McGrath RentCorp (MGRC) Q4 2011 Earnings Report, Transcript and Summary

Welcome to the McGrath RentCorp fourth quarter 2011 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] This conference is being recorded today Wednesday February 29, 2012. Now, I would like to turn the conference over to Geoffrey Buscher at SBG Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, I’m the Investor Relations Advisor to McGrath RentCorp, and will be acting as moderator of the conference call today. On the call 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 7 days following the call by dialing 1-800-406-7325 for domestic callers, and 1-303-590-3030 for international callers. The pass code for the call replay is 4503262. This call is also being broadcast live via the Internet and will be available for replay. We encourage you to visit the Investor Relations section of the company's website at mgrc.com. A press release was sent out today at approximately 4:05 pm Eastern Time or 1:05 pm Pacific Time. If you did not receive a copy, but would like one, it is available online in the Investor Relations section of our website, or you may call 1-206-652-9704 and one will be sent to you. Before getting started, let me remind everyone that the matters we will be discussing today that are not truly historical are forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, including statements regarding McGrath RentCorp's expectations, 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.

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 2011 Form 10-K. The company also announced a 2% increase of the cash dividend to $0.235 per share for the first quarter of 2012 representing on an annualized basis approximately a 2.9% yield on the February 28, 2012 closing stock price. For the fourth quarter 2011, total revenues increased 7% to $85.2 million from $79.9 million for the same period in 2010. Net income increased 4% to $13.2 million from $12.7 million and earnings per diluted share increased by 2% to $0.53 from $0.52. Reviewing the fourth quarter results for the company’s Mobile Modular division compared to the fourth quarter of 2010, total revenues decreased $1.9 million or 6% to $30.2 million due to lower sales and rental revenues partly offset by higher rental related services revenues. Gross profit on rents decreased $0.6 million or 5% to $12.1 million. Rental margins decreased to 60% from 61% primarily due to an increase in other direct costs as a percentage of rents to 23% from 22%. Selling and administrative expenses increased 15% to $8.1 million primarily as a result of increased investment in our portable storage initiative. Lower gross profit on rents, rental related services and sales together with increased selling and administrative expenses resulted in a decrease in operating income of $2.6 million or 30% to $6.1 million. Finally, average modular rental equipment for the quarter was $513 million, an increase of $17 million. Average utilization for the fourth quarter decreased from 67.4% to 67.1%. Turning next to fourth quarter results for the company’s TRS-RenTelco division, compared to the fourth quarter of 2010. Total revenues increased $3.1 million or 10% to $33.5 million due to higher rental, rental related services and sales revenues. Gross profit on rents increased $2.8 million or 28% to $12.5 million. Rental revenues increased $2.9 million or 13% and rental margins increased to 49% from 43% as depreciation as a percentage of rents decreased to 37% from 42%. Selling and administrative expenses increased $1.3 million or 23% to $7 million primarily due to increased salary and benefits costs. As a result, operating income increased $1.3 million or 18% to $8.6 million. Finally, average electronics rental equipment at original cost for the quarter was $265 million, an increase of $14 million. Average utilization for the fourth quarter increased to 67.7% from 66.2%. Turning next to fourth quarter results for the company’s Adler Tanks division, compared to the fourth quarter of 2010. Total revenues increased $6.6 million or 45% to $21.1 million, primarily due to higher rental and rental related services revenues. Gross profit on rents increased $4.8 million or 56% to $13.4 million. Rental revenues increased $5.5 million or 46% and rental margins increased to 78% from 73%. As other direct costs as a percentage of rents decreased to 8% from 11%. Selling and administrative expenses increased $1.6 million or 46% to $5 million. Primarily due to higher personnel and benefits costs and bad debt expenses as a result operating income increased $3.7 million or 63% to $9.6 million. Finally, average rental equipment for the quarter was $184 million, an increase of $61 million. Average utilization for the fourth quarter increased to 86.8% from 81.8%. On a consolidated basis interest expense for the fourth quarter 2011 increased $0.6 million to $2.1 million from the same period in 2010 as a result of the company’s higher average interest rates and higher average debt levels. The fourth quarter provision for income taxes was based on an effective tax rate of 37.7% compared to 37.1% in the fourth quarter 2010. Next I would like to review our 2011 cash flows, for the 12 months ended December 31, 2011 highlights in our cash flows included net cash provided by operating activities was $129.3 million, an increase of $28.7 million or 28% compared to 2010. The increase was primarily attributable to higher income from operations, increased deferred taxes and other balance sheet changes. We invested $155 million for rental equipment purchases compared to $122.7 million for the same period in 2010, partly offset by $28.5 million in proceeds from used rental equipment sales. Property, plant and equipment purchases increased $5.1 million to $17.2 million in 2011. Net borrowings increased $30.9 million from $265.6 million at the end of 2010 to $296.5 million at the end of 2011. Dividend payments to shareholders were $22.3 million. With total debt at quarter end of $296.5 million the company has capacity to borrow an additional $158.5 million under its lines of credit and the ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.84 to 1. For 2011 fourth quarter adjusted EBITDA increased $3.3 million or 8% to $42.5 million compared to the same period in 2010. With consolidated adjusted EBITDA margin at 50% compared to 49% in 2010. Our definition of adjusted EBITDA and a reconciliation of adjusted EBTIDA to net income are included in our press release for the quarter. Turning next to 2012 earnings guidance, we expect 2012 full year earnings per share to be in a range of $2.02 to $2.12 per diluted share. In 2012, we expect approximately 8% to 10% growth in rental operations revenues over 2011 and sales revenues comparable to 2011. We expect strongest revenue growth in Adler Tanks however a significant level of uncertainty remains in the California modular rental market. Rental equipment depreciation expense is expected to increase to $65 million to $66 million driven by rental fleet growth. Selling and administrative costs are expected to increase to approximately $84 million to $86 million to support business growth and continued investment in Adler Tanks and our portable storage initiative. Full-year interest expense is forecasted to be approximately $9 million. We expect the 2012 effective tax rate to be 39.2% and the diluted share count to increase to approximately 25.3 million to 25.7 million shares. Now I would like to turn the call over to Dennis.

