McGrath RentCorp (MGRC) 2011 Q2 法說會逐字稿

Welcome to the McGrath RentCorp second quarter 2011 conference call. At this time all conference participants are in a listen-only mode. Later we will conduct a question-and-session and instructions will be given at that time. This conference is being recorded today, Thursday, August 4, 2011.

Now I'd 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 who will be acting as moderator of the conference call today. 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 seven days following the call by dialing 1-800-406-7325 for domestic callers and 1-303-590-3030 for international callers. The passcode for the call replay is 4456803. This call is also being webcast live over the internet and will be available for replay. We encourage you to visit the investor relations section of the Company's website at mgrc.com.

Our press release was sent out today at approximately 4.05 pm Eastern Time, which is 1.05 pm Pacific Time. 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 statement.

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.

For the second quarter 2011, total revenues increased 20% to $79.5 million from $66.5 million for the same period in 2010. Net income increased 54% to $11.4 million from $7.4 million, and earnings per diluted share increased by 48% to $0.46 from $0.31.

Second quarter results for the Company's Mobile Modular division compared to the second quarter of 2010, total revenues decreased $0.1 million to $29.8 million due to lower rental revenues partly offset by higher rental-related services and sales revenues. Gross profit on rents decreased $0.9 million or 8% to $10.4 million. Rental revenues decreased $0.6 million or 3% with rental margins decreasing to 52% from 55% as depreciation as a percentage of rents was flat at 17% and other direct costs increased to 31% from 28%.

Selling and administrative expenses increased 8% to $7.8 million primarily as a result of increased investment in our portable storage growth initiative. The lower gross profit on rent and increased selling and administrative expenses partly offset by $0.4 million higher gross profit on sales resulted in a decrease in operating income of $1.4 million or 21% to $5.2 million. Finally, average modular rental equipment for the quarter was $500 million, an increase of $11 million. Average utilization for the second quarter decreased from 67.7% to 67.4%.

Turning next to second quarter results for the Company's TRS-RenTelco division compared to the second quarter of 2010, total revenues increased $5.5 million or 21% to $31.2 million due to higher rental and sales revenues. Gross profit on rents increased $2.9 million or 38% to $10.5 million. Rental revenues increased $3.7 million or 19%, and rental margins increased to 45% from 38% as depreciation as a percentage of rents decreased to 40% from 46% and other direct costs decreased to 15% from 16%.

Selling and administrative expenses increased $0.2 million or 4% to $6.3 million. As a result, operating income increased $3.9 million or 96% to $7.9 million. Finally, average electronics rental equipment at original cost for the quarter was $256 million, an increase of $14 million. Average utilization for the second quarter decreased from 66.2% to 65.6%.

Turning next to second quarter results for the Company's Adler Tanks division compared to the second quarter of 2010, total revenues increased $6.6 million or 66% to $16.6 million primarily due to higher rental revenues. Gross profit on rents increased $5.3 million or 98% to $10.7 million. Rental revenues increased $6.2 million or 81%, and rental margins increased to 78% from 71% as depreciation as a percentage of rents decreased to 14% from 17% and other direct costs decreased to 8% from 12%.

Selling and administrative expenses increased $0.7 million or 24% to $3.7 million. As a result, operating income increased $4.8 million or 162% to $7.8 million. Finally, average rental equipment for the quarter was $148 million, an increase of $55 million. Average utilization for the second quarter increased from 71% to 85.8%.

On a consolidated basis, interest expense for the second quarter 2011 increased $0.5 million to $2 million from the same period in 2010 as a result of the Company's higher average interest rates and higher average debt levels. The second quarter provision for income taxes was based on an effective tax rate of 39.2% compared to 38.8% in the second quarter 2010.

Next, I'd like to review our 2010 cash flows. For the six months ended June 30, 2011, highlights in our cash flows included net cash provided by operating activities was $71.4 million, an increase of $28.3 million or 66% compared to 2010. The increase was primarily attributable to increased deferred taxes and other balance sheet changes together with higher income from operations. We invested $71.2 million for rental equipment purchases compared to $59.2 million for the same period in 2010 partly offset by $13.7 million in proceeds from used rental equipment sales.

Property, plant, and equipment purchases increased $7.3 million to $10.8 million in 2011. Dividend payments to shareholders were $11 million. Net borrowings increased $4.9 million from $265.6 million at the end of 2010 to $270.5 million at the end of the second quarter 2011.

