Welcome to the McGrath RentCorp Second Quarter 2016 Conference Call. At this time, all conference participants are in a listen-only mode to reduce background noise, but later we'll be conducting a question-and-answer session. [Operator Instructions] This conference is being recorded today, Tuesday, August 2, 2016. Now, I would like to turn the conference over to Keith Pratt.

Thank you, Viz. Good afternoon and thank you for joining us on today's call. We are here to discuss McGrath RentCorp second quarter 2016 results, which were reported today after the market closed. Joining me on the call is Dennis Kakures, President and CEO. In addition to the press release issued today, the Company also filed with the SEC the earnings release on Form 8-K and the Form 10-Q for the quarter. Please note that this call will be available for telephonic replay for up to seven days following the call by dialing 1-855-859-2056 for domestic callers and 1-404-537-3406 for international callers. The passcode for the call replay is 44678868. This call is also being broadcast live via the Internet and will be available for replay purposes in the Investor Relations section of the Company's website at mgrc.com. 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 the Company's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements are based upon information currently available to the Company and the Company 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 the Company's business are set forth in the documents filed with the Securities and Exchange Commission, including the Company's most recent Form 10-K. With these formalities out of the way, I will turn to our review of the financial results. For the second quarter 2016, total revenues increased 7% to $103.1 million from $96 million for the same period in 2015. Net income increased 7%…

Thank you, Keith. Now let's take a closer look at each rental business for the second quarter. Modular division-wide rental revenues for the quarter increased $4 million, or 14%, to $31.6 million from a year ago. This is the 13th consecutive year-over-year quarterly rental revenue increase for our Modular division. During the second quarter, we experienced a 21% reduction in division-wide year-over-year first month's rental revenue bookings for Modular buildings. However, this is primarily due to a very strong comparative second quarter in 2015 and deliberate effort to be more selective on which commercial rental opportunities we elect to book and to commit valuable production line space. Modular division average rental equipment utilization based on original acquisition cost for the quarter increased to 75.8% compared to 74.4% a year ago. This is the highest second quarter Modular division average utilization level since the second quarter of 2008. Modular division income from operations or EBIT for the quarter increased to $8.3 million, or by 57%, from a year ago. Gross margin on rental revenues increased to 48% for the quarter from 44% last year, driven 14% higher rental revenues was only 5% and 11% higher building preparation costs and depreciation expense respectively. EBIT margin increased to 17% for the quarter compared to 13% in 2015, chiefly driven by improved rental metrics, including higher gross profit on rental related services, and lower SG&A costs as a percentage of rental revenues, partially offset by slightly lower gross margin on equipment sales. Now let me take a moment to update everyone on our Portable Storage business. Mobile Modular Portable Storage continued to make good progress during the first quarter in building its customer following, increasing booking in rental revenue from a year ago. First month's rent booking levels and rental revenues for the second…

Our first question comes from the line of Scott Schneeberger with Oppenheimer. Your line is now open.

Thanks. Hi, guys, afternoon.

Hi, Scott.

Hi, Scott.

So, Modular. Dennis can we touch on as we're coming into an election season, the bond and any updates you have about how that's working and perhaps anything else on the ballot coming up that may be relevant to you modular opportunity post November? Thanks.

Well, the bond measure that Scott is referring to is in California. It’s approximately a $9 billion school facilities bond measure. So, last one was passed in November of 2006, so it's been a decade. The original funds for that 2006 bond measure expired around 2011, 2012 and those bonds were vital towards doing the various modernization construction work in California schools. So, latest update is that it has broad support from both constituents as well as in the legislature and major school industry groups. So we feel very good about the opportunity for passage on the November ballot, it requires 50% percent plus one, so and historically close to 85% or 90% of these types of facility bond measures for education K through 12 in California have been successful on a statewide basis. So we fully expect at this juncture for that to pass. The other bill or item that is positive for California and its current got favorable electorate opinions on it, is that is to extend the tax increase that this Proposition 30 that was put in place a few years ago to get California kind of a booster rocket out of the great recession in it proved to be very important towards that. And the governor is looking at extending that that's really a tax really on higher income individuals for the most part and that also is being received very favorably by the electorate in terms of initial poll, initial and layer poll. So those are responses to your question there Scott.

Great, thanks Dennis. Just curious in switching over to the tank business, continued pressure unsurprisingly just given commodity prices, anything you can do, really on the press release you mentioned you're going to manage what you can control. Any thoughts outside the box otherwise with regard to weathering the storm or we’ve just waited to see coming out on the other side also when the commodity prices ultimately go up again. Is there anything really that can be done in the near-term perhaps shipping geography, leading geographies perhaps, is there any thoughts on that front? Thanks.

