Q4 2020 McGrath RentCorp Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the Mcgrath <unk> Corp, fourth quarter 2020 conference call.
At this time all conference participants are in a listen only mode.
Later, we will conduct a question and answer session.
At that time, if you have a question you would need to price the Starkey followed by the one key on your telephone.
This conference call is being recorded today Tuesday February.
2021.
Before we begin note that the matters 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 full year 'twenty 'twenty, one financial outlook as well as statements relating to the company's expectations.
Strategies prospects or targets. These.
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.
Furthermore, it should be noted that the impact of the COVID-19 pandemic all the company continues to evolve.
As such significant uncertainty remains regarding the full magnitude of impact that the pandemic will have on the company's financial condition liquidity and future results of operation.
The following discussion from management about the company's expected future financial condition is subject to the ongoing effects of the COVID-19 pandemic and.
In addition to the risks associated with the COVID-19, pandemic and important factors that could cause actual results to differ materially from the company's expectations are disclosed under risk factors as accounts.
Arthur SEC filings forward looking statements are made only as of the date hereof.
Seth as otherwise required by law, we assume no obligation to update any forward looking statements and.
In addition to the press release issued today the company also filed with it.
The earnings release, our form 8-K, and its form 10-K was a year ended December 31 2020.
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 Sarah good afternoon, and thank you everyone for joining us on today's call I will start the call with some overall comments from our fourth quarter and full year 2020 performance as well as our look ahead.
We will provide additional detail in his financial review and outlook comments.
I could not be more pleased with the team and our responses to the many challenges we faced in 2020 it.
It was a challenging year and the many disruptions arising from the pandemic tested our metal.
Since we redeemed an essential business in the areas. We operate our teams were working with customers and each other throughout the year.
We implemented strict safety protocols and adjusted work schedules as needed.
I'm happy to say, we completed the year with our work force on the job with minimal COVID-19 operational interference.
I'm proud of the accomplishments from all of our team members during the year to support each other and serve our customers.
The pandemic brought many challenges, but also opportunities and <unk>.
Italy, we thought productivity would suffer in a remote environment, but we were able to accomplish many things.
We have an effective and disciplined planning process across the company, which we use to refine and adjust plans to counter the effects of COVID-19 on our operations.
That effort is worthy of a few highlights.
First we wasted no time and adjusting our capex spend to meet demand conditions, maintaining our high standards for capital allocation.
We reduced cost responsibly being careful not to damage the business, but appropriately plan and account for reduced activity.
We stressed areas of opportunity like accelerating our digital capabilities to interact with customers.
We rolled out customer hub, our online portal that allows inventory tracking payments lease renewals service call scheduling and more.
Additionally, we enhanced our ESG communications by adding new content and helpful navigation to our website.
To improve disclosure for the many things we do on a daily basis to be good corporate citizens.
At mobile modular we made it a priority over the last year to bring more services to our customer base to be viewed more as a solutions provider not just an equipment supplier.
Some of those services involve site improvements that accompany a building rental.
Another example is our ability to offer a sale of a permanent modular solution as an alternative to a rental solution.
The benefits of modular construction have gained momentum in the market and customer behavior reflects it.
We're positioning ourselves to take full advantage of that trend and it is showing in our results.
2020 sales at mobile modular increased by $17 million compared to 2019 with the expectation for more growth in the future.
I am proud of the financial results, we delivered for the first fourth quarter and the full year.
For the fourth quarter strong sales revenues, primarily at <unk> more than offset some softness in rental demand primarily at Adler compared to a year ago. The.
The growth in total revenues combined with good management of cost enabled us to grow operating income by 7%.
Our full year results demonstrated the resilience in our business and the dedication of our teams despite.
Despite the many disruptions arising from the pandemic. We grew total revenues and delivered operating income comparable to the prior year.
We also announced today, a 4% increase in the annual dividend.
I'm pleased to highlight that this marks our 30 <unk> consecutive year of dividend increases we are especially proud that the performance of the business has allowed us to sustainably return value to shareholders in this manner.
Mcgrath <unk> Corp has the rare distinction of being just one of 30 138 publicly listed companies currently known as dividend champions all of whom have increased dividends more than 25 consecutive years of distinction, which we look forward to continuing.
Looking ahead I would like to summarize our current assessment of the demand outlook for the most important industry verticals we serve.
For our modular business recent commercial activity and customer sentiment has improved and is better this year than during most of 2020 with some new projects starting.
And looking at our classroom business students are back in school in some locations, but not all.
While we are not yet in the busy season for education orders recent volumes had been below pre pandemic levels. We.
