti & Company

What do we think that might add going forward?

Larry Trachtenberg

That will add, well, that added – was anticipated to add on the Mobile Mini portion about $30,000 a quarter – and I am sorry that's $30,000 a month, but Mobile Storage, I believe, already has a gas surcharge in the UK.

David Gold – Sidoti & Company

Got you.

Larry Trachtenberg

And we're still operating separately there?

David Gold – Sidoti & Company

And then one other question for you Larry on the yield increase is that a function of mix or are we trying to suppress recent price increases in some markets I guess?

Larry Trachtenberg

Well, the yield increase actually would have been higher except if you look at the mix much of the growth in the quarter came from the UK where the units tend to be smaller and pricing was a little bit lower. And that actually held the yield increase down. As we said in the press release we're attempting to increase the pricing.

David Gold – Sidoti & Company

Got you. Okay, thank you both.

Steve Bunger

Thank you.

Operator

Your next question comes from the line of Scott Schneeberger of Oppenheimer & Co.

Scott Schneeberger – Oppenheimer & Co.

Hi, guys, good afternoon. I guess first question it sounds like you have really rationalized the softer southeast and southwest areas. Could you give us an idea of what percent of the revenue mix that was before and will now be after?

Steve Bunger

(inaudible)

Larry Trachtenberg

I don't have a calculation, actually I will have to talk to you off-line because now we're talking – we actually are talking about the whole state of California.

Scott Schneeberger – Oppenheimer & Co.

Okay, all right. I will take that up with you later.

Steve Bunger

I can tell you it was a significant portion of the pre-merger Mobile Mini revenues in the U.S. and those where the smaller markets for the Mobile Storage, when we combine the businesses that will definitely became a much smaller percentage of the total.

Scott Schneeberger – Oppenheimer & Co.

I guess less than 50% –

Steve Bunger

Yes.

Scott Schneeberger – Oppenheimer & Co.

In California, Arizona, Florida.

Steve Bunger

Well, even right now it is less than 50%; I want to say about 30%.

Larry Trachtenberg

It is probably about 30%.

Steve Bunger

If I were to guess.

Scott Schneeberger – Oppenheimer & Co.

Okay, thanks. The branch count, you've given some pretty good color, is there anything left to be done, what I guess the way to ask this, what do you think the branch count will be in the U.S. and in the UK at the end of this year?

Steve Bunger

For the UK it will be about 20 branches and in the U.S. it will be about 80 branches.

Scott Schneeberger – Oppenheimer & Co.

Okay, and then shifting to units, I think was it 275,000 as of the close of June. So that includes everything of the two combined entities? Correct.

Steve Bunger

It is 275 in the lease fleet. And yes it does include both companies.

Scott Schneeberger – Oppenheimer & Co.

Okay. Yes, but you are only speaking of the lease fleet on that.

Steve Bunger

Yes.

Scott Schneeberger – Oppenheimer & Co.

Any number on additional?

Steve Bunger

It is about another 10,000 units that are considered the sales fleet.

Scott Schneeberger – Oppenheimer & Co.

And where do you guys anticipate ending the year there, if you can't answer that directly just kind of way to think about that?

Steve Bunger

The way to think about it is because of the merger there really won't be any requirements to add more fleet. We will build and take units out of our sales fleet and put into our rental fleet if we get increased demand. So I would imagine the total fleet won't increase significantly at all. We will be adding some offices here and there and things like that like we've always done but for the most part we will use the Capex we have already paid in the merger to supply our growth Capex going forward. And probably only we have to add that is we will be doing a lot of the (inaudible) and rebranding of the inventory which will use up some cash.

Larry Trachtenberg

And if opportunities come up to dispose of some non-core units we will take those so. It that would to happen the total number could come down a little bit.

Scott Schneeberger – Oppenheimer & Co.

Okay, thanks. Just to summarize that fact probably finish the year at about 275 and can give or take a little bit. If opportunities arise to sell you will take those opportunities. I guess Larry, what would be the decisions around those opportunities, I understand and correct me if I'm wrong, steel prices up mean that shipping companies are holding their containers longer creating supply and demand imbalance, maybe some pricing pressure in the used market for acquisition. You guys are obviously in a good position. I would think that makes the – you able to sell your used containers for a good rate but at the same time you're also strategically well positioned. So if you could just confirm that is a good way to think about it and then what your strategy is in that regard.

