Q4 2019 Earnings Call
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Oh conference participants are to listen only mode. Later, we'll conduct a question and answer session at that time. If you have a question you'll need to press the star key published by the one key when your telephone.
This conference is being recorded today Tuesday February 25th.
It doesn't 20 before we begin note that the matters 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.
Leading statements regarding our 2020 total company financial outlook as well the statements relating to the company's expectations.
Jeez 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 could differ materially from those projected.
Important factors that could cause actual results to differ materially from the company's expectation are disclosed under risk factors and the company's form 10-K, and other FCC filings forward looking statements are made only adds up to 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 FCC. The earnings recently at least one form 8-K and form 10-Q for the quarter speaking today will be Joe Hannah Chief Executive.
Officer and Keith.
Chief Financial Officer, I'll now turn the call over to Mr. Hannah go ahead Sir.
Thank you Skyler good afternoon, and thank you for joining us on today's call I will start the call with some overall comments on our fourth quarter and full year 2019 performance and then Keith will provide additional detail in his financial review and outlook comments.
For launching into my comments on our performance I.
I should also highlight that we're very happy to announce today at 12% increase in the annual dividend, marking our 29 year of consecutive increases, we're especially pleased that the performance or the business has allowed us to return value to shareholders in this manner.
Mcgrath Rentcorp has the rare distinction of being one of 134 publicly listed companies currently known as dividend champions.
All of whom have increased dividends more than 25 consecutive years, which we look forward to continuing.
So now, let's turn to our 2019 performance.
We were pleased to deliver another year of profitable growth for our shareholders.
Throughout the year, we remain steadfast on our performance improvement focus and our teams executed very well.
Companywide full year run or what revenues increased 11% and operating income 20%.
Given by strong performance for mobile modular Trs Rentelco enviroplex offsetting challenges at Adler tank rentals.
Specifically addressing fourth quarter performance, we increased the company wide rental revenues by 8% and operating income by 9% compared to a strong 2018 fourth quarter.
Mobile modular and Trs Rentelco were the primary drivers of the increases offset by declines at Adler.
Our performance improvement efforts materialized in the numbers.
We realized a companywide four year return on invested capital of 9.3%, a 13% increase from the prior year.
Primary drivers of the increase we're focused on more profitable transactions with better pricing term and a more favorable product mix and we sold fleet that was generating lower returns.
We saw strong activity across most of the vertical markets we serve.
Astro modernization backlog in student population growth, coupled with a healthy funding environment supported classroom rentals infrastructure projects generating swing space needs field commercial modular building rental.
And our electronics business General purpose equipment rentals, the test satellite new Fiveg devices, and semiconductor chips, where a significant rental revenue driver.
As we have shared during prior earnings calls the number of devices that will be connecting wireless lead to the internet continues to increase requiring more sophisticated testing we are well positioned to support these requirements.
Our soft spot during the quarter in Europe was at Adler with the landscape for oil and gas exploration, becoming significantly more challenged as the year progressed.
It doesn't affect it Adler rental revenues, which decreased 13% for the quarter and 3% for the year.
We maintained our capital spending discipline and made minimal fleet investments, but generated significant EBITDA at Adler and they were a valuable generator of cash throughout the year for the enterprise.
Other than Adler 2019 was a strong year of investment in the fleet for our other rental businesses, where we purchased a growth strategically and meet demand.
At year end, our gross rental fleet purchases totaled 168 million, a 36% increase over 2018 with growth at Trs Rentelco and mobile modular.
Allocating capital to the right markets is Paramount.
We were pleased to see the demand environment provide numerous opportunities to say, yes, the new investments.
Looking ahead to 2020, our expectations are for positive economic growth at a reduced pace, we are anticipating healthy capex investments and mobile modular and Trs rentelco, although likely not at the same level. Its 2019, and we will remain conservative at Adler.
Importantly, we have season teams that are prepared and engaged and customers that enjoy doing business with us we will be working hard to realize further success in 2020.
Now, let me turn the call over to Keith will take you through our financial review.
Thank you Joe.
Picking up on what Joe just said, we were very pleased with the fourth quarter and full year results.
For the fourth quarter of 2019 total revenues increased 11% to 147.2 million from 133.1 million a year ago.
The company's 9% operating profit increase for the quarter was driven by a 2.6 million increase in gross profit from rental revenues.
