Q3 2019 Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by.
We'll consider Mcgrath Rentcorp third quarter to doesn't 19 conference call.
At this time or conference participants aren't listen only mode.
Later, we'll conduct a question and answer session.
At that time, if you have a question you will need depression star.
<unk>, they're starkey followed by the one key on your telephone.
<unk> conferences being recorded today Tuesday October 29th 2000 in 19.
Before you begin note that the matters that the company management, we'll 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 2000 in 19 total company operating profit outlook as well as statements.
Leading to the company's expectations strategies prospects or targets.
[noise]. These forward looking statements are not guarantees of feature performance and involve significant <unk> uncertainties that could cause our actual results to different materially from those projected.
Important factors that could cause actual results to different materially from the company's expectations or disclose under risk factors in the company's form 10, K. and other S.C.C. filings.
Forward looking statements are only or made only as a bit d. here of.
Except as otherwise required by law, we assume no obligation to update any forward looking statements.
In addition to the press release issue today.
<unk> also filed with the S.P.C. their earnings release, one form eight k. and form 10- Q4 the quarter.
Speaking today will be Joanna Chief Executive Officer, and keep <unk> Chief Financial Officer.
Now trying to call over to Mr. Hannah. Please go ahead Sir.
Thank you Chris <unk>.
Good afternoon, and thank you for joining us on today's call I will start to call with some comments on our third quarter of 2019 performance and they Keith will provide additional detail in his financial review.
The third quarter typically mark a very busy time of year for us as customers Spanish summer projects.
Actually modular education projects prior to the start of the school year.
This year, we had an active quarter and we were pleased with our 11% increase in rental avenues and 30% increase in operating profit.
Overall are diversified portfolio, serving a wide range of customers across multiple markets benefited from favorable economic tailwind in our teams did a great job executing.
A mobile modular rental revenues grew 13% and operating income grew 16%.
Activity for modular classrooms with healthy that's funding both at the state and local level and prior quarters have made their way into the gross and modernization of projects at school districts.
Additionally, commercial rentals were as customers increase their needs for temporary space, both in public and private sectors.
We continue to grow the business responsibly, and we're able to improve utilization increased rates during the quarter, while placing 7% more equipment on rent.
This accomplishment reflects a focus team that's committed to our performance improvement initiatives and has consistently delivered results.
Enviroplex are permanent modular classroom manufacturer had an exceptional corridor contributing to accompany wide sales increase of 41%.
We delivered record revenue with a committed and dedicated team that performed very well <unk>.
Permanent modular classrooms helped school districts provide quality education environment for children more economically than conventional construction.
Enviroplex business level, where supported by a favorable funding environment in California through state and local bonds.
Typically a majority of project completions occur in the third quarter of the year.
We have shared in previous calls our focus on strategic initiatives and smart expansion of the business.
During a quarter, we closed and acquisition of a portable storage operator in Tulsa in Oklahoma City markets for 7.8 million.
These markets were on or near term short list of new geography to enter and this acquisition provides a nice jumpstart with a broad base of customers and relatively new fleet, both big positives <unk>.
Previous to this acquisition portable storage also expanded into two other geography this year as Greenfield operations.
We are pleased to see this business expanding in both new and legacy markets.
I <unk> Ronald revenue increase 21% and operating income grew by 32%.
Both the general purpose product segment in the communications product segment grew rental revenues very nicely and activity was broad based.
Testing needs more robust in the lab for R. and D. work as we continue to see a favorable demand picture developing around five g.
As we have shared in previous quarters.
Any benefits that by G. offers will enable many more products to connect wireless lead to the network.
Element of those products is taking place now.
The team at T.R.S. managed customer needs and the rental fleet skillfully and we were very pleased with their performance in the quarter.
Mmm Adler tank rentals, we saw softening market conditions, which contributed to an 8% reduction in rental revenues and a 7% decrease in operating income compared to a year ago.
Typically the third quarter is a strong quarter and we simply did not see the left on a quarter of a quarter basis that we expected visibility is more challenging in this business as we have shared in the past.
A week or oil and gas industry, not only affects direct activity and upstream operations, but also indirectly affects other and markets and we saw this play out in the corridor.
Littering the price of oil today, we view this softness as part of the normal cyclicality of the oil and gas industry.
We did a nice job increasing rates and delivering additional rental related services revenues in a more challenging environment.
To finish up both our third quarter and a year today performance reflects our ability to deliver impressive results with the portfolio. It all takes hard work and our team members around a business have done a remarkable job providing the exceptional experiences that customers associate with Mcgrath rank core.