We hope that dynamic may change as districts returned to more normal operating conditions.
Longer term, we know that many classrooms across the country are aged and have many years of deferred maintenance, which represents an important positive to demand driver for us as schools modernize.
This dynamic has not changed due to the pandemic.
At Trs test equipment demand has been good primarily for general purpose fleet and we expect more field work to be done this year as carriers continue to rollout five G.
Our customers are driving test equipment rentals for <unk> opportunities both in the R&D lab and also with wired bandwidth increases.
We are still in the early stages of a long <unk> implementation as it will have a significant increase on the speed of number of devices that will connect to the internet <unk>.
Again this is a long term positive driver for us as our customers have many testing requirements.
At Adler, we're still facing headwinds from reduced oil and gas demand and the impact of the pandemic on the broader economy refineries and petrochemical plants have been deferring work to conserve cash and that has reduced rentals from maintenance activities.
We're seeing less activity across the full range of market segments, we serve including environmental remediation and industrial work.
Our strategy to maximize cash generation has been successful and we will continue to be disciplined with our investments in new rental fleet.
We started 2021 was a solid business and experienced leadership team and a strong balance sheet and we will build on that to the benefit of all of our stakeholders. Our track record of execution combined with an improving economy should drive healthy free cash flow generation.
While we invest in additional fleet to meet customer needs were.
We are well positioned to continue growing the business as demand conditions improved during the year.
Now, let me turn the call over to Keith who will take you through our financial review.
Thank you Joe.
Since the pandemic began our teams have continued to do a great job in adapting to the new operating norms.
Did all this while also delivering strong fourth quarter and full year results.
For the fourth quarter of 2020, total revenues increased 1% to $149 million.
The company, 7% operating profit increase for the quarter was primarily driven by $3 4 million increase in gross profit from sales revenues.
$3 1 million lower selling and administrative expenses.
The increase in total company revenue and operating profit.
It was primarily a result of higher new modular classroom sales at our <unk> business.
Net income increased 18% to $31 2 million from $26 4 million.
And earnings per diluted share increased 19% to $1 27.
Now I'll break the results done by reviewing rental division operating results and performance compared to the fourth quarter of 2019.
Mobile modular total revenues decreased $5 7 million or 7% to $76 2 million on lower sales rental and rental related services revenues.
Rental revenues for the quarter decreased 2% from a year ago with both commercial and education rental revenues dropping slightly.
Rental revenues for our portable storage business increased compared to a year ago.
The average monthly rental rate for the quarter was $2 49%.
Almost flat compared to a year ago, and reflecting generally stable pricing conditions.
Sales revenues decreased $3 6 million to $12 million, primarily on lower used equipment sales.
Lower rental revenues, coupled with lower equipment preparation costs due in part to lower shipment activity levels during the quarter.
<unk> and rental margins of 65% comparable to a year ago.
Average fleet utilization for the fourth quarter decreased to 76, 2% from 79, 3%.
Reflecting the softer market demand conditions experienced during the pandemic.
Trs rent telco total revenues increased $3 4 million or 10% to $37 8 million on higher sales and rental revenues.
Rental revenues for the quarter increased 1%.
We saw continued strength in general purpose test equipment rentals, which grew 7% offset by lower rental revenues from communications test equipment, which declined 13%.
Communications rentals continued to be impacted by less field work on the communications infrastructure, partly as a result of the pandemic.
Sales revenues increased $3 3 million to $8 $7 million, primarily on higher used equipment sales.
The average monthly rental rate for the quarter was 4.0%.
Compared to a year ago.
The lower average rental rate reflects the continued mix shift towards more general purpose equipment rentals.
Tend to have longer term transactions and <unk>.
<unk> asset lives compared to communications.
Overall market pricing conditions were generally stable.
Rental margins were comparable at 44%.
And the average utilization for the fourth quarter increased to 68, 4% from 66, 8%.
At Adler tank rentals total revenues decreased $4 4 million or 19% to $18 9 million on lower rental and rental related services revenues.
Rental revenues for the quarter decreased 18%.
The decrease reflected weaker demand caused by pandemic related market disruptions and the lower price of oil and gas with all end markets, having lower rental revenues compared to last year's fourth quarter.
The average monthly rental rate for the quarter was $3, two 5% volume compared to a year ago, and reflecting generally more competitive industry pricing conditions.
Rental margins decreased to 51% from 57%.
And average utilization for the fourth quarter decreased to 42, 6% from 50%.
Moving on the remainder of my fourth quarter comments will be on a total company basis.
Total company equipment sales revenues increased to 37 point.
$3 million from $28 8 million a year ago.