Hey, 2.1 million increase gross profit on sales.
And 8.4 million increase in gross profit on rental related services revenues.
Net income increased 9% to 26 point Fourmillion from 24.2 million.
And earnings per diluted share increased 8% to a dollar in seven cents from 99 cents.
Now I'll break the results Don by reviewing rental division performance compared to the fourth quarter of 2018.
Mobile modular total revenues increased 15.9 million or 24% to 81.9 million on higher rental.
Rental related services and sales revenues.
Rental revenues for the quarter increased 14% from a year ago.
Which was driven by an 8% improvement in average rental rates and 6% higher average equipment on rent.
Sales revenues increased 6.9 million worth 78% on higher new and used 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 cost of rental operations increased 2.1 million or 22% to 11.4 million.
Increased costs resulted from higher workload volumes to support increased rental demand in our education and commercial markets higher labor and material cost and higher cost of re rent equipment.
As a result rental margins decreased slightly to 65% from 66%.
Gross profit on rents increased 13% as a result to be higher rental revenue, partly offset by the way we're rental margin.
Average modular rental equipment for the quarter was 814 million, which was an increase of 43 million.
Average fleet utilization for the fourth quarter increased slightly to 79.3% from 79.2%.
At Trs Rentelco total revenues increased two point, threemillion or 7% to 34.4 million on higher rental revenues, partly offset by lower sales revenues.
Rental revenues for the quarter increased 15%.
Primarily driven by 22% higher average equipment on rent.
Mostly offset by 6% lower average rental rates.
The lower average rental rates, reflecting mix shift towards more general purpose equipment rentals and some longer term transactions.
Rental margins decreased to 44% from 45%.
The combined result was a 14% increase in gross profit on rents.
We saw growth and rental revenues from both general purpose and communications test equipment, and we continue to invest in new rental equipment for growth opportunities.
Average electronics rental equipment for the quarter was 328 million.
It was an increase of 43 million.
Average utilization for the fourth quarter increased to 66.8% from 63.1%.
At Adler tank rentals total revenues decreased 2.5 million or 10% to 23 point threemillion on lower rental and sales revenues, which was partly offset by higher rental related services.
Rental revenues for the quarter decreased 13%.
Primarily from 17% lower average equipment on rent, which was partly offset by 5% higher average monthly rental rates.
The rental revenue decrease reflected weaker demand in upstream oil and gas, which we believe also negatively impacted other market segments.
All six of our end markets had lower rental revenues compared to last year's strong fourth quarter.
Rental margins decreased to 57% from 63%.
The combined result was a 21% decrease in gross profit on rents.
Adlers average rental equipment for the quarter was 350 million, which was an increase of just 3 million.
Average utilization for the fourth quarter decreased to 50% from 61%.
No I would this division review complete the remainder of my comments will be on a total company basis.
Selling and administrative expenses increased 2.8 million or 9% to 32.7 million, primarily due to increased salaries and employee benefit costs.
Interest expense for the fourth quarter 2019 was 2.9 million a decrease of 8% as a result of 5% lower net average interest rates and 3% lower average debt levels.
The fourth quarter 2019 provision for income taxes was based on an effective tax rate of 25.5% compared to 24.3% a year earlier.
Next I will review, our 2019 year to date cashflow highlights.
Net cash provided by operating activities was 188 million, an increase of 45.3 million compared to 2018.
The increase was primarily attributable to improved income from operations.
Increased accounts payable and accrued liabilities.
Our balance sheet changes.
We invested 167.7 million for rental equipment purchases compared to 123.1 million for the same period in 2018, mostly on higher purchases at mobile modular and Trs Rentelco.
Property plant and equipment purchases were 12.1 million compared to 15.7 million for the same period a year ago.
Dividend payments to shareholders were 35.5 million.
Net borrowings decreased 5.1 million to 293.4 million at the end of 2019.
At quarter end, the company had capacity to borrow an additional 238.5 million under its lines of credit.
And to reissue of funded debt to the last 12 months actual adjusted EBITDA was 1.24 to one.
Fourth quarter 2019, adjusted EBITDA increased 11% to 63.7 million compared to a year ago.
And consolidated adjusted EBITDA margin was 43% seem as a year ago.
Our definition of adjusted EBITDA reconciliation of adjusted EBITDA to net income are included in the quarters press release.
Finally, turning to our 2020 financial outlook.
