McGrath RentCorp (MGRC) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to McGrath Rentcorp fourth-quarter 2005 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. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Thursday, February 22 of 2006.

I would know like to turn the conference over to Geoffrey Buscher with SBG Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon. I'm the Investor Relations advisor to McGrath Rentcorp and will be acting as moderator of the conference call today.

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

Please note that this call is being recorded and will be available for telephone replay for up to 48 hours following the call by dialing 1-800-405-2236 for domestic callers and 1-303-590-3000 for international callers. The pass code for the replay is 11050313. This call is also being broadcast live via the Internet and will be available for webcast 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 today at approximately 4:05 Eastern time or 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 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 know like to turn the call over to Dennis Kakures.

Thank you, Geoffrey.

Before I turn the call over to Tom Sauer to go through our fourth-quarter and full-year results for 2005, I have a few comments regarding our CFO transition. As you are already aware, Tom Sauer will be retiring as CFO of McGrath Rentcorp in 2006. The plan is for Tom to remain in the CFO role through his signing of the 2005 10-K in March. At that time, we will transfer the CFO title and responsibilities to Keith Pratt, who is with us on the call this afternoon. Since coming aboard in the middle of January, Keith has been working hard at learning our rental business' operations and related accounting. He is a quick learner and has much to contribute. Keith, I know that everyone on the call today wishes you a warm welcome to the Company.

Thank you.

Upon the transfer of CFO title and responsibilities to Keith in March, Tom will serve in a support role to Keith and the financial management team on a part-time basis through the end of 2006.

So today is Tom's 21st and final earnings call as CFO of McGrath Rentcorp. During Tom's tenure as CFO, the Company has gone through some significant events and seen very favorable earnings growth. At every step, Tom's strong business acumen, accounting and financial management skills and high ethical standards have guided our financial results and reporting. I've had the opportunity to work with Tom for going on 23 years at McGrath Rentcorp. In fact, Tom and I actually went to high school together prior to serving the Company. He has always worked tirelessly to understand all of the key math and metrics of our businesses at an operational level that has enabled him to help guide and support divisional leadership in making key efficiency or other cost-saving changes to our businesses. This ground level understanding of our business operations also has made Tom very effective and articulate in explaining the key levers and nuances of trends in our reportable numbers. Tom has also been a close personal friend to others and me within McGrath Rentcorp. Tom, I'm truly grateful to have been able to partner with someone of your talent and caring for the business over the years. I know that everyone on the call today wishes you the very best in your retirement and post McGrath Rentcorp activities. Thanks a very much for your years of service to the Company and your continued friendship.

Now, let me turn the call over to Tom so that he can take us through the numbers for the fourth quarter and year end, 2005.

Thank you, Dennis.

I've been extremely fortunate to work for a great company with great people. I've also been so lucky to go to work every day to a job that I'm passionate about, at a place where I love to work and with people that have become part of my extended family. It's been truly my distinct pleasure to work with Bob McGrath, Dennis and team over the years, serving you and our growing organization.

Moving to Q4, in addition to the press release issued today, which discusses the fourth-quarter 2005 results, the Company also filed with the SEC and press release on Form 8-K. Also, in the press release, the Company announced a cash dividend of $0.16 per share for Q1 2006, a 14% increase over last year's Q1, and on an annualized basis represents approximately a 2% yield.

For the fourth quarter 2005, total revenues increased from 59.3 million in 2004 to 77.6 million in 2005, and net income increased from 8.8 million, or $0.35 per share, in 2004 to 12.1 million or $0.47 per share in 2005. Most of the Company's improved quarter-over-quarter results were driven from our rental operations of both modulars and electronics and, to a lesser extent, the completion of a large sale project of modular classrooms related to hurricane damages. Also, as a result of our first full year of the acquired TRS operations, the fourth-quarter effective tax rate was reduced from our 2005 estimated tax rate of 38% to 36.3%, due to reporting a cumulative true-up adjustment for the state income tax accrual rate. The tax adjustment increased net income by 0.3 million and added $0.01 to EPS during the quarter. Looking forward, we estimate the effective tax rate to be approximately 39% in 2006, compared to 37.5% in 2005, based on our expected 2006 revenue distribution by state.

