McGrath RentCorp (MGRC) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp fourth-quarter 2016 earnings conference call.

(Operator Instructions)

This conference is being recorded today, Tuesday, February 28, 2017. Before I turn the conference over to Keith Pratt, Executive Vice President and Chief Financial Officer, I will read the Company's Safe Harbor statement and provide a few other reminders.

The matters that Company Management will be discussing today that are not truly historical are forward-looking statements within the meanings of the Section 21E of the Securities and Exchange Act of 1934, including statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. The following looking statements are is upon information currently available to the Company and the Company assumes no obligation to update any such forward-looking statements.

Forward-looking statements involve risk and uncertainties which could cause actual results to differ materially from those projected. These and other risks relating to the Company's business are set forth in the documents filed with the Securities and Exchange Commission, including the Company's most recent Form 10-K. In addition to the press release issued today the Company also filed with the SEC, the earnings release on Form 8-K and the 2016 Form 10-K.

Please note that this call will be available for telephonically replay for up to seven days following the call by dialing 1-855-859-2056 for domestic callers and 1-404-537-3406 for international callers. The passcode for the call replay is 6139905 -- sorry, 61399095. This call is also being broadcast live via the Internet and will be available for replay purposes in the investor relations section of the Company's website at mgrc.com.

With these remodeling formalities out of the way, I'll now turn the call over to Mr. Keith Pratt. Go ahead, sir.

Thank you, Michelle. Good afternoon and thank you for joining us on today's call. We are here to discuss McGrath RentCorp's fourth-quarter and full-year 2016 results which will reported today after the market closed.

Before I begin the review of the Company's results, I would like to share some comments regarding Dennis Kakures. On February 17, it was announced that after a career spanning almost 35 years, Dennis Kakures was retiring as McGrath RentCorp's President and CEO and also as a director from the McGrath RentCorp Board. Over the course of his career, Dennis's integrity, leadership and passion for the Company and the people of this organization, never wavered.

His commitment to excellence and his extraordinary work ethic were instrumental in growing the Company into the organization we are today. I think Ron Zech, our Chairman of the Board, summed up our collective feelings very well in saying, all of us at the Company and on the Board thank Dennis for his long service, dedication, and numerous contributions. As both business associates and friends, the Board and all McGrath RentCorp employees wish him the very best.

As announced yesterday February 27, Joe Hanna has been appointed as our new President and Chief Executive Officer. Joe and I would also like to say what a pleasure it was to work with Dennis. We will miss him for his great leadership, and drive at the Company and we will miss him as a great colleague and friend in the workplace. We wish him all the best in his retirement.

For today's call I'm going to give the prepared remarks and Joe will join me during the Q&A. Please note that the Company announced a 2% increase of the cash dividend to $0.26 per share for the first quarter of 2017, representing on an annualized basis a 2.7% yield on the February 27, 2017 closing stock price. This is the 25th consecutive year of the dividend increases announced by the Company.

Now let's get started with the review of the quarter's results. For the fourth quarter 2016, total revenues were $105.3 million, unchanged compared to the same period in 2015. Income from operations increased by 6%, to $22.7 million from $21.5 million.

Net income decreased 15% to $9.7 million, from $11.5 million and earnings per diluted share decreased 17% to $0.40 from $0.48. The fourth quarter 2016 results included the $0.11 impact of an increased income tax provision due to a higher effective tax rate in 2016 compared to 2015.

Reviewing the fourth-quarter results for the Company's Mobile Modular division compared to the fourth quarter of 2015, total revenues increased $0.9 million or 2% to $51.1 million. Due to higher rental and rental related services revenues, partly offset by lower sales revenues. Gross profit on rents increased $4.1 million or 24% to $21.3 million.

Rental revenues increased $2.8 million or 9% and rental margins increased to 62% from 54% as depreciation as a percentage of rents remained at 16% and other direct costs as a percentage of rents decreased to 23% from 30%. Sales revenues decreased $2.4 million or 36% to $4.3 million due to lower new and used equipment sales. Gross profit on sales decreased by a $0.5 million to $1.3 million.

