Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Third Quarter 2019 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] This conference is being recorded today, Tuesday, October 29, 2019.

Before we begin, note that the matters that 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 2019 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 Form 10-Q for the quarter. 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. Please go ahead, sir..

Thank you, Chris. Good afternoon and thank you for joining us on today's call. I will start the call with some comments on our third quarter 2019 performance, and then Keith will provide additional detail in his financial review.

The third quarter typically marks a very busy time of year for us as customers finish summer projects, especially modular education projects prior to the start of the school year. This year, we had an active quarter, and we were pleased with our 11% increase in rental revenues and 30% increase in operating profit.

Overall, our diversified portfolio serving a wide range of customers across multiple markets benefited from favorable economic tailwinds, and our teams did a great job executing. At Mobile Modular, rental revenues grew 13% and operating income grew 16%.

Activity for modular classrooms was healthy as funding both at the state and local levels in prior quarters had made their way into the growth and modernization projects at school districts. Additionally, commercial rentals were up as customers increased their needs for temporary space, both in public and private sectors.

We continue to grow the business responsibly and were able to improve utilization and increase rates during the quarter, while placing 7% more equipment on rent. This accomplishment reflects a focus team that is committed to our performance improvement initiatives and has consistently delivered results.

Enviroplex, our permanent modular classroom manufacturer, had an exceptional quarter, contributing to Company-wide sales increase of 41%. We delivered record revenue with a committed and dedicated team that performed very well.

Permanent modular classrooms help school districts provide a quality education environment for children more economically than conventional construction. Enviroplex business levels were supported by a favorable funding environment in California through state and local bonds.

Typically, a majority of project completions occur in the third quarter of the year. We have shared in previous calls our focus on strategic initiatives and smart expansion of the business. During the quarter, we closed an acquisition of a portable storage operator in the Tulsa and Oklahoma City markets for $7.8 million.

These markets were on our near-term shortlist of new geographies to enter, and this acquisition provides a nice jumpstart with a broad base of customers and relatively new fleet, both big positives. Previous to this acquisition, portable storage also expanded into two other geographies this year as Greenfield operations.

We are pleased to see this business expanding in both new and legacy markets. At TRS-RenTelco, rental revenue increased 21% and operating income grew by 32%. Both the general purpose product segment and the communications product segments grew rental revenues very nicely and activity was broad based.

Testing needs were robust in the lab for R&D work as we continue to see favorable demand picture developing around 5G. As we have shared in previous quarters, the many benefits that 5G offers will enable many more products to connect wirelessly to the network. Development of those products is taking place now.

The team at TRS managed customer needs and the rental fleet skillfully, and we were very pleased with their performance in the quarter. At Adler Tank Rentals, we saw softening market conditions, which contributed to an 8% reduction in rental revenues and 7% decrease in operating income compared to a year ago.

Typically, the third quarter is a strong quarter, and we simply did not see the lift on a quarter-over-quarter basis that we expected. Visibility is more challenging in this business as we have shared in the past.

The weaker oil and gas industry not only affects direct activity and upstream operations, but also indirectly affects other end-markets, and we saw this play out in the quarter. Considering the price of oil today, we view this softness as part of the normal cyclicality of the oil and gas industry.

We did a nice job increasing rates and delivering additional rental related services revenues in a more challenging environment. To finish up, both our third quarter and our year-to-date performance reflects our ability to deliver impressive results with the portfolio. It all takes hard work.

And our team members around the business have done a remarkable job providing the exceptional experiences that customers associate with McGrath RentCorp. We remain positive about our overall momentum entering the fourth quarter. Despite some economic uncertainty, many fundamentals remain healthy and our activity levels are good.

We will maintain our focus as we bring 2019 to a successful close. So, now, let me turn the call over to Keith, who will take you through our financial review..

Thank you, Joe. Picking up on what Joe just said, we were very pleased with the quarter's results. For the third quarter of 2019, total revenues increased 21% to $173.6 million, from $143.1 million a year ago.

