McGrath RentCorp (MGRC) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the McGrath Rentcorp third 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. If anyone needs assistance at any time during the conference, please press *0 for an operator. As a reminder, this conference is being recorded today, Thursday, November 4, 2004. I would now like to turn the conference over to Jeffrey Busher (ph) with SBG Investor Relations. Please go ahead, sir.

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 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 call replay is 11010858. 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 Website at mcrc.com. A press release was sent out this afternoon at approximately 4:05 Eastern time or 1:05 Pacific time. If you did not receive a copy and would like one, it is available online in the Investor Relation 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 expectations or lease intentions or strategies regarding the future. While 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 10K and Form 10Q.

I would now like to turn the call over to Tom Sauer.

Thank you, Jeff. In addition to the press release issued today, which discusses the third quarter 2004 results, the Company also filed with the SEC the earnings press release on Form 8K and its Form 10Q for the three months ended September 30, 2004.

For the third quarter 2004 total revenues increased from $34.9 million in 2003 to $72.5 million in 2004 and net increased from $6.1 million, or 50 cents per share, in 2003 to $9.4 million, or 76 cents per share, in 2004. Most of the Company's improved quarter-over-quarter revenues and net income resulted from the contributions in the acquired TRS assets and operations.

Additionally, for Mobile Modular, rental revenues increased 14 percent in Q3, 2004, to a record $18.4 million as compared to Q3, 2003, driven by educational rentals. Average modular utilization improved from 85.1 percent in Q3, 2003, to 86.3 percent in Q3, 2004, with quarter-end utilization of 86.3 percent.

Modular rental-related services increased 49 percent to $6.3 million, primarily from the addition of new leases to the portfolio over the last 12 months. Most of these revenues are associated with one-time service revenues, like delivery, installation, return delivery, dismantle, negotiated with the original lease and are recognized over the term of the negotiated lease.

Sales in Q3, 2004, increased by $8.9 million to $14.7 million, compared to Q3, 2003, as a result of the $9.3 million sale to a California school district. Significant sales like this are unique and should not be expected on a recurring basis.

For Mobile Modular, pre-taxed income increased 25 percent from $8.4 million in Q3, 2003, to $10.5 million in Q3, 2004 and represented 67 percent of the Company's pre-taxed income for the quarter.

For TRS Rentelco, our combined electronics group, the impact of the acquired assets and operations of TRS are included in the quarter and were the primary drivers of the improved reported results to the electronics business. Rental revenues increased $15.3 million in Q3, 2004 to $18.7 million, compared to $3.4 million in Q3, 2003. Average electronics utilization for Q3 improved from 47.1 percent in 2003 to 65 percent in 2004 with quarter-end utilization of 65.2 percent. Pre-taxed income for Q3, 2004 increased from $1.2 million in 2003 to $4.5 million in 2004 and represented 29 percent of the Company's pre-taxed income for the quarter as compared to 12 percent in 2003.

The Company continues to generate strong cash flows to operate the business and return value to our shareholders. For the first nine months of 2004, operating cash flow, plus proceeds from the sale of rental equipment, amounted to $59.5 million, up 37 percent from $43.3 million for the same period in 2003. In 2004, the primary uses of cash were to purchase TRS assets for $120.2 million, new rental equipment of $46.2 million and to pay $7.8 million in dividends to the Company's shareholders. As a result of this activity, total debt increased by only $115.7 million.

For the first nine months, EBITDA increased 55 percent from $39.3 million in 2003 to $61.2 million in 2004, primarily due to the Company's higher earnings with consolidated EBITDA margin percentage improving from 42 percent in 2003, to 43 percent in 2004.

The Company declared a third quarter dividend of 22 cents per share, two cents per share higher than the third quarter 2003. On an annualized basis, this dividend represents a 2.2 percent yield based on the November 3, 2004 close price of $39.79 per share.

With respect to earnings guidance for 2004, at this time, we are reconfirming our 2004 full year earnings per share guidance to be in a range of $2.30 to $2.40 per diluted share.