With total debt at quarter-end of $270.5 million, the Company had capacity to borrow an additional $184.5 million under its lines of credit, and the ratio of funded debt to the last twelve months actual adjusted EBITDA was 1.85 to one.

For 2011, second quarter adjusted EBITDA increased $8.3 million or 28% to $38.3 million compared to the same period in 2010 with consolidated adjusted EBITDA margin at 48% compared to 45% in 2010. Our definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income are included in our press release for the quarter.

Turning next to 2011 earnings guidance, given our solid results during the first half of the year and encouraging signs for further growth in rental and sales revenues in 2011, we are revising our previous 2011 full-year guidance range of $1.52 to $1.62 to an updated range of $1.65 to $1.75 per diluted share. For the full year of 2011, we expect approximately 13% to 14% growth in rental revenues compared to (technical difficulty) and approximately 15% higher sales revenues.

Rental revenue growth is expected from Adler Tanks and TRS-RenTelco, and sales growth is expected primarily from Enviroplex. Rental equipment depreciation expense is expected to increase to a range of $59 million to $60 million driven by rental fleet growth. Selling and administrative costs are expected to increase to a range of $77 million to $79 million to support business growth, continued investment in Adler Tanks and our portable storage initiative, and removal of employee cost austerity measures in place throughout 2010.

Full-year interest expense is forecasted to be approximately $8 million. We expect the 2011 effective tax rate to be 39.2%. Earnings are expected to peak in the third quarter and then decrease in the fourth quarter due to year-end seasonality at Adler Tanks and TRS-RenTelco.

Now 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 $0.6 million or 3% from a year ago to $19.8 million and were flat sequentially from the first quarter of 2011. Rental revenues grew by 5% quarter-over-quarter in our markets outside of California. However, they declined by 8% within the state. California continues to be plagued by fiscal and unemployment rate challenges.

Income from operations for the quarter declined by $1.4 million or 21% to $5.2 million from a year ago. The higher percentage reduction in income from operations is primarily due to higher SG&A expenses associated with the continued expansion of our portable storage rental initiative and higher inventory center costs outside of California for the preparation of equipment for rental.

Modular utilization at the end of the second quarter was up approximately one percentage point to 67.7% from the end of the first quarter of 2011. However, yields on equipment on rent declined to 1.96% in the second quarter from 1.98% during the first quarter of 2011 due to continuing highly-competitive market conditions.

Division-side modular rental booking levels for the first seven months of 2011 were flat over the comparable period a year ago. However, booking results were very different inside and outside of the California market. In California, first month's rental bookings for the seven-month period were down approximately 28% while outside of California were up 35% from a year ago.

A great deal of uncertainty remains in the California modular market due to the continuing headwinds of state budget challenges, school district austerity measures, high unemployment, and lower levels of commerce. We expect it to remain a very price-competitive environment in all of the modular markets in which we operate until utilization levels begin to rise across the industry.

Please keep in mind that as our modular rental business returns to growth, it will require limited new capital investment to increase rental revenues, and we would expect to see a disproportioned share of this revenue convert to the pre-tax line.

Now let me turn our attention to TRS-RenTelco and their results. TRS-RenTelco's rental revenues for the first quarter increased by$3.7 million or 19% to $23.6 million from a year ago. The healthy pipeline of order opportunities experienced earlier in the year continue through the second quarter of 2011. In fact, we again set a new record on first month's rent rental bookings during the second quarter.

We are seeing favorable demand both domestically and internationally across a number of in-markets including semiconductors and communication products in networks. We also benefited from improved pricing levels as yield on equipment on rent increased from 4.13% a year ago to 4.68% during the second quarter of 2011.

Although rental revenues increased 19%, income from operations increased 96% to $7.9 million. In addition to higher rental revenues, our electronics business also benefited from higher gross profit on equipment sales and lower depreciation, laboratory, and SG&A costs as a percentage of rental revenues from a year ago.

Sale revenue increased by approximately $1.5 million and gross margin on sales to 49% from 43% compared to the second quarter of 2010. The used equipment sale market comprised of end-user and broker sales continues to be very healthy.

