McGrath RentCorp (MGRC) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Fourth Quarter 2017 Conference Call. (Operator Instructions) And this conference is being recorded today, Tuesday, February 27, 2018.

Before we begin, note that the matters that the company management will be discussing today, that are not statements of historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our 2018 total company operating profit outlook as well as statements relating to the company's expectations, strategies, prospects or targets. These forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties that could cause our actual results to differ materially from those projected. Important factors that could cause actual results to differ materially from the company's expectations are disclosed under risk factors in the company's Form 10-K and other SEC filings. Forward-looking statements are made only as of the date hereof. Except as otherwise required by law, we assume no obligation to update any forward-looking statements.

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-K.

Speaking today will be Joe Hanna, Chief Executive Officer; and Keith Pratt, Chief Financial Officer. I will now turn the call over to Mr. Hanna. Go ahead, sir.

Thank you, Sandra. Good afternoon, and thank you for joining us on today's call. I will be providing comments on our performance for the quarter and full year and our outlook entering 2018. Following my comments, Keith will review the financial results. After that, we will open up the call to questions.

Quite simply, we had an excellent year. I want to congratulate the entire McGrath RentCorp team for collective achievements that led to both strong fourth quarter and full year 2017 results. Together, we focus to make strides in improving our performance and we were successful. For the fourth quarter, the company's 16% revenue increase reflected healthy growth in rental operations across each of our divisions and strong growth in modular sales. The company's 18% operating profit increase was driven by $2.6 million increase in gross profit from rental operations and an additional $2.6 million increase in sales gross profit.

At TRS-RenTelco and Adler, we experience less-than-typical seasonal reductions in business activity between Thanksgiving and year-end. Mobile Modular rental revenues for the quarter increased 9% from a year ago, primarily driven by 7% improvement in average rental rates. Rental revenue growth continue to be healthy across commercial and education markets as well as in our Portable Storage business. We continue to invest selectively in new modular rental equipment, primarily in regions outside California and for our Portable Storage business and grew the rental fleet by 1% year-over-year.

Modular sales revenues increased significantly year-over-year, primarily due to higher used equipment sales. TRS-RenTelco rental revenues for the quarter increased 7%, primarily driven by 5% higher average rental equipment and improved utilization. Test equipment rental revenues for general purpose and communications increased 8% and 7%, respectively. We continued to selectively invest in general-purpose test equipment for growth opportunities. Rental revenues for the quarter at Adler increased 18% from a year ago. Rental revenue growth was broad-based and occurred in 6 of 7 vertical markets that we serve and across all 5 of our regional markets. Upstream oil and natural gas rental revenues increased from 8% to 10% of total rental revenues at Adler. Average equipment on rent increased 18% and average utilization increased to 60% from 51%. Our fleet size was unchanged year-over-year, as we focused on better utilization of the existing fleet. Despite ongoing competitive price pressure, average rental rates remained flat.

For the full year, company operating profit grew by 20% compared to a year ago. Mobile Modular, TRS-RenTelco and Adler Tank Rentals delivered operating profit growth of 14%, 18% and 40%, respectively, compared to a year ago. Our 2017 results reflect some improvement in market conditions at Adler Tank Rentals and TRS-RenTelco, particularly in the second half of the year.

Our objective during the year was to keep a laser-beam focus on our performance improvement initiatives and we executed very well. Our ability to grow operating profit 20% for the year with fleet growth of 2% shows that our efforts in improving the financial concerns on our invested capital base were solid success. That is exactly the kind of progress we hope for at the start of 2017, and we delivered. We still have more work to do and our efforts in 2018 will continue. I am proud of the strong execution by each of our divisional teams during the year. Solid progress was made targeting the right market segments and transactions, optimizing rental rates and selectively selling noncore equipment. We also maintained discipline on new rental equipment capital spending.

I'd like to make some comments upfront regarding the new federal tax legislation that was signed into law at the end of 2017. The big picture is that our overall expected tax rate for the full year 2018 will drop significantly. We currently estimate that our comparable effective corporate tax rate will be about 27% in contrast to 38% for the full year 2017, excluding the tax reform impact. The improved company performance and the anticipated earnings in cash flow benefits from tax reform support the 31% dividend increase announced today. This will be the 26th consecutive year that McGrath RentCorp has increased its dividend.

