McGrath RentCorp (MGRC) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the McGrath RentCorp fourth quarter 2003 earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Thursday, the 19th of February 2004. I would now like to turn the conference over to Jeffrey Busher (ph). Please go ahead, sir.

Good afternoon. I'm the investor relations adviser to McGrath RentCorp. I will be acting as moderator of the conference call today.

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

Please note that this call is being recorded and will be available for replay for up to 48 hours by dialing 1-800-405-2236 for domestic callers and 1-303-590-3000 for international callers. The pass code for the call replay is 567142#. This call is also being webcast live over the Internet and will be available for replay. We encourage you to visit the investor relations section of the Company at mgrc.com.

A press release was sent out this afternoon at approximately 4.05 PM Eastern Time and 1.05 Pacific. If you did not receive a copy but would like one, it's 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 21-E 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 on 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 Dennis Kakures.

Good afternoon everybody. In just a moment I will turn the call over to Tom Sauer, our Chief Financial Officer, to go over our fourth quarter results, but first I wanted to handle a few housekeeping matters.

First, with respect to filling the CFO role, we continue to search for an appropriate candidate. Once a candidate is hired, this will allow for Tom Sauer to move into his new role of Vice President of Financial Planning and Analysis. In the meantime, Tom is continuing to serve in all capacities as CFO.

I also wanted to mention that management and the Company's Board of Directors recently updated its corporate governance practices, which can be accessed in the investor relations section of the Company's website at mgrc.com.

Now I would like to turn the call over to Tom Sauer, CFO. And I will follow on after Tom.

In addition to the press release issued today which discusses the fourth quarter 2003 results, the Company also filed with the SEC the press release on Form 8-K.

For the fourth quarter 2003 net income was 7 million or 57 cents per share, as compared to 7.7 million or 61 cents per share in fourth quarter 2002. (technical difficulty) indicated in the press release, excluding land sales gain recorded in the fourth quarter 2002, net income for the quarter would have decreased 3 percent from 7.2 million in 2002 to 7 million in 2003, with earnings per share of 57 cents for both periods resulting from fewer outstanding shares in 2003.

For Mobile Modular rental revenues increased 2 percent in Q4 2003 to 16.9 million as compared to Q4 2002. This was Mobile Modular's highest ever quarterly rental revenue level with gross margin percentage on rents of 68 percent. Average modular utilization for Q4 declined from 85.8 percent in 2002 to 85.1 percent in 2003. Sales in Q4 2003 decreased 1 percent to 5.6 million as compared to Q4 2002, with a higher percentage of the quarter's sales derived from new equipment and resulted in a gross profit decline of 441,000 or 21 percent as compared to Q4 2002. For Mobile Modular pre-tax income declined 11 percent from 11.2 million in Q4 2002 to 10 million in Q4 2003 and represents 84 percent of the Company's pre-tax income for the quarter.

For RenTelco rental revenues increased 8 percent in Q4 2003 to 3.6 million as compared to Q4 2002. This was the third sequential quarterly rental revenue increase for RenTelco. Average electronics utilization improved for Q4 from 43.8 percent in 2002 to 46.6 percent in 2003, although still below our target range of 50 to 55 percent. Pre-tax income for Q4 2003 was 1.1 million, with the sale of under-utilized equipment contributing about half the pre-tax earnings for the quarter.

Now here's a point I would really like to emphasize -- the Company continues to generate very strong cash flows to operate our business and return value to our shareholders. For the year cash generated was used to purchase $36 million of rental equipment, repurchase $10 million of the Company's common stock, pay $9 million in dividends, while continuing to reduce our debt by $8 million.

For 2003 EBITDA, adjusted for non-cash impairment and compensation expenses, declined 17 percent from 67 million in 2002 to 56 million in 2003, primarily due to the Company's lower revenues. Consolidated EBITDA margin percentage declined from 46 percent in 2002 to 42 percent in 2003.

The Company declared a fourth quarter dividend of 20 cents per share, 2 cents per share higher than fourth quarter 2002. On an annualized basis this dividend represents a 2.6 percent yield based on the February 18, 2004 close price of $30.41 per share.