Depreciation, laboratory, and SG&A costs as a percentage of rental revenues declined to 40.1%, 15.2%, and 26.6% respectively from a year ago. We are continuing to benefit from our disciplined approach to equipment purchases and inventory management and more fully leveraging our existing base of employees and infrastructure.

Finally, average second quarter utilization declined to 65.6% in 2011 from 66.2% in 2010. However, the average original costs of rental assets increased to $256 million from $242 million for the second quarter from a year ago. The approximate $14 million increase in rental assets was made up primarily of communications and environmental test equipment assets that have shorter depreciable lives than general-purpose test equipment. These metrics support how in spite of utilization declining slightly quarter-over-quarter rental revenues grew very favorably.

Now let's turn our attention to Adler Tank Rentals. Our tank and box rental division rental revenues increased 81% to $13.8 million for the quarter from $7.6 million a year ago. This strong increase in rental revenues was directly related to higher business activity levels and continued expansion of 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.

Income from operations for the quarter was up over two-and-one-half times from a year ago to $7.8 million as the business further leveraged existing employee and facility infrastructure and also benefited from space of longer-term rental transactions. Business activity levels in bookings have continued very favorably through the second quarter of 2011. Period-end utilization for the first quarter of 2011 increased to 86.4% compared to 70.5% a year ago.

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 good progress during the second quarter of 2011. We saw the number of order opportunities increase by 59% from the same period a year ago. We also saw booking levels based on first month's rent increase 85% from the second quarter of 2010. These increased are chiefly due to an improving market place and gaining more traction with customers.

We believe that when 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 also continued to make good progress during the quarter. Rental revenues grew by 30% sequentially over the first quarter of 2011 and more than doubled compared to the second quarter of 2010. We are working hard at expanding our portable storage business in the California, Texas, and Florida markets, and we are continuing to explore smaller fleet acquisition opportunities to accelerate our growth.

We are also continuing to add sales professionals and operation staff in growing the business. Looking forward, we are excited about the momentum and opportunities for growth in the portable storage industry.

Lastly, our Mid-Atlantic modular expansion continues to achieve favorable growth. Rental revenues grew by 29% over the second quarter of 2010. We are seeing (technical difficulties) market activity, especially for larger building complexes, and are continuing to make good progress in capturing new educational classroom rental business with our innovative classroom products designed specifically for these markets. Our outlook for growing the base of rental revenues and profitability levels for the Mid-Atlantic region going forward is very positive.

Although these new initiatives are all 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're contributing on an annualized basis of approximately $11 million in rental revenues based on the second quarter 2011 rental run rate. This is up from an annualized rental run rate of $9 million from the first quarter of 2011. It should also be noted that these results have been achieved in a very challenging economy.

During the first half of 2011 we had a net addition of approximately $51 million in original costs of rental assets. During the second half of 2011 we plan to continue to invest capital for rental equipment and SG&A to support accelerated growth of these initiatives and Adler Tank Rentals in particular, as well as for our legacy electronics business and for specific modular regional markets.

It's essential that we take full advantage of various marketed and competitive dynamics that currently exist in order to attract more customers and create higher rental revenues sooner rather than later, especially in our newer rental businesses. The faster we can ramp the rental revenues of these initiatives and our larger rental divisions, the sooner we can absorb and further leverage these higher SG&A expense levels to produce greater profitability.

Now for some closing remarks. Our results for the first half of 2011 reflect very good momentum in our electronic and environmental test equipment, tank, and portable storage rental businesses. For our modular rental division outside of California, we've experienced an increase in both rental booking levels and rental revenues for the first seven months of the year from the same period a year ago. However, the California modular rental market continued to face significant challenges from state budget deficits and high unemployment.

It's important to note that our California K through twelve public school modular classroom business is an important income contributor to overall Company results. However, as of the second quarter of 2011, it only represented approximately 9% of our total Company rental revenues.

Our 2011 second quarter rental revenues of $57.1 million were our highest quarterly results in the Company's history. This is also our fifth consecutive quarter-over-quarter increase in both rental revenues and net income coming out of the great recession. The 48% increase in EPS for the quarter from a year ago was driven primarily by higher rental (technical difficulties) activity since the beginning of the year primarily from our electronics and tank rental businesses.

We also benefited from higher profit on sales, our continued depreciation expense management disciplines in our electronics division, and increased leverage over existing base of employees and other infrastructure.