Thank you, Keith. Let's go right to our results for our modular rental business. Mobile Modular's rental revenues for the quarter decreased by $0.5 million, or 2%, from a year ago to $20.3 million and were up approximately 1% from the third quarter of 2011. In our markets outside of California rental revenues grew by 15% compared to the fourth quarter of 2010 however, they declined by 12% within the state. California continues to be plagued by fiscal and unemployment rate challenges. Income from operations for the quarter decreased by $2.6 million or 30%, to $6.1 million from a year ago. However, modular rental operations gross profit declined only 7% more closely in line with the reduction in rental revenue. The higher percentage decrease in income from operations was due primarily the higher SG&A expenses associated with the continued expansion of our portable storage rental business and divisional employee costs as well as lower gross profit on equipment sales. Income from operations was flat compared to the third quarter of 2011. Modular utilization at the end of the fourth quarter was up slightly to 57.3% from 67.2% at end of the fourth quarter of 2010 and 67% at the end of the third quarter 2011. Yield on equipment on rent decreased slightly to 1.96% in the fourth quarter from 1.98% during the third quarter of 2011. Division-wide modular first month rental booking levels for 2011 were up slightly at 4% over 2010. However booking results varied significantly inside and outside of the California market. In California, first months rental booking levels for 2011 were down approximately 13% while outside of California they were up 25% from a year ago. A great deal of uncertainty remains in the California modular market due to the continuing headwinds of state budget challenges, school district austerity measures, high unemployment and lower levels of commerce. We expect to terminate [ph] a very price-competitive environment in the modular markets in which we operate until utilization levels began to rise across the industry. Please keep in mind that our modular rental business returns to growth it will require limited new capital investment, increased rental revenues and we will expect to see a disproportionate share of this revenue convert to the pretax line. Now let me turn our attention to TRS-RenTelco and their results. TRS-RenTelco’s rental revenues for the fourth quarter increased by $2.9 million or $13%, to $25.3 million from a year ago. We experienced a healthy pipeline of order opportunities during the fourth quarter other than the customary seasonal dip in December. In fact it was our highest ever fourth quarter booking level. We are seeing favorable demand both domestically and internationally across a number of end markets with semiconductors, and communications and products and networks. We saw our yield on equipment on rent increased from 4.51% in fourth quarter 2010 to 4.71% during the fourth quarter of 2011. This is due primarily to a greater mix of communications equipment and to a lesser extent market pricing. Although rental revenues increased 13% income from operations increased 18% to $8.6 million. This was the most profitable quarter in TRS-RenTelco’s history. In addition of higher rental revenues, our electronic business also benefited from lower depreciation and laboratory costs as a percentage of rental revenues. As well as slightly higher gross profit on equipment sales from a year ago. Depreciation and laboratory cost as a percentage of rental revenue declined to 37.4% and 13.3% respectively from a year ago. Gross profit on used equipment sales rose by $0.1 million. The used equipment sale market comprised of end user and broker sales continues to be very healthy. We are continuing to benefit from our disciplined approach to equipment purchases and inventory management conservative depreciable equipment laws and more fully leveraging in our existing base of employees and infrastructure. Finally, ending fourth quarter utilization increased to 67.1% from 64.3% in 2010 and was up compared to ending third quarter 2011 utilization of 66.3%. The end of year original cost of rental assets increased to $258 million from $250 million a year ago. The approximate $8 million increase in rental assets was made up primarily of communications test equipment assets that have shortened depreciable lives but higher rental rate in general purpose test equipment. This dynamic is reflected in our yield on equipment on rent increase mentioned earlier. Now let’s turn our attention Adler Tank rentals, our tank and box rental division rental revenues increased 46% to $17.2 million for the quarter from $11.7 million a year ago. This strong increase in rental revenues was directly related to higher business activity levels and continued expansion of Adler’s rental equipment inventory. We are serving a wide variety of market segments including in industrial plant, petrochemical, pipeline, oil and gas, waste management, environmental field service and heavy construction. Income from operations for the quarter increased 63% from the same period in 2010 to $9.6 million as the business further leverage existing employee and facility infrastructure and also benefited from a space of longer-term rental transaction. Business activity levels in bookings continued favorably through the fourth quarter of 2011. Period-end utilization for the fourth quarter 2011 decreased to 79.8% from 84.9% a year ago. The decline in period end utilization reflects the completion of various projects some pullback in activity in the less liquids rich shale plays as well as the impact of weather related seasonality in the Midwest and East Coast markets. Now I will take a moment and update everyone on organic final initiative. Affordable storage business continues to make good progress during the quarter as it did for all of 2011. Rental revenues grew by 32% sequentially over the third quarter 2011 and