Welcome to the McGrath RentCorp First Quarter 2014 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Wednesday, April 30, 2014. Now I would like to turn the conference over to Geoffrey Buscher of SBG Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon. I'm the Investor Relations Advisor of McGrath RentCorp and will be acting as moderator of the conference today. Representatives 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 4678086. This call is also being broadcast live over 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. Our press release was sent out today at approximately 4:05 p.m. Eastern time or 01:05 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 related 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'd 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 the Form 10-Q for the quarter. For the first quarter 2014, total revenues decreased 1% to $87.5 million from $88.7 million for the same period in 2013. Net income decreased 15% to $7.9 million from $9.2 million and earnings per diluted share decreased 17% to $0.30 from $0.36. Reviewing the first quarter's results for the company's Mobile Modular division compared to the first quarter of 2013, total revenues increased $4.6 million or 16% to $33.6 million due to higher rental, rental-related services and sales revenues. Gross profit on rents decreased $0.2 million or 2% to $9.2 million, primarily due to a decrease in rental margins to 43% from 49%, partly offset by higher rental revenues. Lower rental margins were primarily a result of $2.1 million higher other direct costs for labor and materials. Selling and administrative expenses increased $0.9 million or 11% to $9.7 million, primarily as a result of increased employee headcount, salaries and benefit costs. The higher gross profit on rental-related services and sales revenues, partly offset by higher selling and administrative expenses and lower gross profit on rents resulted in an increase in operating income of $0.1 million or 4% to $3 million. Finally, average modular rental equipment for the quarter was $570 million, an increase of $35 million. Equipment additions were primarily to support growth in Texas, Florida and the mid-Atlantic region and for our portable storage business. Average utilization for the first quarter increased from 66.4% to 69.9%. Turning next to first quarter results for the company's TRS-RenTelco division compared to the first quarter of 2013. Total revenues decreased $3.2 million or 10% to $29.6 million, primarily due to lower…

Thank you, Keith. Although, our first quarter 2014 EPS results are approximately $0.06 per diluted share below the first quarter of 2013, they are in line with our internal forecasting. Due to various seasonality, outbound and inbound equipment shipment timing and other factors, our quarterly results can vary significantly within a given plan year. We are reconfirming our 2014 full year guidance range of between $1.70 and $1.85 per diluted share. Now let's take a closer look at each business for the quarter. Modular division-wide rental revenues for the quarter increased $2.2 million or 11% to $21.5 million from a year ago. During the first quarter, we experienced a 37% increase in division-wide, year-over-year, first month's rental revenue bookings from modular buildings with an increase of 44% in California and 34% outside of the state. Our favorable modular building rental booking trends have continued to date in the second quarter of 2014. We also continue to see rental rates rise for various sized products as demand exceeds readily available supply. Modular division average utilization for the first quarter of 2014 rose to 69.9% compared to 66.4% a year ago. This is the highest modular division first quarter average utilization level since 2009. Modular division income from operations for the quarter increased by $0.1 million or 4% to $3 million from a year ago. The lower percentage increase in income from operations compared to rental revenues is primarily due to the increase in divisional booking levels and a significant increase in related inventory center cost for labor and materials to prepare and modify equipment for rental. This is compounded by a need to redeploy various rental assets that have been sitting idle for extended timeframes, which tend to have higher processing costs than inventory that turns more frequently. In fact, inventory…

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

So I was curious if you could give a little bit more color as to, I think, certainly a quarter or 2 ago, the question came up of how long the elevated costs would run at Mobile Modular, I think, at that time, commentary was 12-plus months. So now a quarter or 2 down the road, you're still seeing strong bookings. Any update on that thinking on how long the elevated cost might run and how significant they might be? Is this quarter's $2 plus million incremental a good number to run with?

When you look at how we planned 2014, we look at the first half of the year being in line with the higher expenses like last year and then in quarters 3 and 4, we likely would not spend as much as we did in the first half of the year. Now that will depend greatly on the amount of continued business activity at such a high level. However, what we should start seeing, though, if it's expanding margins as more of this equipment that we've been spending these big dollars on goes on rent. But that's kind of our outlook for the year right now, is really -- Q1 was a heavy spend quarter and all for the right reasons. And we would likely expect Q2 to also be a heavy spend quarter, maybe not to the Q1 level. And then in the second half of the year, we expect to be somewhat less than the first half of the year.

And David, just for clarification in Q1 of 2013, we really weren't experiencing the elevated level of expenditure in the modular business. So that's why you see the comparison with Q1 of '14, it is up significantly, $2.1 million, about 33% increase.

Sure, got you. And then part 2 of that, when you think about the revenue base from modular on a sequential basis, down a touch, which I guess I'm not used to seeing given the demand characteristics, just curious how we should think about that.

It's really the number of days in the quarter, David. And in the modular business, the number of days impact the rents that we collect. And so first quarter is slightly fewer days than the fourth quarter, that's the primary reason. I would also say that during the first quarter, and this is not unusual, we did have slightly more returns than new shipments and so that resulted in fewer units on rent, but to a modest extent.

David, and if you go back historically and look at Q4 to Q1, you can go back to even pre-recession time frames, 2008 and 2009 all the way through today, in Q1 it's typically slightly below or flat to Q4.

It's very common, even if the business is performing well. There's just seasonality dynamics that can come into play between how you end the year and how quickly you start out the new year.

Got you. Okay. And then shifting to TRS for a second, the elevated level of returns that you have, the 13%, it sounds like some of that weather-related but anything else that you think is driving that or is it just pure sort of economic?

