McGrath RentCorp (MGRC) 2010 Q2 法說會逐字稿

Welcome to the McGrath RentCorp second-quarter 2010 conference call. At this time all conference participants are in a listen-only mode. Later we will conduct a question and answer session. (Operator instructions). This conference is being recorded today, Thursday, August 5, 2010.

Now I would like to turn the conference over to Geoffrey Buscher of SBG Investor Relations. Please go ahead.

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. Representatives on the call today from McGrath RentCorp are Dennis Kakures, President and CEO, and Keith Pratt, Senior Vice President and CFO.

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 1-800-406-7325 for domestic callers and 1-303-590-3030 for international callers. The pass code for the call replay is 4329570. This call is also being broadcast live via the Internet and will be available for replay. We encourage you to visit the Investor Relations section of the Company's website at mgrc.com.

A press release was sent out today at 4.05 p.m. Eastern Time or 1.05 p.m. Pacific. If you did not receive a copy but would like one it is available online in the Investor Relations 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'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 relating 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 Keith Pratt.

Thank you, Geoffrey. In addition to the press release issued today the Company also filed with the SEC the earnings release on Form 8-K and second quarter 2010 Form 10-Q.

For the second quarter 2010 total revenues were flat at $66.5 million compared to the same period in 2009. Net income increased 5% to $7.4 million or $0.31 per diluted share from $7 million or $0.30 per diluted share for the same period in 2009.

Reviewing the second-quarter results for the Company's Mobile Modular division compared to the second quarter of 2009, total revenues decreased $7.1 million or 19% to $29.9 million due to lower rental, rental related services and sales revenues. Gross profit on rents decreased $4.1 million or 27% to $11.2 million due to 13% lower rental revenues with rental margins decreasing to 55% from 65% in 2009. Lower rental margins were a result of lower rental revenues combined with flat depreciation and $1 million higher other direct costs for labor and materials to support higher activity levels.

Selling and administrative expenses increased 3% to $7.3 million as a result of increased investment in our mid-Atlantic and portable storage growth initiatives. The lower gross profit on rents, $1.2 million lower gross profit on sales and increased selling and administrative expenses resulted in a decrease in operating income of $5.5 million, or 45%, to $6.7 million.

Finally, average modular rental equipment for the quarter was $489 million, an increase of $12 million. Average utilization for the second quarter decreased from 75.3% in 2009 to 67.7% in 2010.

Turning next to second-quarter results for the Company's TRS-RenTelco division compared to the second quarter of 2009, total revenues increased $1.6 million, or 7%, to $25.7 million due to higher rental revenues. Gross profit on rents increased $2.7 million, or 53%, to $7.6 million. Rental revenues increased $2 million, or 11%, and rental margins increased to 39% from 28% as depreciation as a percentage of rents decreased to 46% from 57%. Selling and administrative expenses decreased $0.4 million, or 7%, to $6.1 million. As a result, operating income increased $2.7 million, or 193%, to $4 million from $1.4 million.

Finally, average electronics rental equipment at original cost for the quarter was $242 million, a decrease of $7 million. Average utilization for the second quarter increased from 59.5% in 2009 to 66.2% in 2010.

Turning next to second-quarter results for the Company's Adler Tanks division compared to the second quarter of 2009, total revenues increased $4.8 million, or 92%, to $10 million, primarily due to higher rental revenues. Gross profit on rents increased $3.1 million, or 134%, to $5.4 million. Rental revenues increased $3.9 million, or 103%, and rental margins increased to 71% from 62% as depreciation as a percentage of rents decreased to 17% from 21%.

Selling and administrative expenses increased $0.9 million, or 40%, to $3 million. As a result, operating income increased $2.4 million, or over four-fold to $3 million.

Finally, average rental equipment for the quarter was $93 million, an increase of $38 million. Average utilization for the second quarter increased from 53.3% to 66.2%.

On a consolidated basis interest expense for the second quarter 2010 decreased $0.4 million to $1.5 million from the same period in 2009 as a result of the Company's lower average interest rates and lower average debt levels.

