McGrath RentCorp (MGRC) 2002 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the McGrath RentCorp third quarter 2002 conference call.

At this time, all conference participants are on a listen-only mode. Later we will conduct a question-and-answer session. At that time, if you have a question, you will need to press the number one key followed by the number four key on your touch-tone telephone.

I would now like to turn the conference over to your host, Mr. Jeffrey Boucher (ph) of the SBG Investor Relations. Sir, please go ahead.

Jeffrey Boucher (ph): Thank you, operator. Good afternoon. I'm the investor relations advisor to McGrath RentCorp, and I'll be acting as moderator of the conference call today.

On the call today from McGrath RentCorp are Robert McGrath, Chairman and CEO; Dennis Kakures, President and COO; and Tom Sauer, Vice President and CFO.

Please note that this call is being recorded, and will be available for telephone replay for up to 48 hours by dialing 1-877-519-4471 for domestic callers, and 1-973-341-3080 for international callers. The passcode for the call replay is 3500231.

This call is also being broadcast live via the Internet and will be available for replay purposes. We encourage you to visit the investor relations section of the company's Web site at mgrc.com.

Our press release was sent out today at 4:05 Eastern time, 1:05 Pacific time. If you did not receive a copy but would like one, it is available online in the investor relations section of our Web site. 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 would now like to turn the call over to Robert McGrath, Chairman and CEO.

Good afternoon. This is Bob McGrath.

As those of you who listen to our conference call know, I like to speak in what I call "nuggets," which are little tidbits you can latch onto and take home with you.

So, nugget number one. To give some guidance, we announced earlier that second half earnings would be between $1.18 and $1.22, with six cents relating to a payment by Tyco. We continue to hold to those numbers.

Nugget number two. Modular rentals are up six percent for the first nine months. On an apples-to-apples comparison, modular's pre-tax contribution is up 17 percent for the first nine months. Over the years, our modular business has produced stability and consistent growth.

Nugget number three. One major institutional investor suggested that it might be smart to value the company by just valuating the modular part, and then considering the instrument rental part as a bonus.

While this is a good thought, with the impairment charges behind us in the instrument rental business, we feel there is a definite opportunity for our electronics division to add decent profit as we go forward.

Nugget number four. I want to say something about our Tyco experience. For many of our people, surviving the Tyco experience was like surviving an earthquake. You think you are OK, but months later you find you are having an occasional nightmare or headache. Slowly, we are coming around. We are working hard to regain everyone's trust and once again have McGrath RentCorp be a happy, exciting and productive place to work.

I will now turn the meeting over to Tom Sauer, our Chief Financial Officer.

Thank you, Bob.

In addition to today's press release that we've issued, we have also filed with the SEC our Form 10-Q for the quarter ended September 30th, 2002, which discusses the three- and nine-month results.

The third quarter 2002 includes a $1.25 million, non-recurring reimbursement of expenses related to the terminated Tyco merger agreement. For now, I would like to point out just a few financial highlights for the quarter, excluding this reimbursement as compared to third quarter 2001.

For Mobile Modular, utilization continues to trend up and reached its highest level since July 1990, ending the quarter at 86.4 percent. Mobile Modular's pre-tax contribution is up 42 percent from $7.7 million in 2001, to $10.8 million in 2002, and represents 83 percent of the company's pre-tax income for the quarter.

Excluding the effect of the change in residual value for modular equipment, Mobile Modular's pre-tax contribution is up 18 percent over 2001.

For RenTelco, this year our electronics business has really been resized as a result of the weakness in the telecom industry. Let's take a look at what it really looks like now.

In 2002, equipment at cost has been reduced from $95 million to $42 million through write-downs and sales of underutilized equipment. The carrying value of the equipment also has been reduced from $58 million to $24 million, of which $9 million is communications equipment.

During the same period, communications equipment has declined as a percentage of the total inventory's carrying value, from 62 percent to 38 percent.

Even as total revenues declined to $6 million, pre-tax income was still $1 million, as lower depreciation expense reduced our operating costs. You can view this as a new baseline for RenTelco's pre-tax contribution.

The flip side of RenTelco's business being down, combined with our focus of using existing modular equipment, means that less equipment is being purchased. Let's take a look at how that's impacted our uses of cash flows for the first nine months of 2002.

Our cash flows from operation, used equipment sales and stock option exercises were $56 million. These funds were used to purchase rental assets, mostly modulars, of $16 million, pay shareholder dividends of $6 million, and reduce bank debt by $31 million.

