McGrath RentCorp (MGRC) 2004 Q1 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the McGrath RentCorp First Quarter 2004 Earnings Conference Call. At this time, all participants are in a listen only mode. Following today’s presentation, instructions will be given for the question-and-answer session. (Caller instructions.) As a reminder, this conference is being recorded today, Wednesday, May 5, 2004. I would now like to turn the conference over to Mr. [Jeff Busher] of [SPG] Investor Relations. Please go ahead sir.

Thank you operator. Good afternoon. I am the investor relations advisor to McGrath RentCorp. I’ll be acting as moderator of this 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 577670, followed by the pound sign.

This call is also being Web cast live over the Internet, and will be available for replay. We encourage you to visit the Investor Relations section of the company’s Web site at MGRC.com. Our press release was sent out this afternoon at approximately 4:05 Eastern time, or 1:05 Pacific. 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. 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.

Thanks Jeffrey. In just a moment, I will turn the call over to Tom Sauer, our Chief Financial Officer, to go over our first quarter results. But first I wanted to announce that Tom will be continuing on as Chief Financial Officer to serve our growing company. With our announcement on the acquisition of technology rentals and services, and with the recent push into Florida with modulars, having the continuity of Tom’s experience in the CFO role will serve us well.

We will now look to fill the senior financial planning and analysis role that Tom was targeted to fill, from outside the company. I will speaking to everyone again following Tom’s run through the numbers. Now I’d like to turn the call over to Tom Sauer, our Chief Financial Officer.

Thank you Dennis. In addition to the press release issued today, which discusses the first quarter 2004 results, the company also filed with the SEC the press release on Form 8-K. For the first quarter 2004, net income was $5.7m or $0.47 per share, as compared to $4.9m or $0.40 per share, in the first quarter 2003.

Rental revenues increased 7% in Q1 2004 for Mobile Modular, to $16.8m as compared to Q1 2003, primarily due to the higher equipment levels on rent. Average modular utilization for Q1 improved from 83.8% in 2003 to 84.3% in 2004.

Sales in Q1 2004 decreased 28% to $1.8m as compared to Q1 2003, and resulted in a gross profit decline of $224,000 or 27%, as compared to Q1 2003. Looking forward, Mobile Modular has a $9m sale order to provide classroom product and site-related improvements to a school district during the second and third quarter 2004. For Mobile Modular, pre-tax income increased 7-1/2% from $7.8m in Q1 2003, to $8.4m in Q1 2004, and represents 88% of the company’s pre-tax income for the quarter.

For RenTelco, rental revenues increased 18% in Q1 2004 to $3.2m, as compared to Q1 2003. Average electronics utilization improved for Q1 from 42.8% in 2003 to 46.3% in 2004, although still below our target range of 50-55%. Pre-tax income for Q1 2004 was $1.1m, of which $800,000 was derived from the selling of under-utilized equipment.

The company continues to generate strong cash flows to operate our business and return value to our shareholders. For Q1 2004, cash generated was used to purchase $5.1m of rental equipment, pay $2.4m in dividends, while continuing to reduce our debt by $3.3m.

For Q1 2004, EBITDA increased 11% from $12.4m in 2003 to $13.8m in 2004, primarily due to the company’s higher earnings. Consolidated EBITDA margin percentage improved from 45% in Q1 2003 to 46% in Q1 2004.

The company declared a first quarter dividend of $0.22 per share, $0.02 per share higher than the first quarter 2003. On an annualized basis, this dividend represents a 2.8% yield, based on the May 4, 2004 close price of $31.66 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 of $2.00 to $2.10 per diluted share. This guidance excludes any potential accretive earnings impact in 2004 of the CRS acquisition. At this point, I would like to turn the call back over to Dennis.

Thanks Tom. Let’s turn right to our first quarter results for our modular rental business. As Tom mentioned earlier, rental revenues for the first quarter 2004 increased 7% over the comparative 2003 period. This is a result of higher utilization, driven by fewer returns during fourth quarter 2003 and first quarter 2004, as compared to a year earlier. The strength of our educational rental business continues to contribute significantly to earnings.

Looking forward, we have experienced very favorable classroom rental bookings over the first four months of 2004, which should help to drive higher utilization levels later in the year. This appears to be a direct result of state and local bond measures passed in March for school modernization projects in California.

I am very happy to announce that in the first quarter, we launched modular operations in the state of Florida, and that in April we booked our first order that was for 35 classrooms. The Florida initiative is a direct result of our strategic planning efforts over the past year, and focused on our sweet spot of educational rentals.