The second quarter provision for income taxes was based on an effective tax rate of 38.8% compared to 39.1% in the second quarter 2009.

Next I'd like to review our 2010 cash flows. For the six months ended June 30, 2010, highlights in our cash flows included -- net cash provided by operating activities was $43.2 million, a decrease of $22.5 million, or 34%, compared to 2009. The decrease was primarily attributable to a lower decrease in accounts receivables and other balance sheet changes together with lower operating results.

We invested $59.2 million for rental equipment purchases compared to $33.7 million for the same period in 2009, partly offset by $11 million in proceeds from used rental equipment sales. Property, plant and equipment purchases increased $3 million to $3.6 million in 2010.

Dividend payments to shareholders were $10.6 million and net borrowings increased $16.2 million from $247.3 million at the end of 2009 to $263.5 million at the end of the second quarter 2010. With total debt at quarter end of $263.5 million the Company had capacity to borrow an additional $103.5 million under its lines of credit. And the ratio of funded debt to the last 12 months adjusted -- the last 12 months actual adjusted EBITDA was 2.12 to 1. We continue to have a solid low leveraged balance sheet.

For 2010 second-quarter adjusted EBITDA decreased $0.3 million, or 1%, to $30 million compared to the same period in 2009 with consolidated adjusted EBITDA margin at 45% compared to 46% in 2009. Our definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income are included in our press release and Form 10-Q for the quarter.

Turning next to 2010 earnings guidance, at this time based on the results for the first six months of 2010 and our outlook for the remainder of the year, we are confirming our previous 2010 full-year earnings guidance range of $1.30 to $1.45 per diluted share.

At this point I would like to turn the call over to Dennis.

Thank you, Keith. Let's go right to our results for our modular rental business. Mobile Modular's rental revenues for the quarter decreased by $3.1 million or 13% from a year ago to $20.4 million. Sequentially from the first quarter 2010, rental revenues were down less than 1% from $20.6 million.

During the first half of 2010 our modular rental business continued to face challenges, particularly in the California market, due to an unsettled fiscal landscape and high unemployment. However, during the second quarter there were a number of positive developments that indicate we are likely in the early stages of stabilization and recovery. First, rental equipment utilization rose slightly in both May and June from preceding months. And second, sequentially from the first quarter of 2010 and quarter over quarter rental revenue bookings were higher in each of our operating geographies.

During the second quarter we continued to see a flow of larger commercial construction project opportunities in California primarily associated with State infrastructure development and public works projects. These projects are for waterway, public transit, healthcare, roadway and other public infrastructure improvement. We also experienced a higher volume of commercial construction projects in our Texas, mid-Atlantic and Florida markets. School booking levels were moderate in Northern California and Texas, however stronger in Southern California, Florida and the Mid-Atlantic. Although not robust by historical standards, overall for the division second-quarter rental bookings were at their highest level since the third quarter of 2008.

With the slightly positive increases in utilization in both May and June, second-quarter period-end utilization rose to 67.9% compared to 67.6% at the end of the first quarter. Although the period-end increase was small, it represents the first quarter-end increase in utilization since the fourth quarter of 2008.

It's important to keep in mind that our modular rental business results tend to behave differently than other types of businesses during the economic recession and recovery. During the downturn due to the larger installed base of rental contracts, the orderly return of equipment over time as customers' needs are fulfilled tends to lower rental revenues gradually. The same dynamic applies during a recovery in that new rentals come in on line, add to the lower installed base of rental contracts and builds over time. In other words, typically there are not dramatic swings down or up with rental revenue levels in the near term.

As 2010 progresses we are cautiously optimistic that we will see higher business activity levels and improving market conditions for our modular division. However, we expect it to remain a very price competitive environment in all the markets in which we operate until utilization levels begin to rise across the industry. Keep in mind that as our modular business returns to growth it will require limited new capital investment to increase rental revenues and we would expect to see a disproportionate share of this revenue drop to the pre-tax line.