We remain positive about our overall momentum entering the fourth quarter. Despite some economic uncertainty many fundamentalists remain healthy and our activity levels are good we will maintain our focus as we bring 2019 to a successful close.
So now let me turn the call already key will take you through our financial reveal.
Thank you Joe.
Picking up and what Joe Joe said, we were very pleased with the quarters results.
[noise] for the third quarter of 2000 to 19 total revenues increased 21% to 173.6 million from 143.1 million a year ago.
The companies, 30% operating profit increase for the quarter was driven by a 4.6 million increase engrossed profit from rental revenues.
A 2.5 million increase in gross profit on rental related service revenues.
And a 7.1 million increase engrossed profit on sales.
Net income increased 31% to 32.5 million from 24.8 million.
And earnings per diluted share also increased 31% to a dollar and 32 cents.
From a dollar and one cent.
No I'll break the results dawn by reviewing rental division performance compared to the third quarter of 2000 did 18.
Mm.
Mobile modular total revenues increased 11.4 million or 15% to 86.3 million.
On higher rental and rental related services revenues.
Partly offset by lower sales revenues.
Rental revenues for the quarter increased 13% for a year ago.
Which was primarily driven by 87% improvement in average rental rates.
7% higher average equipment on ramp.
Sales revenues decreased point 5 million or 3% on lower new equipment sales.
Rental revenue growth continued to be healthy across our commercial and education markets as well as in our portable storage business.
Equipment preparation costs included in other direct costs of rental operations increased 2.1 million or 20% to 12.8 million.
The increased costs resulted from higher workload volumes to support increased rental demand in our education and commercial markets.
Higher labor and material costs.
Higher cost of re rent equipment.
Rental margins were comparable at 61%.
The combined result of higher rental revenue.
Comparable rental margin was a 12% increase in gross profit on rents.
Average modular rental equipment for the quarter was 803 million, which was an increase of 43 million.
Average fleet utilization for the third quarter increased to 79.4% from 78.6%.
[noise] at T. restaurant, Teleco total revenues increased sixmillion or 21% 234.1 million on higher rental and sales revenues.
Rental revenues for the quarter increased 21%, primarily driven by higher average equipment on rent and stable rental rates.
Rental margins increased to 45% from 42% <unk>.
The combined result was 828% increase in gross profit on rents.
We saw balanced growth in rental revenues from both general purpose and communications test equipment, and we continue to invest in new rental equipment for growth opportunities.
Average you went tronics rental equipment for the quarter was 314 million, which was an increase of 34 million.
Average utilization for the quarter increased to 66.9% from 61.9%.
At Adler tank rentals.
Total revenues decreased 1.2 million or 5% to 24.8 million on the lower rental and sales revenues.
Which was partly offset by higher rental related services.
Rental revenues for the quarter decreased 8%.
Primarily from 12% lower average equipment on rent that was partly offset by 4% higher average monthly rental rates.
The rental revenue decrease was due to softer demand across five or six and markets compared to last year, a strong third quarter.
Rental margins decreased to 60% from 61%.
The combined result was a 10% decrease in gross profit on rents.
Mm.
No I with this division review complete the remainder of my comments will be on eat total company basis.
Total company equipment sales revenues increased to 50.9 million from 36.1 million a year ago.
The majority of this increase was due to higher sales revenues enviroplex, reflecting strong demand for education projects in California.
In addition favorable mix of projects it enviroplex increased sales margins for the quarter.
The timing of steals revenues can fluctuate from quarter to quarter and year to year, depending on customer requirements.
The availability of used equipment for sale and other factors.
With a high percentage of expected new sales projects already completed by the end of the third quarter. We currently expect sales revenues in the fourth quarter to be lower than a year ago and total full year sales to be higher than 2000 Denise team.
Mm.
Selling and administrative expenses increased 3.3 million or 12% to 31.5 million.
<unk> due to increased salaries and employee benefit costs.
Interest expense for the third quarter 2000 to 19 was 3.2 million an increase of 1%.
Hi, Arnett average interest rates were partly offset by lower average death levels.
The third quarter provision for income taxes was based on an effective tax rate of 25.3% compared to 23.9% a year earlier.
Next I would like to review our 2000 at 19 year to date cash flow highlights.
Net cash provided by operating activities.
Is 136.9 million and increase of 40.1 million compared to 2018.
The increase was primarily attributable to improved income from operations increased the cons payable into crude liabilities and other balance sheet changes.