Selling and administrative expenses increased 10% to $13.3 million, primarily due to higher allocated corporate expenses. The higher gross profit on rental and rental related services revenues, partly offset by lower gross profit on sales revenues, and higher selling and administrative expenses, resulted in an increase in operating income of $2.8 million or 27% to $13.2 million.

Finally, average modular rental equipment for the quarter was $740 million, an increase of $43 million. Equipment additions supported growth across all regions and our portable storage business. Average utilization for the fourth quarter was unchanged at 77.5%.

Turning next to the fourth-quarter results for the Company's TRS-RenTelco division compared to the fourth quarter of 2015. Total revenues decreased $3.3 million or 11% to $26.4 million due to lower rental and sales revenues.

Gross profit on rents decreased $0.9 million or 9% to $8.6 million. Rental revenues decreased $1.9 million or 8% and rental margins decreased to 41% from 42% as depreciation as a percentage of rents decreased to 40% from 43% and other direct costs as a percentage of rents increased to 19%, from 15%.

Selling and administrative expenses decreased 7% to $5.5 million, primarily due to lower bad debt expense. The lower gross profit on rental and rental related services revenues partly offset by higher gross profit on sales and lower selling and administrative expenses resulted in a decrease in operating income of $0.4 million or 5% to $6.3 million.

Finally, average electronic rental equipment at original cost for the quarter was $249 million, a decrease of $15 million. Average utilization for the fourth quarter increased from 61.2% to 62.3%.

Turning next to the fourth-quarter results for the Company's Adler Tanks division compared to the fourth quarter of 2015. Total revenues decreased $1.6 million or 7% to $21.5 million due to a lower rental and rental related services revenues.

Gross profit on rents decreased $1.8 million or 18% to $8 million. Rental revenues decreased $1.2 million or 8% and rental margins decreased to 53% from 60% as depreciation as a percentage of rents increased to 26% from 25% and other direct costs as a percentage of rents increased to 21% from 15%.

Selling and administrative expenses decreased 1% to $6.8 million. The lower gross profit on rental and rental related services revenues partly offset by lower selling and administrative expenses resulted in a decrease in operating income of $2.1 million or 48% to $2.2 million. Finally, average rental equipment for the quarter was $307 million, unchanged from the same period in 2015.

Average utilization for the fourth quarter decreased from 54% to 51.3%. On a consolidated basis, interest expense for the fourth quarter 2016 decreased $0.2 million or 7% to $2.7 million from the same period in 2015 due to the Company's lower average debt levels partly offset by higher average interest rates.

The fourth quarter provision for income taxes was based on an effective tax rate of 50.8% compared to 37.8% in 2015, which increased the tax provision in 2016 by $2.6 million and reduced earnings by $0.11 per diluted share compared to 2015. The increased effective tax rate in the 2016 was primarily a result of the change in business mix by state and the decision to exit TRS-RenTelco branch operations in India.

Higher business levels in states with higher tax rates, in particular growth in California, and the resulting repricing of the Company's deferred tax liabilities accounted for approximately $1.6 million. In addition, the decision to exit our branch operations in India accounted for approximately $0.7 million.

Next, I would like to review our 2016 cash flows. For the 12 months ended December 31, 2016, highlights in our cash flows included net cash provided by operating activities of $141.8 million, a decrease of $2.8 million compared to 2015. The decrease was primarily attributable to a lower decrease in prepaid expenses and other assets partly offset by an income tax refund received and other balance sheet changes.

We invested $79 million for rental equipment purchases compared to $131 million for the same period in 2015, consistent with a more selective deployment of capital on your rental assets. Property plant and equipment purchases increased $1.2 million to $10.5 million in 2016. Net borrowings decreased $55 million, from $381.4 million at the end of 2015, to $326.4 million at the end of 2016.