Entering the first quarter of 2018, market conditions continue to be highly competitive and our visibility is limited as a result of the shorter rental terms of typical Adler and TRS-RenTelco transactions, however, underlying market conditions are encouraging. At Mobile Modular, funding for both student growth and modernization projects for classroom rentals are favorable as is the construction demand outlook. Our businesses are well positioned, and we will be working hard to build upon our solid 2017 performance.

With that as a backdrop, let me share that our 2018 financial outlook suggests another year of solid operating performance as we continue to focus on performance improvement initiatives across the enterprise.

That concludes my remarks. Now I'd like to turn the call over to Keith now for his financial review.

Thank you, Joe. For the fourth quarter 2017, total revenues increased 16% to $122.2 million from $105.3 million for the same period in 2016. Net income increased to $117.7 million from $9.7 million, and earnings per diluted share increased to $4.82 from $0.40.

The fourth quarter of 2017 includes a net income benefit of $102.5 million or $4.20 per diluted share associated with the U.S. government's enactment of the Tax Cuts and Jobs Act. Reviewing the fourth quarter results compared to the fourth quarter of 2016, for each of the company's rental divisions starting with Mobile Modular.

Total revenues increased $6.3 million or 12% to $57.4 million on higher rental and sales revenues. Rental revenues increased $3.2 million or 9%, however, rental margins decreased to 54% from 64%. Rental margins declined due to other direct costs increasing $4.8 million to $12 million. This cost increase was a result of higher investment in idle fleet to prepare for the 2018 ordering season and a $1.6 million impairment of rental assets deemed beyond economic repair in the Southern California region. The combined result was the gross profit on rents decreased $1.6 million or 7% to $20.4 million.

Sales revenues increased $3.2 million or 74% to $7.4 million on higher used equipment sales. Selling and administrative expenses increased 1% to $13.4 million. The lower gross profit on rental revenues and higher selling and administrative expenses partly offset by higher gross profit on sales, resulted in a decrease in operating income of $0.6 million or 5% to $12.6 million.

Finally, average modular rental equipment for the quarter was $750 million, an increase of $11 million. Average fleet utilization for the fourth quarter decreased slightly to 77.3% from 77.5%.

Turning next to TRS-RenTelco. Total revenues increased $2.5 million or 9% to $28.9 million on higher rental and sales revenues. Rental revenues increased $1.5 million or 7% and rental margins increased to 46% from 41%. The net result was an increase in gross profit on rents of $1.5 million or 18% to $10.1 million.

Selling and administrative expenses increased 4% to $5.7 million. The higher gross profit on rental and sales revenues partly offset by higher selling and administrative expenses resulted in a 29% increase in operating income to $8.2 million.

Finally, average electronics rental equipment at original cost for the quarter was $260 million, an increase of $11 million. Average utilization for the fourth quarter increased to 63.6% from 62.3%.

Turning next to Adler Tank Rentals. Total revenues increased $3.7 million or 17% to $25.3 million on higher rental, rental-related services and sales revenues. Rental revenues increased $2.7 million or 18% and rental margins increased to 60% from 53%. The net result was a 33% increase in gross profit on rents to $10.7 million.

Selling and administrative expenses increased 13% to $7.7 million due to increased salaries and employee benefit costs. The higher gross profit partly offset by higher selling and administrative expenses, resulted in an increase in operating income of $1.9 million or 86% to $4.1 million.

Finally, average rental equipment for the quarter was $308 million, an increase of $1 million. Average utilization for the fourth quarter increased to 60.2% from 51.3%.

On a consolidated basis, interest expense for the fourth quarter 2017 increased $0.2 million or 7% to $2.9 million. Higher net average interest rates were partly offset by lower average debt levels. On December 22, 2017, the U.S. government enacted the Tax Cut and Jobs Act, which among other things reduces the federal income tax rate from 35% to 21%, effective January 1, 2018, and requires mandatory repatriation of foreign earnings. As a result of this Tax Act, the company remeasured its net deferred tax abilities and recognized a net benefit of $102.8 million. In addition, a onetime transition income tax estimated at $0.3 million related to the repatriation of foreign earnings was recorded. The fourth quarter also included a $0.4 million excess tax benefit related to the implementation of ASU 2016-09.

Next, I'd like to review our 2017 full year cash flow highlights. Net cash provided by operating activities was $122.4 million, a decrease of $18.3 million compared to 2016. The decrease was primarily attributable to an $11 million income tax refund received in 2016, higher increase in accounts receivables and other balance sheet changes.