The Company's 30% operating profit increase for the quarter was driven by a $4.6 million increase in gross profit from rental revenues, a $2.5 million increase in gross profit on rental related service revenues, and a $7.1 million increase in gross profit on sales.

Net income increased 31% to $32.5 million from $24.8 million, and earnings per diluted share also increased 31% to $1.32 from a $1.01. Now, I'll break the results down by reviewing rental division performance compared to the third quarter of 2018.

Mobile Modular total revenues increased $11.4 million or 15% to $86.3 million, on higher rental and rental related services revenues, partly offset by lower sales revenues. Rental revenues for the quarter increased 13% from a year ago, which was primarily driven by a 7% improvement in average rental rates and 7% higher average equipment on rent.

Sales revenues decreased $0.5 million or 3% on lower new equipment sales. Rental revenue growth continued to be healthy across our commercial and education markets, as well as in our portable storage business. Equipment preparation costs, included in other direct costs of rental operations increased $2.1 million or 20% to $12.8 million.

The increased costs resulted from higher workload volumes to support increased rental demand in our education and commercial markets, higher labor and material costs, and higher cost of re-rent equipment. Rental margins were comparable at 61%.

The combined result of higher rental revenue and comparable rental margin was a 12% increase in gross profit on rents. Average modular rental equipment for the quarter was $803 million, which was an increase of $43 million. Average fleet utilization for the third quarter increased to 79.4% from 78.6%.

At TRS-RenTelco, total revenues increased $6 million or 21% to $34.1 million on higher rental and sales revenues. Rental revenues for the quarter increased 21%, primarily driven by higher average equipment on rent and stable rental rates. Rental margins increased to 45% from 42%. The combined result was a 28% increase in gross profit on rents.

We saw balanced growth in rental revenues from both general purpose and communications test equipment, and we continue to invest in new rental equipment for growth opportunities. Average electronics rental equipment for the quarter was $314 million, which was an increase of $34 million.

Average utilization for the quarter increased to 66.9% from 61.9%. At Adler Tank Rentals, total revenues decreased $1.2 million or 5% to $24.8 million on the lower rental and sales revenues, which was partly offset by higher rental related services.

Rental revenues for the quarter decreased 8%, primarily from 12% lower average equipment on rent that was partly offset by 4% higher average monthly rental rates. The rental revenue decrease was due to software demand across five of our six end markets compared to last year’s strong third quarter.

Rental margins decrease to 60% from 61%, the combined result was a 10% decrease in gross profit on rents. Now, with this division review complete, the remainder of my comments will be on a total Company basis. Total Company equipment sales revenues increased to $50.9 million from $36.1 million a year ago.

The majority of this increase was due to higher sales revenues at Enviroplex, reflecting strong demand for education projects in California. In addition, a favorable mix of projects at Enviroplex increased sales margins for the quarter.

The timing of sales revenues can fluctuate from quarter-to-quarter and year-to-year, depending on customer requirements, availability of used equipment for sale and other factors.

With a high percentage of expected new sales projects already completed by the end of the third quarter, we currently expect sales revenues in the fourth quarter to be lower than a year ago, and total full-year sales to be higher than 2018.

Selling and administrative expenses increased $3.3 million or 12% to $31.5 million, primarily due to increased salaries and employee benefit costs. Interest expense for the third quarter 2019 was $3.2 million, an increase of 1%. Higher net average interest rates were partly offset by lower average debt levels.

The third quarter provision for income taxes was based on an effective tax rate of 25.3% compared to 23.9% year earlier. Next, I would like to review our 2019 year-to-date cash flow highlights. Net cash provided by operating activities was $136.9 million, an increase of $40.1 million compared to 2018.

The increase was primarily attributable to improved income from operations, increased accounts payable and accrued liabilities and other balance sheet changes. We invested $127.2 million for rental equipment purchases, compared to $84.7 million for the same period in 2018, mostly on higher purchases at Mobile Modular and TRS-RenTelco.

Property, plant and equipment purchases were $6.8 million, compared to $12.5 million for the same period a year ago. Dividend payments to shareholders were $26.4 million. Net borrowings increased $2.9 million from $298.6 million at the end of 2018 to $301.5 million at the end of the third quarter of 2019.