Dividend payments to shareholders were $24.4 million. With total debt at quarter end of $326.4 million, the Company had capacity to borrow an additional $245.6 million under its lines of credit. And the ratio of funded debt to the last 12 months actual adjusted EBITDA was 2 to 1.

The fourth quarter 2016 adjusted EBITDA was flat at $42.9 million compared to the same period in 2015 with consolidated adjusted EBITDA margins at 41% in both periods. 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 our 2017 financial outlook. Comparing 2017 with 2016 the Company currently expects operating profits to be higher at Mobile Modular and roughly flat at TRS-RenTelco and Adler Tanks. For the full-year 2017 the Company expects rental revenues to increase between 1% and 3% over 2016.

Sales revenues to be comparable to 2016, rental equipment depreciation expense to be between $67 million and $69 million. Other direct costs of rental operations primarily for rental equipment, maintenance and repair to be between $62 million and $64 million. Selling and administrative costs to be between $110 million and $112 million, operating profit to increase between 3% and 5% over 2016, full year interest expense to be approximately $12 million.

An effective tax rate of 40%, excluding any potential impact from ASU 2016-09 and lastly, the diluted share count to be between 24.1 million shares and 24.3 million shares. Now a few closing comments.

Despite very challenging end market conditions throughout the year for Adler Tanks rentals and to a lesser extent, TRS-RenTelco, positive results at Mobile Modular and Enviroplex enabled the Company to grow full-year 2016 income from operations by 3% to $79 million. Strong cash flows enabled the Company to reduce debt by $55 million while paying dividends of $24 million and selectively deploying new capital to increase the size of the modular division rental equipment fleet by $32 million.

That concludes the prepared remarks on our quarterly results. Michelle, you may now open the lines for questions.

(Operator Instructions)

Our first question comes from the line of Scott Schneeberger with Oppenheimer.

Thank you very much, good evening. I'm curious just off the bat with TRS-RenTelco and the exiting of some of the international operations, could you just elaborate on the domestic versus international strategy and provide a little bit of leverage there. Thanks.

This is Joe. I can talk to that a little bit. The first thing that I should say is that we have been doing business in India for a number of years now. And we do business in a number of different countries around the world and as you know, TRS being a UPS and FedEx based business, we are able to do that. And so our strategy with the India office was to grow, see if we can grow our business there with in-country operations. And so we opened that office and over time we could not hit the hurdle rates that we had planned, and so in Q4 of this year we decided to shut down that operation.

We don't have any other overseas offices at this point except for Canada, and we don't really have plans to open any new offices overseas at this point. However, we will continue to support local markets and we do have salespeople in different markets in different countries around the world at this point, and we will continue to support those markets from Dallas/Fort Worth where we can ship the equipment from.

Thanks for that, Joe. Sliding over to the modular business. I noticed in the press release, a part of the higher tax rate was higher tax jurisdictions with California being mentioned. Could you just give us a flavor for, sounds like the business is going well. Comparing and contrasting California versus your other geographies and maybe the education vertical versus the run non-res construction vertical, all within modular, just to give us a feel in those categories. Thank you.

Just to give a feel for the growth we saw in the business. We are very pleased, rental revenues grew 9% in the fourth quarter compared to a year earlier. The growth was quite balanced. The California rental revenues were up 7% and then the regions outside of California collectively were up 10%. And keep in mind that the regions outside of California are generally where the new capital is being deployed. So we are definitely seeing recovery in the California market. Across the business the most important vertical is education, but non-res construction is really outside of education the next most important vertical for us.

Okay. Thanks. And then lastly on Adler, to cover each base, I saw, again, the upstream percentage decreased year-over-year, but it still looks like there is a bit of a ripple effect on 21K tanks. Just an update on, we have seen oil creep higher at the back half of 2016, just a little talk about what you're seeing looking out into 2017 particularly with that area of the business. Thanks.