This increase was primarily due to eight 5 million higher sales revenues at <unk>.
Selling and administrative expenses decreased $3 1 million or 10% to $29 6 million.
Reflecting lower salaries and benefits costs, lower which included lower variable compensation and lower travel and <unk> expenses.
Interest expense was $2 million, a decrease of 32% as a result of lower average debt levels and lower average interest rates.
The fourth quarter provision for income taxes was based on an effective tax rate of 27%.
Third to 25, 5% a year earlier.
The lower rate in 2020 was in part due to the deferred tax liability re pricing benefit from a change in the state apportionment factors during 2020, reflecting more business in the lower tax rate states.
For 2021.
We currently expect an effective tax rate of between 26% 27%.
Yes.
Next I'd like to turn to our full year 2020 cash flow highlights.
Net cash provided by operating activities was $185 million a decrease of only 4% despite the market demand disruptions from the pandemic.
We refined our capital allocation priorities in reaction to the pandemic.
With lower market demand conditions, we reduced rental equipment purchases to $86 million.
One from $168 million in 2019.
The strong operating cash flow combined with a reduced need for organic equipment investment demonstrates the company's resilient business model during a period of economic weakness.
The healthy cash generation allowed us to pay $40 million in dividends to repurchase $14 million of common stock and to reduce debt by $71 million.
As Joe mentioned earlier, we ended 2020 with a strong balance sheet.
We have started this year with significant flexibility to increase organic investment as demand conditions improve and we are well positioned to consider opportunities that are good strategic fit.
At year end the company had net borrowings of $223 million in capacity to borrow an additional 309 million under its lines of credit.
The ratio of funded debt to the last 12 months actual adjusted EBITDA.
Zero point 92 to one.
Fourth quarter 2020, adjusted EBITDA increased 3% to $65 3 million compared to a year ago and consolidated adjusted EBITDA margin was 44% compared to 43% a year ago.
Our definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income are included in the quarter's press release.
Finally, turning to our financial outlook.
The full year outlook, which we included in our earnings press release.
<unk> is a range of possible outcomes to offsetting assumptions.
Given the potentially varying geographic end market sector dynamics occurring in the pandemic recovery efforts across the country.
Our current expectations for total revenue and adjusted EBITDA for the full year 2021 are broadly comparable to 2020 levels, while continuing to invest in the business and generating robust free cash flow.
We currently expect total revenue between $560 and $595 million compared to $573 million in 2020.
Adjusted EBITDA between 230 $245 million compared to $241 million in 2020.
Gross rental equipment capital expenditures between 90 and $110 million.
<unk> $86 million in 2020.
It is important to keep in mind that the impact of the pandemic on the economy and on our business continuous to evolve and is difficult to assess.
Also as a reminder, even under normal conditions visibility is limited at Adler tank rentals, and Trs or non telco because of the shorter rental terms in both businesses.
While the 2021 market environment remains uncertain, we remain hopeful that economic conditions will improve as the year progresses.
That concludes our prepared remarks.
Sarah you May now open the lines for questions.
Thank you.
To ask a question you will need to press Star then one on your telephone.
Your question. Please press the pound key.
Again that is star then one if you would like to ask a question.
Yeah.
Our first question comes from the line of Sam England with Baird. Your line is now open.
Hey, guys can you talk a bit about the pipeline for the mobile modular business in 2021.
And whether there's any pent up demand from delayed projects last year.
Hi, Sam.
Sure I can I can address that I would say there is.
Not necessarily pent up demand.
The projects that we've seen and that we've been supporting have.
<unk> kind of been flowing fairly nicely I think as we look forward.
And we look at two facets of the business and modular is one is our education business and as.
As we had said in the prepared comments that.
Is a little bit uncertain right now because we have some schools that are back in session and some that arent and some that are in various stages of planning in that regard and so.
Even though we're a little bit early in the ordering season.
We just have we're just uncertain as to how that's going to transpire for the remainder of the year.
Given that that pandemic uncertainty that's still out there.
Now having said that.
We.
And this was in our prepared comments too we know that.
Okay.
Factors that influenced classroom demand really haven't changed over time, there is still huge pent up modernization demands and in the states that we operating in like Florida, and Texas. I mean, there are significant population increases in student population increases that are taking place.
So overall, we see we're really positive on the long term demand for classrooms.
It's just it's not.
<unk> of if it's when.
You look at the commercial business, we are closing out projects with customers and we're also seeing a nice pipeline of new projects to our bookings for our commercial business in January were actually slightly higher than they were this time last year and we had a very good Q1 last year in terms of bookings so.