As Keith spoke to earlier, based upon our favorable results during the first half of 2011 and our current outlook for the remainder of the year, we've elected to raise our full-year EPS guidance range for 2011. With McGrath RentCorp's broader platform of rental products and geographies today, it has and will continue to support earnings if weakness hits one of our business units and also produce more substantial earnings growth when the macroeconomic picture improves.

It's once again clear from this quarter's results that our strategy of creating additional earnings engines through greater product and geographic diversity is working. And now Keith and I welcome your questions.

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator instructions.) Our first question comes from the line of David Gold with Sidoti. Please go ahead.

Hey, good afternoon.

Hi, David.

Hi, David.

Just a couple of questions for you. First, on the Adler side of things. A couple of things there. One, can you speak to utilization? Is it sustainable where it is? It's very strong right now. And then two, you'd given some color on some more capital allocation during the second half, and it sounds like that would largely be to Adler?

You want to do the first part, Dennis?

Yes. Utilization. Quite frankly we're still learning. We -- when we initially acquired the business, we believed that utilization in the low to mid 70s was very good, and we've been pleasantly surprised with the levels we're at. And we're still -- as I said, we're still understanding and need more quarters and years under our belt to understand what is normal. And so I can only be as humble as that at this point.

And also, David, we tried to target some longer term rental opportunities with customers which helps build up the utilization a little bit as well. The thing we'll have to watch for is any year-end seasonality where certain regions of the country do less work, and typically we'd expect (technical difficulties) rent.

Gotcha. Gotcha.

And then on the capital spending side, we spent $71 million in the first half of this year compared to $59 million in the first half of last year, so we're spending quite heavily. Adler is in a very important focus area. We do want to add more to the fleet, and as you're seeing with the utilization, when we're adding fleet it's going on rent.

And the other area is with our electronics business having a very healthy year, we're adding more equipment to that fleet as well. Some of our other initiatives like portable storage, we're continuing to add to those fleets, but the big areas in the nearer term are Adler and TRS. And I think for the full year, given what we saw in the first half, the full year is likely to come out being a higher CapEx year than 2010.

Gotcha. Gotcha. Okay. And then just curious if you could speak a little bit on TRS right now. Are there pockets where you're seeing that demand from or is fairly broad based, or can you add some color there?

It's fairly broad based. I did make the comment in my prepared remarks about the semiconductor industry as well as communications equipment and network, so that's been consistent really over the past twelve months and it's continuing.

Okay. That's helpful. And then just one last. Sort of the obvious on the Mobile Modular side in California, I guess a couple of things. One, tell us how you're thinking about that market now given that I guess we're in for at least another year of uncertainty? And part two of that is are there things we can do differently there, other service offerings maybe or other markets that we can chase in California with the inventory that you have?

Well, let me respond to the first question with respect to this next coming budget year. The good news is that with a democratic governor and a democratic-controlled legislature, they got a budget approved on June 30, which was the first time in many, many years that that occurred. They also -- they had approximately a $27 billion deficit when the governor took office in January, and they achieved about half of the balancing act with cuts, real-life cuts that really, for the most part, hit a lot of social and other programs and was -- impacted schools somewhat but not very significantly.

And then surprisingly in the spring, revenues picked up. Corporate income tax, personal income tax, and sales tax. So we benefited from that. So they were able to, with some other steps on short-term and et cetera, they were really able to bridge it. So at least from a revenue-generation standpoint, we're (technical difficulties) space today I think the state is ahead year-to-date $6.6 billion in revenues versus last year. So that helps considerably. Plus, they've taken some good austerity measures.

So granted this is going to be another challenging year, but for school districts right now we are looking at pretty much flat budgets compared to last year, and it doesn't appear, unless there's a significant shortfall in revenues over the next couple of months, that there'll be any further austerity that school districts need to take.

So that's kind of the current picture. So if stable or less uncertainty is good news, that's what we have currently. We'll have to see how things play out going forward in terms of unemployment going down, et cetera. So comment on that part of the question.

Just one second. Gel the stability that the school districts are expecting with the 28% down-bookings in California these days.

I'm not sure if I understand the context?

In other words wasn't the comment the bookings on the California side are down 28%?

That's correct.

