McGrath RentCorp (MGRC) 2014 Q1 法說會逐字稿

Welcome to the McGrath RentCorp first quarter 2014 conference call. (Operator Instructions) As a reminder, this conference is being recorded today, Wednesday, April 30, 2014.

Now I would like to turn the conference over to Geoffrey Buscher of 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.

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 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 4678086. 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. A press release was sent out today at approximately 4;05 PM Eastern Time or 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 21-E 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 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 the Form 10-Q for the quarter.

For the first quarter 2014, total revenues decreased 1% to $87.5 million from $88.7 million for the same period in 2013. Net income decreased 15% to $7.98 million from $9.2 million, and earnings per diluted share decreased 17% to $0.30 from $0.36.

Reviewing the first quarter's results for the Company's Mobile Modular division, compared to the first quarter of 2013, total revenues increased $4.6 million, or 16%, to $33.6 million due to higher rental, rental-related services, and sales revenues.

Gross profit on rents decreased $0.2 million or 2% to $9.2 million, primarily due to a decrease in rental margins to 43% from 49%, partly offset by higher rental revenues. Lower rental margins were primarily a result of $2.1 million higher other direct costs for labor and materials.

Selling and administrative expenses increased $0.9 million or 11% to $9.7 million, primarily as a result of increased employee headcount, salaries and benefit costs. The higher gross profit on rental-related services and sales revenues, partly offset by higher selling and administrative expenses and lower gross profit on rent, resulted in an increase in operating income of $0.1 million, or 4%, to $3 million.

Finally, average modular rental equipment for the quarter was $570 million, an increase of $35 million. Equipment additions were primarily to support growth in Texas, Florida and the mid-Atlantic region, and for our portable storage business. Average utilization for the first quarter increased from 66.4% to 69.9%.

Turning next to the first quarter results for the Company's TRS-RenTelco division, compared to the first quarter of 2013, total revenues decreased $.2 million, or 10%, to $29.6 million, primarily due to lower sales and rental revenues. Gross profit on rents decreased $1.2 million, or 11%, to $10.6 million. Rental revenues decreased $1.1 million, or 4%, and rental margins decreased to 44% from 48% as depreciation as a percentage of rents increased to 44% from 40%.

Selling and administrative expenses decreased $0.1 million or 1% to $6 million. As a result, operating income decreased $2.5 million, or 27%, to $7 million.

Finally, average electronics rental equipment at original cost for the quarter was $267 million, an increase of $1 million. Average utilization for the first quarter decreased from 63.8% to 56.8%.

Turning next to the first quarter results for the Company's Adler Tanks division, compared to the first quarter of 2013, total revenues increased $2.4 million, or 11%, to $23.2 million, primarily due to higher rental related services and rental revenues. Gross profit on rents increased $0.8 million, or 8%, to $11.2 million. Rental revenues increased $0.7 million, or 4%, and rental margins increased to 65% from 63%. Higher rental margins were due to $0.5 million lower other direct costs.

Selling and administrative expenses increased $0.9 million or 15% to $6.9 million, primarily due to increased employee headcount, salaries and benefit costs. As a result, operating income increased $0.4 million, or 8%, to $5.5 million.

Finally, average rental equipment for the quarter was $280 million, an increase of $28 million. Average utilization for the first quarter decreased from 64.7% to 61%.

On a consolidated basis, interest expense for the first quarter 2014 was flat, at $2.2 million. The first quarter provision for income taxes was based on an effective tax rate of 39.2%, unchanged from the first quarter 2013.

Next, I would like to review our 2014 cash flows. For the quarter ended March 31, 2014, highlights in our cash flows included net cash provided by operating activities was $38.1 million, an decrease of $3.6 million compared to 2013. The decrease was primarily attributable to a lower increase in accounts payable and accrued liabilities, a lower decrease in deferred income, lower income from operations, and other balance-sheet changes.