Now let me turn our attention to TRS-RenTelco and their results. TRS-RenTelco's rental revenues for the period decreased by -- increased by $2 million, or 11%, to $19.8 million from a year ago. However, income from operations nearly tripled to $4 million from 2009's level. In addition to the higher rental revenue levels, our electronics business also benefited from lower depreciation expense and higher gross profit on equipment sales quarter over quarter. The pipeline of order opportunities during the second quarter was very strong and this trend has continued into the third quarter. We're seeing favorable demand across a number of end markets including semiconductors and communication products and networks.

Although our rental revenue levels in our electronics division have grown very favorably thus far in 2010, we continue to be disciplined in what level of inventory to carry on specific products, what orders we elect to pursue and at what rates. We're also doing a good job of taking cost out of the business by selling underutilized equipment and eliminating its associated depreciation expense. These disciplines and the management of our inventory and pricing levels should benefit us in driving greater profitability over an extended period of time through good and bad economies.

During the quarter our gross margin percentage on sales was 43%, an increase from 36% in the first quarter of 2010 and speaks to the health of the secondary broker and end customer sales markets. As a result of our higher business activity levels and more tightly managing our rental inventory, ending second-quarter utilization increased to 67% compared to ending first quarter 2010 utilization of 65.8%.

Due to the higher business activity levels and strong pipeline of opportunities we are experiencing today, our outlook for the performance of our electronics business in the second half of 2010 is very favorable.

Now let's turn our attention to Adler Tank Rentals. Our tank rental business more than doubled rental revenues to $7.6 million from a year ago. The strong increase in rental revenues was directly related to higher business activity levels supported by the addition of new branch locations, a larger sales force and expanding Adler's rental equipment inventory. We are serving a wide variety of market segments including industrial plant, petrochemical, pipeline, oil and gas, waste management, environmental field service and heavy construction. Quarter-over-quarter income from operations was up over four-fold to $3 million as prior quarter new employee and other start-up investments to ramp the Adler business began to pay off.

Business activity levels and bookings have continued very favorably into the third quarter of 2010. Period-end utilization for the second quarter 2010 increased to 70.5% compared to 63.2% at the end of the first quarter 2010. Looking forward, we are very enthusiastic about the prospects for Adler to become an increasingly significant contributor to McGrath RentCorp's earnings.

Now let me take a moment and update everyone on our organic initiatives. First, TRS-Environmental, our environmental test equipment rental initiative, continued to make very favorable strides in growing its number of opportunities, rental customers and rental revenues during the second quarter of 2010. We increased our rental bookings by 50% and rental revenues by 41% over the first quarter of 2010. This is chiefly due to gaining more traction with customers and an improving marketplace, and to a lesser degree seasonality factors during the first quarter.

Our outlook for the remainder of the year is very positive. We believe that as the economy improves and project work increases, coupled with our country's increasing sensitivity on environmental matters, we can become a significant rental provider in the environmental test equipment industry.

Our portable storage initiative made good progress during the quarter. Rental revenues continued to increase on a sequential quarterly basis in the second quarter as they have each quarter since the business was launched in 2008. We're working hard at expanding our portable storage business in the California, Texas and Florida markets, and we will continue to explore smaller fleet acquisition opportunities to accelerate our growth. We will also continue to add sales professionals and operations staff in growing the business.

Looking forward, we are anticipating continued growth in our portable storage initiative during the second half of 2010.

Lastly, our Mid-Atlantic modular expansion continues to achieve favorable growth. Quarterly rental revenues increased sequentially during the second quarter of 2010 as they had done during each quarter of 2009 and in the first quarter of 2010. We are continuing to make good progress in capturing new educational classroom rental business with our innovative classroom products designed specifically for these markets. We are also growing our level of commercial market opportunities. Our outlook for growing the base of rental revenues and profitability for the Mid-Atlantic region during the second half of 2010 is very positive.