Okay. So I'm saying -- so I'm curious if we're stable there and if they're feeling the stability, how do you put those -- what's freezing them from sort of booking or doing anything? Why are we down so much?

Well the budget was only signed at the end of June.

Yes, you don't -- you just don't have any time to have districts plan for modernization and other projects. And obviously we have derived a lot of our rents in California with schools for modernization work. Still about a half of a billion dollars left that should get us into the first part of 2012 with respect to approving projects.

So it's just -- the dynamics are that there's been uncertainty up until the budget got approved, and there's still a little bit more uncertainty with the revenue dynamic I mentioned where if there's a shortfall there could be some scaled additional austerity. But right now it's looking like there won't be. So --.

Gotcha.

And keep in mind, David, on those bookings, there is a large commercial component to the business as well, and in California it's still a tough commercial market.

Okay. Yes. That's fair. That's fair. Okay. Fair enough. Fair enough. All right. I appreciate all of that, all the color. Thank you.

Thank you, David.

And our next question comes from the line of Scott Schneeberger with Oppenheimer. Please go ahead.

Thanks. Good afternoon.

Hi, Scott.

Hey, Scott.

The -- I guess I'll kickoff -- great job by the way in the quarter. And unfortunately I'll pick up where David left off in the softer spot.

Thank you.

The -- I'm curious with what's going on in Washington, what -- what type of influence might that have on the California budget? Could you familiarize us with how much dependence the California budget may have on federal subsidies and how that -- if there are substantial ones and how that could effect classroom modulars and potentially infrastructure modulars in that state? Thanks.

Quite frankly, Scott, it's too early to tell. I just -- we just don't have enough information as to what austerity will be occurring. So it's premature at this point, but obviously we'll -- we're keeping tabs on things, but it's just too early in the process.

And it's probably more likely to be a factor in next year's ordering season than this year's ordering season. At this point we've got visibility on the level of business that's occurring and the units that are going to go out on rent here in the summer months, and we've got some visibility on the returns that have occurred, so pretty much the school year should be set.

Okay. The -- shifting gears then to within Adler. Could you speak a bit to the ability to source? I saw that utilization went from, I think you ended last quarter up near 90, average utilization was 85.8 here. I don't know -- actually I don't know if that's up or down on average from last time, but how are things going with sourcing? It sounds like obviously demand is still quite robust, but if you could talk about accessing.

Yes. Demand in terms of being able to acquire all the equipment that we'd like to have as soon as we have it is still quite challenging, and we want to acquire the right manufacturers that build the best product, so we're selective. But that continues to be a challenge there.

And I would just say with respect to what you might have seen a quarter ago on any inventory, that is a function of just equipment that cycles back in, and when we take our snapshot of utilization at the end of the month, you can have equipment that just came off rent at very -- it is turning right around and going back on rent. So it's not any -- I mean the demand picture is still as strong as it was entering the year and has stayed very robust.

And just for context it was 86% average utilization in the first quarter, 85.8% in the second quarter, so virtually unchanged. And we added to the fleet over those last three months.

Great. Thanks. And just another -- another Washington read-through. I can't think of any, but can you guys think of any correlation between just, for instance, any of your end-markets, particularly fracking, and what's gone on in DC recently? Thanks.

Yes, I can't. The only thing that I would comment to is the fact that if the general economy as we're -- obviously the markets today reacted to the general economy slowdown, et cetera. I mean, if you get concerned about anything that impacts fracking it would be that energy demand is lower, which potentially could curtail some of the exploration and drilling efforts, et cetera, because you're not using as much energy.

But that's as far as our thing goes right now with respect to kind of macro dynamics such as Washington or the general economy, so we'll -- I'm sure we'll learn move over time here, but there's nothing eminent that we're seeing that is impacting the Adler Tank and Box Rental business from the recent Washington process.

Thanks. Sounds logical. I will cut it off there. Thanks guys.

Thanks, Scott.

Thank you. (Operator instructions.) I am showing no additional questions at this time. I will now turn the call back over to management.

I'd like to thank everybody for joining us on our Q2 call today. Our next call will be in early November with our Q3 results. Thank you all for your attendance today and your continued support. Have a good evening.

Ladies and gentlemen, if you'd like to listen to a replay of today's conference, you can dial 1-800-406-7325 using the access code 4456803. We'd like to thank all of you for your participation, and you may now disconnect.