for the year more than double for 2010. We are working hard to expanding our affordable storage business in the California, Texas and Florida markets and we will continue to explore smaller fleet acquisition opportunities to accelerate our growth. We also continue to add sales professionals and operation staff in growing the business. Looking forward we are excited about the momentum and opportunities for growth in the affordable storage industry. TRS Environmental rental revenue results for the fourth quarter were relatively flat sequentially from the fourth quarter, however for the year, were up 58% compared to 2010. We also saw favorable increases in both the number of order opportunities and new customers year-over-year. We are working hard to broaden our market share and fully leverage our SG&A infrastructure cost in order to make TRS-Environmental a profitable and meaningful contributor to our rental platform. Our mid-Atlantic modular region, continued to make good progress during the quarter as it did for all of 2011. Rental revenues grew by 5% sequentially over the third quarter of 2011 and for the year it grew by 27% over 2010. Although, commercial and modular opportunities remain highly competitive in all of our modular markets we are making good progress in the educational sector with our innovative classroom products designed specifically for the mid-Atlantic markets. Our outlook for growing the base of rental revenues and profitability in the mid-Atlantic region is positive. Although these new initiatives are all relatively small today compared to our legacy rental businesses and Adler Tank Rentals, collectively, between affordable storage, environmental test equipment and mid-Atlantic modulars initiatives, they are contributing on an annualized basis approximately $15 million in rental revenues. It should be emphasized that these results have been achieved primarily in a very challenging macroeconomic environment. During 2011, we had a net addition of $101 million in original costs of rental assets. In fact McGrath RentCorp reached a key milestone in January 2012 in reaching $1 billion in original costs of rental equipment under management. We plan to continue to invest capital for rental equipment purchases and in SG&A to support accelerated growth of these new rental business and Adler Tank Rentals in particular as well as for our legacy electronic business and for specific modular regional markets. The faster we can ramp the rental revenues of these initiatives and our larger rental division, the sooner we can absorb and further leverage is higher SG&A expense level to produce greater profitability. Although we saw SG&A expenses as a percentage of rental revenues increased slightly in 2011 to approximately 33.3% we believe we are now in position to maintain or improve upon this team metric without negatively impacting our growth initiatives, pursuing new opportunities or launching mission critical IT upgrades. Now for some closing remarks, our results for 2011 over 2010 reflect very favorable market conditions and good momentum in our electronic test equipment in tank rental businesses. For our module rental division outside of California we experienced an increase in both rental booking levels and rental revenues for the prior year. However, California modular rental market continues to face significant challenges from state budget deficits and high regional unemployment levels. It’s important to note that our California K-12 public school modular classroom business is an important income contributor to our overall company results. However, as with the fourth quarter of 2011 it only represented 8% of our total company rental revenues. Our 2011 fourth quarter and full year rental revenue were $53 million and $235 million respectively where our highest quarterly and annual results in the company’s history. This was also the most profitable year for the company with EPS reaching $2 a 33% increase over 2010. These strong results in 2011 were driven chiefly by higher rental revenues primarily from our tank and electronics rental businesses. We also benefited from higher profit on sales, especially from Enviroplex, a larger mix of fully depreciated rental assets in our test for the rental pool as well as our continued purchasing and greater return disciplines in our electronics business and increased leverage of our existing base of employees and other infrastructure. In achieving these results we were able to overcome the continuing headwinds of our California modular business as well as the central affordable storage SG&A investments to support expansion and are pushed to critical mass in the markets in which we operate. In examining our initial 2012 guidance range it reflects the small increase in EPS over 2011. Let me share with you some of the considerations that went into this annual earnings outlook. First, the California modular environment is still unsettled. We have continued to see erosion in our modular building rental base in California over the past 4 years although we have seen a higher level of offset from our regional modular locations outside of California over the past year. Second, both our electronics and tank rental business has had very strong and highly profitable years in 2011. We are focused on building favorably upon this success in 2012 assuming healthy market trends continue and we execute. Being just 2 months into the New Year with the broad platform of rental businesses and geographies that we operate in today. There are many moving parts to earnings projection modeling that are not certain. As it is our practice we will provide updated full year EPS earnings guidance on future quarterly conference calls throughout 2012. We believe that McGrath RentCorp’s 32% increase in EPS for 2011 over 2010 validates the strategy and prudency of a platform of diverse final product and geographies. And now Keith and I welcome your questions.

