McGrath RentCorp (MGRC) Q1 2013 Earnings Report, Transcript and Summary

Welcome to the McGrath RentCorp first quarter 2013 conference call. At this time, all conference participants are in a listen-only mode. Later we will conduct a question and answer session. (Operator Instructions) This conference is being recorded today Wednesday, May 1, 2013. Now I would like to turn the conference over to Geoffrey Buscher with SBG Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon. I am the Investor Relations Advisor for 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 pass-code for the call replay is 4611866. This call is also being broadcast live via 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 at approximately 4:05 PM Eastern Time or 1:05 PM Pacific Time today. 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. For the first quarter of 2013 total revenues increased 12% to $88.7 million from $78.9 million for the same period in 2012. Net income decreased 7% to $9.2 million from $9.9 million and earnings per diluted share decreased 8% to $0.36 from $0.39. Reviewing the first quarter results for the Company’s Mobile Modular division compared to the first quarter of 2012, total revenues increased $0.2 million or 2% to $29 million primarily due to higher sales revenues partly offset by lower rental and rental related services revenues. Gross profit on rents decreased $1 million or 10% to $9.4 million primarily due to a decrease in rental margins to 49% from 53%. And lower rental revenues. Lower rental margins were a $0.4 million higher on the direct costs for labor and materials. Selling and administrative expenses increased $0.3 million or 4% to $8.8 million primarily as a result of increased personnel and benefit costs. The lower gross profit on rents and higher selling and administrative expenses partly offset by higher gross profit on sales resulted in a decrease in operating income of $1.1 million or 28% to $2.9 million. Finally, average modular rental equipment for the quarter was $535 million, an increase of $18 million. Equipment additions were primarily to support growth in the Mid-Atlantic region and for our Portable Storage Business. Average utilization for the first quarter decreased slightly from 66.5% to 66.4%. Turning next to first quarter results for the Company’s TRS-RenTelco division compared to the first quarter of 2012, total revenues increased $2.2 million or 7% to $32.7 million, due to higher rental and sales revenues. Gross profit on rents increased $0.9 million or…

Thank you, Keith. Although company Although Company-wide rental revenues increased by only 2%, and EPS declined by 8% for the quarter from a year ago, our overall results mask the underlying favorable business activity levels and momentum we are experiencing in each of our rental businesses. Rental revenues at Adler Tank Rentals, our tank and box division grew by 1%, or $0.2 million, to $16.4 million compared to a year ago. There is typically some seasonality in the tank and box rental business during the first quarter in the colder weather geographies. However, first month's rental revenues and units book for the quarter were up 28% and %41 respectively over the same period in 2012. We saw increased bookings year-over-year in each of the Adler Tank Rentals regional markets. We would expect these higher booking levels to be reflected in our 2013 financial results in the quarters ahead. Adler serving wide variety of market segment including industrial plant, petrochemical, pipeline, oil and gas, waste management, environmental field service and heavy construction. By design we have perceived in successful in generating higher business activity levels across the broader mix of non-franking and historically less volatile vertical markets. Although, Adler Tank Rentals average utilization decreased to 65% for the quarter from 77% a year ago. This is primarily result of the continued redeployment over the past 12 months of underutilized North Eastern US gas field rental assets to other Adler geographies in need of equipment and sees now the factors during the first quarter of 2013 as mentioned earlier. Over the past 15 months Adler Tank Rentals is in 7 new US markets in addition to have been relocated 21K tank inventories to serve these new markets as well as established markets we are continue to purchase new rental equipment to support…

Thank you sir, we will now begin the question and answer session. (Operator Instruction) Our first question comes from the line of Joe Box with KeyBanc Capital Markets please go ahead. Joe Box – KeyBanc Capital Markets: Hi Dennis and Keith.

Hi Joe. Joe Box – KeyBanc Capital Markets: Question for you on the sales in the quarter. If you exclude in Enviroplex it looks like your revenues were up about 30% year over year, can – first can you begin with me little bit of color on what’s driving the increase that Mobile Modular and then may be little more specific on TRS. It looks like you slowed your fleet growth over the last couple of quarters but yet your sales figure actually stepped up, is that just the function of kind of stepping away from the environmental products, business or do anything else that we should need to add there?