At quarter-end, Company had capacity to borrow an additional $230.5 million under its lines of credit. And the ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.31 to 1. Third quarter 2019 adjusted EBITDA increased 24% to $70.8 million compared to a year ago.

And consolidated adjusted EBITDA margin was 41% compared to 40% 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 2019 financial outlook.

Based upon the Company's year-to-date results and current outlook for the remainder of the year, we are raising our financial outlook and expect 2019 full-year operating profit to increase 15% to 19%, above 2018 results, as compared to our prior expectation of a 9% to 14% increase. That concludes the prepared remarks on our quarterly results.

Chris, you may now open the lines for questions..

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

Thanks very much. Good afternoon. I want to ask about the acquisition first. And, it's not huge, but -- in Tulsa, Oklahoma City.

I'm just curious, is that a new market for you, does that establish an adjacency, just curious sort of footprint of your portable storage containers?.

Sure, Scott. I can answer that. Yes, it's a new market for us. And as I said in my comments, it was one that was on a shortlist of potential expansion markets for us in the next year or two.

And the fact that we found this operator there who had this well-established business, young fleet, good broad base of customers, we thought it was a great option for us to get in the market with the jumpstart. And so, we moved it up in the list. .

Thanks, Joe. How is your footprint with -- I guess, I'll ask it relative to your broader modular footprint with regard to portable storage containers. And a few years ago, you were somewhat on pause with growth spending. Obviously, we've had some tailwinds of weight and that's picked up.

Just curious about the strategy, particularly in the Mobile Modular segment, going forward? I guess, the two-parter there. Thanks..

Yes, sure. Well, we initially started the business, our strategy was to open in legacy markets that the modular business was operating in. And we followed that for first number of years, and then, decided to expand the business outside of markets that we serve with Mobile Modular, and we will continue to do that.

And so, this -- the actual two Greenfields that we went in this year, in Nashville and Lake Charles, Louisiana, as well as now this acquisition are really kind of markets that are not really served by the modular business in any big capacity. And so, we're definitely interested in expanding outside of that, and we'll continue to do so.

We did take a pause a few years ago to just take a breadth and allow some of the investments that we made to start really producing for us. And so, we could do that. This depends on how well the business grows and how well our profitability grows as we open these new locations..

And so, Joe, is the penetration 100% more than 100% or still a good bit less of portable overlapping with modular?.

I would say it's a pretty much 100%. Yes..

Okay. Fair enough. I just wanted to be clear on that. Okay. Just watching on to one of the things you mentioned. Obviously, there has been solid state and local funding now, and you're clearly reaping the benefit from that.

I just want to talk about if we have a slowdown in the economy, how that may impact? I'm thinking more on the educational spending, I think we can all draw parallels to what would happen with other end market, most equivalent market, but most specifically on education in modular?.

Well, here is -- it’s a good question, and here is my thoughts on it. I believe as long as there is the capacity in local economies and state economies to sell bonds, bond passages that have taken place in prior years will continue to do so.

And so, I think, there is, I wouldn’t say immunity, but I would say there is less impact of construction cycles on the school construction market, just because of that stability in the funding.

And I'll add that we got some good news recently in California through the passage -- or not the passage but the approval of AB 48, which is a $15 billion state bond to make it onto the California, March 2020 ballot. And that's received very good support from state legislators as well as the governor, who's going to support it and campaign for it.

So, this is another really substantial facilities bond that will give us a nice runway for a number of years. And so, we view this as just a pretty stable funding environment that should continue for us..

Thanks. One more for me. A little more detail on the 5G update, it looks like TRS-RenTelco is moving along quite nicely.

Just if you could take us a few layers deep on what you're seeing into 5G mix?.

So, what we said before and what holds true for this particular quarter is that we're seeing demand in both general purpose test equipment and communications test equipment, and both of those product segments are supporting 5G work.

General purpose is work that’s being done in the labs as automotive manufacturers and medical devices and industrial manufacturers are developing products for -- to connect via 5G to the network. And so, we're seeing that work take place.