Steve Bunger

You know, I doubt we would be disposing containers in any kind of a wholesale volume but we do have some van trailers that really aren't what we consider core and we would consider – and a lot of those are idle and we would consider disposing of those plus we have some, we will take timber cabins in the UK that we're really replacing with steel cabins and so if the opportunity presents itself we would sell both of those product types.

Scott Schneeberger – Oppenheimer & Co.

Just what – is this finding the appropriate counter party and selling in bulk or?

Steve Bunger

It is some selling in bulk, some just setting up incentives for the sales people to move those products. But we're aggressively wanting to get rid of those products because they are noncore and they take up real space that costs money.

Scott Schneeberger – Oppenheimer & Co.

Okay, when we're talking about your total units available, what representation of the fleet are the timber cabins and the trailers?

Larry Trachtenberg

You know, it is hard to say because some of the van trailers are newer and are still of value to us because we have them on rent and a lot of them are idle. This probably I would say Steve, 3,000 to 5,000.

Steve Bunger

Yes.

Larry Trachtenberg

3,000 to 5,000 units would be my guess.

Scott Schneeberger – Oppenheimer & Co.

That is everything timber cabins and the old van trailers.

Larry Trachtenberg

That over the next year or two we want to get to rid off.

Scott Schneeberger – Oppenheimer & Co.

Okay. Thanks.

Steve Bunger

And that was anticipated when we did the merger, we knew that was going to be part of our strategy.

Scott Schneeberger – Oppenheimer & Co.

Okay.

Steve Bunger

And the other thing that we might be encountering is just because we did this merger we're still looking at other strategic acquisition opportunities that are probably more tuck in nature.

Scott Schneeberger – Oppenheimer & Co.

U.S. or abroad?

Steve Bunger

Primarily the U.S.

Scott Schneeberger – Oppenheimer & Co.

Anything pending immediately or just more –

Steve Bunger

There is nothing transforming, nothing significant, but we obviously – part of our growth strategy is to do a fleet of tuck acquisitions and we do have some of those in our pipeline.

Scott Schneeberger – Oppenheimer & Co.

Okay. Would you care to quantify the pipeline, size of revenue, the companies or –

Steve Bunger

No, we for competitive reasons we would rather not.

Scott Schneeberger – Oppenheimer & Co.

Okay, utilization, can we just get an update there of the thoughts going forward maybe some seasonality around that Larry, but just the views on where that should trend?

Larry Trachtenberg

That typically – we would expect that that will probably continue in the same range in the third quarter and probably trend up a little in the fourth quarter seasonally. Mobile Storage’s utilization rate was a little bit lower than ours and that is the – and those units came to the fleet at the end of the second quarter. So that would bring the overall company utilization rate down.

Scott Schneeberger – Oppenheimer & Co.

A couple of more, I am sorry. The UK infrastructure work that started three quarters ago. Could you just remind us what specifically you are doing there and just confirm what I infer from the statements today is that as of June 30th that was complete? Now you will just be benefiting from actions taken previously.

Steve Bunger

It is actually the end of the third quarter that they kind of normalize. And what those infrastructure costs are relates primarily to property costs. When we moved into those branches they had no properties, they were outsourcing everything and we had to go out and find – you know hire people and add a lot of properties. In the UK it took a long time to get into these properties and so that is kind of the run rate of those properties, some of the marketing costs and probably more significant – and just as significant as we had to build up our corporate staff to support that country. But obviously with the UK merger we won't have that same transitional process because all the properties costs and people costs are already in place. In fact we will be taking some costs out.

Scott Schneeberger – Oppenheimer & Co.

Okay, is there still little cost pressure year-over-year into the third quarter into the September quarter, but alleviating or basically decelerating and then fourth quarter you should be anniversaried and starting.

Larry Trachtenberg

Third quarter it should be anniversaried.

Scott Schneeberger – Oppenheimer & Co.

