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Edited Transcript of MGRC earnings conference call or presentation 30-Jul-19 9:00pm GMT

Q2 2019 McGrath RentCorp Earnings Call

LIVERMORE Aug 28, 2019 (Thomson StreetEvents) -- Edited Transcript of McGrath RentCorp earnings conference call or presentation Tuesday, July 30, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph F. Hanna

McGrath RentCorp - President, CEO & Director

* Keith E. Pratt

McGrath RentCorp - Executive VP & CFO

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Conference Call Participants

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* Marc Frye Riddick

Sidoti & Company, LLC - Business and Consumer Services Analyst

* Samuel England

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Scott Andrew Schneeberger

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Second Quarter 2019 Conference Call. (Operator Instructions) This conference is being recorded today, Tuesday, July 30, 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 involving 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. Go ahead, sir.

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Joseph F. Hanna, McGrath RentCorp - President, CEO & Director [2]

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

We were very pleased with our second quarter as our end markets overall were healthy, and we stuck to a fundamental strategy of improving the core business performance. Company-wide, we realized 14% rental revenue growth and 19% improvement in operating profit. Our most significant drivers for the quarter were both commercial and education rental revenues in Mobile Modular as well as general purpose and communications test equipment rental revenues at TRS. We have now completed the first half of the year with a solid foundation and a good pace heading into the remainder of 2019.

At Mobile Modular, for the quarter, we grew rental revenues 17% and operating income 38%. This year, we had school districts place orders earlier in the season, and overall, our pipeline materialized into rental revenue growth for the quarter. In addition, our commercial rentals were robust and project activity was good. Rental rates grew 8% as a result of healthy end markets and our continued focus on pricing improvement.

Additionally, we added new rental fleet in growth geographies, while increasing utilization division-wide. Sales revenues were lower this quarter due to project timing, but the full year outlook remains healthy.

Turning to Portable Storage. Rental revenues grew 16% on broad-based demand. We are on schedule with the execution of our growth strategy and opened 2 new greenfield operations during the quarter.

At TRS-RenTelco, rental revenues increased 15% and operating income grew 3%. Due to strong rental demand, utilization increased considerably as we filled orders for both general purpose and communications test equipment. Our growth spanned several market and product segments. We sold less equipment this quarter due in part to the utilization increase. We have been effective at ensuring we have the right amount and type of equipment available to meet customer demand and not lose attractive opportunities.

The TRS team has been managing this balance very successfully, and we continue to be pleased with the performance of the division.

At Adler, rental revenues increased in 5 of our 6 vertical market segments. Rental revenues grew 6%, and operating income increased 20%. We continue to implement our strategy of directing our sales force to more profitable transactions, allowing us to improve rental rates year-over-year. Additionally, work to improve transportation and hauling rates resulted in division-wide profitability gains in our rental-related services.

In my shareholder -- in my letter to shareholders this year, I outlined a process of strategic planning that has been a focus area for senior leadership over the past 2 years. In addition to our performance improvement initiatives that we have discussed on prior calls, we've also made nice strides at implementing strategic initiatives in our divisions. These initiatives, some focused on growing our core business and some as adjacent opportunities, are flowing through to our results. It has been an extremely valuable journey to see our teams readily grasp these important growth concepts that are focused around what we do best, business-to-business rentals. We are realizing success in building shareholder value through these efforts, and our attention will remain there.

Our results so far in 2019 are encouraging, and we have increased our financial outlook for the full year. I'm pleased that we are spending time on the most important initiatives to increase long-term earnings responsibly and effectively.

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

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Keith E. Pratt, McGrath RentCorp - Executive VP & CFO [3]

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Thank you, Joe. Reiterating what Joe just said, we were very pleased with the quarter's results.

For the second quarter of 2019, total revenues increased 9% to $127.4 million from $117 million a year ago. The company's 19% operating profit increase for the quarter was driven by a $6.2 million increase in gross profit from rental revenues and a $2.3 million increase in gross profit on rental-related services revenues, which were partly offset by a $2.6 million decrease in gross profit on sales.

Net income increased 22% to $19.5 million from $15.9 million, and earnings per diluted share increased 22% to $0.79 from $0.65.

Now let's break the results down by reviewing rental division performance compared to the second quarter of 2018. Mobile Modular total revenues increased $7.9 million or 13% to $67.6 million on higher rental and rental-related services revenues, partly offset by lower sales revenues.