Keep in mind that all of these new initiatives are relatively small today compared to our legacy rental businesses and Adler Tank Rentals. Collectively, between our environmental test equipment, portable storage and Mid-Atlantic initiatives, they are contributing on an annualized basis approximately $6.5 million in rental revenues based on a second quarter 2010 run rate.

It should also be noted that these results have been achieved in a very challenging economy. That being said, we believe we will be able to grow the current base of rental revenues for each of these initiatives to much higher levels as we move forward in an improving economy.

Now for some closing remarks. Although our modular rental business has slid significantly from its peak 2007 earnings levels, the strong operating results of our electronics and tank rental divisions have driven our first quarter-over-quarter rental revenue and net income increases in over a year. At the same time we realize that generating stronger earnings growth in the quarters ahead is contingent upon the recovery of our modular business and in particular the California marketplace. Despite California's challenges, we are seeing improvement in booking levels for our modular business in both the educational and commercial sectors. We are hopeful that these trends continue.

With McGrath RentCorp's broader platform of rental products and geographies today it will support earnings if weakness hits one of our business units and also produce more substantial earnings growth in the future.

And now Keith and I welcome your questions.

Thank you, sir. We will now begin the question and answer session. (Operator instructions). Our first question is from the line of David Gold with Sidoti and Company. Please go ahead.

Hi, good afternoon.

Hi, David.

Hi, David.

A couple of questions for you. First, I guess the obvious. On California, so two things there on mobile modular more broadly. The tick up that you saw in utilization presumably that wasn't from classroom, that was more from the construction side or it was from classroom?

Since most classrooms ship later after the school year ends, it's mostly from the commercial construction sector.

Okay, okay, got you. And what did -- how should we think about or what does it take, really, from here for that business, for the classroom side, to return to more normal bookings or growth? I mean, is it as simple as the budget getting passed this year or have we missed a lot of the booking season and does it shift into next year?

Well, as you know, at this point our booking season really runs from pretty much February through June and then we get some -- sometimes additional order opportunities later in the year in July and August. So I think what -- from here we'll have to see the third quarter numbers to see how the booking side played out and that will give us a much better indicator.

Now going forward from here, the good news is there's still $1.3 billion left in modernization funds on the State level, and the State has been just recently disbursing more monies for modernization projects to move forward. So the third quarter will give a good indication of really what's coming on line this year and, as I said a moment ago, we -- there are available funds for districts, both on a State level basis and locally, to push modernization projects ahead in spite of the budget dynamics. Although school districts with the budget impasse still being present in California currently which has really become quite a norm, they're continuing to move forward with their particular needs on a district-by-district basis.

Okay. And then shifting to TRS for a second. You had strong performance there, but I'm just curious what you're seeing by way of price these days. It looks like we ticked down a little bit, I guess, year to year, despite the return of some demand. So just curious what you're seeing out there.

On the pricing?

Yes.

Yes, rents were actually up year over year and quarter over quarter for TRS. They were up 3% year over year and 3.5% Q2 over Q1.

Let me see, I must have misread. Okay, so presumably all is good there?

Well, it's a very hefty robust market.

Yes, better than a year ago.

Yes.

Okay, all right. And then just lastly on Adler, I'm peeking at the Q it looks like a very big -- even bigger ramp up in equipment at the end of the quarter and even better utilization. And so just curious how much more capital you might think to put in there and what -- sort of the thinking if there's any seasonality that we should be aware of.

Well, let me answer the latter part first. There definitely can be seasonality in the business, especially in the winter months, December through February and into early spring especially with any of the oil and gas well drilling type of activity or those type -- and certain types of construction projects that are not going to move forward in the colder months. That being said, we're also trying to be very prudent about how much equipment we're putting into the business and I think we've done a good job of that. And we're still learning, but when you look at capital spend from here, we're really doing that on a basis of understanding the specific opportunities in each of our legacy markets or additional opportunities in some of the specialty areas like the gas fields and so forth. So we're -- we monitor it quarter to quarter and we'll continue to invest in the business as we prudently can keep the equipment utilized. And that's how we run all of our businesses.