[Operator Instructions] And our first question is from the line of David Gold with Sidoti & Co.

One thing I was hoping that you could hit on for 2012 forecast is thinking on CapEx presumably it would be focused on Adler but just you know thoughts there how much you might allocate and that’s right [ph] pretty focused on adding capacity for Adler.

Yes, looking at CapEx just to give you the perspective we spent $155 million on new equipment in 2011 and that was up from $123 million the year before. So I would characterize 2011 as a heavy investment year and Adler was a very much a priority in terms of new CapEx and growing the equipment pool also with the good strength in the economics business we both added to the equipment pool and also turned over the equipment that we owned. So that was an important area as well and then some of the other organic growth initiatives that we’ve refrenced so many times such as affordable storage continue to an important areas of investment. As we look at 2012 I think you will see more of the same I think Adler continues to be a top priority for new capital and in terms of the amount of capital for the year we are not locked into a specific number we can throttle it as we go through the year but I would say this point of the year I would look at last year and the year before as an order of magnitude of what we might spend and a similar set of priorities to what you saw in 2011. So Adler will definitely be an important continuing priority area.

Got it, perfect. And then speak a little bit more on just the tick down in utilization I think certainly it’s the first time I guess seen it in recent memory. Is it something are you confident that, that will kick back up or is it something, is it a function of slow down a little bit on the acquisition side of acquiring new tanks.

