McGrath RentCorp (MGRC) Q2 2012 Earnings Report, Transcript and Summary

Welcome to the McGrath RentCorp Second Quarter 2012 Conference Call. [Operator Instructions]Later we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] This conference is being recorded today, Tuesday, July 31, 2012. I would now like to turn the conference over to Geoffrey Buscher of SBG Investor Relations. Please go ahead.

Thank you, operator. Good afternoon. I am the Investor Relations Advisor to McGrath RentCorp, and will be acting as moderator of the conference call today. On the call today from McGrath RentCorp are Dennis Kakures, President and CEO; and Keith Pratt, Senior Vice President and CFO. Please note that this call is being recorded and will be available for telephone replay for up to 7 days following the call by dialing 1 (800) 406-7325 for domestic callers, and 1 (303) 590-3030 for international callers. The passcode for the call replay is 4549057. 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 p.m. Eastern Time, or 1:05 p.m. 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. For the second quarter 2012, total revenues increased 5%, to $83.8 million from $79.5 million for the same period in 2011. Net income decreased 8% to $10.5 million, from $11.4 million and earnings per diluted share diluted 9%, to $0.42 from $0.46. Reviewing the second quarter results for the company's mobile modular division, compared to the second quarter of 2011, total revenues decreased $2.1 million, or 7%, to $27.8 million, primarily due to lower sales and rental revenues, partly offset by higher rental related services revenues. Gross profit on rents decreased $0.1 million to $10.3 million, primarily due to lower rental revenues, partly offset by an increase in rental margins, to 53% from 52%. Higher rental margins were a result of $0.3 million lower other direct costs for labor and materials, partly offset by $0.1 million higher depreciation. Selling and administrative expenses increased $0.5 million, or 6%, to $8.3 million, primarily as a result of higher salary and benefit costs, and higher facility rent expense, primarily related to the expansion of our portable storage growth initiative. The lower gross profit on sales, rental related services and rental revenues, combined with increased selling and administrative expenses, resulted in a decrease in operating income of $1.6 million, or 29%, to $2.5 million. Finally, average modular rental equipment for the quarter was $521 million, an increase of $21 million. Equipment additions were primarily to support growth in the mid-Atlantic region and for our portable storage initiative. Average utilization for the second quarter decreased from 67.4% to 65.8%. Turning next to second quarter results for the company's TRS-RenTelCo, compared to the second quarter of 2011, total revenues decreased $0.5 million, or 2%, to $30.6 million, due to lower sales revenues, partly offset by higher rental revenues. Gross profit on rents increased $1.6 million, or 16%, to $12.2 million. Rental revenues increased $1.3 million, or 6%, and rental margins increased to 49% from 45%, as depreciation as a percentage of rents decreased to 38%, from 40%. Selling and administrative expenses increased $0.2 million, or 3%, to $6.4 million, primarily due to increased salary and benefit costs. As a result, operating income increased $0.5 million, or 6%, to $8.4 million. Finally, average electronics rental equipment at original cost for the quarter was $266 million, an increase of $10 million. Average utilization for the second quarter increased from 65.6% to 66%. Turning next to second quarter results for the company's Adler Tanks division compared to the second quarter of 2011. Total revenues increased $4 million, or 24%, to $20.7 million, due to higher rental, rental related services, and sales revenues. Gross profit on rents increased $0.8 million, or 7%, to $11.5 million. Rental revenues increased $2.2 million, or 16%, and rental margins decreased 72% from 78%, as depreciation as a percentage of rents increased to 18% from 14%, and other direct costs as a percentage of rents increased to 10% from 8%. Selling and administrative expenses increased $1.6 million, or 43%, to $5.3 million, primarily due to higher bad debt expense, higher allocated corporate expenses and higher salary and benefit costs. As a result, operating income decreased $0.4 million, or 6%, to $7.4 million. Finally, average rental equipment for the quarter was $218 million, an increase of $70 million. Average utilization for the first quarter decreased from 85.8% to 70.3%. On a consolidated basis, interest expense for the second quarter of 2012 increased $0.4 million, or 22%, to $2.4 million from the same period in 2011, as a result of the company's higher average debt levels, and higher average interest rates. The second quarter provision for income taxes was based on an effective tax rate of 39.2%, unchanged from second quarter of 2011. Next, I'd like to review our 2012 cash flows. For the 6 months ended June 30, 2012, highlights in our cash flows included: net cash provided by operating activities was $65.3 million, a decrease of $6.1 million compared to 2011. The decrease was primarily attributable to the payment of a $6.1 million income tax receivable in 2011 that did not recur in 2012. We invested $73.3 million for rental equipment purchases, compared to $71.2 million for the same period in 2011, partly offset by $1.5 million or lower proceeds from sales of used rental equipment. Property, plant and equipment purchases decreased $1.9 million, to $8.9 million in 2012. Net borrowings increased $11.5 million, from $296.5 million at the end of 2011 to $308 million at the end of the second quarter 2012. Dividend payments to shareholders were $11.5 million. With total debt at quarter end of $308 million, the company had capacity to borrow an additional $222 million under its lines of credit, and the ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.88 to 1. For 2012, second quarter adjusted EBITDA increased $0.2 million, or 1%, to $38.5 million compared to the same period in 2011, with consolidated adjusted EBITDA margin at 46%, compared to 48% in 2011. Our definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income are included in our press release for the quarter. Turning next to 2012 earnings guidance, we have revised our previous 2012 full year earnings guidance range of $2.02 to $2.12, to an updated range of $1.70 to $1.85 per diluted share. For