Terrific, thank you both.

Our next question is from the line of Scott Schneeberger with Oppenheimer. Please go ahead.

Thanks, good evening, guys. I guess one obvious question comes to mind. With the activity in the Gulf these days, is that going to -- is that having an impact on Adler, anything you can elaborate on there?

What we did with respect to Adler did have an impact but what we took was an approach -- of a very measured approach in how much equipment we were going to deploy into the Gulf because what was most important to us was the fact that we need to make certain our core markets that we were going to build over time and establish customer bases in, that those had ample equipment. So that was our first priority when the Gulf opportunities started coming in.

And then when you look at an event like the oil spill in the Gulf, environmental projects such as that or clean-ups, they really have a beginning and an end. And we know that from our past practices in our other businesses as well as what's taken place in the tank rental business over time. So those are kind of less attractive as opposed to being able again to deploy equipment into core markets or with customers that we're really going to build long-term relationships with. So we did put a very limited amount of tanks into the Gulf spill in some of the various southern Gulf states and also some box rentals as well. But I wouldn't term any of that significant by any means.

Okay, thanks. Shifting up gears a little bit, over to TRS, what -- with regard to your product, to your equipment, what -- where -- what are products that you're seeing that are underutilized and where are areas that you're adding? And are you happy with where you are right now or do you think you're going to see more ebb or flow in assets in that area?

Well, I won't get -- for competitive reasons I won't get into any particular products, but we've actually seen fairly broad-based lift here. So I -- and we manage our inventory very tightly and we've even done a tighter job of that or a more prudent approach to that over the past year where we're not investing in as many products of certain types that are lower margin type opportunities or are more highly competitive. And our goal here is to keep a -- much more healthy inventory levels in all areas through good and downturn economies.

And Scott, compared to a year ago, we're definitely turning over the equipment pool more. Demand is healthy. Our capital spend was a little heavier in the first half of this year compared to the first half of last year. And I characterize that as TRS getting back to a normal level of capital spend whereas last year, given the severity of the recession, it was really a below-normal year.

Okay, thanks. Spinning around, I have to cover modular as well. I'm curious, I want to ask it from the perspective of what your sales force hears at the street level with regard to -- primarily in California but this is a broad-based question -- of what the need is and just a kind of street level question as to what would -- are people looking to spend, need to spend, it's dependent on the bonds, just any color you can elaborate on there. Thanks.

I would say that, let's start with commercial construction. I think what we have seen here and this has really been for the first half of 2010 is that we've seen more larger construction projects. And as I mentioned earlier, a lot of these are public works related. There are some stimulus funds in there supporting that. But even beyond that, we're seeing projects for universities, we're seeing them for hospitals, we're seeing them for more quasi-governmental type work which a lot of that is not stimulus related. So it seems to me that that's a very -- that's been very healthy for awhile now. We haven't seen the lift in the single and double-wide kind of core commercial piece yet, that's yet to come.

And then the educational side, quite frankly, it's gotten better, slowly but surely. And the good thing about austerity over the past year or so or couple of years with schools and all, is the fact that demand will build over time. And especially like in the California market we are expecting growth in the school age population here in the next year and over the next couple of years. So there are some good guys there. But it's a much more positive tone when you anecdote -- you talk to the sales force and you get a feel for what they're hearing. And our sales teams, especially in California, have been very busy over the last couple of months as they're getting more calls and more opportunities.

Thanks. One final one if I could. How are you thinking about capital structure use of cash right now?

If you look, Scott, the last quarter we invested very heavily from a CapEx point of view. And then we had a bit of a comparative reduction in working capital. We saw a little bit of an uptick in our accounts receivable really related to growth in the business and a bit more of a shift in the business mix towards Adler in particular where it's a longer collection cycle. So when we look at capital structure we're very comfortable with where we are today. We have accessed the capital as we need it and we're investing very heavily. Overall CapEx was $58 million invested in the first six months of this year. We'll probably spend significantly in the second half, although perhaps not as much as we spent in the first half, but overall we feel comfortable with where we're at.