Yes. The work that we've done Scott in that arena really centers around, although we think it's most important is transactional pricing and those type of opportunities you take on versus those types of opportunities you don't. We owned this business seven years now we got a wealth of data, we've been data mining that in and really slicing and dicing that data. We weren’t actually a great deal about different types of transactions what we should be doing more of, what we should be doing less off and what we should not do it at all. So I would say there's no silver bullets right now to be able to change number significantly. However we have choices on transactions that is within our control. And we're going to work that in a very meaningful way that's going to make a very significant difference over the long run. And in the meantime the other piece of that is obviously we want to be able to be more successful in market verticals that have a much more stable base of business. That is left “price of oil” or price of natural gas driven and we've done a good –we've done well at really trying to start developing those markets, our national accounts sales team has made good progress and so it's a lot of a little, but as long as we are directionally correct in the areas that we think will make a big difference. Then I'm happy with that. And again, I realize that may not be a quick solution, but I think it's the correct one for the long-term.

All right, thanks. Just one more for me and then kind of rounding out the segment. If you look at TRS-RenTelco, is there, what's the view on industry consolidation, right now, it seems like it has consolidated a good bid. Do you see that going any farther than where it is now, is that something that could actually happen from a regulatory standpoint? Do you view yourself an aggregator, would you consider yourself a potential target. It sounds like you're managing that business as well as you can control given a bit of a tough environment. So just kind of a curious, any out of the box on that one? Thanks Dennis.

Well, first of all we love our electronics rental business. We have one of the two primary leadership positions in North America and we fully extend to continue growing that business and to the extent there's been consolidation or there is consolidation that is on the horizon here that we think over time that helps us if we eliminate competitors or perhaps the companies aren't as strong as it might otherwise be or less focused. So we're fully committed to that business and I would expect that business to continue in a strong leadership role in the Americas into the future and hopefully we're continue to grow market share and doing some very attractive things with our profitability metrics. By the way, I want to make a general comment to our folks at TRS-RenTelco that you have done a masterful job of running that business in a soft market. And I really want to acknowledge everybody on the call today for the good work you've done and the good work you'll continue to do. Thank you.

Great. Thanks, Dennis and thanks for hearing the questions.

Our next question comes from the line of Sean Egan with KeyBanc. Your line is now open.

Hey, good evening. Can you hear me guys?

Yes.

Hi, Sean.

Great. I just want to start off asking about any update you have on your focus on ROIC I know you had mentioned at last call. Where there any findings that it could drive near-term improvements or is this more of a long-term initiative and the results would certainly be longer-term.

Sure, it's a journey and we are working hard on it and I think as we've indicated in the last call, a lot of emphasis on where we want to deploy assets around the business, new opportunities, making sure we've got the right assessment of the return opportunity from any new equipment purchases. And then even more substantially for the fleet we already own, really being selective by the transactions we pursue and really being thoughtful about the opportunities for better pricing and that applies all across the business. So the work is ongoing, if you count the way the metric, our ROIC was up slightlyQ2 to Q2 and also for the first six months of this year over the first six months of last year, but the numbers are low relative to what we've achieved with the business in the past and our goal is to move those numbers higher over time. But it's an ongoing journey. There's not going to be any special silver bullet that will trigger a higher level of performance rapidly, but we have a lot of attention across our divisions on this topic and we're working together to move the needle.

Great. And just a follow-up to you had just alluded to being more selective in the business that you pursue. I was curious specifically looking at mobile modular, you mentioned you were more selective, utilization was up. Is it just kind of a rising tide that has allowed you to become more selective within mobile modular. I mean, can you kind of put some color and maybe some specific examples around that?

Well, I'd be happy to. When you look at our production capacity in our inventory centers, it's finite. We have X amount of production capacity and it's very important that we're selecting as wisely as we can to those transactions that can provide us the greatest return on invested capital as we look at those dynamics. So for example we have choices all the time to take on let's say shorter term, non-residential construction contracts, they maybe six months, eight months, 12 months. Typically a contractor very much a price shopper and we can probably get all the business to one of that type. However, when we take on let's say that type of transaction, we may be foregoing a longer-term higher price. Project in not only in the commercial space but on education. And in education in particular it produces generally a much longer rental stream or rental annuity for us and we’ve in our work that keep mention a moment ago about looking at individual transactions. We've done a lot of good homework as to what butters our bread now, what do we get our highest margins over time and it certainly is, we known this for some time in the classroom rentals, but it’s longer-term commercial rentals. So if we're going to test something, we're trying to touch it to be able to get an optimal term and transaction out of it. So, yes the economy is good both in the commercial sector as well as in education and remember too we’ve got a bond measure in California that will be on the ballot in November. Some of our efforts have been trying to pre-prep and prepare enough classroom buildings to be able to meet that demand that we anticipate. So we will walk away from certain business today that would go on rent in the next month or two to be able to have enough classrooms, be able to capture business in the quarters ahead. We think that’s ultimately a better decision. So those are just some examples there when we look at really trying to optimize, what opportunity we take on and which ones we do less up or don't do it all.