the full year 2012, we expect approximately 4% to 6% growth in rental operations revenues over 2011, gross profit from sales to be approximately 10% to 15% lower than 2011. Rental equipment depreciation expense is expected to increase to between $65 million and $66 million, driven by rental fleet growth. Selling and administrative costs are expected to increase to between $84 million and $86 million to support business growth and continued investment in after-tax 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 be approximately 25.2 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 were relatively flat, at $19.5 million from a year ago; and in markets outside of California, rental revenues grew by 8% compared to the second quarter 2012. However, they declined by 7% within the state. California continues to be plagued by fiscal and an unemployment rate challenges. Income from operations for the quarter decreased by $1.5 million, or 29%, to $3.7 million from a year ago; however, modular rental operations gross profit declined only 3%. The higher percentage decrease in income from operations was due primarily to higher SG&A expenses associated with the continued expansion of our portable storage rental business and related divisional employee costs, as well as lower gross profit on modular equipment sales. Modular utilization at the end of the second quarter declined slightly at 66% from 68% a year ago. Yield on equipment on rent decreased to 1.9% in the second quarter from 1.96% during the second quarter of 2011. Division-wise modular first month's rental booking levels to the second quarter 2012 were up 33% over the same period in 2011. This was the highest booking quarter since before the Great Recession. Within California bookings were 38% higher, while outside of California bookings rose 30%. Although we are pleased to see favorable year-over-year increases both inside and outside of the California market, with the continuing general economic challenges that most states are facing, including budget shortfalls, school district austerity measures, and high unemployment, these results should be viewed only as directionally positive and no more. Our modular business will need multiple consecutive quarters of outgoing equipment rentals exceeding equipment returns in order to signal a meaningful positive change in market conditions. We expect it remain a very price competitive environment in all of the modular markets in which we operate until utilization levels begin to rise across the industry. Please keep in mind that as our modular rental business returns to growth, it will require limited new capital investment to increase rental revenues and we would 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 second quarter increased by $1.3 million, or 6%, to $24.9 million from a year ago. We are seeing favorable demand both domestically and internationally across a number of end markets, including semiconductors and communication products and networks. We saw yield on equipment on rent increase to 4.72% during the quarter from 4.68% a year ago. This is due primarily to a greater mix of communications equipment and to a lesser extent market pricing. Communications test equipment assets have shorter depreciable lives but higher rental rates than general purpose test equipment. Divisional income from operations increased 6%, or $0.5 million, to $8.4 million. Although gross profit and equipment sales was down by $0.8 million due to $1.9 million lower equipment sales revenues, income from operations benefited from lower depreciation, laboratory and direct SG&A cost as a percentage of rental revenues from a year ago. Depreciation and direct SG&A cost as a percentage of rental revenues declined to 37.5% and 16.1%, respectively, from 40.1% and 17% a year ago. Ending second quarter utilization increased slightly to 65.7% from 65.4% in 2011 and continues to be in a very healthy range. In producing these strong operating metrics we continue to benefit from our disciplined approach to equipment purchases and inventory management, conservative depreciable equipment lines and our highly skilled efficiency driven and tenured workforce. Now let's turn our attention to Adler Tank Rentals, our tank and box division rental revenues increased to disappointing 16% to $16 million for the quarter from $13.8 million a year ago. This increase was much lower than I had projected and was directly related to continued weakness in the production of dry natural gas in Northeastern gas fields. This is reflected in our 21,000 gallon frac tank utilization level of 57% within the Marcellus gas shale region during the second quarter, as compared to 78% outside of the region. To date we have elected to move limited quantities of this frac tank inventory to other regions due to a favorable number of rental opportunities for this equipment within the greater Northeast region coupled with our desire to minimize long-distance transportation expenses in the redeployment of these rental assets. Although division-wide rental revenues had a double-digit increase from a year ago, utilization at quarter end dropped to 68%, from 86% at the end of the second quarter 2011. This is a function of favorable business activity in all of Adler's geographic markets outside of the Marcellus dry gas plays and our need to continue to build new rental equipment to meet this demand despite the equipment off-rent in the Marcellus. With these current market dynamics, despite the significant reduction in division-wide utilization over the past few quarters, rental revenues have remained relatively flat over the same time frame. This is further reflected in having approximately the same level of equipment on rent at the end of the second quarter 2012 at $153 million as compared to $157 million at the end of the third quarter 2011, our highest ending quarter utilization a day at 91%. The mix of year-over-year rental revenues for the second quarter of 2012 compared to the same period in 2011 reflects frac-ing related rentals decreasing from approximately 35% to 23% and as mentioned earlier with the 16% increase in overall rental revenues. Adler is serving a wide variety of market segments including industrial plant, petrochemical, pipelines, oil and gas, waste management, environmental field service and heavy construction. Gross profit increased 10% to $12.7 million. The lower percentage increase in gross profit compared to rental revenues is primarily related to higher depreciation