Okay, so in the third quarter anniversaried the beginning or end of third quarter I guess –

Larry Trachtenberg

Beginning.

Scott Schneeberger – Oppenheimer & Co.

Okay, we should – that should (inaudible) okay thanks. And then finally for 2009 I realize you are going to give the guidance in December as you traditionally do, you have in the past though I guess the last time we had a call you mentioned next year EPS guidance of $2.10, is that the best number to use right now, just any thoughts you can help us with for next year right here?

Larry Trachtenberg

Obviously in the last few months that economy has weakened a bit. The outlook for nonresidential construction is a bit uncertain at this point. So it is very difficult for us to come up with a number without – as we think later in the year we will be probably in a better position to say one way or another what the outlook for the economy is in '09. Our expectation was at the time that the economy would probably start strengthening later in 09.

Steve Bunger

And the other factor that we're still trying to determine is the synergy, is it $25 million or is it more?

Steve Bunger

So those are the two main components that were playing against each other, one is going in the wrong direction, one is going in the right direction since the last time we would have had the update. So I'm guessing just being wary of the macro environment probably a little bit of conservatism there and then just a wait and see attitude with regard to the cost synergies. Is it a fair way to think about it?

Steve Bunger

I think it is.

Scott Schneeberger – Oppenheimer & Co.

Okay, thanks. That is all from me. Thanks guys.

Steve Bunger

Thank you.

Operator

Your next question comes from the line of Ted Kundtz of Needham & Company.

Ted Kundtz – Needham & Company

Questions for you, do you guys have any pro forma kind of split of the revenues of the combined companies between the U. S. and the UK or U.S. and international?

Larry Trachtenberg

We haven't issued that but historically Mobile Storage’s revenues have been about, I believe about 35% from the UK. Ours have been about 8% or 9% in the UK.

Ted Kundtz – Needham & Company

Okay, great. Could you talk a little bit more about the construction outlook, what your guys are seeing, you feel things are getting any worse or you just mentioned kind of uncertain. What are the trends that you are seeing in that marketplace?

Steve Bunger

You know it is interesting. It feels like most of it is coming from the three states we mentioned which are Arizona, California, and Florida Kundtz. And when you look at the rest of the markets, I mean, there are spots like Vegas that is still weak but Vegas isn't a big market to us. But for the most part the other markets continue to grow, I mean, Texas has been a great market for us, the northwest has been a great market for us, even parts of the northeast have been good for us. We're not seeing any regional pullbacks except for what we saw in Florida and then when you look at Florida, you know there are certain parts of Florida that are still doing – you know, Jacksonville is doing well, Miami is not doing well. If you look at Southern California, you know Southern California probably has hit a plateau where we're not going back any further. Northern California we didn't have as much market share and so it is sort of – right now we're still uncertain to how that looks as we combine the two companies. If you look at Arizona I would say that Arizona probably you know is stabilized or still going back slightly.

Larry Trachtenberg

If you look at the outlook, reports on the outlook for nonresidential construction over the next year the reports we've seen are for slight negative – flat or slight negative growth and certainly the equipment rental companies which usually they would be more a leading indicator what will happen to us. Their growth has slowed in the last couple of quarters while we'd expect that we might have some of the same trends.

Ted Kundtz – Needham & Company

Okay.

Steve Bunger

The other thing that I am seeing with this merger is we are the number one player in the U.S. and Mobile Storage is the number two player. I am sure there's lot of competitiveness going back and forth between the two companies that won’t be there going forward as well.

Ted Kundtz – Needham & Company

Just going to my next question, what do you guys expect on the yield outlook. Does that positively influence that at all or is it probably more of a market situation. I just wanted to get your thoughts on future yield increases.

Steve Bunger

We're not publicly saying we're going to be aggressively raising rates but there are opportunities in certain markets to rationalize the rates. It will be market by market and we are implementing a price increase to many of our existing customers that we selected that are – have had the units for a long time and haven't had a price increase. That will translate into, you know, a fairly decent return.

Ted Kundtz – Needham & Company

When was that current now or is that being implemented now or?

Steve Bunger

It is being implemented as we speak. It will probably be out there in the next 45 days.

