Joe Hanna - Chief Executive Officer Keith Pratt - Chief Financial Officer.

Scott Schneeberger - Oppenheimer Marc Riddick - Sidoti & Company.

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Fourth Quarter 2017 Conference Call. At this time, all conference participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] And this conference is being recorded today, Tuesday, February 27, 2018.

Before we begin, note that the matters that 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 2018 total company operating profit 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.

Important factors that could cause actual results to differ materially from the company’s expectations are disclosed under Risk Factors in the company’s Form 10-K and 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 the Form 10-K. 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, Sandra. Good afternoon and thank you for joining us on today’s call. I will be providing comments on our performance for the quarter and full year and our outlook entering 2018. Following my comments, Keith will review the financial results. After that, we will open up the call to questions. Quite simply we had an excellent year.

I want to congratulate the entire McGrath RentCorp team for collective achievements that led to both strong fourth quarter and full year 2017 results. Together we focused to make strides in improving our performance and we were successful.

For the fourth quarter the company’s 16% revenue increase reflected healthy growth and rental operations across each of our divisions and strong growth in modular sales. The company’s 18% operating profit increase was driven by $2.6 million in gross profit from rental operations and an additional $2.6 million increase in sales gross profit.

At TRS-RenTelco and Adler we experienced less than typical seasonal reductions in business activity between Thanksgiving and year-end. Mobile Modular rental revenues for the quarter increased 9% from a year ago, primarily driven by 7% improvement in average rental rates.

Rental revenue growth continued to be healthy across commercial and education markets, as well as in our portable storage business. We continue to invest selectively in new modular rental equipment primarily in regions outside California and for our portable storage business grew the rental fleet by 1% year-over-year.

Modular sales revenues increased significantly year-over-year, primarily due to higher used equipment sales. TRS-RenTelco rental revenues for the quarter increased 7%, primarily driven by 5% higher average rental equipment and improved utilization. Test equipment rental revenues for general purpose and communications increased 8% and 7%, respectively.

We continued to selectively invest in general purpose test equipment for growth opportunities. Rental revenues for the quarter at Adler increased 18% from a year ago. Rental revenue growth was broad-based and occurred in six of seven vertical markets that we serve and across all five of our regional markets.

Upstream oil and natural gas rental revenues increased from 8% to 10% of total rental revenues at Adler. Average equipment on rent increased 18% and average utilization increased to 60% from 51%. Our fleet size was unchanged year-over-year as we focused on better utilization of the existing fleet.

Despite ongoing competitive price pressure, average rental rates remained flat. For the full year, company operating profit grew by 20% compared to a year ago. Mobile Modular, TRS-RenTelco and Adler Tanks rentals delivered operating profit growth of 14%, 18% and 40%, respectively, compared to a year ago.

Our 2017 results reflect some improvement in market conditions at Adler Tanks rentals and TRS-RenTelco particularly in the second half of the year. Our objective during the year was to keep a laser beam focus on our performance improvement initiatives and we executed very well.

Our ability to grow operating profit 20% for the year with fleet growth of 2% shows that our efforts in improving the financial returns on our invested capital base were solid success. That is exactly the kind of progress we hope for at the start of 2017 and we delivered. We still have more work to do and our efforts in 2018 will continue.

I’m proud of the strong execution by each of our divisional teams during the year. Solid progress was made targeting the right market segments and transactions, optimizing rental rates and selectively selling non-core equipment. We also maintain discipline on new rental equipment capital spending.

I would like to make some comments upfront regarding the new federal tax legislation that was signed into law at the end of 2017. The big picture is that our overall expected tax rate for the full year 2018 will drop significantly.

We currently estimate that our comparable effective corporate tax rate will be about 27% in contrast to 38% for the full year 2017, excluding the Tax Reform impact. The improved company performance and anticipated earnings and cash flow benefits from Tax Reform support the 31% dividend increase announced today.

This will be the 26th consecutive year that McGrath RentCorp has increased its dividend. Entering the first quarter of 2018 market conditions continue to be highly competitive and our visibility is limited as a result of the shorter rental terms of typical Adler and TRS-RenTelco transactions. However, underlying market conditions are encouraging.

At Mobile Modular funding for both student growth and modernization projects for classroom rentals are favorable as is the construction demand outlook. Our businesses are well-positioned and we will be working hard to build upon our solid 2017 performance.