and inventory center costs as percentage of rental revenues. However, divisional income from operations for the quarter decreased by 6% from a year ago to $7.4 million. The reduction in income from operations was due to 43% higher SG&A expenses for the quarter compared to the same period in 2011. The higher SG&A expenses are chiefly due to increased bad debt expense, a higher allocation of corporate overhead expense as Adler's total revenues continue to grow at a faster rate than our other rental businesses, and employee and facility related expenses associated with growing our tank and box rental business. Overall, division-wide business activity levels have remained favorable. Booking levels during the second quarter of 2012 based upon a first month's rent or billing rate were 16% higher than for the same period a year ago and was Adler's highest quarterly booking level ever. We believe the anticipated shortfall in our results for Adler in 2012 is a near-term dynamic that will resolve itself in the quarters ahead. I also want to emphasize that we are just in the early stages of ramp in the Adler geographic footprint and customer following. We have every confidence that we will continue to grow favorably in the future. Now let me take a moment and update everyone on our portable storage environmental test equipment businesses. Mobile Modular Portable Storage continued to make good progress during the quarter in building its customer following and rental bookings. Rental revenues grew 60% for the quarter from a year ago. We are working hard at extending our portable storage business in the California, Texas, and Florida markets and we are continuing to explore a smaller fleet acquisition opportunities to accelerate our growth. We are beginning to realize critical mass in our installed base of customers and some of the markets in which we operate and we have ample room to grow rental revenues within the current cost structure. Looking forward, we continue to believe that we have an excellent opportunity to become a meaningful player in the portable storage rental industry. I also wanted to share that in early July, we made the decision to exit from the environmental test equipment rental business either through a sale of the business or winding it down over the next few quarter. Creating a profitable business model with the potential to become a meaningful contributor to overall company earnings was elusive. This is primarily related to the extremely short average rental term of less than one month that is the norm for the environmental test equipment industry today. We are committed to rental businesses in our portfolio that can produce healthy margins and can be scaled materially over time. Now for a few comments on SG&A. SG&A expenses rose 14%, to $21.2 million over the same quarter a year ago and were down 1% from the first quarter of 2012. The year-over-year increase relates primarily to employee, IT, software and hardware and facilities infrastructure costs. A significant portion of the employee costs related to new employees to support the growth of our portable storage and tank and box rental businesses. The majority of the increase in IT costs relates to brining on our new financial accounting system online late in 2011 and its related amortization expense. Finally, the higher facility costs are driven chiefly by new property rental and to a lesser degree amortization of improvement costs of owned properties to support the expansion of Mobile Modular Portable Storage and Adler Tank Rentals’ geographic footprints. We continue to be very focused on managing overhead costs tightly to ensure that we meet or are below our annual SG&A expense targets. Now for a few closing remarks on Adler Tank Rentals. First, it's important to acknowledge that my timing outlook for redeployment of our off-rent Marcellus gas field rental assets was substantially off the mark. The logistics and dynamics associated with the rigs moving from dry gas to wet gas to oil shale plays, the drilling process and then the positioning of frac tanks for the completions work is complex and time consuming. The good news is that when you look at the collective Adler operating regions today, there is no shortage of wet gas and oil shale play industrial, environmental and construction-related opportunities to redeploy this equipment and this doesn't include various new domestic markets that Adler has either just entered or be entering over the next 12 to 24 months. We believe Adler has a long runway for domestic growth and we are in the very early stages of ramping the business. As I have learned over my 30 years in the rental industry with McGrath RentCorp, the cardinal sin in building a rental business is not having enough assets on the ground when demand hits. Granted in a more perfect world, we want to have a higher percentage of frac tank off-rents in region of the country as we do today in the Marcellus. However, the multi-year contiguous rental streams earned from majority of this equipment over the past few years have served our earnings growth and return on capital of these assets very favorably. Although a dry gas glut exists today especially in the Northeastern U.S. and the natural gas market has a history of volatility, I believe the Marcellus will be producing natural gas in large quantities for many, many decades to come. Finally, it's important to keep in mind that Adler annual utilization for the 3-year period from 2009 to 2011 was 56%, 76% and 86%, respectively. We are still learning what normal utilization levels will look like over time for our tank and box rental business. Utilization rates are likely not to be in as narrow range as a rather rental businesses until we reach a much more mature state of growth. In summary, our tank and box rental business continued to perform well except for the significantly lower business activity in the dry gas areas of the Marcellus. We believe that our current offering inventory of 21K frac tanks in this region will be favorably absorbed into both existing and new geographic markets in the quarters ahead. Our electronics business has continued to produce very strong results and our modular renal business has stabilized with favorable booking levels during the quarter. A reduction in guidance range is primarily a result of lower than projected Adler rental revenues in the Northeast to date and our reduced outlook of this region for the remainder of 2012. And now Keith and I welcome your questions.