Reviewing the fourth-quarter results for Mobile Modular, rental revenues increased 13% in Q4 2005 to a quarterly high of 21.7 million, as compared to Q4 2004, driven by educational rentals. Average modular utilization for Q4 declined from 86.3% in 2004 to 83.8% in 2005 with quarter-end utilization of 83.5% resulting from higher than normal California classroom returns as school modernization projects were completed.

Rental-related services increased 29% to 7.6 million, primarily from the additions 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, and dismantle negotiated with the original lease. These revenues and the associated costs are recognized over the term of the negotiated lease.

Sales increased 8.8 million to 14.4 million for the quarter. The increase primarily related to a sale project associated with hurricane damages. We view these types of large sale projects as unique opportunities and generally don't expect these to reoccur.

Q4 total revenues for Mobile Modular increased 43% over last year's Q4 and led to a 37% increase in pretax income to 13.4 million, representing 71% of the Company's pretax income for the quarter.

For TRS-RenTelco, rental revenues in Q4 2005 increased slightly to 18.6 million compared to 18.5 million in Q4 2004. Average electronics utilization of the fourth quarter improved from 63.9% in 2004 to 70.5% in 2005 with quarter-end utilization of 64.9%.

Pretax income for Q4 increased from 3.9 million in 2004 to 5.5 million in 2005, resulting from improved rental operations and represented 29% of the Company's pretax income for the quarter.

Now, let's talk about McGrath's 2005 cash flows. We continue to generate very strong cash flows to operate our business and return value to our shareholders. For the year, net cash provided by operating activities increased 19 million over 2004, a 31% increase to 82 million, and resulted primarily from the higher earnings before depreciation from both Mobile Modular and TRS-RenTelco.

Net cash used in investing activities was 84 million and included 105 million for rental equipment purchases, 10 million for purchases of other assets, which primarily related to our Florida land purchase, with 31 million in proceeds from used equipment sales reducing the cash requirements for our investing activities. Dividend payments to shareholders amounted to 13 million, and stock option proceeds were 4.6 million. As a result, net borrowings only increased 11 million during 2005. We continue to have a solid low leverage balance sheet.

For 2005, EBITDA adjusted for non-cash compensation expense increased 35% from 89 million in 2004 to 120 million in 2005 with consolidated EBITDA margin consistent at 44% for both years.

With respect to 2006 earnings guidance, at this time, the Company expects rental revenue growth for both rental businesses with its full-year EPS guidance to be in a range of $1.50 to $1.60 per diluted share. Although we expect improved results from rental operations, we don't expect any significant sales like those last year related to hurricane damages, which added $0.09 to EPS. Also in 2006, we expect that EPS will be reduced by $0.09 per share for the estimated impact of stock-option expensing required under the adoption of FAS 123R beginning January 1, 2006 and by $0.04 per share due to the higher estimated effective tax rate of 39% in 2006, compared to 37.5% in 2005, based on our expected 2006 revenue distribution.

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

Thank you, Tom.

Let's jump right to our fourth-quarter and year-end results for our modular rental business. Mobile Modular had outstanding year in rental revenue growth. Not only was the fourth quarter our highest rental revenue quarter ever at 21.7 million, but rental revenues increased 14% for the full year to a record level of 81.2 million.

With regard to our full-year results for 2005, Mobile Modular continued to benefit from the recurring rental stream from educational facility rentals in the geographic markets we serve. California had another favorable year in rental revenue growth despite an increased level of classroom returns during the third and fourth quarters related to the completion of a number of modernization projects. In Florida, we continued to make strong progress in growing our customer base at public school districts. Additionally, our Florida hybrid classroom product continues to gain popularity in the marketplace. In Texas, we benefited from both an increased level of classroom rental activity, as well as from rentals relating to the impact of various hurricanes.

Modular asset utilization decreased to 83.5% at the end of 2005, compared to 86.1% a year ago. This lower utilization level is directly related to the higher-than-normal level of modernization project returns experienced in California during the second half of 2005. We are uncertain at this time as to the level of new modernization work that will be commenced in 2006. This is a function of the current amount of unallocated and unreleased state funds for modernization from the prior state-wide bond measure, the backlog of applications awaiting funding, and the actual commencement of projects. For modernization work beyond 2006, we are increasingly optimistic that a state-wide facilities bond measure in California with significant monies for modernization projects will be placed on the ballot in late 2006. We believe that this bond measure, if passed, along with the success of local bond measures passed in November of 2005, should provide monies to support favorable levels of new modernization projects in both 2007 and 2008. Keep in mind, assuming favorable new business levels, compared to future returning equipment, we would expect that it will take at least a few quarters to raise utilization levels of the California classroom rental fleet, as the majority of classroom equipment typically shifts -- begins to shift late in the second quarter and in the third quarter annually.