We invested 127.2 million for rental equipment purchases compared to 884.7 million for the same period in 2000 at 18.
Mostly on higher purchases at mobile modular and T. or restaurant calico.
Property plant and equipment purchases were 6.8 million.
Per to 12.5 million for the same period a year ago.
Dividend payments to shareholders, we're 26.4 million.
Net borrowings increased 2.9 million from 298.6 million at the end of 2000 did 18, two 301.5 million at the end of the third quarter of 2000 in 19.
At quarter end company had capacity to borrow an additional 230.5 million under its lines of credit and the ratio of fun to debt to the last 12 months actual adjusted EBITDA was 1.31 to one.
Third quarter 2000 to 19, adjusted EBITDA increased 24% to 70.8 million compared to a year ago.
Consolidated adjusted he bit down margin was 41% compared to 40% a year ago.
Or a definition of adjusted either Dot and a reconciliation of adjusted EBITDA to net income are included in the quarters press release.
[noise] finally, turning to our 2000 to 19 financial I Cook.
Based upon the company's year to date results and current outlook for the remainder of the year, we are raising our financial I click and expect 2000 to 19 full year operating profit to increase 15% to 19% above 2000 didn't 18 results.
As compared to our prior expectation of a 9% to 14% increase.
That concludes the prepared remarks on our quarterly results.
Chris you may not open lines for questions.
<unk>.
Vermonter task a question you will need to press to star one on your touch tone telephone to withdraw your question. Please press the pound key please stand <unk>.
And our first question comes in on line of Scott Schneberger with Oppenheimer Your line isn't helping.
Oh, thanks, very much good afternoon.
I want to ask with acquisition first.
And <unk>, it's not it's not huge but in Tulsa, Oklahoma City I'm. Just curious is that is that a new market for you did status stabley shouldn't Jason see just curious at a footprint of of zero or a portable storage containers.
Sure Scott I can answer that yes, it's a new market for us.
And as I said in my comments. It's it was one that was on a short list of potential expansion markets for us in the next year or two and the fact that we found this operator, there who had this yeah well established business young fleet good broad base of customers we.
We thought it was a a great.
Option for us to get in the market with a jumpstart and so we moved it up in the list.
Thanks shows the how is your footprint with with.
I guess I'll ask it relative to your broader.
Module or footprint with regard to to portable storage containers and yeah. A few years ago, you were somewhat on pause with with growth spending obviously, we've had some tailwinds of weight and that's picked up I just curious about this strategy, particularly in the in the in the mobile module or segment going full.
Sure I guess, a two part of their thanks, Yeah, Yeah sure well when we initially started a business our our strategy was to open in legacy markets that the modular business was operating in and we've followed that for you know the first number of years, and then decided to expand.
The business outside of markets that we serve with mobile modular and we will continue to do that and so you know this the the actual to greenfield's that we went in this year in Nashville, and and Lake Charles Louisiana as well as now this acquisition are really kind of markets that.
Are are not really served.
By the modular business in in any you know big capacity and so yeah. We're we're definitely interested in expanding outside of that and will continue to do so we did take a pause a few years ago to just take a breath and allows some of the investments that we made to start really producing for us.
And so yeah, we could do that it just depends on how well the business.
Rose and how well our profitability grows as we open these new locations.
<unk> is the penetration 100% more than 100% are still a good that last of of portable overlapping with with with modular.
I mean, I would say, it's a pretty much 100% it's fine.
Yeah.
Okay Fair and I, just want to be clear on that yeah. Okay. The <unk> latching on to one of the things you mentioned, obviously, there's been solid state and local funding now and you're clearly reaping the benefits from that I just want to talk about.
If if we have a slowdown in the economy, how that may impact.
They I'm thinking more on the did you know the educational spending a I think we can all we can I'll draw parallels to what would happen with with with other end market.
Cool and markets, but most specifically on education in in in in modular. Thanks.
Well, here's here's a good question and here's.
Here's my thoughts on it.
I I believe as long as there is a capacity in you know local economies in state economies to sell bonds bond passages that have taken place in prior years will continue to do so and so I I think there is I wouldn't say immunity, but I would say there is less impact.
Constructions cycles on the school construction market, just because of that stability in the funding.
I'll add that we got some good news recently in California through the through the passage, we're not the passage, but the approval of A.B. 48, which is a $15 billion state bond to make it onto the California March 2020 ballot and that's received.
Very good support from the state legislators as well as the governor who's going to support it and campaign for it so.
This is another really substantial facilities bond that will give us a nice runway for a number of years. So.