Let me answer that in sort of the average utilization for the quarter was 86.8% compared to 81.8% a year ago the down tick to the 79.8% really was a collection of equipment right towards the end of the quarter that the 3 dynamics that play into that, one there is some pull back in drilling, cracking into the non-liquids rick gas shale plays. There was the normal occurrence of projects completing in an orderly fashion and some of those came back right towards the end of the year. And then there is some seasonality that is associated with the colder weather markets in the Midwest and the east but we are very confident that equipment will all be redeployed within the first 6 months of the New Year. So I feel very good about that and yes we are continuing to build equipment to support our needs. So and we are still in a mode of trying to fill out all of our regional markets with equipment as well. So even though equipment may come off in one region large chance that it is going to get relocated to other parts of the country I suppose to that market is needed so those are the dynamics.

Yes, I also point out we added almost $20 million worth of new equipment during the fourth quarter. So increasing the size of the equipment pool we almost had as much on rent at the end of Q4 as we had at the end of Q3 and keep in mind as we develop this business getting to what in normal utilization is still a work in progress, I think the utilization levels we saw throughout 2011 are exceptionally strong. We may look back a few years from now and say that even 80% is very high utilization.

Just one last one, can you comment what you, what’s allocated in the 2012 guidance for continued investment for affordable storage initiatives?

For competitive reasons we don’t break out capital expenditures in particular for new initiatives. So we would continue with that note.

Your next question is from Scott Schneeberger with Oppenheimer & Co.

Just kind of a question for you guys with regard to the guidance for the coming year. How will you make decisions with regards to investments versus EPS growth. Sounds like you will continue to be aggressive with the investment. It is obviously some conservative EPS guidance and just curious how you think about that thanks.

Well Scott, historically this is always been how we operate when we buy assets for any of our businesses it’s all about the long-term viability of those assets we have markets that for the life of those assets that equipment is going to be highly utilized. So that hasn’t changed from Year 1 of the company to today so in terms of looking at our purchases we will keep in the same mode as we always have it’s the same time we used the word conservative potentially on EPS side there. There is just a lot of moving pieces see the business. We’re 2 months into the year, we still have to see out from dynamics play out in various markets. We are certainly very positive about our businesses and at the same time the California module business is still challenging and we are able to get to increased tax revenues later in the year to a vote on that and stronger revenues in general coupled with good discipline and so forth. So we’ll have to see how things play out here but I think nothing is really changed for 2012 in terms of how we choose to invest money. And we certainly don’t, we certainly look at any investment we make in rental assets over the life of that equipment and it’s very well to do with what’s happening in any given year versus our outlook for our market over an extended period of time.

You mentioned with Adler increased personnel and benefit costs I assume that’s just more people running a larger business and then you also mentioned bad debt expense. So could you just confirm the first that is just more people and it’s not something internal because I saw for TRS also you had increased salary and benefit. Did you have an increase and what you are doing internally with regard to payout to employees and then the second part is the bad debt on Adler. Can you just address that please?

Sure, when you see reference to increase in salary and benefits I think the way to explain it is we have more people working in the organization to support a higher level of business activity or growth in the business. Also keep in mind that when you look at the 2011 SG&A compared to 2010 we talked a year ago about unwinding some of the austerity programs that has been in place for ’09 and part of 2010. So that also makes the comparisons more significant when you then compare 2011 with 2010. And then in terms of bad debt the Adler business has grown a lot so the absolute dollar value of bad debt was up slightly in Q4 of ’11 compared to Q4 of ’10 and that’s largely a function of, as you grow the business. We certainly expanded the number of customers we deal with not every customer is perfect and we had a slight uptick on that item.

Dennis, you responded on one of David’s questions on just with regard to Adler utilization you ticked off pull back in gas shale and it’s some seasonality and it’s just quarterly compressed just start coming back off rent. I want to focus on the first one there though. We’ve obviously been hearing the news about world prices for gas only producing [ph] shale, and I’m just curious what’s your -- but obviously shale’s still quite prosperous where it’s liquid rich. Could you address -- do the Adler Tank for the appear more one type than another? How real is the slow down at the gas producing? If you could just take us a few levels deeper into how that sets up.