We invested $94.6 million for rental equipment purchases compared to $79 million for the same period in 2016. Property, plant and equipment purchases increased $4.1 million to $14.6 million in 2017. Net borrowings decreased $22.9 million from $326.3 million at the end of 2016 to $303.4 million at the end of 2017. Dividend payments to shareholders were $24.9 million.

At quarter end, the company had capacity to borrow an additional $248.5 million under its lines of credit and the ratio of funded debt to the last 12 months' actual adjusted EBITDA was 1.7:1.

Fourth quarter 2017 adjusted EBITDA increased 15% to $49.4 million compared to the same period in 2016. Consolidated adjusted EBITDA margin was 40% and 41% in the fourth quarter of 2017 and 2016, respectively. Our definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income are included in our press release for the quarter.

Finally, turning to our 2018 financial outlook. For the full year 2018, we expect rental revenues to increase between 3% and 5% over 2017. Sales revenues to be between flat and 10% lower compared to 2017. Rental equipment depreciation expense to be between $70 million and $72 million. Other direct costs of rental operations, primarily for rental equipment maintenance and repair to be between $64 million and $66 million. Selling and administrative costs to be between $113 million and $115 million. Operating profit to increase between 8% and 12% over 2017; full year interest expense to be approximately $12 million; the effective tax rate to be approximately 27%, and lastly, the diluted share count to be between 24.4 million and 24.6 million shares.

That concludes the prepared remarks and our results. Sandra, you may now open the lines for questions.

(Operator Instructions) Our first question comes from the line of Scott Schneeberger with Oppenheimer.

Joe, could you speak, I guess, my first question is on modular. Could you differentiate between classroom and office and speak to geographies? And I guess, third part would be, what you see for this year upcoming relative to recent years?

Scott, this is Joe. I can answer that. We -- let me just say that as far as geographies go, we are seeing -- we've seen strength across all of the markets that we've served over this past year, except for Texas. Texas was a little bit slower than we would've liked to have seen, we had less classroom orders in Texas than we had anticipated during the start of the year. And that was due to the fact that some customers opted to buy which happens from time to time. But across those markets, our education business is relatively good, bond funding and state funding, local funding and tax revenues have been relatively strong, which has supported education growth. Our commercial side, that's been driven mostly by construction and we've seen good commercial activities across our geographies too. And so we're anticipating that should continue into 2018.

And just [curious], Joe, when those customers in Texas opted to buy, hopefully they buy it from you?

No, they do not. We compete with manufacturers who sell direct sometimes, and we have a margin that gets added to a manufacturer when we sell, and sometimes they have the opportunity to sell at lower prices than us. It's been a dynamic that's been there in that market for a long time. We've -- we're well aware of it, and they get orders from time to time and we get orders from time to time. The customers really appreciate our service and that's makes a difference for some of our clients there.

Understood. And are you seeing any major trend changes? Or is it still largely, the classroom market is still largely a rental market, just broadly?

Oh yes, no significant changes in the market at all in terms of the direction that customers go. Keep in mind that some of that depends on the funding they have. If it's operating funds, they will typically go for rentals. If it's capital funds that they have, they might go for a sale. And that's dictated long before we even get it in on the process. So it's very typical for what we've seen in prior years.

Got it, understood. Switching it up. Upstream a good quarter for you over in Adler, 8% to 10% mix, and I know that's just kind of -- that's not a managed number, but just curious, strategically, how are you approaching upstream? Is that an area where say that continues to come back? Will you continue to fund and fuel it? Or are you just going to let it be and focus on your other end markets over in Adler?

Yes. Well, we're well positioned to take advantage of growth in upstream. And if that market comes back, when it comes back, and it has come back to a certain degree in 2017, we'll be there and we're happy to take orders and support them.

Yes, the only thing, Scott, I would say, and we've said this in the past, the upstream oil and gas tends to be one of the more competitive segments of the Adler markets that we serve. So pricing can be more challenging and a lot of players in that market.

Okay, and just one more, and I'll pass it along. It sounds like the rental rates are still soft over there as you're alluding to, Keith. Speak please more broadly on rates that subsegment meaning upstream, and then across the other end markets in Adler. And what are seeing as far as optimism for a turn in timing or if not on the upstream part?