In addition to our favorable rental operations in 2005, we benefited from unique sales of modular classrooms related to hurricanes in the southeastern U.S. that contributed $0.09 in EPS for the year. Again, these sales are considered a one-time event, not to be repeated.

Now, let me turn our attention to TRS-RenTelco and their results for the fourth quarter in 2005. Fourth-quarter rental revenues were relatively flat at 18.6 million, as compared to 18.5 million in the fourth quarter of 2004. However, gross profit on rents increased by 1.4 million or 22% over the same period in 2004. This increase in rental profitability was mainly the result of a significant reduction in depreciation expense and, to a lesser degree, improvement in the cost-effectiveness of our operations.

Depreciation expense as a percentage of rents reduced to 44.6% in the fourth quarter of 2005, as compared to 51.5% in the fourth quarter of 2004. The significant decrease in depreciation expense was attributable to the extension of useful life of two test equipment models in the second quarter of 2005, the impact of selling underutilized equipment through more effective management of our rental inventory at the model number level, and rental equipment becoming fully depreciated.

We are continuing work at becoming more cost-effective in how we market to each target customer group. The proper alignment of and focus for our outside and inside sales and marketing teams is essential towards lowering our marketing cost per dollar of rental revenue generated.

Rental revenues for TRS-RenTelco for full-year 2005 did not meet our expectations. After a disappointing first quarter, we did see sequential quarterly increases in rents for the second, third and fourth quarters. Although top-line rental revenue growth for TRS-RenTelco has been challenging to date, 2006 business opportunity levels feel stronger compared to 2005. To date in 2006, first-quarter rental revenue levels are ahead of 2005's first-quarter levels.

Looking forward in 2006 for each of our rental divisions, for Mobile Modular, the backlog in continuing (indiscernible) the modernized school facilities is significant in California. However, the flow of new projects commencing is highly dependent upon the availability of state funding.

For Florida, we're well positioned to continue to grow our business levels. We anticipate that we will continue to benefit from student enrollment growth, class size reduction, the phasing out of older coated modular classrooms, and broader market acceptance of our hybrid classroom product. Also, in 2006, we will begin to develop our Florida property for a regional sales and inventory center to support our growth.

In Texas, we hope to build on the increased classroom rental activity we experienced in 2005.

Looking forward in 2006 for our test equipment rental business, we are anticipating healthier U.S. and Canadian rental markets. Additionally, we should continue to benefit from cost-effectiveness improvement efforts to our operations. Internationally, we will continue the work started in late 2005 on evaluating strategic development opportunities in selective markets in which we are either currently doing business or are considering entering.

I also wanted to note on today's call that, in late 2005, we began an important initiative and investment in our future by upgrading our operating and financial software applications. We believe this investment will benefit us in the years to come by creating information system platforms that provide us the scalability necessary for increased business levels. At this time, we expect this project to be completed in late 2007.

You should also know that our strategic planning process for evaluating organic, core acquisition and potential third-leg rental opportunities for growth is fully engaged. We are actively working on a number of potential strategic growth charters, as discussed earlier, and are preparing our information systems and operating processes to support a growing McGrath Rentcorp in the years ahead.

In closing, I'd like to take a few minutes and review some financial highlights of 2005. Mobile Modular rental revenues reached record levels for both the year at 81.2 million and an exceeding 21 million in a quarter for the very first time in Q4 2005. With fairly flat top-line rental revenue growth, TRS-RenTelco's pretax profit increased by 1.6 million or 41% for Q4 of 2005 over Q4 of 2004, led by a significant reduction in depreciation expense, as I mentioned earlier. As a result of our efforts at more tightly managing utilization at the model level, Q4 2005 ending utilization reached approximately 69% as compared to 2004's ending level of approximately 62%.

The Company's rental assets surpassed $0.5 billion in original cost value in 2005 with a year-over-year increase of approximately 15%.