Well let’s first, I think it’s good to identify the fact that there is more dynamics than just the Henry-Hub price per GAAP impact the rental. And first of all there is a variety of markets for frac tanks including both oil and gas shale and conventional oil and gas. So the dynamics are such that even though there is without question some slowdown in some of the non-liquids rich gas shale plays perhaps particularly in the Marcellus but equipment just as drilling rigs are moving between the dryer place to more liquid place not just for gas. But then there is also a need to say in the Balkan and oil shale plays with the price of oil being what it is I mean there is certainly a very robust market for those rigs et cetera. So take some time to transition. But also the frac tanks are used in the refinery environment industrial environment, environmental environment, construction environment. So you have lots of other uses for the product but in terms of the shale dynamics in particular although there was some pull back there, there is also people still drilling frac because various folks are they are held by production under the lease agreement. They have to otherwise, they will lose their lease right. Plus as I mentioned there is this is migration of equipment within oil shale plays or between them and then I would say perhaps most importantly for ourselves is that we are still building out the ATR fleet amongst our different regional and branch location. So we were 10 years into the business so to speak as the company from McGrath RentCorp start it might be a different dynamic but we find ourselves still not having adequate equipment in all the markets in which we are currently in and other ones that we will look to enter within the next 12 months or so.

Following up on that if I look at where the major shales are and look at just from your slide deck of where you have major Adler operation. It appears you are not very present in the block and although excellent overlap some of the other major shale. I assume what you just responded with was part of that answer that you can still develop where you are and there are areas where you will not do well. I guess the question would be embedded in all this how geographically dispersed are you and then how much longer is it going to take for you to get the assets where you want to be or is it many, many years. And then that’s one part of the question and the final one I will be done is right now at this snapshot in time, does 2012 feel similar trajectory-wise to that of 2011 or has maybe some of the slug [ph] shale slowdown hampered that a little bit.

Let me respond to the first one. You talked about diversity, we are in a variety of different gas and oil shale plays but I won’t give percentages because that’s competitive information that I would not want to get out over this call. I will say there is no question we’ve had material presence in the Marcellus and we also not insignificant in other plays. When you start looking at what does 2012 looks like from the trajectory standpoint et cetera we have to see how things play out this year. We feel very good how we’re positioned in the various shale markets in particular, we obviously have had success in both oil and gas shale plays and we have a good customer name and a good following. So and in terms of migrating equipment, it doesn’t take years I mean, we move equipment regularly between markets and you produce equipment new out of a manufacturer but you can also move equipment that’s off rent even quicker into a new market to support demand and that transportation cost obviously is absorbed within the quarter et cetera. By the way I wanted to add one other item to the discussion and we should always remember this about gas shale is the fact that with gas shale there tends to be a fairly significant drop off in the production of wells, you know, after the first year. So what it means is that even though supplies can be high at a current timeframe unless you continue to drill and are able to get at large quantities of gas shale the supply can diminish rather quickly. So production you get one year out of a well can be very different the next year. So there is only that dynamic play as well to where that market tends to self-correct fairly quickly based on supply and demand, and then lastly I would just say this continuing more stable price of lower cost of gas is not necessarily a bad thing. Because if you get this stable supply in bulk of natural gas there very well can be greater conversion of, in a generation of electricity as well as fleet vehicles et cetera that are converting to natural gas as well as the opportunity to eventually export L&G internationally, which the markets have the much higher pricing than the U.S.

Scott, if I could just add one last comment maybe this is helpful. Just if you look at our business mix I think as Dennis has pointed out and we’ve said many times we are still building the Adler business, we’ve come a very long way in the last 3 years. There is a lot more we have to do but in terms of business mix, oil and gas is a very important segment of demand in the market. And frac-ing-related business we believe has been an important contributor to growth in the market over the last few years and just to frame it all for you for 2011 we put together a careful study of our own business mix, frac-ing related demand accounted for about 35% of our rental revenue mix in 2011. So clearly it’s an important segment but we have a lot of other things going on as well and we will continue to grow that business.

The other question I was going to ask is, it’s just how are things going with regard to trying to get contractually longer term rental durations within Adler.

We actually have been very successful at that. If we are going out we are buying new tanks and building new tanks obviously there is an attractiveness to that especially when there the better safety features, clean wall tanks, easier to clean et cetera the integrity of the tank is top notch. So you know, in this type of market where you got high demand in limited supply you can be so more selective in terms of the types of contracts that you want to pursue and we were very focused on this a couple of years ago when we first acquired Adler and we were seeing an uptick in demand beginning in probably late 2009 or early 2010. And to-date we’ve been very successful at that in an industry that historically has been pretty much a day-to-day rental industry.