[Operator Instructions] Our first question does come from the line of Joe Box with KeyBanc Capital Markets.

So between the modular and the TRS business alone, it looks like the product sales were actually down by about $4 million versus last year. How should we read into the change in product sales? Is it a function of just timing, given it’s lumpy, or is it a function of just a broader change in the modular or electronics business?

Joe, the comment I would make is the sales part of the business is hard to forecast and can be fairly volatile year-to-year. So if you look back over the last couple of years, you'll see 2011 was actually a pretty strong year for sales. This year, it's turning out to be lighter. It's being lighter in the first half and our best assessment at this point in the year is those trends will continue for the balance of the year. So again, it can move around year-to-year. Our primary focus, as you know, is getting our assets on rent and running the rental business. The sales are really a byproduct of those rental activities, and this looks like it's going to be a softer year in terms of the gross profit contribution.

Understood. That's good color, Keith. Dennis I'm hoping you can help me just shore up all the different moving pieces in the modular business. For California, it looks like bookings are improving yet revenues are still relatively weak. Based on the pipeline that you guys have right now, can you just help us reconcile growth or top line revenue over the next couple of quarters?

Yes. First of all, when you look at bookings during the second quarter of 2012, X amount of that is related to school work and some of this -- also additional larger complex work that really has not hit the rental cycle yet. So a lot of that equipment was shipped over the summer and will going into ramp and we may, during the third quarter, get anyway from 1 to 2 months work up rental revenue, but you only see the true run rate for the business until the fourth quarter of 2012. So there's no question that in California, in particular, business activity have also picked up. In fact we've had our third -- we've had 3 consecutive months of over $200K in first month rental bookings, which we haven't experienced since before the Great Recession, and July maybe along on the same tracks. So there's some -- that feels very good. We haven't seen that type of pace in the business for some time. But, again, it's only 3 to 4 months and it's not a dovetail. But, again, know that a lot of the bookings that have occurred from April forward, that equipment would ship -- most of that equipment is not shipping until the third quarter. And then we'll just have to really gauge that against what are the returns, because that's the other piece of things that we don't control. And in other -- if you look at the other regions of the country, we grew very favorably in Texas during the second quarter in terms of bookings. A lot of that equipment too won't be going out until the third quarter, a lot of good petrochemical work there as well as some school work. Florida is down a little bit, but we are expecting based upon the pipeline to have more activity over the summer and hopefully hit their goal numbers, their internal goal numbers. And the Mid-Atlantic is up slightly, good booking levels and good momentum, it looks like, going into the summer and the second half of the year. So that's the state of things. It certainly is a better -- if you compare this to last year at this juncture, the businesses and a considerably better position in terms of business activity and it's just not one month. So that's the good news. Hopefully, it will continue and returns will be lighter than last year.

Okay. And then on the Florida market. I think last quarter you talked about a large modernization project in Florida. What quarter did that pretty much fall in? Was that mostly in 2Q or was it also in 3Q, just trying to understand the comps with that?

I think we talked last year about -- or I should say in the first quarter, about the various modernization projects coming off rent and we had actually gotten more of those bookings last year in the first quarter. So those are the dynamics there and we are expecting kind of later activity in Florida this year, just due to what we're hearing from school districts. So I think there's still some booking level to go here in August. And obviously there's been, obviously, some additional bookings in July. So we'll just have to see how that all nets out relative to returns as well. Although I will tell you that the momentum feels are better there in the second quarter than it did in the first quarter.

Okay, great. And maybe just changing gears to Adler. One, can you talk about the markets that you either just entered or plan to enter over the next 12 to 18 months? And two, can you talk about the decline in Adler's yield? I guess I would have thought with the 21,000-gallon frac tanks to be softening up a bit and boxes potentially becoming a bigger component, I would actually have expected a little bit of a yield benefit. So, are you seeing any sort of price degradation or is the mix shift not that significant?

The mix shift has stayed pretty consistent. We have a higher percentage of frac tanks today than we do when we bought the business. It's well north of 50%. So the dynamic with frac tanks is that they have typically longer – they’re higher utilized and they have lower rental rates and with boxes and specialty type -- even specialty type tanks, they have shorter lives but higher -- I should say, shorter rental turns, but higher rental rates. So the mix is pretty consistent. And if you look at the dynamics of the marketplace, pricing has been very soft. The only place where pricing may be weak at all is in the Marcellus, and that's on some of the -- and that's on a customer-by-customer basis. But elsewhere our rates have held up very nicely. Adler has a wonderful product. And all things being equal, people love to have that product and we haven't really seen any pricing issues in any of the markets other than, like I said, some of the excess inventory dynamics within the Marcellus.