Rental revenues for the quarter increased 17% from a year ago, primarily driven by an 8% improvement in average rental rates and 8% higher average equipment on rent. Sales revenues decreased $2.2 million or 25% on lower new and used 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, which we refer to as other direct costs of rental operations, increased $1.8 million or 15% to $14.3 million. The increased other direct costs resulted from higher workload volumes to support increased rental demand in our education and commercial markets and higher labor and material costs.

Rental margins increased to 56% from 54%. The combined result of higher rental revenue and higher rental margin was a 22% increase in gross profit on rents.

Average modular rental equipment for the quarter was $787 million, which was an increase of $38 million. Average fleet utilization for the second quarter increased to 79.2% from 77.1%.

TRS-RenTelco total revenues increased $2 million or 6% to $32.3 million on higher rental revenues, partly offset by $1.5 million in lower sales revenues.

Rental revenues for the quarter increased 15%, primarily driven by 15% higher average equipment on rent. Rental margins were comparable at 44%. The combined result was a 16% increase in gross profit on rents.

We saw balanced growth in rental revenues from both general purpose and communications test equipment, and we continued to invest in new rental equipment for growth opportunities.

Average electronics rental equipment for the quarter was $297 million, which was an increase of $23 million. Average utilization for the second quarter increased to 67.2% from 63.2%.

Adler Tank rentals total revenues increased $3.3 million or 14% to $26.3 million on higher rental, rental-related services and sales revenues.

Rental revenues for the quarter increased 6%, primarily driven by 7% higher average rental rates, which were partly offset by 2% lower average equipment on rent. The higher rental rates were a result of better market pricing as well as a favorable product mix. Rental margins decreased to 58% from 60%, and the combined result was a 1% increase in gross profit on rents. Adler's rental revenue growth was broad-based with increases in 5 of our 6 vertical markets.

Now with this division review complete, the remainder of my comments will be on a total company basis. Total company equipment sales revenues decreased to $13.7 million from $19.5 million a year ago. 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.

Selling and administrative expenses increased $1.3 million or 5% to $30.8 million, primarily due to increased salaries and employee benefit costs.

Interest expense for the second quarter 2019 was $3.1 million. Higher net average interest rates were partly offset by lower average debt levels.

The second quarter 2019 provision for income taxes was based on an effective tax rate of 24.9% compared to 24.6% a year earlier.

Next, I would like to review our 2019 year-to-date cash flow highlights. Net cash provided by operating activities was $92 million, an increase of $38.2 million compared to 2018. The increase was primarily attributable to improved income from operations, increased deferred income and changes in accounts payable and accrued liabilities. We invested $90.7 million for rental equipment purchases compared to $58.7 million a year ago, primarily due to higher purchases at Mobile Modular and TRS-RenTelco.

Property, plant and equipment purchases were $4 million compared to $6.4 million a year ago. Dividend payments to shareholders were $17.3 million.

Net borrowings increased $3.3 million from $298.6 million at the end of 2018 to $301.9 million at the end of the second quarter of 2019. At quarter end, the company had capacity to borrow an additional $230.1 million under its lines of credit, and the ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.39:1.

Second quarter 2019 adjusted EBITDA increased 15% to $52.4 million compared to a year ago. And consolidated adjusted EBITDA margin was 41% compared to 39% a year ago. Our definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income are included in our press release for the quarter.

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 total operating profit to increase 9% to 14% above 2018 results as compared to our prior expectation of a 5% to 10% increase.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Scott Schneeberger with Oppenheimer.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [2]

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Certainly a fine-looking quarter. I guess, I'll start, Keith, I'll go to you. The guidance increase, how much of it would you attribute to the first quarter outperformance? How much is it to your outlook for the -- I said, first quarter, I meant first half. And how much would you attribute to an improved outlook for the second half? And then, I guess, either one of you, if you want to address some of the swing factors towards the high end or low end, maybe the top 2 or 3 that you see.