We invested $31.8 million for rental equipment purchases, compared to $25.2 million for the same period in 2013, partly offset by $6.4 million in proceeds from sales of used rental equipment. Property, plant, and equipment purchases increased $1.3 million to $2.82 million in 20143.

Net borrowings decreased $1.9 million from $290 million at the end of 2013 to $288.1 million at the end of the first quarter 2014. Dividend payments to shareholders were $6.5 million. With total debt at quarter-end of $288.1 million, the Company had capacity to borrow an additional $281.9 million under its lines of credit, and the ratio of funded debt to the last 12 months' actual adjusted EBITDA was 1.81 to 1.

On March 17, 2014 we amended our note purchase and private shelf agreement to extend the shelf agreement for three years. In addition, we issued 40 million of Series B senior notes at an interest rate of 3.68% and with a term of seven years.

For 2014, first quarter adjusted EBITDA decreased $1.3 million, or 3%, to $36 million, compared to the same period in 2013, with consolidated adjusted EBITDA margin at 41%, compared to 42% in 2013. 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 2014 earnings guidance, our 2014 full-year earnings guidance range remains unchanged at $1.70 to $1.85 per diluted share.

Now, I would like to turn the call over to Dennis.

Thank you Keith. Although our first quarter 2014 EPS results are approximately $0.06 per diluted share below the first quarter 2013, they are in line with our internal forecasting. Due to various seasonality, outbound and inbound equipment shipment timing and other factors, our quarterly results can vary significantly within a given playing year. We are reconfirming our 2014 full-year guidance range of between $1.70 and $1.85 per diluted share.

Now let's take a closer look at each business for the quarter. Modular division-wide rental revenues for the quarter increased $2.2 million, or 11%, to $21.5 million from a year ago. During the first quarter, we experienced a 37% increase in division-wide year-over-year first months' rental revenue bookings for modular buildings, with an increase of 44% in California and 34% outside of the state.

Our favorable modular building rental booking trends have continued to date in the second quarter of 2014. We're also continuing to see rental rates rise for various sized products as demand exceeds readily available supply.

Modular division average utilization for the first quarter of 2014 rose to 69.9% compared to 66.4% a year ago. This is the highest modular division first quarter average utilization level since 2009.

Modular division income from operations for the quarter increased by $0.1 million, or 4%, to $3 million from a year ago. The lower percentage increase in income from operations compared to rental revenues, is primarily due to the increase in divisional booking levels and the significant increase in related inventory center costs for labor and materials to prepare and modify equipment for rental.

This is compounded by the need to deploy various rental assets that have been sitting idle for extended time frames, which tend to have higher processing costs than inventory that turns more frequently. In fact, inventory center costs, primarily for the preparation of booked orders and anticipated near-term orders, were approximately $2.1 million, or 33% higher during the first quarter a year ago.

These expenditures reinforce our belief that our modular building rental business is experiencing a strong turnaround. Keep in mind that almost all of our inventory center costs for building preparation and modification work are expensed in the quarter in which they are incurred. However, we benefit from the associated rental revenue stream from such expenditures in the quarters ahead.

Over the past few quarters, we have begun to experience year-over-year rental revenue and utilization lift associated with these higher than normal inventory center expenditures. We also had higher SG&A expenses during the quarter from a year ago. These costs were primarily related to increased sales and operations staffing levels to support the recovery of our modular rental business, as well as the continuing expansion of our portable storage rental business.

Finally, some of these increased costs were offset by higher gross profit on sales of equipment from a year ago.

Now let's turn our attention to Adler Tank Rentals and their results. Rental revenues at Adler Tank Rentals, our liquid and solid containment tank and box division, increased by $0.7 million, or 4%, to $17.1 million from a year ago. The year-over-year increase in rental revenues was achieved despite harsh, cold weather conditions in the Midwest and East and drought conditions in the West and driven primarily from growth in branch locations opened less than one year.