Ted Kundtz – Needham & Company

Okay.

Larry Trachtenberg

One thing that has certainly happened is the price of used containers has been increasing. It is increasing for the past few years but the used containers are in especially short supply right now and there's been a lot of upwards pricing pressure on them and we believe that that could cause upward pressure on rates.

Ted Kundtz – Needham & Company

Okay, great. And one last question, just kind of, could you discuss your Capex plans going forward. I know you're refurbishing a lot of these units and maybe you could address that and what would you plan to spend maybe in the balance of this year and I don’t know if you have any thoughts for '09 at all?

Steve Bunger

I think I'll do a part of it and I'll let Larry do a part of it. From a strategy perspective like on the rebranding, our plan is not to go out there and just rebrand everything. It is going to be more of a systematic process as the units come off around like past acquisitions we have done and if we need another unit we will rebrand that inventory. We're not going to rebrand ahead of supply. So it is just going to be customer driven primarily and that process probably won't be started in the UK until the fourth quarter. It started in the U.S. about right now because we're in the process of starting that in many of the branches. And the other thing we're probably doing is we will be repositioning containers between branches instead of buying branches that are nearby. We will be repositioning offices, mobile offices, security offices, and the whole theory is let us reposition our fleet to the right area so that we can kind of right size the fleet for the whole company which in turn will significantly reduce our need for Capex. As far as the dollar amount Larry do you have?

Larry Trachtenberg

You know we had said at the – you know, late last year – I am sorry earlier this year that our Capex would probably be about – our container Capex would probably be around $60 million and we're running kind of at around that rate or a little bit lower than that. No reason to think it is going to be appreciably different from that and that will include the cost of refurbishing and rebranding Mobile Storage units.

Ted Kundtz – Needham & Company

Okay, any thoughts for next year?

Steve Bunger

It will depend on the level of growth we have and where the growth is but we don't expect it to be to get back to the levels of 2006, 2007.

Ted Kundtz – Needham & Company

Okay, you mean there's a good chance it goes down from those level.

Steve Bunger

It is doubtful that it will go down from this level because there will be – we expect that there will additional demand for units in our fleet and that we will be refurbishing and rebranding units.

Ted Kundtz – Needham & Company

Okay, terrific. Thanks very much.

Operator

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

Jamie Sullivan – RBC Capital Markets

Hi, thanks. How much leasing and sales revenue did Mobile Storage do in 2Q, do you have those?

Steve Bunger

In the second quarter do we have that. If we have that I 'm not sure it is available.

Larry Trachtenberg

Not available here right now.

Jamie Sullivan – RBC Capital Markets

Okay, and you talked about some of the redistribution of the fleet, is that underway, should that happen in the third quarter or throughout the year?

Steve Bunger

It is underway and it will happen through the rest of the year.

Jamie Sullivan – RBC Capital Markets

And you talked a little bit about utilization, did some of the merger work or the merger the fact that was happening impact utilization in 2Q?

Steve Bunger

You know, it is hard to say it is not, you mean, I wish it wasn't but we were – part of the integration planning is we were doing lots of pulling – I mean we did a whole process of reinterviewing all of our branch managers, reinterviewing a lot of our different positions in the company and also a lot of what we called field due diligence where we send out our employees to look at containers, you know right after the merger closed. And I'm sure that had some effects but I don't want to blame that on anything.

Larry Trachtenberg

Likewise at Mobile Storage as opposed to affecting our utilization rate but just I'm sure the announcement and everything that was happening at Mobile Storage had some effect on the level of productivity.

Jamie Sullivan – RBC Capital Markets

It probably had more. (inaudible)

Larry Trachtenberg

Yes, yes.

Jamie Sullivan – RBC Capital Markets

So you are expecting it to be in the 75, 76 range for the rest of the year?

Steve Bunger

No, it should get stronger because we're coming into our third and fourth quarters when we start doing a lot of our seasonal business and Mobile Storage does a lot of seasonal – actually there is more seasonal business than we do through the national account department. So that yield by definition should go up.