The Company generated EBITDA of 120.1 million for the year, compared to 88.6 million in 2004, an increase of approximately 35%. The significant increase was chiefly attributable to a full year's impact from the TRS acquisition and, to a lesser degree, higher business levels for our modular division.

EPS grew to $1.61 per share in 2005 from $1.21 per share in 2004, an increase of 33%.

Finally, due to our strong results in 2005, we announced a 14% increase in the first-quarter 2006 dividend, due to the favorable cash flows and outlook for our rental businesses. In our view, we create value for shareholders employing free cash flow and available debt capacity on strategic growth opportunities that we believe may result in increased earnings and distributing some of our excess cash in the form of dividends.

Finally, as I look forward at our outlook and earnings guidance range for 2006, I'm very pleased with our top-line rental revenue growth estimate, the key barometer of the health of our rental businesses. I'm also energetic about the level of rigor that we have as a company in our long-term strategic planning efforts for each of our rental businesses, as well as in looking for opportunities to potentially add a third rental business at some point in the future. However, when I first looked at our 2006 guidance range of $1.50 to $1.60 per share, compared to 2005's results of $1.61 per share, I needed to do an apples-to-apples comparison in order to provide me with the proper perspective on the health of our business operations. When I subtracted out the $0.12 per share for the benefits from the hurricane sales and effective tax rate reduction of 2005, it left me with $1.49 per share as the earnings engine coming into 2006. For 2006, without stock option expensing of $0.09 per share, I'm at $1.59 to $1.69 per share, or a 7 to 13% EPS increase for 2006. Again, this was just my way of getting comfortable with the growth outlook for our business operations in 2006. I thought stepping through this example might be helpful to those listing in on the call today.

Now, we are pleased to take any of your questions.

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

Good afternoon, everyone. Can you guys comment a little bit on the lack of modernization work that you're expecting? Maybe you can talk about what is delaying it and how much funding is out there that has not been released yet.

Certainly. 2006 is a year in which we are familiar with what bond monies are still available that have either been unallocated or unreleased. We are obviously trying to calibrate the demand we're seeing from our sales force. It's early in the ordering season, so we don't have a full picture yet. The next two months, it will really play out within that window. But currently, in our estimate -- and these are from figures from the Office of Public School Construction -- there's around $750 million of either unallocated or unreleased funds. The difficulty for us is in being able to determine if the unreleased funds are already for projects that are already working today, and that that funding is -- (technical difficulty) -- and pay those bills at a later date. So, we don't have a real clear picture of what is, again, unapportioned -- you could argue that what is on apportioned, which is about roughly 275 million, has not been put into project deployment yet. Sometimes school districts will start with a project and they will get their funding from the state because they know the monies are available and they are going to qualify.

So, that's our conservatism built into our modeling at this point, because we just don't have a better feel than the numbers that we're seeing from the Office of Public School Construction to date. Then also with really -- there's another two months in the key ordering window for us to get a better handle on what will come in in the way of projects.

Okay, so by the time the first-quarter earnings release rolls around, you guys should have a much better sense of that and then hopefully maybe there could be some upside to that?

Well, by the middle of May, in that neighborhood, we should have a much better feel for what projects would be coming online.

Okay. Can you comment a little bit on the bond issue that you're expecting for '06 (indiscernible) towards the end of '06? What are you hearing in terms of funding levels and any support by the public for that?

A couple of items on that -- there was a survey done late at the end of 2005 that showed broad support for a bond measure in 2006. Then currently, there's very broad support on both the legislative front as well as from the governor's office on a modernization bill in 2006. Although we are looking at November, there is some talk on the street that it could be as early as June, although we are more apt to be conservative with the November timeframe. But -- and the amounts, the amounts that we're hearing for the modernization piece is around 3 billion-plus, so that is a very sizable amount of dollars that should support a significant amount of work for either very late 2006 or -- and then 2007 and 2008.

Okay. Can you talk a little bit about -- I know, with $0.09 in earnings from the hurricanes, but the breakdown between the third and fourth quarter?

On a revenue basis, it was about slightly over 14 million in sales revenue, 8 -- roughly 8.5, 8.4 million in Q4. The remainder was in Q3.

On an earnings basis?

It was about, on a proportional basis, the same.

Okay. Dennis, I know you don't like to talk quantitatively about the Florida operation, but could you give us a sense as to where things are in terms of ramping up? I mean, you know, are you still incurring a lot of start-up costs? If so, how long will they continue?