We we view this as just a pretty stable funding environment that should continue for us.
Thanks, a lot just one more from me.
A little more detail on the five g. update it looks like terrorist Rentelco is is moving along quite nicely. It just if you get tickets if you layers deep on what you're seeing and it's typically the five gee. Thanks.
Sure so that what we said before and holds true for this particular quarter is that we're seeing demand in both general purpose test equipment and communications test equipment and both of those products segments are supporting five g. work.
General purpose is work that's being done in the lab as you know automotive manufacturers and.
Medical devices and industrial manufacturers are developing products for to connect to V.F.I.G. to the to the network and so we're seeing network take place and then we're also seeing work on a communication side through the back call fiber or to the to the towers.
Type expansion for bandwidth improvements all that requires testing and so we're seeing that demand also there's also actually some four g. build out that's continuing and so there's some tower work that's being done there and that all you know it's filtered into good good rental demand for us.
Things here my <unk>.
Thank you.
Thank you and our next question comes from a lot of Sam England with Banbury. Your line is now.
Hi, guys and should come from me and the first one was just could you give it a little bit more caught on the strength.
And borrow tax business in the in the culture and just as we look at 2020 should we she not business resets back to that level.
How many years was there anything more sustainable when Nick right that's awesome.
Yeah, Hi, Sam This is Keith and I would really P.D. back on some of the Joe's comments about the funding environment for education, and we've seen that as a ti driver of demand for the Enviroplex business and again just as a reminder, that business is a manufacturer of education product for the California Mark.
So the the business had a very strong third quarter 28 million in revenue compared to 14 million in the third quarter of last year and even already the year to date revenue from that part of the business is at 32 million and that's essentially an all time high for the base.
<unk> for on a full year basis, even at the end of September . So it's been a very strong you know year to date number and great I look for the year, obviously and couple of comments. One is just to clarify that business is very seasonal most of the businesses in the third quarter. Some in the fourth for US this year the fourth quarter.
Will not be as strong as the fourth quarter of a year ago, but in a full year base for your base is still up nicely looking ahead to next year I would say at a very high level the demand environment looks very good it all gets into the details when we come to next year of which project.
<unk> actually get completed and executed what kind of mixed they have what kind of margin profile and it's too far out to really make a determination there, but we did benefit from really three things. This year very good demand environment. Our team won a very attractive mixed up <unk>.
Jacks and they did a excellent job of executing and getting them done. So next year, we'll have to just see again, what the number one and it looks like we think it's going to be strong based on what we know today it'll be to be determined what makes it projects will actually land during 2020, and then we always have the jaw.
Job of executing while and capitalizing on whatever opportunity we we win.
Right. Thanks, then the next home was around the AD. Let business. You said you pack comments that that was smiled a week markets outside when in gas, so yeah, and Paul driven by the weakness doing and gas market can you just talk shows where.
Weakness Wow, what do you think that is to taste select the next few courses or whether there's any more so temporary in nature.
Sure Sam I I I can provide some color on that and when I tried to elude too in my comments <unk> was the following.
When overall you know demand for oil has just not been as robust. It has been in the past due to you know general, but you know economic and and global growth slow down and what happens is that we we can feel that in several different ways. If if there's.
Less.
Drilling activity in exploration, then you're going to see that upstream there's gonna be some upstream weakness.
And then that kind of kind of flow into some other products segments for us as an example.
Oh, and environmental services company would be called into you know clean out a tank add a refinery or something and so if demand is weak or they're just not going to do those projects, though push them and so that that weakness then we kind of feeling in those other products segments and and that's really kind of.
How the quarter laid out for us does that make sense.
Yeah, Yeah, that's great. Thanks, and then the last question was just around contacts plans you've always had a couple of course is like you invested.
Taking the Mulcher decide what's.
So it's complex plans for on Saturday 20, 220.
Yeah, Sam we've spent heavily this year really driven by great demand opportunity and the electronics business to your restaurant Teleco similar we very good demand for the modular business, we spend 127 million year today this year compared to 85 in the first nine months.
Last year, I think that will taper off a bit in Q4 on a full year basis, I think the number will be somewhere in the neighborhood of 150 million. It's too early to tell for next year, we'll be doing our planning work later this year, we'll look across all the opportunities that we can identify.
I and run them through you know our normal process of both financial returns that we would expect and really an assessment of the competitive environment in a macro environment before we decide what the fun and then the other comment I would make is every year as we get into funding the business, we're really not committed too far in advance.