Jamie Sullivan – RBC Capital Markets

Thanks. And on the synergy side you talked about the hard synergies, can you talk about some of the other synergy opportunities that are out there right now that you are thinking about?

Steve Bunger

You know it is things like some of the soft things are is you know it bringing up certain things to the same company averages of both companies like as example late charges. We know we, Mobile Storage, doesn't charge a lot of

late charges, we charge a little bit more and just some of the things like that that if we can best practice some of those ideas, I don’t know if I am having the specifics for some of them. We could actually realize some different revenue gains.

Jamie Sullivan – RBC Capital Markets

Okay, so some revenue synergy opportunities.

Steve Bunger

And some of the other cost synergies are – those things that they did good at purchasing better than we did, operating things that we're looking at and saying we should negotiate some of these contracts, and so we're looking at the P&L line by line compared to (inaudible) where can lower costs, to take the best the best of both companies.

Jamie Sullivan – RBC Capital Markets

Okay, then in Europe, just wondering whether with the Mini what was the organic growth in Europe or UK in the quarter?

Steve Bunger

We for competitive reasons we're not issuing organic growth for specific markets at this time.

Jamie Sullivan – RBC Capital Markets

But is it fair to say that the trends in 1Q continued into 2Q.

Steve Bunger

Yes.

Jamie Sullivan – RBC Capital Markets

Okay, all right, and lastly on the fleet I know you said it is at 275 and you may take some units out of the sales inventory and put it into the lease fleets. So we should expect the lease fleets to tick up throughout the year, correct?

Steve Bunger

Yes.

Jamie Sullivan – RBC Capital Markets

That's it from me, thanks.

Operator

Your next question comes from the line of Brandt Sakakeeny of Deutsche Bank.

Brandt Sakakeeny – Deutsche Bank

Thanks, actually I think most of my questions have been answered. I just wanted to maybe expand a little bit on the revenue synergy and just touch on the national accounts business, any interesting opportunities there as you leverage MSG historical approach there into your business?

Steve Bunger

It is still kind of early to tell. You know for competitive reasons I don't want to get to much into it but obviously with our 80 branches in the U.S. and 20 branches in the UK, especially in the U.S. you know, for companies that need national coverage I think we'll be better positioned than anybody if they need storage containers. I think the third largest competitor before this was with about 30,000 units in their fleet. So we feel like we're in a good position, I mean, we're not going to take advantage of the situation but we definitely want to look for opportunities to improve profitability while we can and where it makes sense.

Brandt Sakakeeny – Deutsche Bank

Okay, and I guess Larry, I think you said you expected $19 to $20 million in merger charges and I think you've taken 11 so far, will the remaining whatever 8 or 9 be done by the end of the year or do you think merger charges will continue in '09?

Larry Trachtenberg

Most – the vast majority will be done by the end of the year but there will be some that continues into '09.

Brandt Sakakeeny – Deutsche Bank

Okay, great. I think that is all I have. Thank you.

Operator

Your next question comes from the line of Bob Franklin of Prudential Financial.

Bob Franklin – Prudential Financial

Hi, when you first announced the acquisition I think you gave a pro forma leverage number of 3.9 times, is that right and is that still about the number that we should be looking forward?

Steve Bunger

Yes, it is.

Bob Franklin – Prudential Financial

Okay, and you feel like that is the right level going forward or do you want to get it down below that?

Larry Trachtenberg

We like to get down below that. I mean we're comfortable at this level of leverage but if you look where we have run typically it has been between 3 to 1 and 4 to 1 and when we've been up this high we have delevered over time.

Bob Franklin – Prudential Financial

Okay, so must be thinking of a 3 to 1 over time maybe.

Larry Trachtenberg

I am sorry, what was the question.

Bob Franklin – Prudential Financial

I mean, is the goal to be closer to 3 than to 4.

Larry Trachtenberg

You know the goal would probably be to be closer to 3 unless there were opportunities that came up to grow the business I mean like the MSG opportunity where – we preferred to be less levered so we can take advantage of growth opportunities when they come up.

Steve Bunger

And as an example we're fairly risk averse in the balance sheet and when we're looking at the Mobile Storage merger, I am sure they would have liked to take more equity. So we wanted to limit the amount of debt we would get post-merger.