And then, we're also seeing work on the communication side through the backhaul, fiber to the towers, pipe expansion for bandwidth improvements all that requires testing. And so, we're seeing that demand also. There's also actually some 4G buildout that's continuing. And so there's some tower work that's being done there.

And that all is filtered into good rental demand for us..

Thank you. And our next question comes from the line of Sam England with Berenberg. Your line is open..

Just a couple for me.

And the first one was just could you give a little bit more color on the strength in the Enviroplex business in the quarter? And just as we look ahead to 2022, should we assume that business reset back to the level it's been at over the last couple of years, was there anything more sustainable in the growth?.

This is Keith. And I would really piggyback on some of Joe's comments about the funding environment for education. And we've seen that as a key driver of demand for the Enviroplex business. And again, just as a reminder that business is a manufacturer of education product for the California market.

So, the business had a very strong third quarter, $28 million in revenue compared to $14 million in the third quarter of last year. Even already, the year-to-date revenue from that part of the business is at $32 million, and that's essentially an all-time high for the business for -- on a full year basis, even at the end of September.

So, it's been a very strong year-to-date number and great outlook for the year obviously. And couple of comments. One is just to clarify, that business is very seasonal, most of the businesses is in the third quarter, some in the fourth. For us, this year, the fourth quarter will not be as strong as the fourth quarter of a year ago.

But on a full-year basis, still up nicely. Looking ahead to next year, I would say at a very high level, the demand of environment looks very good.

It all gets into the details when we come to next year of which projects actually get completed and executed, what kind of mix they have, what kind of margin profile, and it's too far out to really make a determination there.

But, we did benefit from really three things this year, very good demand environment, our team won a very attractive mix of projects, and they did excellent job of executing and getting them done. So, next year, we'll have to just see again, what the land [ph] looks like. We think it's going to be strong based on what we know today.

It will be -- to be determined what mix of projects will actually land during 2020. And then, we always have the job of executing well and capitalizing on whatever opportunity we win..

Great, thanks. Then, the next one was around the Adler business. You said in your prepared comments, there were some other weak markets outside oil and gas that were in part driven by the weakness in the oil and gas market.

Could you just touch where the areas of weakness were, and what do you think those will persist over the next few quarters or whether there's any that are more sort of temporary in nature?.

Sure. Sam, I can provide some power on that. And what I tried to allude to in my comments was the following. When overall, the demand for oil has just not been as robust as it has been in the past due to general economic and global growth slowdown, and what happens is that, we can feel that in several different ways.

If there's less drilling activity and explorations than you're going to see that upstream -- there's going to be some upstream weakness, and then that can kind of flow into some other product segments for us. As an example, an environmental services company would be called into cleaning out a tank at a refinery or something.

And so, if demand is weaker, they're just not going to do those projects, they’ll push them. And so that weakness then, we kind of feel in those other product segments, and that's really kind of how the quarter played out for us.

Does that make sense?.

Yes. That's great. Thanks. And then, the last question was just around CapEx plans. You’ve obviously had a couple of quarters where you've invested reasonably heavily in the fleet, particularly on the modular side.

What are the sort of CapEx plans for Q4 and early 2020?.

Yes. Sam, we've spent heavily this year really driven by great demand opportunity in the electronics business, TRS-RenTelco, similarly very good demand for the modular business. We spent $127 million year-to-date this year compared to $85 million in the first nine months last year. I think that will taper off a bit in Q4.

On a full-year basis, I think the number will be somewhere in the neighborhood of $150 million. It's too early to tell for next year.

We'll be doing our planning work later this year, we'll look across all the opportunities that we can identify and run them through, our normal process of both financial returns that we would expect and really an assessment of the competitive environment and the macro environment before we decide what to fund.

And then, the other comment I would make is, every year as we get into funding the business, we're really not committed too far in advance. In most instances, we have an ability to throttle up or down, based on our comfort and what we're seeing in the environment..

Thank you. And our last question comes from the line of Marc Riddick with Sidoti..