[Operator Instructions] And our next question is from the line of Joe Box with KeyBanc Capital Market.

Dennis, I’m not sure if I heard you correctly earlier, but it sounded like you said that California bookings were down 13% in January of 2012 whereas outside of California it was up 25%.

I was speaking to 2011. I haven’t given any numbers in my prepared remarks with respect to 2012.

Well, regardless, it sounds like that 25% growth rate outside of California is accelerating from where it’s been over the last couple of quarters. I’m just curious maybe you could talk some of the end markets or some of the primary factors that are really driving that increase.

Well part of it is the dynamic of not having had a very strong 2010, it wasn’t a strong year, so we got some lift from that. Probably if you look at the Texas market that’s probably been our healthiest market as of late in fact that’s with the price of oil and refinery work and more industrial-type needs. And we are very -- we’re probably the most prominent player in that industry in Texas. So that has supported our growth outside of -- that’s probably the biggest lift outside of California. Probably second to that is the Florida educational market getting somewhat better. Commercial markets in both the mid-Atlantic and Florida still remain very tough but also benefiting from some added educational business that due to our innovative classroom projects in the mid-Atlantic. So those are kind of the more favorable dynamics.

And kind of switching gears to the guidance, just doing some back of the envelop math on your guidance and backing into EBITDA it looks like the implied incremental EBITDA margin for 2012 ranges from call it 20% to 40%. Can you maybe just talk to why we would expect to see that incremental EBITDA margin range fall so much from the 57% that you guys put up this year? Are there maybe any big items that we should be thinking about?

Yes, I don’t think there is anything unusual in the individual businesses. I think as we’ve said repeatedly the Adler performance in 2011 was really exceptional in terms of very high demand for new equipment we were adding to that equipment pool, getting everything out on rent almost immediately. So the EBIT’s performance was exceptionally strong there. We can still grow that business and grow the EBIT dollar amount but maybe not with quite the same margin profile. The other thing I would say generally about the business is keep in mind that the nexus between sales and rents. The rents the EBITDA margins are a bit more consistent. With sales both the amount of sales we get in a year and the margins associated with those sales can be lumpy quarter-to-quarter and vary year-to-year it’s the hardest part of the revenue and profit stream to forecast. So keep in mind that can move the corporate EBITDA metric around somewhat year-to-year and somewhat within a guidance range. It’s just a harder part of the business to predict.

Sure, just one last. Sorry were you going to say something?

I was just going to add that you would take all that sale business but you really have to look at what’s happening with the rental margin. Because that’s the true measure of health there and if those rental margins are staying in the healthy range that’s pretty much what you need to know. That’s the critical metric.

Maybe one last for you on Adler I think it was back at your Analyst Day you guys have talked about some hydrostatic testing of pipelines. Obviously those are pretty high profile case there with PG&E and recently they were actually out talking about significant cost to handle some of the water storage and testing of their pipeline. I’m just curious has this been a driver for Adler, is this a one-off thing only in California or is this becoming more of a national opportunity?

Well, I’ve always looked at California is being a bit of a trend setter and certainly we’ve been engaged in some of that work here in California. And I would expect with the unfortunate disaster that occurred in San Bruno down the peninsula from San Francisco couple of years back related to these gas lines that obviously lacked in some level of integrity that has gotten everybody’s attention I would think that regulation and scrutiny in terms of checking gas lines et cetera, and the associated rental tanks to support that process is something that you are going to see more of and not less of.

(Operator Instructions) And at this time, I’m showing no questions in my queue. I would like to turn the conference back over to management for closing comments.

Well, thank you all very much for joining us today. We appreciate it and we will look forward to chatting with everybody on our Q1 earnings call in early May. Thanks so much.

Thank you. Ladies and gentlemen, this conference will be available for replay until March 7, 2012 at midnight. You may access the replay system at any time by dialing 303-590-3030 or 1-800-406-7325 and then ringing the access code of 4503262. We thank you for your participation and you may now disconnect.