Bob Franklin – Prudential Financial

Okay, and question about the UK operations, I am under the impression that the economy is weakening over there, do you expect that to affect you at some point?

Larry Trachtenberg

You know may at some point if it happens but we're not seeing any signs of it happening at this point. I know there are certain countries in Europe where the economy is weakening. There's some expectation it may happen in the UK, I think the housing market may be weakening there but we're not seeing any effect in the markets that we serve.

Bob Franklin – Prudential Financial

And in this country one thing has got weaker in Florida and Arizona and California. Did your results lag that or are you concurrent?

Steve Bunger

We were concurrent there.

Bob Franklin – Prudential Financial

Okay. Great thank you.

Operator

Your next question comes from the line of Bardor John [ph] of Deutsche Bank.

Bardor John – Deutsche Bank

Hi, just a couple of quick questions for you guys, in terms of the free cash flow do you expect to continue to grow that free cash flow duration in the back half as it seems like you're not going to be spending as much on the fleet; and secondly your full year guidance, how much of the synergies are you actually baking into this in the back half of the year given that you already started taking some actions in terms of consolidating facilities. So will we see some of that benefit actually benefited reflected in the back half of the year.

Steve Bunger

About half of them – about half of the $25 million will be achieved in 2008 and then it'll be kind of – it is mainly a function of time and then it'll run rate up for the whole rest of 2009.

Larry Trachtenberg

And by half Steve means, you know, we have half a year so he means kind of like half of half.

Bardor John – Deutsche Bank

Okay, and in terms of free cash flow for the back half?

Larry Trachtenberg

We expect to continue – you know to achieve free cash flow. There will be some merger related expenses in the second half of the year. So we have to just see just how it calculates out but we're continuing to run cash flow positive.

Bardor John – Deutsche Bank

Okay, should we take that reduction would mean just being just down the revolver?

Larry Trachtenberg

Yes.

Bardor John – Deutsche Bank

Thank you.

Operator

Your next question comes from the line of Christopher Hwerty [ph] of Oppenheimer.

Christopher Hwerty – Oppenheimer & Co.

Good afternoon Steve and Larry. Just looking you talk a bunch about the construction market but you know on the retail market or consumer market is also about 36% of your business, have you seen any slowdown in that and you know when would you – when do the orders come in for that high season or the holiday season?

Steve Bunger

You know when we say it is 36% of our business that includes the mass discount retailers but it is also – that is only 5% of our mass miscount retailers. The vast majority of those are strict shopping centers like a flower shop, you know a hotel or restaurant, who are renting this one container and it is not seasonal. It is more permanent. And what we find in most economies even in the slow economy is that that piece of the business typically does not contract and usually actually grows because that is the area where we increase market awareness where it'll be a business in the shopping center that says, "Hey, my business is doing well the economy is doing bad, I am scared to take on more office space and if they hear about the price that they can rent a container for $100 a month they will do that as a temporary gap and it is being permanent solution for them. So I just wanted to clarify that piece. And as far as the seasonal, we've actually starting the process of actually delivering some of our seasonal business. We're in the process of getting what we though expressions of interest on our seasonal and based on what we're running right now we don't anticipate any surprises.

Christopher Hwerty – Oppenheimer & Co.

And just lastly, if you look at sort of the combination, assuming what I would guess you call the safety inventory or the excess that you have to maintain that if someone wants it, you know, what could that be cut back by given the merger and now with sort of a combined company?

Steve Bunger

Well, I mean, we think we could run at an average utilization of 85% to 87% in the long term. So our plan really isn’t to sell that inventory because our plan is to hold that inventory since there is not a lot of holding cost. We're going to get rid of the non core pieces because there's a holding cost associated with that but the other inventory we are just going to – you know, over the next year or 18 months we won’t be needing that inventory anyway, repositioned to the right markets.

Christopher Hwerty – Oppenheimer & Co.

And that is the sort of way I was looking at it, how long could you basically keep Capex at a minimum before you have to start to grow it again?

Steve Bunger

It depends on the market, it is different. It is probably less in the UK and 18 to 24 months in the U.S. based on current growth rates.