The debt reduction trend continued into the first few weeks of the fourth quarter, as the company reduced debt by an additional $7 million. That's reducing our debt levels thus far in 2002 from $104 million at the start of the year to today's debt level of $66 million, or a 37 percent reduction.

EBITDA adjusted for non-cash items for the first nine months declined 22 percent from $63.8 million in 2001 to $49.6 million in 2002, and is attributable to the decline in RenTelco's rental business.

Even as challenging as RenTelco's business is, it generated EBITDA of more than $9.2 million on revenues -- total revenues -- of $20.6 million, up 45 percent EBITDA margin. Consolidated EBITDA margin declined from 53 percent in 2001 to 45 percent in 2002.

In September 2002, the third quarter dividend was declared at 18 cents per share, two cents per share higher than the comparable 2001 period. On an annualized basis, this dividend represents a 3.4 percent yield, based on the October 22nd, 2002 close price of $21.26 per share.

With respect to earnings guidance for the fourth quarter of 2002, we believe Mobile Modular will continue to contribute a significant portion of the company's pre-tax income. Enviroplex revenues will be lower than the comparable period last year as a result of reduced order activity and backlog. And RenTelco seems to be stabilizing and will marginally contribute to pre-tax earnings in the fourth quarter.

With that said, for the fourth quarter 2002, we estimate earnings per share will be in a range from 50 cents to 52 cents per share.

As I indicated before, in addition to today's press release, we have also filed the SEC -- with the SEC -- our Form 10-Q for the quarter ended September 30th, 2002, which discusses the three- and nine-month result in more detail.

I'd now like to turn the call over to Dennis Kakures, our President.

Thank you, Tom.

First, on the investor relations front, I wanted to share with everyone that in early October the company presented at the Sidoti investor conference in San Francisco. Also that Bob, Tom and I are headed to the East Coast next week to meet with a number of fund managers who we are anxious to share the McGrath story with.

Now let's examine the results for each of our businesses more closely. Let's start with Mobile Modular.

Rental revenues for the third quarter 2002 increased three percent to $16.7 million from $16.2 million in the third quarter of 2001. For the nine month period, rental revenues increased six percent to $49.7 million from $46.8 million in the first nine months of 2001.

These were the highest ever third quarter and first nine month rental revenue levels for Mobile Modular.

The educational market continues to be the strongest segment of our modular rental business. Our California classroom rental business continues to benefit greatly from increasing student populations, insufficient funding for new schools, and aging facility infrastructure.

Over the past 10 years, we have established ourselves as the preeminent provider of educational buildings for rental in California. These include rentals for public and private schools K through 12, community colleges, universities, child care and adult education.

Educational rentals now make up greater than 56 percent of our rental revenue mix for modulars, and better than 45 percent of total company rental revenues. The recurrent rental annuity from this segment of our business continues to grow and to provide the company with a very stable and increasingly larger portion of total income.

Gross margin percentage on rents for Mobile Modular for the third quarter 2002 increased to 68 percent from 52 percent in 2001. Excluding the impact of the change in residual value, gross margin on rents would have increased to 57 percent.

The increase from 52 percent to 57 percent is directly related to our campaign to lessen our dependency on higher priced contract labor in our inventory center operations by hiring employees directly. This has had a significant impact on lowering average hourly labor costs in our inventory centers.

In our last conference call, we stated that we expected approximately two percent increase in gross margin from the impact of this transition, but have improved upon this with a five percent increase. With the majority of the transition now completed, we expect to continue to benefit from these reduced labor costs going forward.

Mobile Modular sales revenues for the first nine months of 2002 increased 25 percent to $15 million, compared to $12 million for the first nine months of 2001. This increase is attributed to higher billing levels for projects associated with our major projects group.

The major projects group supplied larger and more sophisticated modular buildings, related site construction and project management services to a variety of industries, ranging from health care to education.

We are looking forward to our major projects to play an increasing role in sales revenue growth.

For my closing comments on our modular rental business, I want everyone to be aware of what we are currently focused on to further increase rental and sale revenue levels.

One. Expanding our educational rental business by targeting more opportunities for organic growth with public schools, private schools, community colleges, universities and childcare providers.

Two. Increasing our market share of the commercial rental market, especially in Southern California, through increased marketing efforts and expanding our sales force.