Sure. Well, the good thing that we're seeing in across all of our markets and with our competitors as well is that utilization is improving. Our belief is that as utilization improves, rates should start to improve. It just really hasn't happened yet. And there are certain segments of the market that, it's more competitive than others, oil and gas is one of them. And so we just really haven't seen a whole lot of rate improvement yet. But hopefully, it's kind of reached a trough here and we should start to see that turnaround at some point. We're not overly optimistic there'll be a big change this year, but we continue to be cautiously optimistic about it.

And our next question comes from the line of Marc Riddick with Sidoti & Company.

I wanted to touch -- sorry about the delay there. I wanted to touch on TRS-RenTelco for a moment and go over the growth that you saw there, especially given -- being a high single-digit growth number and what we saw the prior quarter. I was wondering if you could sort of -- are we really looking at the beginnings of 5G to the point that you're actually able to sort of see it, maybe on a more tangible basis, or maybe if you could just share your thoughts around that? And -- because clearly it seems that once that gets going, that's going to be very beneficial for quite some time.

Yes. I can answer that. The growth that we saw in Q4 was we saw growth in communications equipment and general-purpose equipment. The communications equipment growth that we saw were some -- were for some 4G build-out projects that we were able to land and what I might add there is that despite the fact that we're waiting for 5G, there's still a lot of 4G opportunities that have not been completely built out across the country. And so carriers will selectively go and do that.

So what we have not seen at this point and will not expect to see very much of in 2018 is any of the 5G activity. Just hasn't happened yet. And we're still not sure of what the testing requirements are going to be, once they do roll that out.

Okay. And from a standpoint of the willingness then to go ahead and do the back sale, if you will on 4G projects, do you get the sense that those are things that maybe they just sort of had a pause on? Or maybe is this their way of taking advantage of lower taxes? Or is there any sort of general feedback that -- or sense that you get from them as to what may have kickstarted those projects?

No, not necessarily. It's just -- it's lumpy sometimes. And there's -- they're just projects on smaller scales to fill in particular signals that these carriers need to get to their clients and so. They'll execute small projects as needed.

And then I was wondering if you could share a little bit if you could -- you certainly touched on education and the construction markets from the modular side. I was wondering if you could touch on maybe what you're seeing from maybe either industrials or some of the consumers/retail environment. Whether or not you've seen a similar trend there? Or if there was any particular callout or target area that would give you any concern at this point, given the numbers that you've had?

Yes, I mean, we're -- there's nothing of note there to call out, Mark. We see strength across all of the businesses or all of the markets that we serve right now and -- but I wouldn't say there's anything in particular like retail or industrial services or anything that's sticking out as anything noteworthy.

Okay. And then one last thing for me and I certainly appreciate the inclusion of the dividend increase and certainly, that's a positive. I was wondering if you could -- and forgive me if I missed this, but did you make mentioned as far as CapEx for 2018? And what you are looking at? And then maybe what the pace of that may be?

Sure. And we don't have our CapEx plans cast in concrete this early in the year. But just to give you context in 2017, our gross CapEx was about $95 million and that compared with $79 million in 2016. And I think, the way I would look 2018 is we'll be in that neighborhood. So somewhere from call it high 70s to mid-90s. If we look at the mix of business opportunities that we see, a number in that range makes sense. Our biggest area of spend last year was TRS-RenTelco. Part of that was net growth in the investment in the equipment pool. Part of it was just turn over of equipment in the equipment pool, but that will continue to be an important focus area for us. And then some incremental investment in both Mobile Modular and Portable Storage and selectively, in some specialty equipment for Adler, very similar to what we've seen over the last 12 months.

Okay. And I guess one last one from me, if I could. Just wanted to get your general thoughts on sort of where you are from an HR perspective, certainly, the -- it's a fairly tight labor market out there. I was wondering maybe what your thoughts were there? And what you seeing? And what you might anticipate going forward?

I am assuming you're referencing our ability to hire and staff positions. It is a tighter market. And it is more difficult for certain positions to get them filled, but we have an attractive opportunity here with the company. A great culture, and a great career for folks. So we're able to get folks on board and don't anticipate that slowing our progress down in 2018.

(Operator Instructions) And as that appears to be the final question, I would like to return the call to Mr. Hanna for any closing remarks.

All right. I'd like to thank everyone for joining us on a 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.