In examining various school markets, we found Florida to have similarities in school population growth and funding to the California market. Note that our Florida initiative is strictly an educational rental-based model. This allows us to create lower overhead cost structure, by avoiding significant inventory center expenditures associated with building customizations, and more frequent inventory turnover, which are customer with the commercial side of our business.

While the Florida initiative leverages our educational rental expertise, it will take time to develop into meaningful earnings. The great news is that we’ve got another pair of oars in the water, that will help to drive income growth in the years ahead. We will also continue to explore other potential educational rental market opportunities.

Switching now to our test equipment rental business, let me first address our first quarter results, before transitioning into color regarding Monday’s press release on the acquisition of Technology Rentals and Services or TRS.

RenTelco experienced an 18% increase in rental revenues over first quarter 2003. Additionally, gross margin on rent increased 56% in the first quarter, compared to a year ago, due to higher utilization on rental rates and, to a lesser degree, lower depreciation expense.

Keep in mind that the size of the percentage increase is also a result of the very low base of business a year ago. There is no doubt that these results are directly related to an improving communications test equipment marketplace.

The acquisition of TRS, just as with our Florida initiative for modulars, is a direct result of our strategic planning efforts over the past year. The TRS opportunity is a very special one. Over the past 30 years, TRS has built a very successful test equipment rental business. They’ve focused mainly on serving large and middle market companies, with both general purpose and communications test equipment.

Comparatively, RenTelco has created its success by serving the test equipment rental needs of smaller companies, especially communications contractors, installers, and integrators. The rental assets at each organization, particularly with respect to communications test equipment, have minimal overlap, and are very complimentary to one another. When merged, the new enterprise will offer one of the most extensive inventories of general purpose and communications test equipment in the United States.

In addition to rental assets and existing rental portfolio and customer following, we will also benefit from Canadian operations and an international business knowledge base that will allow us new opportunities for growth; a 120,000 square foot lead facility located on the grounds of the Dallas/Ft. Worth Airport that provides for significant operating efficiencies, and the ability to extend shipping hours to much later in the day; a very powerful integrated information system, designed around the business, that serves operations for everything from customer relationship management to billing; a strong base of key OEM partnerships that generate vendor rental referrals.

And, most importantly, we will benefit greatly from TRS’ dedicated and knowledgeable employees, that have an average tenure with the company of nine years, and are passionate about the business and serving their customers.

With respect to the transaction price, of the approximate $116m to be paid at closing, roughly 90%, or $104m, are rental assets, with approximately $12m of accounts receivable making up the balance. Please note that these numbers are based on March, 2004 data, and are subject to change by the closing date.

I’d like to now share some operating decisions that have been reached regarding the new enterprise. Following the close of the transaction, currently estimated to be on May 31, we will begin to consolidate all of RenTelco’s current operations – that’s both Livermore, California, and Plano, Texas – into TRS’ Dallas facility. This will allow the new enterprise to maximize both operational and facility cost savings.

The new enterprise name will be TRS RenTelco. Both companies have significant customer allegiance that we want to transfer to the new organization. We have selected [Susan Voutwell], a 23-year veteran of TRS, to be the day-to-day operational leader of TRS RenTelco. She is well qualified for the position, and very well respected throughout TRS. I will be actively involved in the integration of the two companies, and will work closely with Susan and others in the execution of her business plans. Susan, if you’re listening, congratulations.

Success of the new enterprise ultimately will be determined by executing on a well thought out integration plan, that takes nothing for granted, and involves stakeholders from both TRS and RenTelco, maximizing on the consolidation economies opportunity, our ability to skillfully manage the technology life cycle of our rental assets, and continuing favorable market conditions.

This is a unique opportunity for McGrath RentCorp, to merge two very find companies into one remarkable enterprise. We are driven by the opportunity to create the premier test equipment rental business in North America, that’s measured by rental revenues, breadth of inventory offered, technology application expertise, and customer following.

One final comment – as a result of the consolidation of the businesses in the TRS’ Dallas facility, a number of RenTelco employees may not choose to make the transition. I have had the distinct pleasure of working with many of these great people for a number of years. Their hard work and dedication at McGrath RentCorp is immeasurable. And we thank them ever so much. We are committed to assisting each impacted employee with finding new employment, either through an open position in other parts of the company, or elsewhere.

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

Thank you sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Caller instructions.) One moment please for our first question. Our first question comes from Cliff Walsh with Sidoti & Company. Please go ahead sir.

Thank you. Hi guys.

Cliff, how are you?

Good. How are you?

Good.

Can you give us an idea of what the size of TRS is, and any profitability info you can share?