Average utilization was 51% in the quarter compared to 64.7% a year ago and 60.8% sequentially from the fourth quarter of 2013. However, reflective of the strong business activity levels later in the first quarter of 2014, period end utilization rose to 64.5% compared to 63.5% a year ago and 57.7% sequentially from the fourth quarter of 2013.

At the end of the first quarter of 2014, Adler Tank Rentals had $182.2 million of assets at original cost on rent, its highest level ever.

Overall fleet average monthly rental rates for the quarter remained relatively flat at 3.34%. We've been able to offset some of the downward pressure on rental rates for 21K tank assets by renting larger quantities of box and specialty tank products that have higher average monthly rental rates and yields.

Adler serves in a wide variety of market segments, including industrial plant, petrochemical, pipeline, oil and gas, waste management, environmental field service and heavy construction. By design, we have pursued and been successful in generating higher business activity levels across a broader mix of non-fracking in historically less volatile vertical markets.

In fact, fracking related rental revenues reduced to 12% of total rental revenues for the first quarter of 2014, as compared to 15% a year ago.

Adler Tank Rentals income from operations increased by $0.4 million, or 8%, to $5.5 million from a year ago. For the quarter, the higher percentage increase in income from operations compared to rental revenues is primarily related to lower inventory center costs and higher gross profit on rental related services, partly offset by higher SG&A expenses.

Adler Tank Rentals has added 15 new branches since 2009, with 9 of those locations having been opened since 2012. We have elected not to pursue any further geographic expansion during the calendar year 2014. Instead, management is giving their undivided attention towards making all of these new market investments successful.

In 2014, our objective is to refine, refine, refine our operational and administrative structures and processes in order to expand margins and enhance the customer experience.

Now let me turn our attention to TRS-RenTelco and their results. Rental revenues for TRS-RenTelco, our electronics division, declined for the quarter by $1.1 million, or 4%, to $23.8 million from a year ago. The decline in rental revenues is primarily related to lower billing run rate entering 2014 and higher equipment return levels from the same period a year ago. In fact, first month's rental billing shipments increased by 4% for the quarter from the same period a year ago. However, first month's rental billing returns increased by 13% for the same timeframe.

The overall lower business activity levels were driven primarily by softness in our general purpose test equipment end markets, as well as a colder and longer winter in various markets than a year ago. This is further reflected in quarter end utilization of 56.4% compared to 63.3% a year ago and 58.2% sequentially from the fourth quarter 2013.

Average monthly rental rates for the quarter actually increased to 5.22% from a year ago. However, this increase is primarily due to an increased mix of communications test equipment, which has shorter depreciable lives, but higher rental rates than general-purpose test equipment.

Divisional income from operations decreased by $2.6 million, or 27%, to $7.0 million from a year ago. The higher percentage decrease in income from operations compared to rental revenues for the quarter is primarily related to lower gross profit from rental equipment sales, and secondarily, to higher depreciation expense as a percentage of rental revenues.

Now let me take a moment and update everyone on our portable storage business. Mobile Modular Portable Storage continued to make good progress during the quarter in building its customer following, increasing booking levels and growing rental revenues, from a year ago.

Rental revenues for the first quarter of 2014 grew by 35% from a year ago. During 2014, we will be expanding into two new geographies; however, our primary focus will be on building greater critical mass and profitability in the markets in which we are already established. Looking forward, we continue to believe that we have an excellent opportunity to become a meaningful player in the portable storage rental industry.

Now for a few closing comments. Our full-year EPS guidance range of $1.70 to $1.85 per diluted share remains wider than we typically provide. However, there are many moving parts to our portfolio of rental businesses currently that make it challenging to narrow guidance further at this time.

The most material variables include one, the strength of the recovery underway in our modular building division. Two, increasing utilization levels of our liquid and solid containment tank and box rental assets. And three, the potential for continuing softness in general purpose test equipment rental demand in our electronics division.

We have made a significant amount of investment in our tank and box modular and portable storage businesses over the past few years that have created near-term EPS headwinds. These investments were made with significant forethought towards creating materially higher earnings levels in our future than if we had not made them. We are working hard to realize this goal.

