McGrath RentCorp

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath Rink Corp. Fourth Quarter 2020 Conference Call. At this time, all conference participants are in a listen-only mode. Later, we'll conduct a question and answer session. At that time, if you have a question, you will need to press the star key followed by the one key on your telephone. This conference call is being recorded today, Tuesday, February 3rd, 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 Security Litigation Reform Act of 1995, including statements regarding our full-year 2021 financial outlook, as well as statements relating 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 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 by management about the company's expected future financial condition is subject to 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 under risk factors and 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 of Form 8K and its Form 10K for the year ended December 31st, 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'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 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'm proud of the financial results we delivered for the 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 percent 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 Rent Corp. 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 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.

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 percent 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 percent, to 76.2 million on lower sales, rental, and rental-related services revenues. Rental revenues for the quarter decreased 2 percent 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 percent, 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 continued to be impacted by less fieldwork 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 percent down compared to a year ago. The lower average rental rate reflects a continued mixed shift towards 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 percent, and average utilization for the fourth quarter increased to 68.4 percent from 66.8 percent. At Adler Tank Rentals, Total revenues decreased 4.4 million, or 19 percent, to 18.9 million on lower rental and rental-related services revenues. Rental revenues for the quarter decreased 18 percent. 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, 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 percent compared to 25.5 percent 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 to 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 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 and 245 million compared to $241 million in 2020, gross rental equipment capital expenditures between $90 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 Rentalco 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.