Well, what I can say is TRS is one of the three largest test equipment rental companies in the United States, and serves the Canadian market, and does some other international business as well. And they have a significant general purpose business, as well as the communications end of the business. So that’s what we’re able to share with respect to size and market reach.

Okay. So you can’t share any – you know, like last year’s annual revenue of the business, or anything like that?

Not until after the closing.

Okay. I thought originally the plan was to move away from telecom, and more into general test equipment. What was it about this acquisition that made you stick with the telecom?

Well, it was always our intention to be in the telecom business. And that’s our niche play. And we actually want to be able to build on that core, and do more of that business. And the beauty of this transaction is that we also get with it a very significant play on the general purpose side of the industry that we could not have really hoped to ever have grown ourselves, for many, many years.

So what we have at the end of the day is significant in both product areas, and a knowledge of how to be able to penetrate markets from small companies to large companies, to serve both of those test equipment arenas.

Okay. Now in terms of EnviroPlex, have you seen anything in terms of any delays in state funding or project delays, or anything like that?

Well, from a state standpoint, I am not aware of any delay in funding from the most recent bond measure at this time. And I don’t know of any specific delays with respect to EnviroPlex’s business in general.

Okay. Great. Now can you give us an idea of what any costs associated with Florida – how quickly you think you’re going to ramp up, and what it’s going to cost to have an inventory center there?

Well, what’s significant about our penetration into the Florida market with respect to cost is that we don’t have to establish an inventory center initially. And that’s because the type of transaction we’re pursuing, which is educational rentals, most of those transactions minimally go out for a couple of years to start with. And a great majority of those extend for longer terms. So at this time, we don’t even have an inventory center.

And since we’ve got a very – as I indicated – sweet spot look into that market, that’s infrastructure we should not have to create for some time. And, with respect to how it’s going to look overall, we would hope in the first year that we can be pretty close to break-even. That’s what our modeling shows. And then as you get into years three, four and five, it starts having a much more significant impact.

Okay. So in terms of - ? So you will be shipping direct from the manufacturer, and just heading right to the school sites?

That’s exactly right.

Okay. Can you share with us who you are using in terms of manufacturers down there?

For competitive purposes, at this time I would rather not share that. But we will be able to at a later date.

Okay. Great. Thanks so much guys.

Thank you.

Our next question comes from [David Towen] with Midwood Capital. Please go ahead sir.

Yeah. You actually – I wanted also to ask about the supply question in Florida. I mean is that a different spec than the California spec for DSA product?

Yes, it is a different spec. In fact, just recently they adopted a new code in Florida. And that enables us to come into that marketplace, and build all of our products to the latest code, and not have other inventory that is built to the later code, which some of that is being phased down.

Okay. And do you expect much in the way of unit sales, as opposed to rentals in that market? And are you pursuing the sales business – new unit sales business in that market?

Well, as you know, we’re a rental based company. But there is always some sales that come along with just being in the rental business. And we’ll certainly take those where they fall. But that’s not our primary focus.

Okay. And can you give some – any sort of color on the competitive landscape in Florida? Are the G.E.’s, Williams, [ReSuns] [ph] all there with educational products? And are there any other, or regional dealers there?

All of the companies that you mentioned are in the Florida market. They’re all very worthy competitors. And we will need to build our business, based upon our ability to serve the customer well, build a better product, and to be able to just bring our California expertise into the marketplace, and leverage it as best we can.

Okay. Well what do you think your competitive advantage is? I assume all of these guys have been in that market for a while. I mean you’re the new kid on the block. I mean what’s your competitive advantage to penetrate that market?

Well, I’d like to believe it’s our ability to really understand customers, and to be able to serve their needs well. Also, I think in this particular circumstance, because of the code change, we have an ability to build a state of the art rental fleet, and not be saddled with older inventory that is becoming less acceptable, going forward.

Okay. Well good luck with that. Thanks.

Thank you.

(Caller instructions.) Gentlemen, we have no further questions. Actually, we do have one more question. It comes from Robert McGrath from McGrath RentCorp. Please go ahead sir.

Right. I am calling from Rome, Italy. And I really don’t have a question. I just want to say congratulations. And I am especially excited about all the people from TRS, and [Susan Voutwell], who I know. And I am so impressed the people who have been there for the average of nine years, which fits right in with the people from RenTelco who have been there for a similar length of time. And I just want to express that I can’t wait to get started. So I will – there is no question here, but only great optimism.

Bob, thank you so much for those great comments.

Gentlemen, we have no further questions. Please continue.

Well, I’d like to thank everybody for joining us on today’s call. And we’ll look forward to speaking to everybody on our Q2 2004 call in a few months. Thanks so much.