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

Good afternoon, ladies and gentlemen. The third quarter was our best earnings quarter in the Company's history at $9.4 million in net income, leading the way with our modular rental business that exceeded $18 million in rental revenues for a quarter for the very first time. This is a result of very strong booking levels in the first half of 2004 and the shipment of this equipment to school districts during the third quarter. Keep in mind, the fourth quarter will be the first quarter in which a full three months worth of rental revenues will be recognized for the majority of equipment shipped throughout the third quarter. Driving these booking levels was our leadership position in providing classroom facilities to California school districts to meet their current housing needs. The great majority of new business activity is related to local and state bond-funded modernization and reconstruction projects.

Rental revenue growth was also the result of our expanding base of educational rental customers. We focused heavily on this in 2004 and those efforts are beginning to bear fruit. Our Florida educational rental initiative continues to progress nicely. Our ability to leverage our experience and knowledge from our California market success has really made a difference in our initial months of business operations. Booking levels have been quite favorable and our operations execution has been very solid. The third quarter rental revenue number reflects Florida activity for the very first time. While the impact of these initial rental revenues is minimal, we are very enthusiastic about the opportunity to create a meaningful educational rental business in Florida.

Average utilization for the quarter increased to 86.3 percent from 85.1 percent a year earlier. This is reflective of fewer returns during the first nine months of 2004 than a year ago, improvement in rentals of buildings serving the construction and commercial markets and our continuing focus on use of existing inventory versus making new equipment purchases.

We noted in our press release that Mobile Modular recognized a $9.3 million sales project to provide classrooms manufactured by Enviroplex and (indiscernible) improvements to a California school district. Just to clarify, although the buildings were manufactured by Enviroplex, the Mobile Modular sales force generated the sale and, thus, the revenues are reportable by Mobile Modular. Beyond the sale revenue and margin that this project contributed, there are other dynamics that the Company will get to benefit from going forward. These items include an increase in acceptance by California school districts to create permanent campus infrastructure from modular building technology that cannot be easily distinguishable from stick-built construction in terms of aesthetics and the quality of educational environment for fewer dollars and, in many cases, one-half the timeframe of conventional construction and, second, utilizing the Mobile Modular sales force in creating more opportunities for this type of project and, in turn, increasing utilization of Enviroplex's plant facilities and fixed-cost structure.

Now let's switch to our electronic test round business, TRS Rentelco. When we initiated our integration efforts on June 2nd to bring TRS and Rentelco together as one enterprise, we made customer and rental revenue retention our highest priorities. Our third quarter results appear to validate the excellent effort put forth by all TRS Rentelco employees in meeting this challenge. This quarter's results also demonstrate just how significant the TRS acquisition was to our Texas rental business. Rental revenues of $18.7 million, which accounted for just over 50 percent of total Company run revenues, EBITDA of $14.6 million and pre-taxed income of $4.5 million.

Over the past five months we've accomplished a great deal in our integration work. We completed our consolidated of U.S. operations into a single facility at DFW Airport and valuated all operating groups in key programs and are moving to implement plans on how to most effectively and cost-efficiently market to our target customer segments. Having the right structure in place for growing our base of customers is core to our success going forward. This is, perhaps, the most critical of all of our integration work. Other integration work relating to QRX (ph) Web site channel ,operations, etc., will continue through the first quarter of 2005. Finally, the QRX leadership team, made up from both businesses, is now solidly in place and we could not be more pleased with the quality and capability of these individuals to grow the business.

Please keep in mind that our third quarter results only reflect a portion of the overhead cost structure adjustments related to the integrations. Although we have internally announced all other reductions in the work force related to the integration, we will not complete these changes until the end of November. During the second quarter conference call, I spoke to being able to realize approximately 15 to 20 percent in operating expense savings from the original combined businesses. We are on track to accomplish those savings.

The reduction in overhead cost structure impacted a number of TRS employees who had served the organization faithfully for many years. The reduction in work force, especially of longer term employees, is never easy for either impacted or continuing employees. I wish to thank all of those individuals who will not be staying on with the new enterprise for the professional manner in which they have served here over the years, including finishing strong in their roles through their departure date.