Three. Further enhancement of our Internet offerings in order to create more unique, valued online features that are difficult for our competitors to duplicate.

And finally, continue to build and develop our major products through sales and project management personnel infrastructure and our marketing efforts.

And now let's look at the quarter for Enviroplex, our classroom manufacturing subsidiary.

Net sales revenues for the first nine months of 2002 increased 12 percent to $11.3 million compared to $10.1 million for the first nine months of 2001. The backlog of orders as of 9/30/02, decreased 68 percent to $2.8 million compared to $8.6 million a year earlier.

Finally, let's take a closer look at RenTelco. For the past year, our conference call comments regarding our communications test equipment rental business have spoken to both quarter-over-quarter and sequential quarterly double-digit declines in rental revenue levels.

Although those trends continued in the third quarter, it should be noted that within the quarter, that is comparing July to September, rental revenue is flat. Although we continue to have limited visibility at this juncture, we may be seeing the bottoming of business levels, although there still could be some bumps ahead.

In our last conference call, I identified a number of key steps we were taking to return the business around to increasing profitability. Those items included: one, pushing hard to sell off underutilized equipment; and two, right-sizing personnel expenses to align with current business activity levels.

We are very pleased with our underutilized equipment sales results during the quarter and in getting our overhead cost structure adjusted. Our new division leadership team has firmly taken the reins of the business, and is working hard at increasing business opportunity levels.

With the impact of the Q1 and Q2 equipment impairment charges behind us, coupled with the restructuring, we have recalibrated the business. Or, said another way, we have set a new baseline by which to measure RenTelco's success going forward.

RenTelco's pre-tax income for the third quarter was $1 million. We feel very confident about the prospects for RenTelco's continued profitability and are rebuilding our communications test equipment business, rental by rental.

Now for a few closing comments.

Over the years, our modular rental business keeps right on enduring through good times and bad. We create recurring revenues through rental contracts.

During slow times our rentals are counter-cyclical, and as we reduce purchasing rental inventory, we use our strong cash flow to pay down debt. During more active periods, we increase our rental inventory purchases and grow the base of our current revenues even more.

All of this results in very predictable long-term growth. This stalwart business model has sustained us through a very difficult 18-month window for our communications rental business.

On one hand, it's comforting to know that we can fly the plane with a single engine. On the other hand, with our recalibrated RenTelco engine now in place, our aero speed can increase as turbulent skies give way to greater visibility on the horizon.

We have built a wonderful business in communication test equipment rentals over the years that will again prosper. We are also very proud of what the RenTelco name stands for in the industry.

We have an employee group with a commitment and expertise level in serving our customers that is very, very special. It was the competency and dedication level of these employees that propelled us to our industry leadership position in communications test equipment rentals and to our previous heights of profitability.

Although we've had to do some paring of the ranks, virtually all of the same team members are in place to rebuild the business. We know they will be the cornerstone of our success going forward.

And finally, during the last conference call I noted that the senior management of the company was re-engaging our long-term strategic planning process that had been put on hold during the Tyco merger.

Our strategic planning council has a meeting on a regular basis, and is working hard to produce an enhanced focus, energy levels and direction for the company that will ultimately translate into increased earnings and shareholder value over the long haul.

And now, Bob McGrath, Tom Sauer and I are pleased to take any of your questions.

Thank you. The floor is now open for questions and comments. If you do have a question or a comment, please press the numbers one followed by four on your touch-tone phone at this time.

Please hold while we poll for questions.

Our first question comes from Cliff Walsh (ph) from Sidoti.

Cliff Walsh (ph): Hi, everybody.

Hi, Cliff, how are you?

Cliff Walsh (ph): Good, how are you? Can you break down Mobile Modular sales by market? I know you said that education was 56 percent, I believe. Can you give like construction and sales development like you did last quarter?

Yes, you're speaking of rental revenue breakdown?

Cliff Walsh (ph): Yes, yes. I'm sorry.

OK. Fifty-six percent, as you said, relates to educational rentals.

Cliff Walsh (ph): OK.

And then if we look at the other groups, the next largest group is construction and development, and we actually break that into two groups. That is -- bear with me just a moment. I'm just pulling up a chart here, just so I can speak more specifically to it.

All right. Construction development is the next largest sector, which makes up about 20 percent of the rental revenue mix and then from there, it's a variety between governmental, petrochemical, health care, segments making up three, four, five percent of the business.