With respect to earnings guidance for 2004, at this time we estimate the 2004 full-year earnings per share to be in a range $2 to $2.10 per diluted share. We expect Mobile Modular's contribution will continue to account for a significant portion of the Company's profits in 2004.

At this point I'd like to turn the call back over to Dennis.

Let's jump right to our fourth quarter and year end results for our modular rental business.

Although rental revenues for the full-year were down approximately 3 percent from 66.2 million in 2002 to 64 million in 2003, Mobile Modular had its highest ever rental revenue level in the fourth quarter. The exceptionally strong year in classroom orders that we spoke to during previous conference calls was reflected for the first time in the fourth quarter due to it being the first full three-month billing period for the great majority of the orders booked. We will benefit nicely in 2004 from the recurring rental revenue stream these orders bring. Passage of the November 2002 bond measure and monies allocated for school modernization projects was the key driver behind our classroom order activity in 2003.

Although we had a very good year in classroom rental bookings, in the earlier part of the year we experienced an increased number of equipment returns, as well as lower average rental rates throughout the year. These factors offset some of our strong order activity and led to a year-over-year decline in rental revenue levels. Keep in mind that the latest quarter results are typically the most meaningful for assessing rental revenue levels for future periods.

I'd like to take a moment now to discuss further the factors that helped offset some of our strong year end (ph) classroom rental bookings.

Equipment returns -- the increase in equipment returns related mainly to an increased number of returning classroom rentals for completed school modernization projects and from larger commercial complex buildings related to the completion of permanent building space. It is very important to remember that unlike classroom rentals for growth or class size reduction that can say for extended time period, modernization projects have a beginning and an end. As stated earlier, classroom rentals for modernization products have been the largest component by far of new classroom rental orders in 2003. Typically, these (indiscernible) rent anywhere from 12 to 36 months. This type of classroom rental requirements well turn over more frequently than other classroom rental needs. Looking forward, assuming a higher mix of modernization project rentals, in order for us to continue to grow our classroom rental base we will need to have sufficient number of new opportunities to both utilize these returning classrooms, as well as to warrant investment in additional classroom campus (ph).

Lower average rental rates -- when analyzing average rental rates that utilize the utilize equipment we can break this down into two contributing factors. First, with the economy in California continuing to be sluggish, there has been downward pressure on rental rates, especially the commercial construction sectors. Rates for our classroom rental products have also been impacted by tighter school budgets due to the state budget deficit. Encoding routes (ph) put out during more favorable economic periods when recycled and put back on rent during 2003, have experienced a more competitive environment, and thus lower rental rates. The second contributing factor impacting average rental rates is the mix of equipment returned during the first three quarters of 2003. We experienced a higher number of larger square footage buildings with higher absolute rental rates as compared to smaller square footage single wide buildings that carry lower absolute rates. Thus, the mix of utilized equipment reflects an overall lower average absolute rate for building.

Finally, in 2003 we set internal goals to increase both school rental revenue booking levels and our base of school district customers. The initiative in front of these goals was to enhance even further our market leadership position in ranking educational facilities in California, and more specifically our expertise in serving the modernization and reconstruction project needs of school districts. Although absolute rental revenue growth in this market segment was less than what we would have hoped to see for the reasons stated earlier, this should not detract from the long-term benefits of this year's significant booking levels, including increased levels of recurring rental revenues, broadening our school customer base and greatly solidifying our leadership position in classroom rentals in California. We had a truly outstanding year in generating new classroom rental business that will benefit the Company going forward.

Staying with the modular side of the business, let's examine Enviroplex, our classroom manufacturing subsidiary.

Sales revenues for the fourth quarter 2003 increased to 3.9 million from 1.2 million in 2002 due to the completion of various large projects during the quarter. However, sales revenues for the year 2003 decreased to 11 million from 12.5 million for 2002. The backlog of orders as of 12/31/03 was 4.2 million, as compared to 3.3 million a year earlier. We're looking forward to higher utilization of Enviroplex's production capacity in 2004.

Now let me turn our attention to RenTelco and their results for the fourth quarter.