Hi Joe, sales, first comment on sales is they can be lumpy quarter-to-quarter. If you stand back and look at the business, generally around the third quarter it’s a heavier period for sales, both in our modular business where we get some sales of both new and used equipment, and also on our Enviroplex business. I think in the first quarter of this year we had a little bit of sales activity in the modular business, some new product -- it’s just the timing of the sale. It was the project started late last year and there was a possibility we would have seen it show up in Q4 but it rolled into the early part of this year, and that gave a little bit of a higher level of sales in the modular business. I would say in TRS, that business is running very well for us. Sales are an inherent part of the business and they had a slightly stronger than typical quarter, both in terms of the level of sales and the margin, and just reflects that they were executing very well and they were turning over equipment as they routinely do. Joe Box – KeyBanc Capital Markets: And which part of that, the environmental testing equipment that got…

No, no. All the environmental products were sold in the fourth quarter of last year. So we’re completely out of that business and have no inventory or sales for that business. Joe Box – KeyBanc Capital Markets: Got it. OK, maybe switching gears to the modular business, we’ve been watching pretty closely the inside versus outside of California revenue trends and this quarter actually look like revenue growth outside the state moderated somewhat, and then inside the state it deteriorated a little bit. We’ve also kind of paid attention to your commentary on first month booking, which seems to have been broadly positive for the last couple of quarters. So, I guess with that contact, is the revenue degradation that we are seeing in the mobile modular business, solely a function of pricing now? And is there anything else that you can give us to maybe frame up some of the market strength that you’re actually seeing?

Joe, I think the first place to start, when you look at rental revenue decline, in particular in California, one thing we don’t control is what equipment comes back. So we can have a strong booking quarter and we may get in the same period that more equipment than we anticipated. So that’s the one thing you don’t control, even if you are getting good, favorable numbers on the booking side. And then as well, in California in particular, and not really elsewhere, you have equipment that’s returning offering at a higher price than what is going out at, although that has narrowed greatly over time. So you have those dynamics in place. The momentum in the bookings that we are seeing, are very positive of last two quarters and actually March and April were probably, and I am going between quarters here, but probably are two highest months that we’ve had in many, many years. They are both very strong on the booking side and hopefully, we are going to see that trend continue. The key right now is that we are seeing, I’ll give you an example, the Texas market is very healthy, driven by the oil and gas industry, as well as the general economy. We are seeing an uptick in school business there and we are doing a lot of complexes there for the refineries, turnaround work, just go down the list of opportunities. So we would expect to see lift in Texas rental revenues, without question this year. I don’t think there’s any question with us at that market Joe Box – KeyBanc Capital Markets: Florida?

We’ve had a very good booking season that’s primarily classroom related, and also the commercial business has picked up some, which is very good to see. And so in the Florida market, I would also expect rental revenues to be increasing throughout this year. When you go to the mid-Atlantic, they have been able to grow their business, although it’s a much smaller base, favorably over the last few years. I don’t think this year will be any exception on rental revenues, and they have had some healthy bookings in the first part of the year. California – let’s come back to that. There’s no question in California that the general economic environment is considerably healthier than it was a year ago. Now, we’ve also been saying and I think in a very candid manner, we need to see it in the numbers. So booking activity levels in California, we’re actually in the first quarter, and this relates to some of the expense side of things, we actually did a lot of very custom work on a lot of complexes, restaurant building and other projects that we really haven’t seen over the last couple of years, and this would include failed lawsuits. So we are seeing good business activity in the California market, the question would be is the school piece, and the school piece, we may not see any material recovery till next year because there is supposed to be facility bonds in the first half of 2014 and that would be a key catalyst to really boosting the number of market opportunities for classroom rental. So we are close to 2014. We are not there yet but we have seen some pretty good activity this year, but not to where we would like to see it and hopefully, in the first part of next year, if that funding is in place then we are going to see a lift in the California business because it has been declining on rental revenues and ‘x’ amount of that is really related to rate and that we don’t really control what comes back. But we’ve been in this now for over five years and there’s no question in my mind anecdotally and factually with the statistics in the market, that it’s a much healthier economy. So at some point, especially with the school piece next year, if that comes to fruition, we are very hopeful that we’ll see lift. Joe Box – KeyBanc Capital Markets: That’s, that’s really helpful. Thank you Dennis. One last question and then I’ll turn it over – can we dig in a little bit to the 7 new Adler locations? I know you guys typically start with asset-like model when you go in each market, can you maybe just give us a sense of how the revenues are trending in that market, relative to the added costs, and maybe just talk about the profitability as to in those new locations?