Great. Thank you for that. And then one last one for me, you mentioned that you are looking at other downstream verticals for applications within Adler I was curious if you could give us any color on, maybe, what some of those other verticals would be that had a more recurring and stable revenue stream?

Well, I think you know at the end of the day when you look at the industrial complex in the U.S. there's a lot of waste generation and there’s a lot of consistent need for products within plants et cetera. So that's certainly is an area of focus for us.

Okay, great. Thanks so much.

Our next question comes from the line of Marc Riddick with Sidoti & Company. Your line is now open.

Hi, good evening everyone.

Hi, Marc.

I wanted to see if you could share some information regarding some of the other areas geographically and maybe what you're seeing there, especially on the education side. And if there is any leading indicators to give you an idea that education might be picking up in some areas outside of California?

Well, as most investors know we're in the California, Texas, Florida and Mid-Atlantic educational markets. And I would say as a whole all of those markets are doing well. I think that's a fair assessment at this juncture. California probably going forward due to the sharp decline we experienced in the great recession has the greatest opportunity to add materially to the company’s return on invested capital and profitability. So we're very excited about that and obviously a lot of the comments that preceded so this question support that our preparation of classroom buildings are focused on this bond measure in November passing and so on. But we actually like our position that we've created in the educational verticals in all the states that we operate in and quite frankly again just to emphasize they're all in a relatively healthy state.

Thanks, Dennis. Thank you for that. On the Mobile Modular storage, I wanted to sort of touch on the strength on the rental revenue booking that - was in excess of 20%. I wanted to get a sense of maybe where if there are any particular industries or verticals that were stronger than others and is that a function of sort of the regional expansion that's kind of follows the footprint of the existing business, and then I have a follow-up with that.

Yes. I see Marc, just to be clear on Dennis’s comments on the rental bookings for modular is they were down 21% in the second quarter of 2016 compared to portable storage.

You're speaking about portable storage?

Yes. I was talking about portable storage.

I’m sorry. Okay.

That’s okay.

So I would say that there's not any particular vertical. I think we're doing well across the board and I wouldn’t point to anything more significant than this. It's a matter - it takes time to build critical mass. And as you are in a market it takes time to develop your base of business and you layer on top of that and you keep layering on the top and X amount of those rentals are longer-term and you're getting that benefit of that average rental term going longer and longer over time. If you're doing all the right things and working in all the right verticals. So I think it's much more about just that pick and shovel work every day about trying to build critical mass and trying to pursue those longer-term rental opportunities.

And is it fair to say that you mentioned the operating metrics being attractive. Is it fair to say that you view this is something as being a potential driver of the ROIC goals that would been previously laid out?

Absolutely and I think that longer-term rental transaction fits right in that alley there, when you look at the fact that if somebody contracts for eight months to rent a product and with no extra effort or energy if you're able to turn that into a 15-month rental or 16 need of having that. Well then in effect from your original analysis you've got seven months’ worth of rental income and really you're only cost against other depreciation and interest et cetera which you are going to carry anyway. So most of that rental revenue will go to the pretax line, so term is a wonderful thing in impacting ROIC positively.

Okay. And as far as our leverage levels, they were about the same as last quarter. I was wondering if there was any particular, I think you were fairly comfortable with kind of where you were, if I recall, but I was wondering if there are any particular cycles maybe for the year-end or for 12 months out as far as looking at leverage levels. Thank you.

Yes. Leverage at the end of June at 2.2, very comfortable with that, our loan confidence led us go up as high as 2.75. If you look through the balance of the year, I would expect debt levels to be comparable at the end of the third quarter to what we saw at the end of the second quarter and then the potential to drop slightly by year end if the business plays out as we expect. So from a leverage point of view, I would think we'll be in the same neighborhood that we are today and we're very comfortable with that.

Okay. Great. Thank you very much.

Thank you.

And that concludes today's question-and-answer session. I'd like to turn the call back to management for any further remarks.

Well, I’d like to thank everybody for joining us this afternoon. We appreciate your continued support and we'll look forward to speaking with you again on our upcoming Q3 call in late October or early November. Thank you all.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.