Sure. I can answer that. You're right, we have seen oil stabilize here in the latter half of 2016. And what that's enabled producers to do is, especially in the US here, is to feel more comfortable about drilling more, and that's actually what we are seeing. So rig counts, as we all know, have actually been increasing at a steady rate throughout the year and so there are more rigs deployed now than there were at this time last year. So as you know with Adler, we are involved in the completion side of the business there, and so the more rigs that are in operation and drilling activities that are taking place, that's a positive thing for us.

Now the other thing that's good for us too, if you is if you couple that with the increased transmission projects that have been approved recently, by a more energy friendly administration here, we see demand for midstream opportunities increasing. And we see customers being very positive about their outlook for projects next year as we are able to build further infrastructure in the country to get that product to market. So overall we are hearing more positive comments from our customers, and that in turn is really having us anticipate a little bit stronger year next year for our tank business.

Great. Thanks, Joe. I will pass it along.

Sure.

Joe Box with KeyBanc.

Good afternoon, guys.

Hi Joe.

Can you talk a little bit about your education bookings in California? I'm curious how they have trended, both through the quarter and then specifically post bond?

I can speak to that. We are on pace, we are very pleased with our education booking activity in California. It is lumpy from quarter to quarter sometimes, but we see that the activity levels with school districts are very good currently. There is excitement and positive indicators that we're getting from school districts based on the bond money right now.

Right now in California, we really have not seen bonds sales from any of the November ballot issues that passed, and that's from a local level or the state level. We don't expect those to be sold at least at the state level until the fall. However, there is a lot of money in the pipeline right now based on 2014 bond passages at the local level. You combine all these things together and the outlook for education bookings are good for us and we are pleased at the funding levels as they stand now. It's looking good.

Okay. I certainly get that you guys don't give guidance utilization by segment, but I'm a little bit curious why we've seen Mobile Modular utilization flatten out on a year-over-year basis, really over the last couple of quarters. Would you think that that would theoretically start to improve again on a year-over-year basis as we get into next year and we see the education units turn back on, or should we maybe start to think about being at the point in the cycle where it's less about pushing utilization higher and more about starting to accelerate the rental rate profile?

Joe, I will make a couple of comments. If you look over the last year or so, what we've seen it across modular business is a little bit of a softening in utilization in the Texas region. And keep in mind that utilization in that region was extremely high, well above I would say even historically good levels of utilization. That has been coming down a bit.

It's still actually above our overall modular fleet average. So it's very healthy, but that has come down, that has been partly offset by improving utilization, particularly in California and Florida. So you're right to observe that a fleetwide level it looks flat, but those are some of the dynamics. Texas going from being extremely strong to being good and then improvement occurring in California and in Florida.

I think if we look at the modular fleet, the area that is still soft relative to other regions and parts of the business is Southern California. There is still challenge there and including the commercial market where we would like to see a higher level of business and more opportunities to put more fleet out. But as we look forward we see opportunities to both further improve utilization gradually and also to work hard on picking the right transactions where it has a rate profile and they term profile that we think works well for us.

Got it. Thanks for that, Keith. Joe, with 14 years of experience at McGrath, I think this is probably fair question. Just curious do you have any thoughts on broader strategy at McGrath, how are you thinking about the collective business units and are there maybe any early initiatives that you could theoretically pursue at McGrath?

Thanks a Joe, that's a fair question. Having been announced 24 hours in the role now, I'm not ready to share any strategic moves at this point. And I do want to take this opportunity to say that I'm so very fortunate to inherit a wonderful organization from a very competent and capable CEO like Dennis Kakures. One of the things that I want to share of course that Dennis had gotten us started on over 2016 was our return on invested capital work.

So what I would really like to stress is the fact that I've been working on that over the last year. And that I'm coming into the seat in a stable situation here means that I can keep my sleeves rolled up and I will continue to work with Keith and the team on that very initiative. Because I view that as a very, very important initiative that Dennis started and that we're going to continue through 2017. And I'm very much looking forward to that. So as far as strategy goes, that's going to be to focus this year, and we are already seeing results from that based on our work and in modulars and we're going to continue that process.