One final comment, as part of our integration work over the summer, ten senior managers, including officers and managers of both TRS Rentelco and Mobile Modular, hit the streets to travel with their outside sales force to meet TRS Rentelco customers in both the U.S. and Canada. I had the opportunity to spend time in the field as part of this effort. As you might imagine, our learning's were many. New learning's were as powerful as what we discovered about the value of timely and thorough execution of customer requests. We can talk all day long about the strategic plans for the business and all the tactical efforts it supported, but I can tell you that there's nothing more powerful that will increase our base of customers and our bottom line than having a customer response execution standard that our competitors will have difficulty meeting. We will work exceedingly hard to make this a TRX Rentelco competitive advantage.

Now, Tom Sauer and I are pleased to address any of your questions.

Ladies and gentlemen, at this time we will begin the question and answer session. (OPERATOR INSTRUCTIONS) Cliff Walsh, Sidoti & Company

Can you talk a little bit about the earnings impact from the big classroom sale?

The classroom sale was related to a permanent modular school construction project that we had been working on for some time. Basically, we're seeing a bit more trend in California to where it's becoming an acceptable alternative to permanent stick-built construction. As the modular industry has really expanded its ability to create more aesthetic enhancements to the buildings, districts look at the modular construction method in terms of cost savings and time savings and its aligning very well with their needs.

Tom, did you have time to run any numbers on that to see how much that is in earnings?

As far as gross margin impact, because it's a new product in the large sale, as we commented in the press release, it has a tendency to reduce our overall margin on a consolidated basis.

You don't have any estimates?

We're not prepared to give out gross margin information on a specific job just for competitive reasons.

Cost of sales as a percentage of revenue, will that be higher going forward given the acquisition and greater sale of electronic test equipment?

The overall margin, what we experienced during Q3 on a consolidated basis, was in the combined TRS Rentelco universe, we sell a higher amount of new equipment and that, again, draws down the overall consolidated gross margin.

Okay. In terms of Florida, I realize that that business right now is just a very small part of the overall business, can you give us a sense of what you think that business could be in two to three years, maybe as a percentage of rental revenue?

It's not our practice to give any kind of forward-looking projections regarding business levels. What I can tell you is that, based upon our initial work as well as this years business activity levels, we are very excited about the opportunity to grow a meaningful business there. That's about the extent that we can share with respect to any kind of an outlook.

You've mentioned in the past that you expect it to be profitable in year one. I'm assuming that you're saying that initial expectations have been better. The results of your initial expectations are still on target for profitability in year one?

Yes.

Okay. Great. Thanks very much, guys.

(OPERATOR INSTRUCTIONS) Charles Brucker, Brucker & Associates

I have several questions related to the electronics segment. I noticed your average utilization improved from about 47 percent to 65 percent on average in the most recent third quarter. Has the pickup in utilization been fairly broad across your product segment, meaning general test and measurement equipment, as contrasted with that that has a communications application? Secondly, with that pickup in utilization, are you now experiencing some improvement in rate structure?

What we have experienced, with respect to equipment levels overall, general purpose equipment, TRS has a higher mix of general purpose equipment which was not impacted nearly as much as communications equipment in the downturn. The greatest amount of inventory at TRS relates to general purpose, so, overall, that's a more stable base of equipment. However, with respect to the mix of equipment between communications - we break communications down into various areas of equipment manufacturers, wireless, etc. - we have pockets of communications business that are doing very well and are at very high utilization levels and we have other areas that are still challenged because there are varied sectors that have not returned to the levels that we'd like to see them return to. It's kind of a mixed bag right now. Again, the biggest dynamic between the Rentelco mid-40, high 40 percentage universe and the TRS universe has been this general equipment piece of the business.

Have you experienced any firming of rates in the communication side?

There are areas that are doing very well, that have returned, and there are other areas that are still challenged. Those, we will have to see over time how well they can improve to.