For the full year 2020, we expect.
Total revenue between 575, and 595 million compared to 570 million in 2019.
Adjusted EBITDA between 240, and 248 million compared to 237 million in 2019.
Net capital expenditures between one African Tan and 120 million compared to 135 million in 2019.
Please keep in mind the following regarding our outlook for the year.
Market demand for mobile modular and Trs Rentelco appears healthy entering 2020.
While there is softer market demand and greater uncertainty for Adler tank rentals.
Visibility is limited at Adler tank rentals, and Trs Rentelco because of the short rental terms in both businesses.
At Enviroplex, our permanent modular classroom manufacturer, we achieved exceptional sales volume in 2000 to 19.
The project mix that drove unusually high gross margins.
Well, we expect the good year in 2020, we do not currently anticipate that I did the total sales volume or margin to be a strong as 2019.
2019 was an outstanding year for the Companys financial performance.
And despite some headwinds we will be focused on building on that success during 2020.
That concludes the prepared remarks on our results Skyler you may now open the lines for questions.
As a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound.
Please standby.
Any roster.
Our first question comes from Scott.
With Oppenheimer. Your line is open.
Thanks, very much a good evening, Hi, Joe Hi, Keith.
Scott Scott.
I'm Gonna go around the Horn is I like to do and then starting off with with module or just a you know here. We are couple of months into the a into the new year. Just curious your thoughts are kinda Joe overview on the education market in modular what you're seeing a I think that.
The funding backdrop is nice and strong, but some some background on that and how you feel I know it's still early just at this point of the year, but how you feel you as you look out to 20 point. Thanks.
Sure, yes, the the funding backdrop as you said is good.
Thats in virtually all of the markets that we operate in.
In particular, I'll highlight just California, and the presence of prop 13, which is the 15 billion dollar.
The facilities bond, which is on the March ballot, it's the only bond measure on the ballot and early.
You know in indicators on voting our that it's favorable and that it should pass so that's going to be very good to keep the.
Flow of funds going in California, but also mentioned that in addition to that and not only in California, but we're seeing it into other markets to.
Our the presence of local bonds that are passed to support facilities and we're just seeing that said in a good place in the markets that we operate in.
And so that is that in turn as just funding.
Good facilities opportunities for us for both growth and modernization and so we're very pleased with how the year has started and we're anticipating.
Favorable bookings as we really enter the season here.
Great. Thanks.
Real quick on portable storage How's it has that been developing you know at through the end of the year and ended this year just curious if you're going to we're going to see that the same moment.
Yes, very pleased about how that business is growing.
We announced last year that we expanded geographically into some new markets. We did a couple of tuck ins and for the quarter rental revenues increased 14%. So we're very pleased with how the business is growing and we anticipate.
Being able to keep a nice pace into 2020.
Thanks Ntrs.
I just five GE about what percent would you say of the total segment.
Revenue is tied somehow to Fiveg and then the follow up question there is.
What other end market drivers are you seeing outside of five GE that a that that.
Thanks.
Sure Yeah, that's a that's.
That's kind of a tough one to quantify the fiveg breakout the difference that I can say between what happened backend like 13, and 14 is we saw a lot of work that was.
To take place out on the towers and so that was within a couple of different product lines in our wireless category now what we're seeing with Fiveg at least right now at the present time is more things happening in the lab and that is more focused on our general purpose.
Shipment line.
The things like chip design, and communication standards and things like that that that.
Companies are are designing products to connect wireless lead to the network and so it's kind of hard to know exactly where that breakout is we do anticipate that there will be more tower work taking place later in the year. The T mobile and sprint merger has been approved and we believe that will probably.
Result in some things moving forward out in the field. So we are anticipating that which is which should be good.
In terms of the markets and some of the the verticals that we're seeing strength, then I mean aerospace and defense has been good for US semiconductor has always been there for us too and so those are those been too good market segments that were seeing growth and.
Thanks, I appreciate that I would add we're now.
The Oh, Hi, IVC, Oh, we understand the that the tough conditions that you're right that you that AD was facing but monthly rental rates seem do trade pretty well in the fourth quarter could you kind of speak to the pricing environment and what you're seeing there that then I'll follow up.
Okay sure Yeah I that.
That's that's a good question and I would say that despite our pricing gains that we've had that that is not influencing utilization really the impact of the business that we've seen is significantly more on the demand side than anything that we're dealing with pricing having said that we're very happy with.