I appreciate it. Thanks, Joe. One more quick one if I may, Keith, what's your sense for the ASU benefit and would that be all be theoretically included in 1Q?

Well, it will be marked up every quarter just as the effect is experienced. We looked at it historically and for us, and this gets to the fact that we will be a volatile item, both on tax rate and EPS potentially. But in the last two years, full-year 2016 and 2015, it would have been a shortfall issue for us, and so a negative, if you will, on EPS. If you went back to 2014 we would've had an excess and a positive impact. Again, this is only the interplay of the actual strike price of options and SARs, when they're exercised compared to the Black Scholes value and whether you're above or below the threshold level. It could absolutely be an item that moves around a bit quarter to quarter and year-to-year for us and for all other companies.

Got it. Thank you.

Marc Riddick with Sidoti & Company.

Good evening, gentlemen.

Hi Marc.

I wanted to touch on the progress being made at Mobile Modular portable storage, and I wondering if you could spend a little time talking about some of the drivers that led to the growth there and what you might foresee going forward.

I can speak to that. We are very pleased with our progress in portable storage. As you may know, we are co-located in a number of markets with our modular business, and so we work very well together. We are very pleased with the new markets that we have entered and the progress we are making there also.

And so what we are really focusing on in 2017 is continuing to be efficient as we run the business. We want to make sure that the markets that we entered a year or two ago are producing according to the right profitability profile for us. We want to continue to make sure that the service levels that we have committed to serving our customers with in the business are maintained as we grow the business. And so that's going to be our focus in 2017 and so far, as I said, we are very pleased with the progress and we are very excited about how that business is growing and will contribute in the future to our overall revenues.

Okay. Thank you for that. And I was wondering if you could touch a little bit on the rental related services line. I was wondering if you could share with us, there'd been some progress earlier in the year on growing that part of it with some, maybe from the service offerings. What we might see there as far as the approaches going forward to generate those revenues?

Just to clarify, particularly for the modular business, the rental related services revenues are comprised of two things. The first is, it's really the delivery and set up of units at a customer site and then the dismantle and return delivery at the end of a rental term. And those actually, those revenues are recognized ratably over the contract, and that's the predominant revenue stream within rental related services for modulars.

But in addition we sometimes have site-related work or moves that are done for a customer, and those are more, if you will of a one-time nature. A lot of that work can be done during the summer months, particularly if they're tied to education projects. So that is also included in that line item.

So when you look at that area of the business, it's really ancillary to the core rental revenue stream of having more units out on rent, and there can be some lumpiness, particularly in the summer months, on that line item. But those are some of the factors at play and again, really that number will follow over the long haul. It will follow our progress in having more equipment out on rent.

Thanks for the color there. And then finally, I just want to confirm levels of comfort as far as the leverage going forward. As you finish the year at a pretty comfortable rate there, I was wondering if there are any changes as to overall general level of comfort on debt?

Just to remind you, per our loan covenants, our leverage can reach a maximum level of 2.75 of total debt to trailing adjusted EBITDA of 12 months. We ended the year of 2.0, so very comfortable with that level. Our leverage came down during 2016, that just is evidence of the very healthy cash flows coming out of the business. As we mentioned in some of the earlier remarks, we reduced leverage, we reduced total debt for the Company, we added to the equipment pool on the modular side, and paid out a very healthy level of dividend during the year as well. So 2016 was a good year for cash flows, and we're very comfortable with where leverage is currently.

Okay. Great. Thank you so much.

I'm showing no further questions at this time, and I would like to turn the conference back over to management for any further remarks.

I'd like to thank everyone for joining us on the call today and for your continuing interest in our Company. We look forward to speaking with you again in early May to review our first-quarter results.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.