And, Joe, to be clear, the big driver in yield for Adler year-over-year was utilization, the significant drop in utilization.

Okay, great. One last question, then I'll hop back in queue. 2Q was a pretty strong quarter for Enviroplex and 3Q last year was extremely strong. Can you just tell us what's baked into your new guidance for Enviroplex over the next quarter?

Yes, the comment I would make is the team at Enviroplex has done a phenomenal job of securing business opportunities in what is really still a very tough challenged market. And I think you're right to say last year, they had a great year in terms of top line and actually did a very nice job delivering a solid bottom line. I think if we look at this year and look at the balance of the year and what we're assuming in the guidance, I think they'll still be a healthy contribution in terms of top line. But I think the profit profile may be more challenged and it's just the mix of projects, the market conditions we're seeing. So if we look at it year-over-year in terms of the profit contribution for the full year that we're expecting, it's going to be lower than last year is our current thinking and that's reflected in the guidance.

Okay. And was there any sort of pull forward into 2Q? I mean, how should we think about it over the next quarter, because typically you don't get that much business in 2Q?

Yes, really it's just timing of when projects are shipped to customers and we recognize revenue. You can get some starting in Q2. Generally, Q3 is the bigger quarter and then you may have some other projects fall into Q4. So it's not uncommon to have some projects recognized in Q2, as we just did this year. But Q3 is generally a bigger quarter for that business, and we would expect that this year.

And our next question does come from the line of David Gold with Sidoti & Company.

So, a few questions for you. First, can you give us some insight or color on the shift in total reduction guidance? Essentially – obviously, your second quarter was soft and Adler’s been a little soft, but the changes are a little bigger than I might have expected. So, just curious if you can give us some color around that and sort of what the big-thing sort of changes are?

Yes, David, I'd say it's 2 things. It's a change in outlook for the Northeast region of the Adler business and to a much lesser extent, a lower contribution in terms of sales gross profit. So, when we look at the Adler business, and Dennis gave a lot of color in the prepared remarks, when we look at what we've achieved year-to-date in the Northeast versus what we would have expected, we're behind what we planned. And when we look at the trends and the outlook for the balance of the year, that part of the business, that region will fall far short of what we'd expected earlier in the year. And so that's really the dominant item in changing the guidance range. And then I'd say the secondary issue, and I touched on it in response to Joe Box's question, but the sales gross profit that we're expecting for the whole business, the outlook for that for the year is lower than what we had expected earlier in the year.

David, I might also add that in a rental business like ours is the dynamic. If you miss early in the year on rental revenues in the rental stream or in building your base of rental revenues, it's very tough to make that up each month that goes by that you don't have that. So you may end up getting all the equipment on rent that you wanted to for the year, but it's how soon you do it within the year, because otherwise you just don't have the earning power over the remainder of the year, so…

Sure, sure, fair. Okay. And then on Marcellus, is there a way that you guys could put some -- and you give a utilization number, but some other metrics around that as to maybe how much of the Adler business is revenue-wise maybe a year or ago spending from Marcellus?

We don't break out by region how much business we're doing, for competitive purposes, obviously. We gave the metric of 35% last year of being gas and oil shale play or related versus 23% now today. I think what's important to note is in this dynamic is that this is one region of the country and one end market. And although it's significant for us in terms of where we would have like rental revenues to be for the second quarter, this is not an issue with -- this is one area -- the rest of the business is performing very well, and we'll get this equipment redeployed. It's just taken us longer than we had anticipated to do so. We're also trying to be prudent and not move in equipment sooner than we need to and not incur the expense, transportation expense, if we can get redeployed in either within the Northeast region or within regions that are more adjacent to it.

Right, right. And actually, I think last quarter, you spoke about the high transportation costs of sort of shifting it around, or shifting around these things. Curious -- I guess at what point, how much time do you give for sort of recovery redeployment in the same general area before you say, you know what, rather than buy it, it starts to make sense economically to shift and to transport the tanks?

Well, first of all we have moved some equipment. So just to be clear on that, because you want to hedge your best and we've got -- and this is for orders that we had in other regions, including the Southern region in Texas, et cetera. So we've already move some and we've incurred those costs even in the second quarter, right. The other dynamic is that we have a pipeline of opportunities -- and if we didn't have a pipeline today, we would already have moved quite a bit more. But we've got pipeline opportunities that are a timing issue where we're looking at it each month of saying, okay, has that come to fruition, is it likely to occur, et cetera. So we're constantly analyzing the pipeline against not only the timing on that within the region, but also to what else has happened in other regions because rather than build equipment for another region even though we have continued to do that to-date on some of this 21K frac, it makes much more sense to get it out of the region if it's a long-term contract, et cetera, and we don't see as much occurring within the Marcellus. So this is a continuum of monitoring it weekly. And like I said, we've already moved some. We'll probably without question move some additional units. But the more we can do locally within the existing markets, the better.

