McGrath RentCorp (MGRC) Q4 2020 Earnings Call Transcript

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McGrath RentCorp (MGRC 0.71%)
Q4 2020 Earnings Call
Feb 23, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Fourth Quarter 2020 Conference Call. [Operator Instructions] This conference call is being recorded today, Tuesday, February 23, 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 2021 financial outlook as well as statements related to the company's expectations, strategies, prospects or targets.

These forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties that could cause our actual results to differ materially from those projected. Furthermore, it should be noted that the impact of the COVID-19 pandemic on the company continues to evolve. As such, significant uncertainties remain 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 by management about the company's expected future financial condition is subject to the ongoing effect of the COVID-19 pandemic. In addition to the risks associated with the COVID-19 pandemic, important factors that could cause actual results to differ materially from the company's expectations are disclosed in the risk factors in the company's other SEC filings. Forward-looking statements are made only as of the date hereof. Except as otherwise required by law, we assume no obligation to update any forward-looking statements. In addition to the press release issued today, the company also filed with the SEC the earnings release on Form 8-K and its Form 10-K for the 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.

Joseph F. Hanna -- President, Chief Executive Officer

Thank you, Sarah. Good afternoon, and thank you, everyone, for joining us on today's call. I'll start the call with some overall comments on our fourth quarter and full year 2020 performance as well as our look ahead. Keith 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 was a challenging year and the many disruptions arising from the pandemic tested our mettle.

Since we were deemed 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 workforce 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. Initially, 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 in 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 CustomerHUB, 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'm 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 Enviroplex more than offset some softness in rental demand, primarily at Adler compared to a year ago. 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 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 30th 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 RentCorp has the rare distinction of being just one of 138 publicly listed companies currently known as dividend champions, all of whom have increased dividends more than 25 consecutive years, a 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. In 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 have been below pre-pandemic levels. We hope that dynamic may change as districts return 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 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 roll out 5G. Our customers are driving test equipment rentals for 5G opportunities, both in the R&D lab and also with wired bandwidth increases. We are still in the early stages of a long 5G implementation as it will have a significant increase on the speed and number of devices that will connect to the Internet. 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 for maintenance activities. We are 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 with a solid business, an 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. We are well positioned to continue growing the business as demand conditions improve during the year.

Now let me turn the call over to Keith, who will take you through our financial review.

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Thank you, Joe. Since the pandemic began, our teams have continued to do a great job in adapting to the new operating norms. They 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's 7% operating profit increase for the quarter was primarily driven by a $3.4 million increase in gross profit from sales revenues and $3.1 million lower selling and administrative expenses. The increase in total company revenue and operating profit was primarily a result of higher new modular classroom sales at our Enviroplex 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 will break the results down 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, resulted in 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. At TRS-RenTelco, 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 continue 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 4.08%, down compared to a year ago. The lower average rental rate reflects a continued mix shift toward more general purpose equipment rentals that tend to have longer-term transactions and longer asset lives compared to communications. Overall market pricing conditions were generally stable. Rental margins were comparable at 44%, and 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 3.25%, down 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 $37.3 million from $28.8 million a year ago.

This increase was primarily due to $8.5 million higher sales revenues at Enviroplex. 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 meals 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 20.7% compared to 25.5% a year earlier. The lower rate in 2020 was in part due to the deferred tax liability repricing 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% and 27%. Next, I'd like to turn to our full year 2020 cash flow highlights.

Net cash provided by operating activities was $180.5 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, down from $168 million in 2019. The strong operating cash flow, combined with a reduced need for organic equipment investment, demonstrate 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 have good strategic fit.