The teams and the progress that they made in terms of being able to raise price at the right kinds of accounts the right types of transactions and for the right customers and the comp program that we rolled out last year and the focus on ROI see that we've had in the business you know as resulted in us making some strides there.
Yeah, we'll see in a softer environment, perhaps in 2020, we may not be able to really maintain that pace, but.
We will be that is a focus area for us, but you know it is a fine line between.
Driving the right utilization and the right price and we're not going to walk away from you know business.
Yes in a in a big way because.
Pricing.
So.
Yeah. We're we're we're very much watching that and keeping a very close eye on it.
Thanks, and just one more on Adler.
Upstream oil and gas what is the mix now and are you.
How are you handling.
Obviously, probably very soft utilization in the upstream oil fields.
How are you are you handling the asset allocation there. Thanks.
Well I think oil and gas is 10% of our rental revenues I don't think thats changed a bit higher state for same 40% in Q4, yes. So that's.
Little bit less than it's been historically.
And.
In terms of asset allocation.
We'll move assets as we need to.
But I don't see any significant movements on the horizon here to to reposition the fleet at this point.
Well, we'll keep a close eye on that and we'll do that as as needed and for the right transactions and opportunities.
Thanks, and then in the last from me and I'll turn it over how are you thinking about capex for next year.
What what type of number relative to this year, which segments and why.
Yeah.
This is Keith Scott just to give you some color on that if you look over the last few years 2019 was a big year for gross Capex additions, we mentioned earlier 168 million of ads.
Very heavy investment at Trs Rentelco close to 90 million a little less than that at mobile modular. So as we look at 2020 I really go back to Joe's comments in the prepared remarks, we think it's a positive economy, just not as robust over growth environment as we saw last year. So at this.
This point, we think the capex spend will be lower.
I would point you to 2018 and look at the Capex spend we had ban has probably a better guide post than what we did last year and 20 team was about 20% lower than last year and so that's sort of the way we're thinking as we enter the year clearly as the year plays side and we were.
React we either can add to or subtract from that sort of outline planning number, but gross capex about 20% lower.
A number similar to 2018 is how we're thinking about it.
I'll just add to that to that even though it's 20% lower its still a very strong number for us. If you look at historically to what we've done in prior years that made it.
It's a big spend for us.
Great, Thanks, and a incorrect congrats to both you and the organization really nice 2019 and best wishes between 20.
Thank you Scott Thank you.
Our next question comes from Sam England.
Caroline.
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Hi, guys that just a couple from me Thats. One can you give us an idea about how youre thinking around capital allocation heading into Twentytwenty, given what we could you just sat around capex and.
Got you reduce Capex guide for this year should be expansion excise increases on the dividend.
On the talking side or just de leveraging.
Yeah, It's a great question, Sam and it's a topic, we frequently returned to and try to get the balance right and as you've already heard us speak to the new capital equipment ads for the year and as Joe said, we still got a healthy spend planned for the year ahead, we try to be disciplined in the.
Opportunities that we go after in the market. We're looking for good return over the life of the asset. So we're taking the long view when we make those investment decisions, but it will still be a big year for organic growth from the business and we do some tuck in M&A, we're sort of a value conscious buyer there but.
We continue to engage with opportunities in the market. We've done that for the last couple of years I think we'll continue to do that in Twentytwenty and beyond.
You heard us mention today, the dividend increase that we announced that will be effective.
In April and that's a 12% increase.
Buybacks, we tend to be more opportunistic and will be patient and wait for times, where we think theres a good value for buying back our own stock.
But that's another tool in our tool kit and if all of those items don't absorb all of the available cash flow from the business, we'll pay down some data and I view that as really a more interim measure to if you will bank capital for future needs.
Okay, great on the next one was just around margins it looks from the guidance lot you're guiding to flattish EBITDA margins in times, you try and is that you're expecting progressing.
On the mall genocide that some of an offset from from <unk>.
Is there anything else ongoing Saigon.
Yeah, I think thats, very well observed and I would agree with those comments the only additional item I would say that we see us every year in the business. He is one level of equipment sales that occur and generally speaking we get very nice margins when we're selling used equipment from our rental fleet.