So we like to kind of characterize the other group of opportunities for any buildings that people that need office space adjacent to existing facilities. And that's going to be really for any type of business or entity in its life cycle. Cliff (ph), did that answer what you were after there?

Cliff Walsh (ph): Yes. Yes.

And again, the floor is now open for questions and comments. If you have a question or comment, you may press one followed by four on your touch-tone phone at this time. We have Les Bryant (ph) and Cliff Walsh (ph) again.

Thank you. Our next question comes from Les Bryant (ph) from ...

Les Bryant (ph): Hello? Am I on?

Yes.

Les Bryant (ph): I just had a question. I'd like a little color on the -- and an explanation of -- we had good deliveries from the viralplex (ph) this quarter and I noticed that our backlog is substantially lower. Could you give us a little color on that as to what's happening and what's to be expected?

Well, just from the standpoint of where the backlog is now, that's just assumption of what opportunities they've been able to capture versus other folks. So I don't have much color than that other than the backlog is kind of a moving target and that backlog can change actually fairly quickly based upon what they are able to bring in. So it's a bit of a moving target.

This is Tom (ph). The other item I would point out in our Q2 conference call, there was a large project that the bulk of the work isn't done and in Q2 was about two and a half million dollars that was completed in the early part of Q3, and so that's why there was a bump in sales revenue in Q3.

Les Bryant (ph): Do most of the -- most of your orders there come from the bond fundings for the schools?

You know, we've never done any study on that. There's a lot of these state bond monies, there's local bond money and then there's regular funding that districts have from other sources, so we've never really done an analysis on that, so we could not answer that question specifically.

Les Bryant (ph): OK. I just was curious as to how evenly the funding came in versus the orders and deliveries. And I guess you don't have too good of an answer.

We don't have any additional inference that we could share on that.

Les Bryant (ph): OK. Thank you.

OK. We have a follow-up question coming from Cliff Walsh (ph).

Cliff Walsh (ph): Sorry about that. I seem to have gotten disconnected there for a second. Do you have a timeframe as to when you're going to finish up the strategic planning process?

We haven't set a specific date. There are -- we're doing it in segments. We do have some items we're trying to get accomplished before the end of the year, which are very critical, probably the most critical part of things, and so we do have that, but there are other components of that that will extend beyond the end of the year. And as you know Cliff (ph), strategic planning processes are ongoing and continuing, but there is some initial work here before the end of the year that we're trying to get buttoned down and get clarity on.

Cliff Walsh (ph): All right. Now when did you implement Rentelco's rental equity program and what have the results been like so far? On the Internet I believe, I saw ...

Yes. That's just been in the last few months and we don't have any data to share from that at this point.

Cliff Walsh (ph): OK. Is this going to be a long-term program or just something that you'll, you know, (INAUDIBLE) until the economy picks up?

I think it will depend upon the success of the program and what peripheral business we get from it. Sometimes if you're able to do a transaction of that sort, it can lead to expanding the rental, straight rental opportunities. So I think it's the assumption that we need to look and see what comes in and you know, what peripherally we get as a result of that.

Cliff Walsh (ph): OK. And do you have an estimate Tom (ph), as to how much debt you're going to pay down in Q4?

One way to look at it is on a historical basis in Q4 of 2001, we paid down roughly 20 million in debt and in Q4 this year, we'll probably be purchasing less equipment, but we haven't really forecasted out how much debt will ultimately be paid down.

Cliff Walsh (ph): OK.

Once again, as a reminder the floor is open for questions or comments. You may press one followed by four on your touch-tone phone at this time.

We have a follow-up question from Cliff Walsh (ph) from Sidoti.

Cliff Walsh (ph): Sorry about this. I keep getting disconnected here. How does the reimbursement from Tyco (ph), what's the tax effect on that?

It's roughly $800,000. It's the net income impact of the 1.25 million.

Cliff Walsh (ph): OK. All right. That's everything that I have.

Thank you Cliff (ph).

Thanks Cliff (ph).

Cliff Walsh (ph): Thank you very much.

Once again, as a reminder, if you do have a question or comment, you may press the numbers one, followed by four, on your touch-tone phone at this time.

Sir, there appears to be no further questions at this time.

Oh, I -- this is Dennis Kakures and I'd like to thank everybody that joined us today and I'm sure a number of you might be folks that we'll be seeing on the East Coast next week, but thank you all for your support of the company and we'll look forward to speaking on the next conference call. Thanks so much.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.