With that as a backdrop, let me share that our 2018 financial outlook suggest another year of solid operating performance, as we continue to focus on performance improvement initiatives across the enterprise. That concludes my remarks, I’d like to turn the call over to Keith now for his financial review..

Thank you, Joe. For the fourth quarter 2017 total revenues increased 16% to $122.2 million from $105.3 million for the same period in 2016. Net income increased to $117.7 million from $9.7 million and earnings per diluted share increased to $4.82 from $0.40.

The fourth quarter of 2017 includes a net income benefit of $102.5 million or $4.20 per diluted share associated with the U.S. Governments enactment of the Tax Cuts and Jobs Act. Reviewing the fourth quarter results compared to the fourth quarter of 2016 for each of the company’s rental divisions starting with Mobile Modular.

Total revenues increased $6.3 million or 12% to $57.4 million on higher rental and sales revenues. Rental revenues increased $3.2 million or 9%. However, rental margins decreased to 54% from 64%. Rental margins declined due to other direct costs increasing $4.8 million to $12 million.

This cost increase was a result of higher investment in idle fleet to prepare for the 2018 ordering season and a $1.6 million impairment of rental assets deemed beyond economic repair in the Southern California region. The combined result was that gross profit on rents decreased $1.6 million or 7% to $20.4 million.

Sales revenues increased $3.2 million or 74% to $7.4 million on higher used equipment sales. Selling and administrative expenses increased 1% to $13.4 million.

The lower gross profit on rental revenues and higher selling and administrative expenses partly offset by higher gross profit on sales resulted in a decrease in operating income of $0.6 million or 5% to $12.6 million. Finally, average modular rental equipment for the quarter was $750 million, an increase of $11 million.

Average fleet utilization for the fourth quarter decreased slightly to 77.3% from 77.5%. Turning next to TRS-RenTelco. Total revenues increased $2.5 million or 9% to $28.9 million on higher rental and sales revenues. Rental revenues increased $1.5 million or 7% and rental margins increased to 46% from 41%.

The net result was an increase in gross profit on rents of $1.5 million or 18% to $10.1 million. Selling and administrative expenses increased 4% to $5.7 million. The higher gross profit on rental and sales revenues partly offset by higher selling and administrative expenses resulted in a 29% increase in operating income to $8.2 million.

Finally, average electronics rental equipment at original costs for the quarter was $260 million, an increase of $11 million. Average utilization for the fourth quarter increased to 63.6% from 62.3%. Turning next to Adler Tank rentals.

Total revenues increased $3.7 million or 17% to $25.3 million on higher rental, rental related services and sales revenues. Rental revenues increased $2.7 million or 18% and rental margins increased to 60% from 53%. The net result was a 33% increase in gross profit on rents to $10.7 million.

Selling and administrative expenses increased 13% to $7.7 million, due to increased salaries and employee benefit costs. The higher gross profit partly offset by higher selling and administrative expenses resulted in an increase in operating income of $1.9 million or 86% to $4.1 million.

Finally, average rental equipment for the quarter was $308 million, an increase of $1 million. Average utilization for the fourth quarter increased to 60.2% from 51.3%. On a consolidated basis, interest expense for the fourth quarter 2017 increased $0.2 million or 7% to $2.9 million.

Higher net average interest rates were partly offset by lower average debt levels. On December 22, 2017 the U.S. Government enacted the Tax Cuts and Jobs Act, which among other things reduces the federal income tax rate from 35% to 21% effective January 1, 2018, and requires mandatory repatriation of foreign earnings.

As a result of this Tax Act, the company re-measured its net deferred tax liabilities and recognized a net benefit of $102.8 million. In addition, a one-time transition income tax estimated at $0.3 million related to the repatriation of foreign earnings was recorded.

The fourth quarter also included a $0.4 million excess tax benefit related to the implementation of ASU 2016-09. Next I would like to review our 2017 full year cash flow highlights. Net cash provided by operating activities was $122.4 million, a decrease of $18.3 million, compared to 2016.

The decrease was primarily attributable to an $11 million income tax refund received in 2016, higher increase in accounts receivable and other balance sheet changes. We invested $94.6 million for rental equipment purchases, compared to $79 million for the same period in 2016.

Property, plant and equipment purchases increased $4.1 million to $14.6 million in 2017. Net borrowings decreased $22.9 million from $326.3 million at the end of 2016 to $303.4 million at the end of 2017. Dividend payments to shareholders were $24.9 million.