Well, for the most part, you know, we buy assets; we capitalize them. That's the big item. Then there's rent against that. So we were accretive very quickly in that market. But in terms of other expenses, it's really personnel, obviously sales staff, and management and operating folks. That business was accretive within its first year and has gotten more accretive every quarter since. So, as we're building that rental -- buying assets and building that rental base, it's got very favorable margins and metrics at this point. Then our investment in the inventory center -- you know, we obviously paid for that in 2005; it was a cash transaction. It goes on the balance sheet. Then we will begin the development of that this year and really, the vast majority of those costs will be capitalized over a very extensive period. So that business unit is doing very favorably in terms of margin and also growing, in terms of absolute numbers, on a margin basis.

Okay. Now, can you share an estimate for how much you're planning on spending equipment purchases in '06?

Well, Cliff, as you know our history, we don't give a CapEx number. We buy as our business market conditions warrant for us to buy, and we will do the same in 2006. So we are pleased with what we are projecting in terms of our top-line rental growth and obviously, there are assets -- purchases that go along with that. But that's the extent that we have shared historically, and I think we want to hold to that pattern.

Okay, that's is what I was expecting but I had to ask. Can you comment on the third rental business that you mentioned? Is there are anything you are targeting specifically, or maybe you can just share some general comments about that?

Well, if you look at our business acumen, it's renting and so we are very capable in that arena. Even though we have two core rental businesses today, we always want to keep the door open for other commercial or business-type rental product that make sense, where we could leverage our acumen in renting. There's nothing eminent there, but we certainly look at opportunities from time to time as they are presented. We will continue to do that and that's part of our rigor and our strategic planning work as a group. So, nothing particular at this point.

Okay. All right, thank you very much.

(OPERATOR INSTRUCTIONS). Charles [Purucker], [Purucker] & Associates.

Good afternoon. I have a question on TRS-RenTelco. Going through your quarterly results, you showed a very nice improvement in your utilization, running from 61% plus to about 70.5% by the end of the fourth quarter. I noticed, in today's release, though, that the average monthly rental rate declined to about 5.75% from 6.55. I would have guessed, on the surface, that you might have seen some improval in rental rates to correspond with the improvement in utilization, but that doesn't seem to be the case. And/or does that suggest a shift in the type of equipment being rented?

Well, Charles, there's two dynamics going on there, the first one being is that the more favorable utilization level is -- since top-line rental revenue growth is fairly flat, it's being driven by selling underutilized equipment. So, we are seeing that uptick in utilization there as we move that equipment out of the pool.

Because of how some of that equipment was priced originally in the transaction, as you remember, we bought equipment for $0.55 on the dollar. The new equipment we're buying today, you know, at $0.100 on the dollar, would discount at $0.90, is a higher cost basis. When you take the same rental revenue you get in the marketplace against the higher costs, it produces a lower yield, although you're getting the same absolute rental dollars. So that's what's -- it's that mix of equipment that is being sold, that has a higher yield because it has a lower cost basis, being replaced by higher cost basis equipment.

Okay, fine. a second question related to that somewhat -- in the first three quarters of this year, your sales of electronics equipment were in the range of 6 to 7 million, and then they bulged up to about 12.5 million in the fourth quarter. Did that represent any reappraisal of the character of your inventory, or just simply represent some weeding out now that you've gotten a better handle on things?

I think what you're seeing there is some dollar buyout activity, and what that is is it's really finance (indiscernible) this new equipment that's really passing through. It's not really part of our inventory. We are, in effect, buying it new from the manufacturer instead of a financed sale. So that makes that number look larger. Actually, that's very low-margin business and impacts the overall margin. (multiple speakers).

Right, I noticed you had an improvement in the gross profit margin until the fourth quarter.

Exactly.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Okay, management, I'm showing there are no further questions. I will turn the conference back to you for any closing comments you may have.

All right, well, I want to thank everybody for joining us on today's call, and we will look forward to sharing with you again on our Q1, 2006 call in May of this year. Thanks so very much.

Thank you. Ladies and gentlemen, that does conclude the McGrath Rentcorp fourth-quarter 2005 earnings conference call. Once again, thank you for your participation in today's conference and at this time, you may disconnect.