And then on top of that we do have some new equipment sales during the year as well and you heard some of the comments I made on Enviroplex. So an example, where we typically don't get as high a fee margin on new equipment sales as we do unused and we also get some new equipment sales through our modular division through that said.
Segment as well so thats the harder part of the mix to forecast, but I think your original comments are a good guide post a high we're looking at it.
Okay, Great and then last one from me just just on the athletic and expectations. Twentytwenty, you, obviously said visibilities relatively light and not business I think many said that eichenbaum business expending vapor recovery in H. too I, just wondered whether youre thinking on the sidelines or whether it's really just too early to say.
The demand over time and second off.
Yes, there is a lot going on in the economy right now and.
Well, it's for US, it's just too early to say.
And we'll we'll hope that.
Things get better.
But it's too it's too early at this point and then it's very.
Unpredictable at this point so we're we're we're taking a cautious outlook.
Okay, great. Thanks, guys.
Thank you.
Our next question comes from Marc Riddick with Sidoti. Your line is now open.
Hi, good evening gentlemen.
Hi, Mark.
So I was wondering if you could go back a little bit too you mentioned some a classroom.
Backlog looking looking positive I was wondering if you could spend a little bit more time on what that may look like as far as you know whether it's a similar mix to what youve seen historically, what maybe over the last couple of years or if it's if it's a if that.
Mix shift has changed much at all over overall over what you're seeing.
Sure I don't believe the mix is getting it is going to change much and the backlog than I'm, referring to essentially is the backlog up modernization needs in classrooms across the country.
And you know school districts typically are chronically behind in modernizing and with the funding environment. The way it is now.
You know folks are.
Jurors student I'm, sorry, teachers and parents and at school administrators are more willing to put money behind modernizing those classrooms, and so that that backlog is good and it'll it'll remain good for a while as long as the funding is there there's always going to be work that needs to be done.
And your pressure memory I think if there was a little bit of a timing.
I should say issue, but it's just a little bit about off season timing that took place as far as some of the orders I think earlier in the year.
Certain states I was wondering you can sort of remind us and clarify on whether or not you would expect those situations to go back to sort of.
Normalization of the normal timing in order.
Yeah, Yeah, I think you recalling last year in Q1, we we had some early bookings and each year is different and.
Just depends on on when some of these districts really get.
Their plans ironed out and they get around to you know knowing how many classrooms that are going to need and so each year is different and.
We didnt.
Necessarily in Q4 experience.
Any real robust.
Orders at this point, but we're anticipating in 2020 that the overall demand will be healthy.
Okay, Great and then last one from me just wonder if you could give us a bit of an update around the the the acquisition landscape you did touch on some of the market growth opportunity lesion and.
Reaching out with with portable storage a bit and I was just wondering if you sort of give an update on sort of what you're seeing out there as far as all availability multiples.
Alike.
Yeah, I think availability there continues to be a fairly routine stream of opportunities every quarter. It seems like there are opportunities to take a look at.
Thank you know we're selective it's got a fit with the businesses that we already operate sometimes it's a way to further our presence.
Or open up a new geography for us and so we're open to that if it fits well with with the core businesses that we operate today I.
I do think valuations in some cases expectations from sellers can be a little high we've seen that build over the last couple of years. So we have to do what's right for us, but we were absolutely willing to engage in those opportunities and clearly under the right circumstances, it's a way too.
Make progress with growing the business.
And again from a geography point of view either.
Further create further density in markets that were already in or give us a beachhead in some new markets.
Yes, Mark I'll I'll also add in there too I mean, we're we're very concerned about the quality of the assets that are for sale in these enterprises and sometimes they're not all that great and so not only did you have to look at the valuation, but we want to bring quality assets into the fleet and that's that's a bar for us that we've got a hurdle also.
Okay and that seems to be a great way to segue into my last question, which is sort of how you're feeling about the most recent acquisition and maybe some some updated thoughts since since that was completed final. Thanks.
Sure the the I believe the one you're talking about was are the tuck in that we did in Oklahoma and that was very nice business with young young fleet and a good customer base and we integrated those assets right into the business and got off and running so we're very happy with how that started.
Great. Thank you very much.
Welcome.
That appears to be the last question I'd like to turn the call back over to Mr. Hannah for closing remarks.
All right. Thank you very much I'd like to thank everyone for joining us on the call today and for your continuing interest and our company. We look forward to speaking with you again in late April to review, our first quarter results.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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