At quarter end the company had capacity to borrow an additional $248.5 million under its lines of credit and the ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.7 to 1. Fourth quarter 2017 adjusted EBITDA increased 15% to $49.4 million, compared to the same period in 2016.

Consolidated adjusted EBITDA margin was 40% and 41% in the fourth quarter of 2017 and 2016, respectively. Our definition of adjusted EBIT DA and a reconciliation of adjusted EBITDA to net income are included in our press release for the quarter.

Finally, turning to our 2018 financial outlook, for the full year 2018 we expect rental revenues to increase between 3% and 5% over 2017. Sales revenues to be between flat and 10% lower compared to 2017.

Rental equipment depreciation expense to be between $70 million and $72 million, other direct costs of rental operations primarily for rental equipment maintenance and repair to be between $64 million and $66 million, selling and administrative costs to be between $113 million and $115 million, operating profit to increase between 8% and 12% over 2017, full year interest expense to be approximately $12 million, the effective tax rate to be approximately 27% and lastly the diluted share count to be between 24.4 and 24.6 million shares.

That concludes the prepared remarks on our results. Sandra, you may now open the lines for questions..

[Operator Instructions] Our first question comes from the line of Scott Schneeberger with Oppenheimer. Your line is now open..

Thanks. Good afternoon. Keith and Joe, could you speak, I guess, my first question is on Modular, could you differentiate between classroom and office, and speak to geographies and I guess, third part would be what you see for this year upcoming relative to recent years? Thanks..

Thanks, Scott. This is Joe. I can answer that. We -- let me just say this, as far as geographies go, we’re seeing strength across all of the markets that we’ve served over this past year, except for Taxes. Taxes was a little bit slower than we would have like to see.

We had less classroom orders in Taxes than we had anticipated during the start of the year and that was due to fact that some customers opted to buy which happens from time to time.

But across those markets our education business is relatively good, bond funding and state funding, local funding and tax revenues have been relatively strong, which is supported education growth.

On commercial side, that’s been driven mostly by construction and we’ve seen good commercial activities across our geographies too and so we’re anticipating that should continue into 2018..

Then and just curious, when those customers in Texas opted to buy, hopefully they bought from you?.

No. They did not. We compete with manufacturers who sell direct sometimes and we have a margin that gets added to manufacturer when we sell and sometimes they have the opportunity to sell at lower prices. It’s been a dynamic that’s been there in that market for a long time.

We were well aware of it and they get orders from time to time and we get orders from time to time. The customers really appreciate our service and that makes a difference for some of our clients there..

Understood.

And are you seeing any major trend changes or is it still largely the classroom markets still largely rental market just broadly?.

Oh! Yeah. No. No significant changes in the market at all in terms of the direction the customers go. Keep in mind that some of that depends on the funding they have. If it’s operating funds they will typically go for rentals, if its capital funds that they have they might go for a sale and that’s dictated long before we even get in on the process.

So very -- it is very typical for what we’ve seen in prior years..

Got it. Understood. Thanks. Switching it up, upstream a good quarter for you over in Adler 8% to 10% mix and I know that’s just kind of -- that’s not a manage number.

But just curious strategically how are you approaching upstream? Is that an area where say that continues to come back? Were you continued to fund in few? Are you just going to led be and focus on your other end markets over in Adler? Thanks..

Yeah. Well, we are well-positioned to take advantage of growth in upstream and if that market comes back, when it comes back and it has come back to a certain degree in 2017. We will be there and we are happy to take orders and support them..

Yeah. The only thing, Scott, I would say and we have said in the past. The upstream oil and gas tends to be one of the more competitive segments of the Adler markets that we serve. So pricing can be more challenging and a lot of players in that market..

Okay. Thanks. And just one more and I will pass it along. It sounds like a rental rates are still soft over there as you are alluding to keep.

Just speak please more broadly on rates, if that that sub-segment meaning upstream and then across the other end markets in Adler? And what you’re seeing as far as optimism for turn in timing or if not on the upstream part? Thanks..

Sure. Well, the good thing that we’re seeing in the -- in across all of our markets and with our competitors as well as that utilization is improving.

Our belief is that, as utilization improves, rates should start to improve, it just really hasn’t happened yet and there are certain segments of the market that is more competitive than others, oil and gas is one of them and so we just really haven’t seen of a lot of rate improvement yet.