Got you, got you. One last, if I can, and then I'll let you off. As it sounds like on the sales contributions side, essentially to the extent that reduces guidance, it sounds like that's coming out of the Enviroplex sort of year-to-year. And a, I guess, correct me if I'm wrong but then b, is that more -- it sounds like that's not as much an operational problem, it's more a sort of pricing or tough environment for pricing issue?

Well, first I would say David, Enviroplex is part of it but when we look at equipment sales related to modular's and also TRS, we're still -- we've seen a tough first half to the year and I think when we look at the balance of the year, I don't think it's going to be as good as it was last year, and we've reduced our expectations there. So it's partly what's the market demand in terms of demand for used equipment and then, in the case of modulars, we sell some new equipment. That's really -- we can only react to the market opportunity that's out there, and it's very -- it moves year to year. We had a very strong year in 2011, up significantly from 2010, 2012 maybe somewhere between the 2.

Yes, I might add, David, in our electronics the business, but flipside of not doing as many sales, especially if you're - if you look at these margins we're creating on depreciations of percentage of rent. The more fully utilized equipment that you have that continues to rent, I mean those are wonderful metrics. And adjacency sales decreasing, keep rent and same equipment. So we don't have to buy a new equipment to support those rental needs. So there's kind of a double-edged sword to the electronics business. And as long as we're keeping the inventory fresh, I'd just assume try to run as much fully utilized or fully depreciated equipment as we can for as long as we can.

And I would agree with your comment, David, for the Enviroplex business and that's as a reminder that is purely new equipment being sold directly from that factory, it's a tough pricing environment. It has been and continues to be.

And our next question is coming from the line of Scott Schneeberger with Oppenheimer.

Could you guys speak to, it sounds, Dennis, like it caught you a little off-guard, how much of a slowdown you had in Adler in the Northeast and the challenge of redeploying when you're making that decision. Could you speak to the month-by-month-by-month in the quarter, of what you saw April -- contracting April to May to June?

Scott, are you saying just in terms of the amount of activity booking-wise or the health of the region?

Any of both, kind of an all-encompassing question, but Yes, but encompassing both please?

Okay. Well, what we've had is -- we've had actually a very healthy pipeline for sometime in the greater Marcellus area and a lot of it is timing, and there wasn't as much that got -- went out as soon as we thought it would. And it -- we have x amount of projects that we thought would go out in the second quarter that didn't, that are now targeted for the third quarter or later and at the same time you have equipment coming off rent, in a normal fashion because those projects are finishing. So and then coupled with all that is that I think there's 35% fewer rigs in the Marcellus today than there were a year ago. And those rigs are migrating to other, either wet plays within the Marcellus, or wet plays or oil shale plays in other parts of the country and it takes time to have all those logistics play out and to be able to be in a position to re-rent of that equipment. Also too, in some of those regions there, we don't have the same customer contacts, et cetera and we've got to create a business. But overall if you look at the pipeline of opportunity, not only within the Northeast but if you look at Texas, if you look at other parts of the country for us it's very stable. I'm not really concerned with being able to redeploy this equipment over the next few quarters and when you're a growing business like Adler's and you're early in your life, you want to make certainty you have ample equipment and meet market demand, essentially spot demand that hits pretty quickly. So we're in a very good position to have that equipment utilized and then be adding to the fleet over time here.

And I know you said that per digit, rental equipment for the company increased year-over-year, and you'd mentioned on last quarter call that you were going to hope this slowdown, the spend, and I presume it's predominantly in Adler for both years. Was -- is it a matter of this is going to continue -- is it something you can stop on a dime or how long out are your contracts for off the purchase orders?

If we can typically start things very quickly, but the equipment we're adding as your building out this national fleet for Adler, it's not the 21Ks, that are standard product. It's double-wall tanks, it's Weir tanks, it's mix tanks, also our box inventory, dewatering boxes, and other types of debris boxes. So, there's a variety of equipment other than standard frac tanks, even in the Bakken region. Those require interior manifold tanks, which is a different product than an external manifold tanks. So it's a variety of specialty equipment coupled with box inventory, et cetera. And again because the geographic opportunity for Adler is so significant in building up the business that even though we may be underutilized in 21Ks currently, et cetera, that really when you look at the long-term rollout here in the niche of the business, it isn't anything that we're losing sleep over.

Okay, just. I know you don't provide guidance on CapEx. But how should we think about that going forward? Will it be higher near 2012 versus '11, just on needs and other regions outside of - outside Northeast?

Yes, Scott, just to try and be helpful if you look at the company's total equipment purchases, bank in 2010 it was $123 million, if you look last year, it was $155 million. Last year it was obviously a big year for the business and a big year for Adler. So far this year we're at about $73 million year-to-date. So on a pace quite similar to last year, at this point I would expect the second half of the year it will be a lower level of CapEx, predominantly because we'll be spending less on Adler, given the utilization of the fleet. So I would guess when you get to the end of 2012, the total numbers probably going to look more like 2010, than 2011. So probably closer to $123 million than $155 million, but some of that CapEx, particularly for electronics business, it's just ongoing replenishment of equipment in the pool and ongoing turnover of the technology, so that number can move around a bit. But that's why I characterize it. I think we'll be lower than last year and closer to the 2010 number.