Great. Thanks, Keith, thanks, Dennis.

Thank you.

(Operator instructions). Our next question is from the line of Jamie Sullivan with RBC Capital Markets. Please go ahead.

Hi, good evening.

Hi, Jamie.

Jamie.

On the mods bookings that you called out and the increases in May and June, just wondering what the historical pattern has been in that business in 2Q?

Well, second quarter is typically a pretty significant booking quarter. We'd expect that -- that and the third quarter tend to be our strongest booking quarters of the year.

Okay. So it feels more like a normal year or getting back to kind of normal seasonality, is that a fair way to characterize it?

I would say -- I would characterize it like this. I'd say things are improved. I don't think we are back to a pre-recession state, but it's certainly significantly better than it was a year ago.

And Jamie, if I could add, one way to think of the modular fleet is the rental revenues that we see each quarter reflect the net effect of new business offset by returns where units that were out on rent come back to us. And what we've seen is the level of returns was very high last year. It's not as high this year. And the level of new business is better this year than it was last year. But, again, when you look at the net effect of it, rents did drop a bit as we moved from the first quarter through to the second quarter, although the drop was much less than we experienced a year ago.

And keep in mind a lot of the bookings in Q2 will not come into the income stream until Q3. A lot of it, it's classroom or larger (technical difficulty). For instance, we had a lot of equipment that we were preparing in the second quarter that was shipping in the third quarter and we won't see that rental revenue impact until the Q3 numbers.

Right, okay. And where we stand today, last quarter saw a pretty nice uptick in activity. It seems like bookings are recovering in modular, you're expecting a strong half in TRS, Adler continues to be strong. As we look at the range of the guidance, keeping it where it was, what are you -- what should we sort of think about that you're contemplating at the low end and the high end?

Yes, Jamie, first comment would be we're very comfortable with the range. And I would say we're really pleased with the second quarter results, very pleased with the increasing profit contributions we saw from Adler and TRS, and obviously signs of stability in the modular business. And as Dennis remarked, we've seen some very positive trends across each division even through the beginning of the third quarter. So we fully expect stronger earnings in the second half of the year and that's very typical in our business.

I think the things that we want to keep monitoring during the third quarter, a couple of things. One is as we just discussed, we want to see the final outcome on the modular side as to if there's recovery, just how strong it is. And also the third and to some extent the fourth quarter, are very important quarters from a sales point of view, and we want to see exactly how those sales numbers come in.

And so it's just a little early to really make an adjustment to the range but we're very comfortable and we think it's been a good first half and good trends in the business as we enter the second half of the year.

Okay, that's helpful. And then if I just hit California once there. If we think about the bookings that you've seen thus far in the year and they're following, let's say, the traditional pace, what - how would you characterize them at this point?

Well, as I said a moment ago I would characterize them as feeling significantly better than last year at this time but not up to what we -- pre-recession numbers. But certainly up and to the right and feeling a lot better.

And that's in the education bookings, right?

It's in both commercial as well as in education, that's correct.

And if we think about the education bookings alone, would that still apply there or is it a little bit more uncertain this year at this point?

I would say that commercial construction has certainly been strong, education has been -- I mean, they're both stronger than a year ago. And I would say that I wouldn't give either one of those more weight than the other at this point.

Okay, thanks.

At this time I would like to turn the conference back to management for any closing remarks.

So I want to thank everybody for joining Keith and me on our call today. We'll look forward to having you join us on our Q3 results in early November. So thanks so much and have a good evening.

Ladies and gentlemen, this conference will be available for replay after 7 p.m. Eastern Standard Time today through August 12, 2010 at midnight Eastern Standard Time. You may access the replay system at any time by dialing 1-800-406-7325 or 303-590-3030 and entering the access code 4329570 followed by the pound key.

This concludes the McGrath RentCorp second-quarter 2010 conference call. Thank you for your participation. You may now disconnect.