Those new locations, I mean they vary between Texas, Utah, Maryland, so it’s in a very different geography, and as you mentioned appropriately, we have a very low-cost startup process. We hire either an industry veteran from the tank and box rental industry or an industrial type salesperson that of course has worked in the industrial sector, and typically they work out at their home or they work out of a truck with a cab in the back. They have obviously a computer and list of customers etc. and opportunities and they really start selling quite immediately. And as they go on our business, we ship equipment into the market to support them. As we develop critical mass in the market, then we’ll rent inventory space, and then eventually as we develop through the critical mass, we are having more of a turn of asset. We typically will go out and buy a piece of property and get the operating expenses down and we know we’re there for the long haul. So that’s very typical of how we have opened all of our new markets, other than, and again with our established locations for modulars, where we already had the infrastructure. But it’s really adding the people first, the equipment follows, and then additional infrastructure. Joe Box – KeyBanc Capital Markets: Thanks guys.

Our next question comes on line of Scott Schneeberger with Oppenheimer. Please go ahead. Scott Schneeberger – Oppenheimer & Company: Thanks. Good afternoon guys

Thanks a lot. Scott Schneeberger – Oppenheimer & Company: Hey, just throwing up on the Adler question, the new geography, to see CapEx in the quarter, total company $25 million, $35 million last year, how big a component was Adler and what’s the plan on spending this year, Adler and total company please?

Just on the CapEx Scott, Adler was $7 million of equipment additions in the first quarter of this year that compares with $22 million in the first quarter of last year. So definitely, at last new capital going into the business really for specialized items that we needed to complement the existing fleet and we have a lot of equipment that is ready to be put to work there. Scott Schneeberger – Oppenheimer & Company: Thanks and then it’s still on the topic of the 7 new markets, it’s how are you allocating the new fleet? Obviously you are still moving out of northeast, it sounds like that is getting near the final innings. And then the specialized fleet, how does that work? Is it broadly spread, or they’re going to one or two locations?

The way it works is, and as you said, the 21k tank product, which is the primary product in the rental fleet, we’ve been able to fill all the need in most of the new markets again the seven new markets over the last 15 months. Some of that equipment came new but the more recent ones have all been filled through coming out of North East region or other regions that may have had an access for a period. Then the specialty equipment whether it’s Vacuum Boxes or Double Wall Tanks, weir tanks etc those have been added in as market as – we have examined the market and we look at the type of verticals that they have and we support that with new equipment coming around the factory or if we have an access in another region we will move that equipment there. But it’s done in a very thoughtful manner and we put in a certain mix and will deepen those supplies as it wants in terms of market activity. Scott Schneeberger - Oppenheimer & Company: Thanks, and then you guys those bad debts in April, could you speak to the trend little bit what you have seen over each of the quarter in the last year and why you did that (inaudible) and just why you are highlighting it now?

Hi Scott, the bad debt was 0.6 million in the most recent quarter Q1 and that was up 0.4 million from a year ago but done significantly from the fourth quarter where it was 1.6 million. And I think for us is the couple of things one is we haven’t executed well and we’ve made a number of personnel changes and working on tightening up our processes to do a better job on the collections and the credit side there is a portion of Adler customer base. It is tougher collect for us compared to the businesses that we have been historically and we are working hard to get things into a better place. Scott Schneeberger - Oppenheimer & Company: Lastly, I noticed with portable storage container business moving up into the North East you are using Adler brand which seems logical. Is that something that’s done nationally, could you just I guess speak to the brand strategy there and there you are also speaking how that can be meaningful to earnings, might we get clarification on a quarterly calls doing on, how many to go about this?