We're encouraged and we're hearing good things from our customers as far as infrastructure projects. There is a considerable amount of things that are going on out there and we.
We're involved with these projects. So we're we're feeling pretty good to the start of the year so far.
Okay, Great and then have you seen any incremental demand on the margin aside from some pandemic related factors like people needing additional units the social distancing.
And particularly in the education market by size on the construction side of things as well.
The answer to that is yes, and let me divide that into the two parts of the modular business one being the container business and then.
For the modular buildings first the container business. We've we've landed some pretty nice orders for Covid testing stations and things like that in various places around the country.
So that's been a positive highlight and also with some school districts.
Who have needed to store.
Their furniture as they have cleared out some of their classroom space for additional for social distancing.
They've had to put all of that furniture somewhere and they ran in containers and we've gotten some some nice orders from that.
Around the country.
Districts dealt with that so that.
That was the first thing the second thing is with the modular business related to Covid. What we're seeing are on the rentals that we are.
We are getting that are for construction projects or infrastructure projects. The spaces that people are requesting from us are larger than normal and thats to say, hey, I want to hit 50 people in this building. They are now ordering more floor space to be able to put those 50 people.
So that they can keep them properly spread out in the building and so that's been another positive driver for us and we're continuing to see that.
Even as we speak.
Okay, Great and then maybe one more and then all profit.
Maybe one for Keith you touched on the leverage ratio continuing to improve in fact that you might use the balance sheet for organic investment in 2021 can you talk about where non investment might be focused you. Obviously said in Adler youre going to be controlling the capex that.
I'd say, it's in the other two divisions do you think you need to put capital to win.
Yes, it's a good question and I think if you look back to how we operated in 2019 pre pandemic. The two divisions that got most of the new capital where the modular division.
The Trs division and within modular not only do we have opportunities to grow and be commercial and education markets for modular buildings, but also with our portable storage business. We continue to expand the geographic footprint. There. So I think those those things are still opportunities for us.
As Joe mentioned earlier, our teams have done a lot of work looking at their businesses looking at where they want to play where they see growth opportunities in this year and beyond and so all of those plans will get executed and the pacing will reflect again some of the.
Pacing of demand recovery after the pandemic.
And as you know with Trs from telco Theres still a long tail to opportunities tied to five G. We've seen more of that in R&D work will continue to support that with equipment purchases.
If you look at some of our operating metrics.
At Trs has done really a very nice job managing the equipment pool and by the standards of that business finished the year with very high utilization. So when they are in that kind of a position if they see more incremental growth that will make sense to add to the fleet.
Sam I'd, just like to add value.
Sam I'd, just like to add to that in certain product categories and modular were highly utilized so well.
Further orders will need to purchase product to to be able to fill them.
Great. Thanks, Jay and thanks, guys and I'll hand, Doug.
Thank you.
Next question comes from the line of Marc Riddick with Sidoti. Your line is now open.
Hi, good evening.
Hi, Mark Hi, Mark.
So wanted to touch a little bit on use of cash and I'm wondering if you could talk about.
The.
The landscape out there for potential acquisitions of regional expansion and the like whether what that opportunity set might look like and maybe what youre seeing now versus a year ago is it any is it any different.
Mike provided opportunities and wonder if you could comment a little bit on that.
Sure Mark I'll take a crack at it I think as you know our track record is we've done a great deal of organic investment in our fleet and really be very successful at growing the business over a long periods of time.
Alongside that we also routinely do I'd say small tuck in M&A and we've been doing that for the last few years. It lets us in the case of portable storage it often lets us enter a new market and jump start our operations there.
You probably heard us in the past talk about incremental initiatives such as in our modular business. We introduced the blast resistant modular <unk> about a year and a half ago. So we're open to using both.
Both of those uses of cash to grow the business I think what's may be different in this year is in a softer demand environment. They are probably more opportunities to look at the M&A side when there are fewer.
Sort of fewer opportunities to deploy a lot of capital organically and so we like most players are going to look at that as another option and our teams routinely do work looking at the kinds of things they'd like to do to grow their footprint and increase their density in markets, where we already play.
Okay and I was wondering if you could give a bit of an update at least with the major markets is cheap.
While it's early for the potential for what orders you may be just wanted to touch a little bit about how you feel about the funding environment, particularly around the education and what that opportunity might look like.
Sure.
We were we were concerned.
Last summer I would say is this.
Pandemic was really kind of new to all of US and of course, the message that we were getting from state governments.
Around the country, where there is going to be some potential very significant gaps.
And I think the fortunate thing Thats taken place is.
As this thing has unfolded and we realize the economy has bounced back in.