Last, please keep in mind that McGrath RentCorp has a very strong balance sheet, with a funded debt to last 12 months actual adjusted EBITDA ratio of 1.81 to 1 and with the current capacity to borrow an additional $281.9 million under our lines of credit. We can be very opportunistic in growing our business lines with the availability of such funding. We are committed to making each of our rental businesses meaningful in size and earnings contribution and with the best operating metrics by industry. We plan to continue to make favorable strides during 2014 towards achieving these goals.

And now Keith and I welcome your questions.

(Operator Instructions) David Gold, Sidoti & Company.

I was curious if you could give a little bit more color as to, I think a quarter or two ago, when the question came up of how long the elevated costs would run at mobile modular, I think at that time commentary was 12-plus months. So now a quarter or two down the road, you're still seeing strong bookings. Any update on that thinking on how long the elevated costs might run and how significant they might be? This quarter is $2-plus million incremental a good number to run with?

When you look at how we plan 2014, we look at the first half of the year being in line with higher expenses like last year and then in quarters three and four, we likely will not spend as much as we did in the first half of the year. That will depend greatly on the amount of continued business activity at such a high level. However, what we should start seeing though, is expanding margins as more of this equipment that we've been spending these big dollars on goes on rent.

But that's kind of our outlook for the year right now is really Q1 was a heavy spend quarter and all for the right reasons. And we would likely expect Q2 to also be a heavy spend quarter; maybe not to the Q1 level. And then in the second half of the year we would expect to be somewhat less than the first half of the year.

And really just for clarification, in Q1 of 2013, we really weren't experiencing the elevated level of expenditures in the modular business. So that's why you see the comparison with Q1 of 2014, it is up significantly, $2.1 million or 33% increase.

Okay. And then part two of that, when I think about the revenue base for mobile modular on a sequential basis, down a touch, which I guess I'm not used to seeing, given the demand characteristics. Just curious how we should think about that?

It's really the number of days in the quarter, David. In the modular business the number of days impacts the rent that we collect and so first quarter is slightly fewer days than the fourth quarter. That's the primary reason. I would also say that you're in the first quarter and this is no unusual. We did have slightly more returns than new shipments. And so that resulted in fewer units out on rent, but to a modest extent.

David, if you go back historically and look at Q4 to Q1, you can go back to even pre-recession time frames, 2008 and 2009, all the way through today and Q1 is typically slightly below or flat to Q4. It's very common, even if the business is performing well. There's just seasonality dynamics that can come into play between how you end the year and how quickly you start out the New Year.

Okay. Then shifting to TRS for a second; the elevated level of returns, you have that 13%; it sounds like some of that is weather related, but anything else that you think is driving that or is it just economic?

Well, the dynamics in the general purpose market today is that it's highly competitive. There are a lot of under-utilized assets in the industry and that's being really driven by weakness in the semiconductor industry as well as in aerospace and defense and perhaps some other general electronics business. I wouldn't say that the returns are so much greater, as much as the outbound equipment and order activity has not been that plentiful in terms of realizing a higher amount of growth over a Q1 2013.

The returns are just occurring in an orderly manner; we just have not seen what's in the pipeline really converting into orders going out.

I guess what I was thinking was just the 13% increase in returns I guess year-over-year, right, seemed to be a big jump.

Well, like I said, the business is bigger today, but this has more to do with what is not going out, in terms of what it pent up in the pipeline and we just haven't seen as much equipment going out. In my prepared comments I tried to explain the delta there. But it more than anything has to do with the momentum of new equipment shipments.

One last if I might. I think November was the current due date for Agilent to do the key site spinoff and just curious if you think that affects you? My guess would be that it would be a positive for you, but I'm curious if there are any thoughts on the effect?

I'm not sure if there's any real material difference of any sort there. We likely become more important in the new world, because it's a test equipment world as opposed to the mix of business today. But I wouldn't expect anything of a material nature going forward other than we have a good relationship and we expect that to continue.

Perfect. Thanks so much.

(Operator Instructions) Scott Schneeberger, Oppenheimer.

Adding up one in each segment then go around the (inaudible); in Adler, could you talk a bit about the weather impact and less so on the fracking and more so on the other segment? How much of an impact would that be and how much recovery are you seeing in the second quarter?

Well, if you look at the Midwest and the East and the winter that we had, needless to say, the reason the national gas prices are where they're at today, close to $5.00 an MBtu is because the amount of natural gas used this past winter, as well as the link that's been used into March and April of larger quantities, we obviously there's a negative side to that in the fact that various projects that would otherwise have gone forward in the Midwest and the East couldn't move forward because the ground was frozen or due to other inclement weather hindrance. So that's really the dynamic there.

I think that the telltale there is if you look at the ending utilization level for the quarter for Adler it's markedly from the average for the quarter. So I think that's probably your best telltale that things got a lot stronger towards the end of the quarter and that strength has continued now into the second quarter.

Within TRS-RenTelco, when do you anticipate -- it looks like we're kind of in a down cycle so to speak. When do you anticipate recovery from this? Obviously weather was a little bit of an impact in the quarter but certainly more to it than that. What indicators are you watching and any telltale signs that things may improve in the near future?

That's a difficult question to answer at this juncture. It's April. We would have liked to have seen some improvement already this year. We knew there was a slow start to the year. We haven't seen that yet. Although we're hopeful that over the next couple of quarters we'll see our billing rate ramp nicely. But we're still waiting to see that throughput. So we've actually had for April -- April was our best month of the year so far in terms of if you look at the beginning of the month billing rate versus the end of the month. And so it was certainly stronger than earlier in the year.

We need that to continue but right now it's still a big of a wildcard to all of us. That's an important part of our plan this year for TRS to be able to hit our internal projection numbers, etc. But right now, we've got that business running tightly. It's lean. We're trying to really manage depreciation expense tightly, which as you know is 40% to 50% of the cost of every rental revenue dollar. So we want to make certain we're not going to be bleeding excess depreciation expense that could take away from profitability.

So we're working both ends of it, the top line as well as the cost element to be able to get the margins we need in the business this year.

Great. The last one is going to straddle a couple of end markets, a couple of segments. You mentioned two new geographies in portable storage. I'm just curious, how active were you with new geographies the last quarter, why just two here? You talk about a focus on greater critical mass. And I noticed in Adler you had also mentioned, you said it three times, objectives [are refined] and not a lot of new market investment. So a bit of a different tact than what you had in both of these end markets. If you could elaborate a little bit more on both?

I'd be happy to. First of all, the general theme is that we've really pushed hard to grow both of those businesses over the last few years and we've made a lot of investment and it's been good investment and we like the markets we're in and the opportunities that they present to us.

However, at the same time, it's also created a lot of EPS growth headwind and our goal this year is we've got to create more top line headroom in our existing investment to be able to expand margins in the business and increase EPS before we make further investment.

We've got plenty investment we've made that our goal here is to refine that and expand those margins, develop critical mass. So we've got work in front of us but it's the kind of work that we're good at and we'll pick up additional growth in various businesses here once we are generating EPS on a level that's stronger than what we've done over the past couple of years. We need to be doing that.

But there is no shortage of opportunity in front of us and this is a good point in our evolution to make these additional investments in what we already have under our belts.

I'm showing no further questions at this time. I would like to turn the call back over to management for closing remarks.

We'd like to thank everyone for joining us this afternoon and will remind everybody of our upcoming annual shareholders meeting on June 11th, beginning at 2 PM in Livermore, California. And we'd love to have you be able to join us if you can. Otherwise it will be webcast and we'll look forward to you listening in.

Thank you so much for your continued support. Have a good evening.

Ladies and gentlemen, this concludes the McGrath RentCorp first quarter 2014 conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325 and enter access code 4678086 followed by the pound sign. Thank you for your participation. You may now disconnect.