And then on storage containers, could you just speak to -- it sounded pretty upbeat in the press release that you're getting some nice penetration in a bunch of markets. Could you speak to one, CapEx, and two, more importantly, how you are doing in those markets and how broadly, how geographically broad you are now?

Sure on the CapEx side we continue to put more capital into that business. It's still a smaller-scale business, compared to our other activities. So for that business even spending a handful of millions of dollars in a 3 to 6 month period, that's a pretty big number for that business. But we have ample opportunity to continue feeding capita into that business as we grow our branches and we are continuing to do that. But it's not a huge driver of the overall corporate CapEx number.

Yes, and then I would add, in terms of the markets that we've made very good progress in growing the top line of that business and really getting smarter about managing he cost associated with it and, in fact, in a couple of our markets we've reached profitability and overall as a business unit we just got over profitability -- to profitability this quarter. I'm not saying that we may not have some ups and downs here over the next couple of quarters, but it's a good sign. And know that we've accomplished all of this growth, really the great majority of it, through the heart of the recession. And as we have picked up momentum we are coming out of the recession, we feel very, very good about the business. We have a wonderfully capable leader of the business, in Kristy VanTrease, and she is a very, very dynamic leader and we are really looking forward to continued growth of that business unit.

[Operator Instructions] And our next question does come from the line of Andrew Gadlin with CJS Securities.

On the some of the demand that you're seeing within Adler and the box business, can you talk about what industry is that's within?

The box business is really a variety of industries, everything from Superfund cleanup sites to general debris, or, I should say, petrochemical plants, when you have the soil that needs to be excavated and taken to an appropriate landfill, et cetera, because of the contamination, et cetera. So it's pretty broad end market of users.

Let me put it this way, you gave a number earlier that 23% of revenues were in frac-ing. I assume that's this most recent quarter, versus 35% a year ago?

That is correct, you look at the total mix of rental revenues where they were generated from the main dynamic there is the fact what's related to really the E&P frac-ing world.

Just applying that percentage to the revenues at Adler in that quarter it kind of tells you that frac-ing is down on the order of 20%. The other business are up in the order of 40% so could you -- I mean, what's driving 40% growth. If that number is right?

You've got to also understand that 40% -- the tank business, it's just not just boxes but they're the tanks are deployed to other than E&P. So the tanks are used primarily in the other areas of industrial waste cleaning, petrochemical plants, turnarounds. It's used for dewatering of construction sites, environmental-type remediation. So those are the other -- and if you look at the frac tank product. Those are the other big markets for that product.

And regionally, outside of the Northeast for the rest of the business, we've seen good growth.

Are you seeing that growth from increased demand or just from rolling out more equipment into the field?

I don't think there's any question we're taking market share. If you look at inventory level in the rest of the country, I think they're -- we're still building equipment to serve markets. Now Standard 21Ks, we're not, because we have plenty of those and we either can redeploy them in the Northeast, as I said earlier, or we're going to shift additional amounts to other areas. So business is healthy other than the one region of the country and the one market segment.

And then on the modular business, you used to break out some of the other growth area markets there in terms of the growth you were seeing there. Do you have that number?

Are you talking about what I had in my prepared remarks?

Yes, I may have missed it. What was the growth outside of California?

The growth outside of California -- let me just go to my…

Because there were a couple of newer markets in the past 2 years, North Carolina, Florida…?

8% for the markets outside of California and a decline of 7% within the state.

That's on rental revenues.

On rental revenues, Yes.

And so as we look at year-over-year flat revenues, does this seem like the inflection point or do you think that's a ways away?

Having being in -- it's really different by markets, so Texas had a very strong second quarter this year over last year, I mean very, very strong and it's really driven by the oil and gas industry plus some additional school work, et cetera. So it's really market by market. We're very reserved in our comments, no different than my prepared remarks about we have to be measured. This is one quarter and what we need are multiple consecutive quarters, where we have outgoing equipment exceeding returns, and that's when we're going to know that we're in some kind of a trend line and there is a -- really been an overall change to the market in terms of moving the numbers up, i.e. utilization in particular, that will be your first tell-tale once utilization starts climbing.

Our next question does come from the line of John Krulock with Bluefin Investment Management.

So my question was -- it's related to what Scott asked in Adler, but I know bookings was up good sequentially and just wondering kind of what you're seeing as far as court activity picking up related to natural gas going higher. I think it ended your -- right now it's at $3.20, I think the second quarter average was like $2.25. But can you kind of give a little more visibility into that? And then is that more of -- I know when you're talking about your opportunity in the Northeast region and you're mentioning your pipeline, how your pipeline is large, is that stuff that is kind of irrespective of price or -- just trying to figure out how this is going to roll out the next few quarters?