As Tom spoke to your earlier, our communication and test equipment business experienced its third sequential quarterly increase in rental revenues in the fourth quarter of 2003. More importantly, gross margin on rent have increased as well over the past three quarters to 1.6 million in the fourth quarter and was over 5 million for the year. What we are beginning to see is early signs of increasing margin contribution from rentals versus sales as communications market continue their recovery. It is very encouraging to see product areas that have had minimal order activity over the past 12 to 18 months begin to show increasing demand.

We've worked hard at right-sizing inventory levels and in making infrastructure cost reductions in our electronics business over the past couple of years. Keeping in mind that even during the most difficult periods of the downturn there are minimal staffing levels that are necessary to serve all aspects of the business. Going forward, we will benefit nicely from today's overhead bandwidth and additional business activity capacity that it can absorb before needing to increase personnel and other infrastructure costs. 2004 appears to be off to favorable start and we expect to see increasing business levels as the year progresses.

In closing, I'd like to make a few brief comments on our 2004 results and what we see ahead for the Company.

In a year that challenged both our rental businesses, the Company made over $22 million in net income; two, the Company generated EBITDA of 56 million in 2003. The strong cash flows of our businesses were used to -- A) purchase $36 million of rental equipment, thus increasing our total original cost of rental assets to 339 million; B) repurchase $10 million of the Company's common stock; C) pay out $9 million in dividends, which is an 11 percent increase over 2003; and finally, reduce our debt by $8 million and lower our notes payable to $47 million.

Next, the electronics leg of our business is getting stronger. RenTelco has survived an incredibly difficult market environment over the past two years. Even during its most difficult quarters EBITDA for RenTelco never fell below $2 million. We expect market conditions to continue to improve in 2004.

Next, classroom rentals will continue to be at the core of our success and provide favorable recurring income stream for future financial reporting periods. We're focused on growing our leadership position in providing affordable inter-facility solutions to the educational community.

And finally, over the past 12 to 18 months the Company's management has made a significant investment of time and money in developing a strategic printing (ph) structure and protocols to cultivate and assess growth opportunities going forward. As we stand today the Company's management is much better enabled than it has ever been taken advantage of new opportunities in support of long-term income growth.

In many ways, we have the best of both worlds. We are first and foremost committed to charting a course of strategic investment where we can utilize our core business strengths and strong balance sheet position to support increasing income levels over time. At the same time, as we continue to evaluate opportunities our strong cash flow and low leverage position enables us to continue reducing debt and provides us an even stronger financial position for when we're prepared to execute on new growth opportunities.

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

(OPERATOR INSTRUCTIONS) Cliff Walsh, Sidoti & Co.

If you look at the rental related service costs as a percentage of total rental revenue it spiked up pretty significantly -- almost 10 percentage points from the third quarter. Can you give me an idea what the cause of that was? And is it an aberration or should we expect for that to continue somewhere around that rate?

In the rental related services category that primarily relates to delivery installation, return delivery and dismantle on the modular end of the business. And the margins there on those onetime services are being eroded slightly. And so on a comparative basis, rental related service margin has declined from 45 percent to 38 percent because of it.

What is the reason for the margin eroding?

More competitive on those onetime services that we provide.

In terms of the $12 billion bond issue, that's March 2nd, is that the date that the vote goes down? That's when your primary is?

It is Proposition 55, 12.3 billion. And the date -- I don't know if it's March 2nd for certain. I don't have -- I know it's in early March. I don't have the exact date of the month.

Any thoughts on whether or not the issue will past?

The only poll that I have seen and what I am familiar with in terms of being the latest poll also is that we have 52 percent support; it needs 50 percent plus 1 to pass. And there's been a very strong record of passage of these types of facility bond measures historically. There's only one that I am aware of that has failed in the last 15 to 20 years. But this seems to be running tighter than historical measures have, probably due to the fact that there's also $15 billion deficit bond financing measure that is also on the ballot.

Tom, in terms of share buy backs in the fourth quarter, can you give us an idea of how much and average price?

We had no share (multiple speakers).

Thanks very much guys.

(OPERATOR INSTRUCTIONS) There are no further questions at this time.

I'd like to thank everybody for joining us for the Q4 2003 conference call. We will look forward to speaking with everyone on the Q1 2004 call. Thank you all very much.

Ladies and gentlemen, this concludes the McGrath RentCorp fourth quarter 2003 earnings conference call. Thank you once again for your participation today. You may now disconnect.