But hopefully it’s kind of reach the trough here and we should start to see that turnaround at some point. We are not overly optimistic. There will be a big change this year, but we continue to be cautiously optimistic about it..

Okay. Great. Thanks, guys. I will pass it on..

Yeah..

Thank you. And our next question comes from the line of Marc Riddick with Sidoti & Company. Your line is now open. Marc Riddick, if your line is on mute, please unmute it..

Hi. Good afternoon..

Hi, Marc..

Hi, Marc..

I wanted to touch, sorry about that delay there, I wanted to touch on TRS-RenTelco for a moment and you go over the growth that you saw there especially given the -- being a high single-digit growth number and what we saw the prior quarter.

I was wondering if you could sort of are we really looking at the beginnings of 5G to the point that you’re actually able to sort of see it may be on a more tangible basis or maybe if you could just share your thoughts around that and because, clearly, it seems the ones that gets going it’s going to be very beneficial for quite some time?.

Yes. I can answer that. The growth that we saw in Q4 was -- we saw growth in communications, equipment and general purpose equipment.

The communications equipment growth that we saw were some -- or for some 4G build-out projects that that we were able to land and what I might add there is that despite the fact that we are waiting for 5G, there are still a lot of 4G opportunities that have not been completely built-out across the country and so carriers will selectively go and do that.

So what we have not seen at this point and we will not expect to see very much in 2018 is any of the 5G activity. Just hasn’t happened yet. And we are still not sure what the testing requirements are going to be, once they do roll that out..

Okay. And from the standpoint of the willingness then to go ahead and do the backfill if you will on 4G projects.

I mean, do you get the sense that those are things that maybe they just sort of had a pause on or maybe this is their way of taking advantage of lower taxes or is there any sort of general feedback that or sense that you get from them as to what may have kick started those projects? Thank you..

No. Not necessarily, just its lumpy sometimes and there’s -- they are just projects on smaller scales to fill in particular signals that these carriers need to get to their clients and so they’ll execute small projects as needed..

And then, I was wondering if you could share a little bit if you could -- you certainly touched on education and the construction markets on Modular side.

I was wondering if you could touch on maybe what you’re seeing from -- maybe either industrials or some of the consumers/retail environment, whether or not you have seen a similar trend there or if there was any particular callout or target area that gives you any concern at this point, given the numbers that you’ve had?.

Yeah. I mean we are -- there’s nothing of note there to call out, Marc. We see strength across all of the businesses or all of the markets that we serve right now and but I wouldn’t say there’s anything in particular like retail or industrial services or anything that’s sticking out as a -- anything noteworthy..

Okay. And then one last thing for me and I certainly appreciate the inclusion of the dividend increase and certainly that’s a positive.

I was wondering if you could, and forgive me, if I missed this, but did you make mention as far as CapEx for 2018 and what you’re looking at and then maybe what the pace of that maybe?.

Sure. And we don’t have our CapEx plans casting concrete this early in the year. But just to give you a context in 2017 our gross CapEx was about $95 million and that compared with $79 million in 2016. And I think the way I would look at 2018 is we will be in that neighborhood, so somewhere from call it high 70s to mid-90s.

If we look at the mix of business opportunities that we see a number in that range makes sense.

Our biggest area of spend last year was TRS-RenTelco, part of that was net growth in the investment in the equipment pool, part of it was just turnover of equipment in the equipment pool, but that will continue to be an important focus area for us and then some incremental investment in both Mobile Modular and portable storage and selectively in some specialty equipment for Adler, very similar to what we’ve seen over the last 12 months..

Okay. And I guess, maybe one last one for me, if I could. Just want to get your general thoughts on sort of where you are from HR perspective, certainly the -- it’s a fairly tight labor market out there. I was wondering maybe what your thoughts were there and what you’re seeing and what you might anticipate going forward? Thanks..

I’m assuming you’re referencing our ability to hire and staff positions. I mean, it is a tighter market and it is more difficult for certain positions to get them filled. But we have an attractive opportunity here with the company, a great culture and a great career for folk.

So we are able to get folks on Board and don’t anticipate that slowing our progress down in 2018..

Okay. That’s great. Thank you very much..

Yeah..

Thank you. [Operator Instructions] And as it appears to be the final question, I would like to turn the call to Mr. Hanna for any closing remarks..

All right. I would like to thank everyone for joining us on the call today and for your continuing interest in our company. We look forward to speaking with you again in early May to review our first quarter results..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day..