And a fairly significant way that some of these gaps are not as big as they had originally thought so I would say in certain areas.
There's funding shortfalls. If there is tax revenues that are tied to that and folks are working through that.
<unk>.
I know one of the things right now that is on the minds of.
The different state governments everywhere is the potential for the stimulus package to pass in it I would just mentioned there was $130 billion, that's really earmarked for school districts to return to safe operations and I do believe that this is going to pass in some fashion it might not be.
The entire amount, but that's a significant amount of money to make available to state governments. If there are shortfalls now if you look at a state like California of course, we said before that there are more.
Most of the facilities improvements are funded through bond referendums and bond sales both at the local and state level and so those those are still able to be transacted and that money. We think is going to continue to flow out into the market as as it has been in a pretty steady way so.
We're not as concerned about the state.
Budget shortfall the potential to impact the business as we were before but its something that were keeping an eye on.
Okay, and then I wanted to switch over to Trs for a moment.
Sort of curious as to whether or not.
Maybe it's too early for this but.
With everyone working from homes, we're about a year or so now so I'm wondering if you can get a sense of if you're getting any feedback as to the once we get fully ramped up as far as <unk>.
The rollout and the effects of that are you getting any sense as to the magnitude or timing of that maybe.
Maybe has changed.
That post pandemic might look like as opposed to maybe where plants you might've been beforehand, given the fact that we're all using that much more.
Yes, I don't really think so I mean that the demand for bandwidth is still there whether you are scattered around the country in your house or whether youre at an office.
The real advantage of <unk> is the fact that you don't need to be connected to a wire to get the same high speed and so.
I don't know about you but.
I don't want to be connected with a wire and most people don't and so that dynamic is going to continue and as we deploy more.
Devices that connect to the internet, they're going to connect in a wireless fashion and thats going to continue to drive that bandwidth and so I really don't see that changing.
We're in a.
Still think the early stages of a long roll out there and we're very we're feeling very good about the ability for Trs to supply that part of the market. So that's very positive for us.
Okay and then the last one from me.
I'll touch on all of them I wanted to just get a sense of maybe what Adler might look like how should we think about I mean, obviously theres still struggles have been sort of book and I was wondering if you could get a sense of.
How should we think about what the potential is for Adler under.
Maybe a more steady.
Crude environment, how should we think about what the potential utilization may be with the potential.
For that business.
So over the next few years share well, we can say at this point that it's.
Under optimized we'd like to see performance better in the business the nice thing about that.
The situation that we're in now is that we do not need to make a lot of.
Additional investment in the fleet to be able to get better financial performance out of it we need to raise utilization and of course along with that.
Pricing can improve too so.
I think that.
Things are relatively uncertain right now the oil and gas industry has taken a significant hit.
Think as people start to return to more norm normal conditions.
Theres more flying Theres more folks in cars things like that.
The demand picture will improve and I think that will.
Support further exploration and things like that that which is good for that business now having said that that's just a part of that business that we support.
There is environmental work that we do there is industrial work Theres construction work.
And there is room for improvement in those areas to environmental support off times supports plant work petrochemical plant work and.
So if the plants are slow that environmental work can be slow to and so.
We see.
We see a slowly improving demand picture, but where we're cautious at this point as as the economy.
Lowly emerges from from this pandemic Keith anything you want to add there.
Yes, I think you've characterized it well Joe I think our view as we enter this year and it's really reflective in the outlook that we gave which is things are going to change gradually and I think that's true for Adler.
The businesses we're in it it really is the greatest turmoil in its end markets.
Have the double effect of initially in oil and gas price war at the beginning of 2020 and then very soon after that all the impact of the pandemic. So we think the recovery will be gradual.
Clearly metrics like utilization are well below where that business has historically operated but it will be a gradual process. We've got to take one quarter at a time, we have a good team they manage the business very responsibly from a cost management point of view.
They also understand their marketplace and they know there are some opportunities going forward.
But a lot of this is pandemic related and people are not driving cars, they're not jumping on planes as much and that has a ripple effect into many of the industries that Adler supports so patience is warranted here, but we've got a good team good business and as Joe mentioned earlier this business generates healthy cash flow.
For the Corporation and we can utilize that to do other things.
It was much appreciated thank you very much.
Thank you. Thank you.
Ladies and gentlemen that appears to be our last question. Let me now turn the call back over to Mr. Hanna for any closing remarks.
Well I'd like to thank everyone for joining us on the call today and for continuing interest in our company. We wish you all health and safety in the months ahead, and we look forward to speaking with you again in late April 2021 to review our first quarter results.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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