Christopher Hwerty – Oppenheimer & Co.

All right. Thank you.

Operator

Your next question comes from the line of Art Weiss of Group G Capital. Mr. Weiss, your line is now open. The question has been withdrawn.

Your next question comes from the line of Philip Volpicelli of Goldman Sachs.

Philip Volpicelli – Goldman Sachs

(inaudible) I know we're approaching an hour here, but most of my questions have been answered, just one quick follow up on the breakout of the I guess end market, I know it was measured a little bit differently between the two companies, pro forma between like construction and then consumer services and maybe the five to six main ones, do you have that breakout?

Steve Bunger

We haven't gone through the process yet. So I would be absolutely guessing if I told you something right now.

Philip Volpicelli – Goldman Sachs

Okay, and just general trends now we see on the construction side has been talked about, the retail just mentioned, then any other larger ones as far as trends in those end markets?

Steve Bunger

We are not seeing any major trends. I think of hospitals, governments, homeowners, and homeowners is motor remodeling is what that is for us. I am not really seeing anything significant happen right now.

Philip Volpicelli – Goldman Sachs

Okay, great. Good luck, thanks.

Operator

Your next question comes from the line of David Manthey of Robert W. Baird & Co.

David Manthey – Robert W. Baird & Co.

Hi guys. I apologize for the noise here. I was wondering if you could talk with us about EPS accretion that you would attribute to MSG relative to the core business. I am trying to square the old guidance to the new guidance. If you are talking about EPS accretion from MSG in the second half and then maybe impact the synergies, just where you might be and how you are thinking about it?

Steve Bunger

It is difficult to separate out accretion from MSG because we really run the two businesses as one; they're completely combined. What we did say is there's probably about you know, $6 million of synergies in the second half of the year from the acquisition. So I suppose you can look at that as some accretion although if you look at MSG's operating results from say the first quarter they are pretty much EPS neutral at standalone.

David Manthey – Robert W. Baird & Co.

Okay, and then to that comment, I think you said that in the second half you anticipated that MSG would be slightly accretive, were you at that point anticipating some synergies or were you thinking just operationally synergy accretive on an additive basis?

Steve Bunger

We didn't expect them to be anywhere near that accretive and we expected that frankly, we expected that revenues would be – we didn't expect the synergies to be anywhere to be quite that high. And we expected revenues to be a little bit higher. So it is kind of an offset.

David Manthey – Robert W. Baird & Co.

Okay, thank you.

Operator

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

Jamie Sullivan – RBC Capital Markets

Follow up on the UK commentary on the strength there, just wondering, do you think it is because you are in geographies within the UK that aren’t experiencing any weakness or it is difference in that market all together, thanks?

Steve Bunger

Well, it is going to be hard to you know, out of what is going on is prior to the merger we were the number 3 player. So we did not have the market share that other people had. So, I think part of it is the fact that we are small and we will continue to go through that slowdown. When we combine the two businesses I don’t anticipate the same kind of growth rate combined. So, the other piece of the puzzle is our business model in the UK is different than many of our competitors in the fact that we have really put an effort to increasing market awareness like we do in the US. We have put instead of like having sales people that are basically paid salary and take in orders, we put in sales people that are commission-based and make 60% to 70% of their compensation on commission which is unusual in Europe. What it does is we pay the sales people well, but they really have to perform to get paid. So, it is a combination of all those pieces. The general economy is slowing down, but we continue to see opportunities because of our business model.

Jamie Sullivan – RBC Capital Markets

Maybe you can comment on the overall market, what you see the opportunity or the penetration rate there today versus the US?

Steve Bunger

You know, we are not giving out exact individual country guidance, so it is hard to comment on that. You know, we were growing at 30% or so and coming into this it is not a whole lot different. I know if you look at the Mobile Storage piece they are up slightly in the UK from the year ago. I am not sure if that helps you at all.

Jamie Sullivan – RBC Capital Markets

Okay, thanks.

Operator

There are no further questions. I will now turn the conference back to management.

Steve Bunger

I want to thank everyone for participating in the conference call and wish everyone a great day. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Mobile Mini, Inc. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts