McGrath RentCorp (MGRC) 2015 Q1 法說會逐字稿

Welcome to the McGrath RentCorp first-quarter 2015 conference call. At this time, all conference participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. This conference is being recorded today, Thursday, April 30, 2015.

And 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 adviser 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 1-888-203-1112 for domestic callers and 1-719-457-0820 for international callers. The passcode for the call replay is 7197361. 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 p.m. Eastern Time or 1.05 p.m. 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 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 the Form 10-Q for the quarter. For the first quarter 2015, total revenues increased 3% to $90.2 million from $87.6 million for the same period in 2014. Net income decreased 13% to $6.8 million from $7.9 million, and earnings per diluted share decreased 13% to $0.26 from $0.30.

Reviewing the first-quarter results for the Company's mobile modular division compared to the first quarter of 2014, total revenues increased $5.2 million, or 16%, to $38.9 million due to higher rental and rental-related services revenues, partly offset by lower sales revenues. Gross profit on rents increased $3.1 million, or 34%, to $12.3 million. Rental revenues increased $4.9 million, or 23%, and rental margins increased to 47% from 43%, as depreciation as a percentage of rents decreased to 17% from 18%, and other direct costs as a percentage of rents decreased to 36% from 39%.

Selling and administrative expenses increased 17% to $11.4 million, primarily as a result of increased employee headcount, salaries and benefit costs. The higher gross profit on rental and rental-related services revenues, partly offset by higher selling and administrative expenses and lower gross profit on sales revenues, resulted in an increase in operating income of $1.4 million, or 47%, to $4.3 million.

Finally, average modular rental equipment for the quarter was $641 million, an increase of $70 million. Equipment additions supported growth across all regions and our portable storage business. Average utilization for the first quarter increased from 69.9% to 74.2%.

Turning next to first-quarter results for the Company's TRS-RenTelco division compared to the first quarter of 2014, total revenues decreased $1.5 million, or 5%, to $28.1 million, primarily due to lower rental revenues, partly offset by higher sales revenues. Gross profit on rents decreased $2 million, or 19%, to $8.6 million. Rental revenues decreased $1.6 million, or 7%, and rental margins decreased to 39% from 44%, as depreciation as a percentage of rents increased to 46% from 44%, and other direct costs as a percentage of rents increased to 15% from 12%.

Selling and administrative expenses increased $0.1 million, or 1%, to $6.1 million. As a result, operating income decreased $1.8 million, or 26%, to $5.2 million. Finally, average electronics rental equipment at original cost for the quarter was $264 million, a decrease of $3 million. Average utilization for the first quarter increased from 56.8% to 59.9%.

Turning next to first-quarter results for the Company's Adler Tanks division compared to the first quarter of 2014, total revenues decreased $0.3 million, or 1%, to $22.9 million, primarily due to lower sales and rental revenues, partly offset by higher rental-related services. Gross profit on rents decreased $0.5 million, or 4%, to $10.7 million. Rental revenues decreased $0.2 million, or 1%, and rental margins decreased to 63% from 65%, as depreciation as a percentage of rents increased to 23% from 21% and other direct costs as a percentage of rents was unchanged at 13%.

Selling and administrative expenses were flat at $6.9 million compared to 2014. As a result, operating income decreased $0.4 million, or 8%, to $5.1 million. Finally, average rental equipment for the quarter was $300 million, an increase of $20 million. Average utilization for the first quarter increased from 61% to 61.1%.

On a consolidated basis, interest expense for the first quarter of 2015 increased $0.2 million, or 8%, to $2.4 million from the same period in 2014, primarily due to the Company's higher average debt levels, partly offset by lower average interest rates. The first-quarter provision for income taxes was based on an effective tax rate of 39.5% compared to 39.2% in the first quarter of 2014.

Next I'd like to review our 2015 cash flows. For the quarter ended March 31, 2015, highlights in our cash flows included net cash provided by operating activities was $34.6 million, a decrease of $3.4 million compared to 2014. The decrease was primarily attributable to a decrease in accounts payable and accrued liabilities and lower income from operations, partly offset by other balance sheet changes.

We invested $30 million for rental equipment purchases compared to $31.8 million for the same period in 2014, partly offset by $6.1 million proceeds from sales of used rental equipment. Property, plant and equipment purchases increased $0.2 million to $3 million in 2015. Net borrowings decreased $1.6 million from $322.5 million at the end of 2014 to $320.9 million at the end of the first quarter 2015. Dividend payments to shareholders were $6.6 million.

With total debt at quarter end of $320.9 million, the Company had capacity to borrow an additional $229.1 million under its lines of credit, and the reissue of funded debt to the last 12 months' actual adjusted EBITDA was 1.88 to 1. For 2015, first-quarter adjusted EBITDA decreased $0.5 million, or 1%, to $35.5 million compared to the same period in 2014, with consolidated adjusted EBITDA margin at 39% compared to 41% in 2014. 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 2015 earnings guidance, our 2015 full-year earnings guidance range remains unchanged at $1.75 to $1.95 per diluted share.

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

Thank you, Keith. Now let's take a closer look at each rental business for the quarter.

Modular division-wide rental revenues for the quarter increased $4.9 million, or 23%, to $26.4 million from a year ago. This is the eighth consecutive year-over-year quarterly rental revenue increase for our modular division.

During the first quarter, we experienced a 21% increase in division-wide year-over-year first month's rental revenue bookings for modular buildings, with a 44% increase in California and a 9% increase outside of the state. We're also continuing to see rental rates rise for various-sized products as demand exceeds readily available supply.

Modular division average and ending utilization for the first quarter of 2015 reached 74.2% and 74.5%, respectively, an increase from 69.9% and 69.4% 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 to $4.3 million, or by 47% from year ago. This strong increase in profit was driven primarily by higher rental revenues and rental revenue margin expansion. Gross margin on rental revenues increased to 47% for the quarter from 43% a year ago.

Direct costs associated with renting equipment and inventory center operations as a percentage of rental revenues decreased to 36% from 39% for the same period a year ago. Although our year-over-year quarterly building preparation expenditures continue to be at a high level due to favorable market demand, we are now beginning to see the benefit of an increasing base of rental revenues on key metrics.

During the quarter, modular division EBIT also benefited from higher profit on rental-related services, offset by higher SG&A expenses and lower profit on equipment sales from last year's quarter. The higher SG&A 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.

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, decreased $0.2 million, or less than 1%, to $17 million from a year ago. Adler Tank Rentals serves a wide variety of market segments, including industrial plant, petrochemical, pipeline, oil and gas, waste management, environmental field service, and heavy construction.

Average utilization and total original cost of rental equipment was 61.1% and $300 million for the first quarter of 2015 compared to 60% and $280 million from a year ago. First-quarter average equipment on rent rose 7% to $184.1 million compared to $171.1 million a year ago. Overall fleet average monthly rental rates for the quarter slid to 3.08% from 3.34%, or by 8% from a year ago. The marked reduction in rental rates is primarily due to lower crude oil prices and the significant decline in well head drilling and completions activity, resulting in highly competitive upstream rental market conditions, in particular for 21K tanks. The oversupply of 21K tanks relative to demand in the oilfields is also putting downward pressure on rental pricing in midstream, downstream, and other market verticals.

Adler Tank Rentals' first-quarter results were also negatively impacted by seasonal cold weather in both the Midwest and the Northeast geographies. We remain cautious in our outlook for our liquid and solid containment rental business for the remainder of 2015 due to the current excess supply of 21K tanks in the marketplace.

Adler Tank Rentals' income from operations for the quarter decreased $0.5 million, or 8%, to $5.1 million from a year ago. The higher percentage decrease in EBIT, at 8% as compared to rental revenues at 1% for the quarter, was primarily a result of depreciation expense rising to $4 million, or by 8%, year over year.

Now let me turn our attention to TRS-RenTelco and their results. Rental revenues for TRS-RenTelco, our electronics division, declined by $1.6 million, or 7%, to $22.1 million from a year ago. The year-over-year reduction in rental revenues was driven by significantly lower communications test equipment business activity. We anticipate that our communications test equipment booking levels will show improvement beginning in the second quarter.

General-purpose test equipment rental activity, which had been slow throughout 2014, improved in the first quarter of 2015 compared to the same period a year ago. EBIT for the quarter declined by $1.8 million, or 26%, from the same period in 2014. The reduction in rental revenue of $1.6 million was the primary contributor to lower year-over-year EBIT, as higher equipment processing and SG&A costs were mostly offset by higher profit on equipment sales and lower equipment depreciation expense.

The higher percentage drop in year-over-year EBIT, at 26% compared to rental revenues at 7%, is primarily due to equipment depreciation expense, typically making up between 70% and 75% of direct rental costs. In other words, within any given quarter, we only have a limited amount of variable costs associated with rental revenue generation that can easily and responsibly be taken out of the business.

Average equipment utilization was 59.9% for the first quarter compared to 56.8% for the same period in 2014. Average rental rates for the first quarter of 2015 declined by 11% to 4.66% from 5.22% a year ago. This is primarily due to the on-rent equipment mix increasing for general purpose and decreasing for communications test equipment. General-purpose test equipment has longer depreciable lives and lower rental rates than communications test equipment.

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 first quarter in building its customer following, increasing booking levels, and growing rental revenues from a year ago. First month's rent booking levels and rental revenues for the first quarter grew by 57% and 44%, respectively, from the same period a year ago. Individual branch as well as overall business profitability is continuing to grow. We are targeting further geographic expansion during 2015. We are on track towards building a meaningful-sized storage container rental business with attractive operating metrics.

Now for a few closing comments. In examining our past year's quarterly earnings results, there are a variety of seasonality factors with our different rental businesses that tend to put downward pressure on the Company's earnings in the first half of the fiscal year and even more so in the first quarter. In fact, over the past decade, the Company's average percentage of annual EPS for both the first quarter and first half of our fiscal year represent 21% and 43%, respectively. Most recently, our first quarter of 2014 was only 17% of total EPS for the year.

When occasional cyclical forces are combined with seasonal factors in a given period, it can exacerbate downward pressure and quarterly EPS results. In particular, for the first quarter of 2015, our results were impacted negatively by not only seasonal factors, but also in our electronics rental business by a slowdown in the deployment of new or enhanced communication networks, as well as in our liquid and solid container rental business by the precipitous decline in crude oil prices entering the year.

While assessing the full impact of these cyclical forces to our earnings is difficult, we expect improved earnings through the balance of the year, led by recovery in our modular rental division and through reducing expenses compared to our beginning-of-year internal forecast. We have thoroughly reviewed our operating plans for 2015 and have identified various cost adjustments that can be executed upon with limited impact to our top line rental revenue growth objectives. In turn, we are reconfirming our full-year guidance range of $1.75 to $1.95 per diluted share.

And now Keith and I welcome your questions.

(Operator Instructions.) David Gold, Sidoti.

I wanted to ask a little bit on mobile modular, a couple of things there. But really curious as, I guess by now we're in the midst of the seasonal, the stronger bookings season. If you can speak a little bit toward visibility for this season, say, versus last year based on the demand and the interest that you're seeing out there.

And is this for education or generally across the business?

For education.

Well, if you look at education, we've had another favorable year in Florida as well as in the mid-Atlantic and in northern California, more favorable than the past year or two with respect to educational bookings. Southern California still has lagged behind. We have not seen a meaningful lift in southern California as compared to past years before the Great Recession, although there is some uptick there. But primarily, the educational markets are doing well outside of California and better in northern California, but with limited lift in southern California.

Okay. So the booking lift that you see in there, is that more on the construction side of things than industrial?

The booking lift that you see when you look at both outside the state and within California, the commercial side has remained very healthy, in particular in the Texas market as well as in the California market, so those have been very healthy verticals, both res and non-res. And then as I mentioned on the educational side of things, southern California is slowly but surely getting better, but it is not anywhere close to its performance level pre-Great Recession.

Got you. I guess what I'm getting at, though, is if we look at the 44% increase in California, what's driving that, if that's fair to ask.

The biggest part of commercial, but also with some favorable educational bookings, and in particular in the northern part of the state. And mind you, that's without statewide facilities bond monies available. So that's moving forward on its own.

Okay, good. And then as we look at Adler and a little bit of a tough road ahead of us for the next few months, is there anything you can do by way of -- I guess way back when, there was some talk of some fungibility of the tanks. And I was curious if there was anything there, or because of the possibly short-term nature, does it not make sense to shift them around?

Well, we've got, for the most part we've got equipment where we need it, although there will always be some inter-regional transfer of equipment. I think the key for us in the Adler business, in the window we're in currently, is to really create greater operational efficiency, market by market, build out the newest ones for critical mass. And also, in terms of the oversupply of 21K tanks, sell where you can and take out that depreciation expense. And we've been making some progress there, although small. But it's certainly a focal point for our different regional sales teams, and that's a way to take some cost out of the business here until markets get better for that multipurpose product, which is used in all of our verticals.

Got you, got you. Okay, and then just as to portable storage, expansion plans there this year?

Portable storage will -- we won't mention the two new markets, but we've targeted two additional geographies this year to expand into. And we're very pleased with the performance of that business. It's nicely profitable, we're building critical mass, we compete very well in the markets that we're in, and we're just trying to grow it prudently and responsibly.

Got you. Perfect. Thanks much.

(Operator Instructions.) Scott Schneeberger, Oppenheimer.

This is Daniel in for Scott. I want to ask a few questions on TRS. You alluded to on the communications side there might be a turn here in the second quarter. Can you take us a level deeper there, like what you're seeing that gives you confidence in that, please?

Well, it's primarily related to service providers and the contracts that they typically let in a given year for either new networks or enhancing-upgrading existing networks. And that business activity has been fairly slow towards the second half of 2014 and was slow again to start the year. But everything that we're hearing at this juncture is that that should get better starting in the second quarter.

Okay, understood. And on the general test equipment, it seems like that could have a turn here. What's your visibility there? What's the end markets driving this potential turn here?

Well, certainly the semiconductor industry as well as the other electronics devices. Aerospace and defense are also factors in all that. And last year was a challenging year in those market verticals and general-purpose test equipment as a whole. And we've seen much better activity to start this year. I'm not ready to cry hallelujah yet, but it's certainly positive thus far over the first four months.

Okay, got you. And then a final one from me. On the cost adjustments you alluded to, you identified, can you take us a level deeper there, please?

Yes, the way I would think about it is we've looked at all divisions and just tried to see are there any improvements we can make against the plans we had at the beginning of the year? And if you look at, for example, in our guidance ranges when we gave you the various cost categories of depreciation, direct cost of other operations, which is really preparing equipment for rental, and also the SG&A, we're really trying to manage towards the lower end of those ranges of the costs in each case.

And again, any and all opportunities are being looked at across the businesses. I would say an important area is hiring. We had a number of areas where we're adding new positions. We're just being very selective there, really taking a second look at where we need to add and the timing of where we'll make those additions. That's really the way to think about it.

And on the depreciation side, again, a second look over where we're adding equipment, being really sure that it's the right thing to do. And where we can in some of the businesses, looking for opportunities to sell used rental equipment, and that all helps with the depreciation expense. So really combing through the plans in all areas.

Okay, understood. Thank you very much, guys.

(Operator Instructions.) Joe Box, KeyBanc.

So when you look at the rate degradation within Adler, can you maybe give us a feel for how much of that is upstream versus just pricing pressure bleeding into some of your other markets?

It's mostly upstream with that as somewhat of a -- the oversupply being a contagion into the others. But E&P firms, as you know, upstream, they're doing everything that they can possibly do to economize, rationalize their expenses, renegotiate contracts, do whatever they can to get their costs down. And we're certainly right in the middle of that, and these rate adjustments have been fairly significant in the upstream market. And of course, that oversupply is there and it's going to impact our other verticals -- not as severely, but certainly to some degree.

And does everyone else have fungible tanks now? I know that wasn't the case earlier in the cycle, but are we looking at a lot of those new tanks being potentially applied to downstream or construction markets?

Well, it really depends on were people buying smooth-walled interior tanks that can be cleaned appropriately to be served in more sensitive containment situations? So it's really a function of you can buy the low-cost version that's corrugated, that's difficult to clean, that's more of just a strictly oil- or gas-field-style tank, or you can pay more money and buy the better one that's really multipurpose, as we have in our fleet.

So it really comes -- I'm sure there's some of that that's into the other markets now, although our competitors historically have purchased more of the corrugated type. But I personally, I don't know the mix of all of their purchases over the past few years. But there's no question there's more of that smooth-walled, multipurpose equipment in the market. I'm just not certain what degree.

And then just for my own purposes, what would the difference in cost be? Do you know? So smooth-walled versus oil and gas?

You could have a 20%, anywhere from 15% to probably 20% price delta in buying that.

For new construction.

For new equipment.

Right. So I'm trying to get a handle on the drought in California. And I really can't tell if that's a good thing or a bad thing for Adler. Do you have any early reads on that?

Yes. Actually, drought is not good for the Adler business. They like rainfall, and rainfall creates, especially for construction sites, creates runoff that needs to be contained. So anything to do with Mother Nature and rain is very good for that business. So when there's not rain, it's not nearly as good, especially during that time of year when we would typically get rain.

And then, Dennis, I do recognize that some of your assets fit together. But we're arguably six years into a cycle, and it just seems like the different units haven't really been able to get on the same page. I think it's also potentially debatable that there's been a lot of leverage or even synergy across some of the units. I'm just curious -- when you sit down with the Board, are you guys having portfolio discussions?

Well, we consistently look at the businesses we have. We consistently look at other good rental businesses, and we're very selective. And here, the dynamics of having -- I'd love to have everything hitting on the same eight cylinders every year; that would be fabulous.

But let's look at what's transpired here since the Great Recession. We had a modular business that we lost 80%, or 70%, of its EBIT, about $1.00 of EPS on a company that was about $1.60 in EPS. That business is coming back in a very significant manner today. And we've hit some headwinds in our other businesses that have performed well. But we added the Adler business in December of 2008. That was a whole 'nother complete new division that's providing very nice earnings quarterly.

So one of the tradeoffs here is when you have four different rental products -- portable storage, electronic test equipment, modular buildings, and liquid and solid containment -- yes, sometimes it's hard to get them all on the same page. At the same time, that diversity also provides us safety and protection in being just in one vertical that might be -- or one product that might be much more cyclical in some fashion.

We like our specialty rental company that we've built. And granted, we're trying to get everything on the same page. But if the modular business does what it's supposed to do, we will have cycles with our other businesses, but those are good rental businesses, not the least of which is portable storage. That's growing very nicely, very good margins, and great opportunity.

So we've ebbed and flowed here, but there's no, certainly, vacillation on our part with respect to the businesses that we're in today. We like what we have.

Right. All right. Thanks for taking my questions, guys.

And as we have no further questions, I would like to turn the conference back over to management for any additional or closing remarks.

I want to thank everybody for being on the call today. We greatly appreciate it. We will look forward to chatting with everyone again on our Q2 earnings call towards the end of July. Thank you all so much.

And that does conclude today's conference. Thank you for your participation. You may now disconnect.