Also related to electronics, with a 65 percent utilization right now, what do you assume your ceiling is for that because utilization on electronics, obviously, can never approach that on your modulars, but is your upper ceiling, possibly, in the low 70 percent range?

We are targeting between 65 to 70, but the business could certainly run in the low 70's with the right set of circumstances out there. I think Tom and I both feel 65 to 70 is a very realistic range, that its sustainable over time.

Okay. Thank you.

John Givens, Odin Partners

I think I understood what you said about this $9.3 million sale, that you buried the revenues of that into Mobile Modular because those sales were done there. Do you also do that so that no one could look into Enviroplex and figure out what went on there?

John, this is strictly the way the sales organizations are set up. If a Mobile Modular sales person generates the sale, it's a sale revenue for the Mobile Modular business. The fact that we can utilize Enviroplex's facility and take up underutilized capacity, it's a win-win for both organizations. We have a sales force that is out there pushing rentals and, if they can also do sales in the same call or the same relationship, we're ahead of the game.

In the past you guys have made sales and the margins on those - - normal sales - - forgetting this $9.3 sale, are somewhat higher than, if I understand Tom, than what this was like and we can't really look at the pre-tax in Enviroplex and make any assumptions about the kinds of sales you normally make, right?

The normal sales in the modular business is a mix of used equipment sales, equipment that is purchased off red and, then, new equipment sales which are generally a lower percentage as far as total sales for any given period. The $9.3 million sale really skews that for Mobile Modular this period.

I'm just curious, I was on a Modtek call listening to them lament, their cries of woe about steel and wood pricing and how they had mis-cost some things out, are you able to take advantage of a company like that that doesn't know what they're doing? I know you buy some units from them, buying units at a good price that they haven't realized they're priced incorrectly. They assure us they're going to price them correctly in the future.

John, I wouldn't speak specifically to Modtek. When we go out and buy equipment we, obviously, have a number of different manufacturers that we can buy from and we try to buy as intelligently as we can and as good a price as we can, so we will continue to do so.

They were also very positive about business in Nevada and Texas, in addition to Florida. I don't know if you have any business, any Mobile Modular kind of business in there.

As you know, we have Texas operations and we feel favorable about our Texas market, but they are speaking in terms of manufacturing business which I don't have the kind of insight that they do with respect to that.

They said they had quite a pickup in units to the general business which had been soft, the non-school business there in Texas and Nevada.

I think that would be favorable across the board.

Great quarter, guys, a new high for us who have been there for years. It's wonderful.

Cliff Walsh, Sidoti & Company

One more question. Can you talk about the earnings impact from the acquisition, strip that out and talk about what it would be like on its own?

If you look at the quarter-to-quarter comparison Q2 to Q3, as you may recall, there was one month's activity, the TRS acquisition for Q2, and the pre-tax impact for Q2 for electronics was $1.2 million. You may also recall that there was a severance one-time charge in Q2 for the electronics unit which was about $900,000. If you adjust that out, you'd have earnings of about $2.1 million. You can compare that to, roughly, the $4.5 million that was done in Q3. So that gives you a relative comparison, I know that there's one month in Q2. You can go back to Q1 in the standalone Rentelco business was about $1 million pre-tax. Just to get a sense of Rentelco standalone Q1, TRS and Rentelco with TRS being one month in Q2 and, then, you have the combined business in Q3. Know that there are still ongoing expenses that we have in there because we haven't finished our integration efforts.

Okay. Great. Thanks so much.

(OPERATOR INSTRUCTIONS) Gentlemen, we have no further questions. Do you have any concluding comments?

I'd like to thank everybody for joining us this afternoon for our Q3 conference call. We look forward to speaking to everyone again on our Q4 call in the early part of 2005. Thank you much.

Ladies and gentlemen, this does conclude the McGrath Rentcorp third quarter 2004 conference call. Once again, if you'd like to listen to a replay of today's call, please dial, internationally, 303-590-3000, or toll-free, 800-405-2236. The pin code is 11010858. Thank you for your participation. You may now disconnect.