At year-end, the company had net borrowings of $223 million and 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 was 0.92:1. 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, balances a range of possible outcomes and offsetting assumptions. Given the potentially varying geographic and market sector dynamics occurring and 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 million and $595 million compared to $573 million in 2020, adjusted EBITDA between $230 million and $245 million compared to $241 million in 2020, gross rental equipment capital expenditures between $90 million and $110 million compared to $86 million in 2020. It is important to keep in mind that the impact of the pandemic on the economy and on our business continues to evolve and is difficult to assess. Also, as a reminder, even under normal conditions, visibility is limited at Adler Tank Rentals and TRS-RenTelco because of the short 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.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Sam England with Berenberg. Your line is now open.

Sam England -- Berenberg -- Analyst

Hey, guys. Can you talk a bit about the pipeline for the Mobile Modular business in 2021, whether there's any pent-up demand from delayed projects last year?

Joseph F. Hanna -- President, Chief Executive Officer

Hi, Sam. Sure, I can address that. I would say there's not necessarily pent-up demand. I think the projects that we've seen and that we've been supporting have kind of been flowing fairly nicely. I think as we look forward and we look at two facets of the business in modulars, one is our education business, and 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 aren't 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 kind of is still out there.

If you -- now having said that, we -- and this was in the prepared comments, too, we know that factors that influence classroom demand really haven't changed over time. There's still huge pent-up modernization demands. And in the states that we operate in like Florida and Texas, I mean, there's significant population increases and student population increases that are taking place there. So overall, we see -- we're really positive on the long-term demand for classrooms. It's just -- it's not a question of if, it's when. If you look at the commercial business, we are closing out projects with customers, and we're also seeing a nice pipeline of new projects, too. Our bookings for 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's a considerable amount of things that are going on out there and we're involved with these projects. So we're feeling pretty good to the start of the year so far.

Sam England -- Berenberg -- Analyst

Okay, great. And have you seen any incremental demand on the modular side from sort of pandemic-related factors like people needing additional units for social distancing? I was thinking particularly in the education market, but I suppose on the construction side of things as well.

Joseph F. Hanna -- President, Chief Executive Officer

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 landed some pretty nice orders for COVID testing stations and things like that at 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 social distancing, they've had to put all that furniture somewhere and they rented containers, and we've gotten some nice orders from that around the country as districts dealt with that. So 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 getting that are for construction projects or infrastructure projects, the spaces that people are requesting from us are larger than normal. And that's to say, "Hey, I want to fit 50 people in this building," they're 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.

Sam England -- Berenberg -- Analyst

Okay, great. And then maybe one more and then I'll pass it over. Maybe one for Keith. You touched on the leverage ratio continuing to improve and the fact that you might use the balance sheet for organic investment in 2021.

Can you talk about where that investment might be focused? You obviously said in Adler, you're going to be controlling the capex there. So where, I suppose in the other two divisions, do you think you need to put capital in?

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

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 were the Modular division and the TRS division. And within modulars, not only do we have opportunities to grow in the 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 things are still opportunities for us. And 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 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-RenTelco, there's still a long tail to opportunities tied to 5G. We've seen more of that in R&D work. We'll continue to support that with equipment purchases. If you look at some of our operating metrics, the team at TRS have 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're in that kind of a position, if they see more incremental growth, it will make sense to add to the fleet.

Joseph F. Hanna -- President, Chief Executive Officer

Sam, I'd just like to add too that in certain product categories in modulars, we're highly utilized. So if we have further orders, we'll need to purchase product to be able to fill them.

Sam England -- Berenberg -- Analyst

Great. Thanks, Jay. And thanks guys and I'll hand it over.

Operator

Thank you. Our next question comes from the line of Marc Riddick with Sidoti. Your line is now open.

Marc Riddick -- Sidoti -- Analyst

Hey, good evening.

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Hey, Marc.

Joseph F. Hanna -- President, Chief Executive Officer

Hey, Marc.

Marc Riddick -- Sidoti -- Analyst

So I wanted to touch a little bit on use of cash, and I'm wondering if you could talk about the landscape out there for potential acquisitions, regional expansion and the like, whether -- what that opportunity set might look like and maybe what you're seeing now versus a year ago. Is it any different? Has the pandemic provided opportunities? I'm wondering if you could comment a little bit on that.