Hi. Good evening. I wanted to talk a little bit about portable storage.

And I wonder if you could give a little detail around the -- excuse me, sorry about that, around Mobile Modular, and if you could give a little detail around geographic footprint performance and what you were seeing if it was kind of across the spot [ph] as far as the performance around the country?.

Sure, Marc. We -- let's characterize it. I'll just give you each of the regions essentially. And what I can say is that California, the Mid-Atlantic and Florida have actually been good performers for us this year. I’d say, our weak area in the modular business was Texas over this past year. And a lot of that had to do with returns.

There have been -- we have put some fairly large projects out in prior years and we got some fairly heavy returns over the course of the last year. And we just have to get that product back out on rent. But from a demand perspective, it's actually been pretty good. And that covers both the commercial and the education demand in each of those markets. .

And Marc, I would just clarify all those regions that is California, Texas, Florida and the Mid-Atlantic, all experienced growth in rental revenues on a year-over-year basis. And so, when we talked about relative strength Texas, on a percentage basis was not up as much, but it did show an increase..

Okay, great. And then, I wanted to shift back to the Enviroplex -- for a moment.

I was wondering if there was a -- how we should think about the order patterns that you're seeing there, is it sort of coming from multiple orders, or is it sort of maybe two or three big orders? How should we think about how that sort of played out in the quarter and how you look at that going forward for future projects?.

Yes. It's a project basis -- or a project business. So, we receive the opportunity to bid on projects. If we win them, we then need to execute, as Joe mentioned in his remarks, with the education work that we do through Enviroplex, it tends to be heavily weighted to the summer months for completing those projects and getting them installed.

And then, probably the next busiest period is in the fourth quarter and some of those projects get installed during the winter break at schools. So, timing is always an issue in any particular year as to when projects are actually completed and recognized by us..

Yes. I would say, Marc, I can add to that a little bit. I would say that project ranges that we get in that business could be anything from a $400,000 project to a several million dollar project. And depending on where they fall in during the year then indicates that you can get some lumpiness there.

This particular third quarter, we had three large projects land in the quarter that we had to close out prior to the start of the school year, and that's what contributed to an exceptional quarter for Enviroplex..

Okay, great.

And then, I wanted to shift over to the sort of, if you could give a bit of an update on acquisition pipeline and what you're looking at and maybe what those valuations may look, given the completion of a targeted market, maybe what -- if you have some updated thoughts on that and what we might see going forward there?.

Yes, Marc. I mean, we have a very active process to look at different opportunities. And we're choosy and we will not overpay. And so, it just depends on what that opportunity is and how it pencils out the kind of financial returns that we're going to get from it as to whether we would do it or not..

As with all M&A, Marc, and I would echo Joe's comments, we're always monitoring the marketplace engaging in opportunities. The tricky things in any business to get right are that the potential acquisition makes financial sense. You're looking for a fair price for a good business.

In our rental business, the quality of fleet is always very important to us, particularly for longer lived assets where we need to be able to make our return over future years. And then obviously, with any business, we are bringing on team members, cultural fit is another important factor.

And those are all things we and I'm sure most companies like us have to look at very hard. I think, if you look at our success over the last few years, it's been heavily driven by organic investment in the business.

It lets us pace our new activities appropriate to the market opportunities that we see, it lets us control the quality of our equipment and in some instances lets us look for some feature differentiation.

So, we've been very pleased with the way we've been operating, our tilt has been towards organic, and we've added to our fleet, we've improved utilization, we've done a lot of good work with pricing, and it's a it's a recipe that's worked pretty well for us so far..

Yes. And I might add too, it does not bring goodwill onto the balance sheet too when we do an acquisition. It's our new product that we want specified for our fleet. And so, it's very attractive for us to do organic growth..

Thank you. And ladies and gentlemen, this appears to be the last question. I will now turn the call back to Mr. Hanna for any further remarks..

All right. Thank you. Thank you, Chris. And I'd like to thank everyone for joining us on the call today for your continuing interest in our Company. We look forward to speaking with you again in late February 2020 to review our fourth quarter 2019 results..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..