Yes, well, as you know, every E&P company has different dynamics, whether or not they were hedging, and they have got futures contracts at certain pricing. Other ones are held by lease, where they have got to start drilling within a certain window or they are going to lose or lease rights. And of course, the price is rising, although, as the percentage base is high, but still at a depressed price level. So everybody has got a different circumstance and even I was surprised by how much activity there might be in the Marcellus. Also, X amount of that pipeline, as you might imagine is for wet gas within portions of the Marcellus. So, we don't have a breakdown project by project, that I have in front of me. Our sales force will be much more closer to that. But I can tell you it's a variety, a mix of dynamics that each E&P firm faces, and again, not the least of which also is the movement of rigs within the Marcellus from dry to wet gas.

But have you seen kind of a pickup in quote, “related activity” as natural gas has -- the price has risen in the last couple of months? Is there a correlation, or is it…

I wouldn't say that there is a definitive move on that, although any time, the price of natural gas is going up, it's a good thing. And you asked me for the dynamics in the Marcellus, so I will be conservative and say I have not seen a direct correlation at the same time, there is likely some of that, that is occurring and with people also betting on account of it’s going to continue to rise. That market tends to self-correct pretty quickly.

Still a lot in storage.

Yes. Still a lot in storage. So, we had a pretty late winter this past winter, but anyway, there is all kinds of variables that impacts that. But it's nothing else going from 2 in a quarter to 3 in a quarter in the MBTU price, that's a good guide.

Our next question does come from the line of Carson Yost with Yost Capital.

I thought you guys actually did a really good job with Adler, despite all these people on the call talking about it, compared to what we see here in Fort Worth in the Barnett. That was pretty darn good, so I'd say, congrats. I guess, the question that I have, and I wanted to ask you all about is, what are you seeing in your markets with the large concept Poseidon-type concept frac tanks. Number one, is there a secular shift away from traditional frac tanks, and number two, just looking at the number of tanks that these guys are building, my back of the envelope shows these guys are kind of adding 30% to 40% capacity to the market this year alone, and anyway, just hoping for your thoughts and good job for what you did.

There’s a Poseidon – I’ll say there’s the Poseidon product and there are also some additional products similar to that modular tank products. They are going to be a certain part of the market, I don't think there is any question about it, you have to have the right topography to use that product, you have to have the clear space to do it, and it's certainly a part of the rental environment and we have been aware of it for some time now, and it's not applicable in all applications. The other thing I might add is that it doesn't meet the needs of mix tanks or other Weir-type tanks for the affluent coming out of the wells, etcetera. So there is always opportunity to rent tanks even in those environments that serve other needs on a drill pad. But, again, viable product. We know it's a competitive product, and to date we have been fortunate that we haven't really seen it displace any of our existing product, and then perhaps the opportunity pipeline would be more full if that product wasn't in the marketplace. But it is, but it doesn't seem to be something we will run into too often.

Last question with respect to that, I mean, one, if you can't beat them, why not join them? Any thoughts about an Adler lookalike, because the paybacks are phenomenal?

It's like anything else with oil and gas, what you want -- it's always ebb and flow, and there's obviously peak markets, and there is good times and bad times, especially in the E&P world, and the way we manage our rental business is we want assets that when the next downturn occurs in E&P, we can redeploy those assets into other markets. When we are buying a 20-year asset, we want that product to be able to serve many, many different end markets over its lifetime due to its ups and downs in the E&P world. The other product is not really amenable to any other application, to the best of my knowledge, other than the frac-ing world, and even within that, the storage of water for the initial frac work. So, we had needed to say we have opportunity to do that. We've got opportunity today to build that product or rent that product, and it hasn't been our desire to do so, because there’s a lot of people are easily producing product in that market, different design, different products, and what I wouldn't want to do is stuck with assets, in a down market that I couldn't redeploy.

Our next question is a follow-up question from the line of Joe Box with KeyBanc Capital Markets.

Just one quick follow-up, Keith. Are you guys expecting a write-off with the planned divestiture wind down of your environmental business, and if so, is that included in your guidance?

Yes. At this point, and we are really early in the innings of looking at how that business will wind down, but at this point, the guidance assumes neither a gain nor a loss on the winding down of that part of the business. Obviously, if that was to change, either positively or negatively, it might have a small impact. I would emphasize, it's a small part of the business. If you look at the fact, we have $1 billion worth of equipment at original cost on our balance sheet. The environmental test equipment portion of that is less than 1% of our asset pool, and so, as we unwind it, I don't think it's going to be a large impact, but we will know a lot more over the next couple of months.

And at this time there are no further questions. I'd like to turn the call over to management for any closing comments.

Well, thank you all for joining us this afternoon and this evening for our Q2 call. We’ll look forward to chatting with you again on our Q3 call, which will be in early November. Thanks so much.

Ladies and gentlemen, that will conclude the conference for today, we do thank you for your participation. You may now disconnect your lines at this time.