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Sure, Marc, 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 fleets and really been very successful at growing the business over 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've probably heard us in the past talk about incremental initiatives such as in our Modular business. We introduced the blast-resistant modulars about 1.5 years ago. So we're open to using both those uses of cash to grow the business.

I think what's maybe different in this year is in a softer demand environment, there 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.

Marc Riddick -- Sidoti -- Analyst

Okay. And I was wondering if you could give a bit of an update, at least with the major markets, as to -- while it's early for the potential for what orders may be, I was wondering if you could touch a little bit about how you feel about the funding environment, particularly around education and what that opportunity might look like.

Joseph F. Hanna -- President, Chief Executive Officer

Sure. We were concerned last summer, I would say, as 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 were there's going to be some potential very significant gaps. And I think the fortunate thing that's taking place is as this thing has unfolded and we realize the economy has bounced back in 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's tax revenues that are tied to that and folks are working through that. 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. And in it, I would just mention there's $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 -- most of facilities improvements are funded through bond referendums and bond sales, both at the local and state level. And so those are still able to be transacted. And that money, we think, is going to continue to flow out into the market 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 it's something that we're keeping an eye on.

Marc Riddick -- Sidoti -- Analyst

Okay. And then I wanted to switch over to TRS for a moment. I was sort of curious as to whether or not -- maybe it's too early for this. But with everyone working from home for about a year or so now, just 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 5G rollout and the effects of that, are you getting any sense as of yet as to the magnitude or timing of that? If that maybe has changed, what that post-pandemic might look like as opposed to maybe where plants might have been beforehand, given the fact that we're all using that much more?

Joseph F. Hanna -- President, Chief Executive Officer

Yes. I don't really think so. I mean, the demand for bandwidth is still there, whether you're scattered around the country in your house or whether you're at an office. The real advantage of 5G 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 that's going to continue to drive that bandwidth. And so I really don't see that changing. It's -- we're in a -- I still think the early stages of a long rollout 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.

Marc Riddick -- Sidoti -- Analyst

Okay. And then the last one for me, I guess, since you'll touch on all of them. I wanted to get a sense of maybe what Adler might look like. I mean, how should we think about -- obviously, there are struggles and have been for a bit. 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 or what have you? How should we think about what the potential utilization may be, what the potential for that business is over the next few years?

Joseph F. Hanna -- President, Chief Executive Officer

Sure. 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. I think as people start to return to more normal conditions, there's more flying, there's more folks in cars, things like that, I think the demand picture will improve, and I think that will support further exploration and things like that, which is good for that business.

Now having said that, that's just a part of that business that we support. There's environmental work that we do, there's industrial work, there's construction work. And there's room for improvement in those areas, too. Environmental support oft times supports plant work, petrochemical plant work. And so if the plants are slow, that environmental work can be slow, too. And so we see a slowly improving demand picture, but we're cautious at this point as the economy slowly emerges from this pandemic.

Keith, anything you want to add there?

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Yes. I think you've characterized it well, Joe. I think our view as we enter this year, and it's really reflected in the outlook that we gave, which is things are going to change gradually. And I think that's true for Adler. Of the businesses we're in, it really faced the greatest turmoil in its end markets. It sort of had the double effect of initially an 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.

And clearly, metrics like utilization are well below where that business has historically operated but it will be a gradual process. We got to take one quarter at a time. We have a good team. They've managed the business very responsibly from a cost management point of view, and 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.

Marc Riddick -- Sidoti -- Analyst

Much appreciated. Thank you very much.

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Thank you.

Operator

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.

Joseph F. Hanna -- President, Chief Executive Officer

Well, I'd like to thank everyone for joining us on the call today and for your 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.

Operator

[Operator Closing Remarks].

Duration: 39 minutes

Call participants:

Joseph F. Hanna -- President, Chief Executive Officer

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Sam England -- Berenberg -- Analyst

Marc Riddick -- Sidoti -- Analyst

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