In most instances, we have inability to throttle up or dawn based on our comfort and what we're seeing in the environment.
Okay, great. Thanks, very much vessel to me thanks.
Thank you.
Thank you and our last question comes from the line of Mark Riddick with <unk> no.
Mm.
Mark your long held.
Hi, Good evening wanted to talk a little bit about a portable storage and wonder if it could give a little detail around shifting [laughter], sorry about that round up mobile module and if he'd give a little detail around geographic a footprint performance and what you were saying if it was kind of across the.
A study as far as the apartments around the country.
Sure Mark.
We.
Let's let's characterize a list I'll just.
Give you each of the regions essentially in it and what I can say is that California, the mid Atlantic and Florida had actually been a good performers for us this year.
I'd say are weak our our our weak area in the modular business was Texas over this past year and a lot of that had to do with returns.
Then we have put some fairly large projects out in prior years thing we got some fairly heavy returns over the course of the last year and you know, we just have to get that product back out on rent, but from a demand perspective, it's actually been been pretty good and so.
And and that that covers both the commercial and the education demand and in each of those markets.
And and Mark I would just clarify all those regions that is California, Texas, Florida in the mid Atlantic all experienced growth in rental revenues on a year over year basis, and so you know we talk about relative strength, Texas on a percentage basis was not up as as much but it did show an increase.
Okay, Great and then Oh, what does it shifted back to invite a for a moment I was wondering if there was a how we should think about the order patterns that you're seeing there. It is it sort of coming from multiple orders or is it sort of maybe two or three big orders how should we think about how that sorta played out in the.
Quarter, and how you look at that going forward for future projects.
Yeah, It's a project basis or our project business. So we receive the opportunity to bid on project. If we win then we then need to execute as Joe mentioned in his remarks with the education work that we do through Enviroplex. It tends to be heavily weighted to this summer months for complete.
Those projects and getting them installed and then probably the next busiest period is in the fourth quarter and some of those projects get installed during the winter break at school. So timings always an issue in any particular year as to when projects are actually completed unrecognized by us.
Yeah, I would say mark I can add to that a little bit the the <unk> I would say that project ranges that we get in that business could be anything from you know a 400000 dollar project to several million dollar project and depending on where they fall in during the year.
And then indicates that it you you can get some lumpiness. There. This particular third quarter, we had three large projects land in the quarter or that we had to close out prior to the start of the school year and that's what contributed to you know unexceptional quarter for for Enviroplex.
Okay, Great and then what it to shift over to the so if you could get a bit of an update on an acquisition pipeline and what you're looking at and maybe what those with those valuations may look like give them. The the the completion of of a targeted market maybe what you know if you have some updated thoughts.
That and what we might see going forward.
Yeah, Marc I mean, we're we have a very you know active process to look at at different opportunities and.
We're we're choosy and we will not over pay and so.
You know it it just it it just depends on what that opportunity is and how pencils out that kind of financial returns that we're gonna get from it as to whether we would do it or not.
<unk> as with all M. and aim, Oregon, I would echo Joe's comments were always monitoring the market place engaging in opportunities the tricky things in any business to get right are that the potential acquisition mixed financial sense, you're looking for a fair price for a good business you know or <unk>.
<unk> the quality of fleet is always very important to us, particularly for longer lived assets were we need to be able to make our return over future years, and then obviously with any business. We are bringing on team members cultural fit is another important factor and those are all things, we and I'm sure. Most companies like us have to look at very high.
Hard I think if you look at our success over the last few years, it's being heavily driven by organic investment in the business. It lets us case, our new activities appropriate to the market opportunities that we see it lets us control the quality of our equipment and in some instances wants us to look for.
Some feature differentiations. So you know we'd be very pleased with the way. We've been operating are till two is being towards organic and we've you know added to our fleet. We've improved utilization we've done a lot of good work with pricing and it's a it's a recipe that's worked pretty well for us so far and I might add too you know when <unk> does not.
Ring goodwill onto the balance sheet to when we when we do an acquisition, it's our new product that we want specified for our fleet and so it's it's a very attractive for us to do organic road.
Okay, great. Thank you for answering my questions.
You bet.
Thank you and ladies and gentlemen, this appears to be the last question. We're now trying to call back to Mr. Hannah frightening for other March.
Alright. Thank you I, Thank you, Chris and I'd like to thank everyone for joining us on the call today for your continuing interest in our company. We look forward to speaking with you again in late February 2022 review, our fourth quarter 2019 results.
Ladies and gentlemen disk includes today's conference call. Thank you for participating me now disconnect.