Well let me answer – address those questions. With your success with Adler names obviously we are testing that in the greater New York and New Jersey markets and that’s successful then we certainly have to consider that strategy in other new markets that we enter. So we are hopeful that will be successful. With respect to growing the portable storage business and trying to really quantify either current size potential size etc we will be very guarded with that until almost forced to report separately based upon whatever rules or regulations that extends strictly because we don’t’ want to tip off our competitors as if what we are doing, where we are doing it, how much we are doing etc. So yet our goal is to really try to ramp that business as quickly and as responsible as we can and its in the best interest of our shareholders that we don’t’ share any more than we absolutely need to with respect to that. The business is now profitable and you should say we understand the business well and we believe we can be a very successful on it. Scott Schneeberger - Oppenheimer & Company: Thanks and then final question. Congratulations on your profitability in that business segments. How are you seeing yield in that phase is that a large contributor is it are you using price in entering new markets or is something that you find you don’t have to use them.

That business is not really about price degradation. I mean debt pricing in that industry has been very stable for an extended period of time and its really done based upon how efficient you can create your operation as well as providing great customer experience. I know that sounds over simplified but those are really the nuts and bolts of it. Scott Schneeberger - Oppenheimer & Company: Great, thanks.

Ladies and gentlemen if there are any additional question (Operator Instructions) our next question come from line of Luis Filipe with EDS Financial Services please go ahead.

Hi, I had one question, something was troubling me in the report. There was no indication of Enviroplex is that or any backlog or any business, could you give us the little update of what Enviroplex is doing now?

Well Enviroplex, as you know that business has been impacted negatively by the lack of public school funding for new construction. However, Enviroplex has actually done an I think an exceptional job of really finding work with charter schools and private schools and been to fill its backlog with that. So that’s no difference this year. I think business ideally if there is facility born next year it’s going to potentially greatly improve the revenue levels but more importantly yielded in the business as we obviously took some negative impact from the project or two this past year that didn’t go we would like to see it. But they have a great product, they have a great brand names, they have a very significant customer following, what we really need for that business is State funding for 50% of the cost of projects that we put in place and hopefully that will occur next year.

Well, are you accounting for that in the modular division now?

Now really Enviroplex now that’s not when we project our numbers in Enviroplex it is going to take us one way or the other. So it’s the pretty neutral event. If you like to see more detail on Enviroplex in our segment summary at the back of press release you will actually see that Enviroplex is listed out as one of the operating segments within the data.

Well, I am aware of that, but in the past you have given some indication of what they are doing and I didn’t know if after the problems we had last year you had seized the be in the business or if you I just want the little color on it.

Thank you, this is a good question and as you know we are business to business rental company and that gets all of our time and attention and that’s where the greatest dollars are in terms of profitability and shareholder growth and value and so that’s what we are focused but same time Enviroplex will push along here.

Well I just missed it in the report and I know in the past you have commented on the activity and I just was thought on might have missed the fact but you would no longer go into be in that business?

Well, thank you for your good question.

Okay bye.

And I’m showing there are no further questions and thank you. Please continue with any closing remarks you may have.

We would like to thank everybody for joining us this afternoon for Q1 call. Our Annual Shareholders’ Meeting this coming June 12 and we love to see as many of you be able to attend that as you can, if not please make certain that you return your parking card and otherwise we look forward to share with everybody in early August on our Q2 call. Thanks so much.

This does conclude our conference for today. Thank you for your participation. You many now disconnect. This conference will be available for replay at Thursday to May 8, 2013 at the night. You may the access the replay system anytime by dialing 303-590-3030 1-800-406-7325 and entering access code 4611866. Thank you. You may now disconnect.