Well, the dynamics in the general purpose market today is that it's highly competitive. There is a lot of underutilized assets in the industry. That's been really driven by weakness in the semiconductor industry as well as in aerospace and defense, perhaps some other general electronics business. And I wouldn't say that returns are so much greater as much as the outbound equipment and order activity has not been that plentiful, in terms of realizing a higher amount of growth over Q1 2013. I don't think -- the returns are just occurring in an orderly manner. We just had not seen what's in the pipeline really converting into orders going out.

I guess, what I was thinking there was just the 13% increase from returns I guess year-to-year, right, seem to be a big jump.

Well, like I said, the business is bigger today but this has more to do with what is going -- not going out in terms of what is pent-up in the pipeline. And we just haven't seen as much equipment going out. Not only the returns -- in my prepared comments, I tried to explain the delta there. But more than anything it has to do with the momentum of new equipment shipments.

Got you. One last, if I may. I think, November was the current due date for Agilent to do the key site spinoff. Just curious, if you think that affects you. I guess it would be a positive for you, but curious if there's any thoughts on the effect.

I'm not sure if there is any real material difference of any sort there. We likely become more important in the new world because it's solely a test equipment world as oppose to the mix of business today. But I wouldn't expect anything of a material nature going forward other than we have a good relationship and we expect that to continue.

[Operator Instructions] And our next question comes from the line of Scott Schneeberger with Oppenheimer.

With one on each segment, I'm going to go around the horn. In Adler, could you talk a bit about the weather impact and less so on the fracking and more so on the other segments, how much of an impact would that be and how much recovery are you seeing into second quarter?

Well, if you look at the Midwest and the East in the winter that we had, needless to say the reason the natural gas prices are where they're at today, close to $5 in MBTUs, is because the amount of gas, natural gas used in this past winter as well as the length that it's been used, to March and April, of larger quantities, we -- obviously there's a negative side to that in the fact that various projects that would otherwise have gone forward in the Midwest and the East couldn't move forward because the ground is frozen or due to other inclement weather hindrance. So that's really the dynamic there. And I think the telltale there is you look at the ending utilization level for the quarter for Adler, it's markedly from the average for the quarter. So I think that's probably your best telltale that things got a lot stronger towards the end of the quarter and that strength has continued now into the second quarter.

Okay, great. Within TRS-RenTelco, when do you anticipate, it looks like we're kind of in a down cycle so to speak, when do you anticipate recovery from this? I mean, obviously, the weather was a little bit of an impact in the quarter but there's certainly more to it than that. What indicators are you watching and any tell-tale signs that things may improve in the near future?

That's a difficult question to answer at this juncture. In April, we would have liked to have seen some improvement already this year. We knew there was a bit of a slow start to the year. We haven't seen that yet, although, we're hopeful that over the next couple of quarters, we'll see our billing rate ramp nicely. But that we're still waiting to see that throughput. So we've actually had, for April -- April was our best month of the year so far in terms of -- if you look at the beginning month's billing rate versus the end of the month. And so it was certainly stronger than earlier in the year. We need that to continue. But right now, it's still a bit of a wildcard to all of us. And that's an important part of our plan this year for TRS, to be able to hit our internal projection numbers, et cetera. But right now, we've got that business running tightly. It's lean. We're trying to really manage depreciation expense tightly, which as you know is 40% to 50% of cost out of every rental revenue dollar. And so we want to make sure we're not going to be bleeding excess depreciation expense, as that can take away from profitability. So we're working both ends of it, the top line as well as the cost elements to be able to get the margins we need in the business this year.

Okay, great. My actually last one is going to straddle a couple end market -- a couple of segments. You'd mentioned 2 new geographies in portable storage and I'm just curious how active were you with new geographies last quarter? Why just 2 here and maybe talk about a focus on greater critical mass? And I noticed in Adler, you'd also mentioned, I think you said it 3 times, objective to refine and it's not a lot of new market investment. So a bit of a different tactic than what you had, had in both of these end markets. Just if you could elaborate a little bit more on both.

I'd be happy to. Well, first of all, the general theme is that we've really pushed hard to grow both of those businesses over the last few years. And we've made a lot of investment and it's been good investment. We like the markets we're in and the opportunities that they present to us. However, at the same time, it also created a lot of EPS growth headwind. And our goal this year is, we've got to create more top line headroom in our existing investment to be able to expand margins in the business and increase EPS, before we make further investment. We've got plenty of investments we made that our goal here is to refine that and expand those margins, develop critical mass. So we've got work in front of us, but it's the kind of work that we're good at. And we'll pick up additional growth in various markets or various businesses here once we are generating EPS on a level that's stronger than what we've done over the past couple of years. We need to be doing that. But there is no shortage of opportunity in front of us, and this is a good point in our evolution to make these additional investments in what we already have under our belt.

And I'm showing no further questions at this time. I would like to turn the call back over to management for closing remarks.

We would like to thank everyone for joining us this afternoon, and I want to remind everybody of our upcoming annual shareholders' meeting on June 11, beginning at 2:00 p.m. in Livermore, California. And we'd love to have you be able to join as if you can. Otherwise, it will be webcast. And we look forward to you listening in. Thank you so much for your continued support. Have a good evening.

Ladies and gentlemen, this concludes the McGrath RentCorp's First Quarter 2014 Conference Call. If you'd like to listen to a replay of today's conference, please dial (303) 590-3030 or 1(800) 406-7325 and enter access code 4678086, followed by the pound sign. Thank you for your participation. You may now disconnect.