McGrath RentCorp
Q4 2020 Earnings Call Transcript

Published: 23 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Fourth Quarter 2020 Conference Call. 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.

[Joe Hanna:]

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.

[Keith Pratt:]

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.

[Operator:]

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

[Sam England:]

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?

[Joe Hanna:]

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:]

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.

[Joe Hanna:]

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:]

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 Pratt:]

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.

[Joe Hanna:]

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.

[Operator:]

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

[Marc Riddick:]

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 Pratt:]

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:]

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.

[Joe Hanna:]

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:]

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?

[Joe Hanna:]

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:]

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?

[Joe Hanna:]

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 often 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 Pratt:]

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.

[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.

[Joe Hanna:]

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:]

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