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Keith E. Pratt, McGrath RentCorp - Executive VP & CFO [3]

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Sure, Scott. I'd be happy to try and help you with that question. I think the first comment is, we had a really good first half of 2019, and so that's certainly a big factor when we look at the increase in the outlook for the year. Keep in mind as well, as we look at the balance of the year, keep in mind, the second half of 2018 was very strong for us. So we do have some tougher comps when we look at the remainder of this year. And as we always remind people, when we try to forecast and reassess the outlook, it is challenging with both Adler and TRS where the rental terms are shorter and the business does turn over much more quickly. So those are some of the things to keep in mind. And obviously, seasonality is a factor when we look at the later part of the year, particularly the period between November and end of year at both those businesses. Some of the factors that could put us higher or lower in the updated outlook, first thing that comes to mind are sales revenues, both the size of those sales that we can expect for the second half of the year, the associated gross margin and also specific timing of project completions, exactly when they land and whether they land in 2019 or sometimes we have projects that slide into the following year. Seasonality, I mentioned, at TRS and Adler are important. Obviously, as we get further out later in the year, general economic conditions, customer sentiment and how that impacts customer behavior, those are all things that are very hard to really be precise around and that's why we keep the range fairly wide. We do have some costs to consider as well. If you look at our first half, we've invested fairly heavily in our direct cost of rental operations, particularly in the modular side. So when we get later in the year, we're typically making trade-offs between how much equipment is rental-ready or if we see demand looking strong earlier in the following year, we may continue spending right through year-end. So I know there's a lot of pluses and minuses there. That's one of the reasons we still keep the range fairly wide at this point, but we are really pleased with the first half. And as Joe said, we've entered the second half on a really good footing.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [4]

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Great. Appreciate that, Keith. It sounds like things are very -- going very well. I guess, it is kind of a broad next question. But for each of the 3 primary segments, you touched on it a little bit, but could you talk to rate, more than just overall yield and mix, but how are rates, how is the competitive environment, how is ability to get rate in each of the 3 segments?

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Joseph F. Hanna, McGrath RentCorp - President, CEO & Director [5]

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Scott, this is Joe. Rate and improvement of rate in the businesses across all of them has been a focus area for us. And so we've really been, we believe, able to move the needle on that very effectively. And I'll just talk about Modulars first. We -- and actually for our Portable Storage business. A while back, we installed a pricing engine which has helped us considerably in improving rates and helping the sales force get better at pricing dynamically according to the deal at hand. And so we can look at utilization, we can look at prior rates that we had gotten with that customer and we can price that into the deal, which has helped us. In addition, all the performance improvement work that we've done and everything that we've looked at with our customers and trying to get more profitable transactions from our customers has really helped us improve rate as we've steered the sales force towards those more profitable deals. And so in Modulars, the rates that we've gotten, we're happy with, and we do still see runway for us to continue to improve those rates, particularly as equipment comes off rent and goes back out at market prices.

I would say at TRS, rates have been pretty steady. It is a focus area for us, but as we cycle in more general purpose equipment to the fleet, that has -- those are typically at a little bit lower rates than the communications equipment, and so that mix dynamic is kind of keeping our rates on a more flattish tone. And then at Adler, again, our focus on steering the sales force to our more profitable customers and more profitable deals has enabled us to raise rates, and we've done some things like changed comp plans and things like that to help incent folks to do all the right things to raise rates. So we've been pleased, and we still think that there's more runway out there for us.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [6]

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Appreciate that. Just 2 more questions. I'm going to steer clear, and let someone else tackle Modular. But one in Adler, one in TRS. Let's do TRS first. Just your update on 5G, I saw it was cited in the press release, but would be curious to get the little more comprehensive update.

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Joseph F. Hanna, McGrath RentCorp - President, CEO & Director [7]

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Sure. We're excited at the prospect of 5G. We've talked about it before. And really there's -- this rollout is going to be, we feel, a little different than the 4G rollout, which was really concentrated on the tower and communications with your handset. But with the advent of 5G and many more things connecting to the Internet, there is a lot more work done with chip design and in the labs and things like that, that are more of a general purpose equipment need. So we are excited to see that, that has begun as equipment manufacturers are starting to design these things that are going to be connecting wirelessly that we literally have not had them before. So that's the first thing. We're starting to see that business. And we haven't seen much happen on the towers yet because there hasn't been very much of a rollout yet. And we're not sure how much business we're going to see on the towers, but we are optimistic that some of that may come. It depends on testing requirements that the carriers have and that has yet to be determined. And so we feel overall this is going to be more of a longer-term benefit for us, and it will encompass 2 -- both of our product segments, which is really good.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [8]

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Excellent. And then lastly, the one on Adler is, I think you mentioned 5 of 6 verticals grew. I would just be curious if you could take us around and touch on these each. And then just addressing upstream, which has been volatile in the past, curious to hear what trends you're seeing there and how that's doing?

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Joseph F. Hanna, McGrath RentCorp - President, CEO & Director [9]

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Sure. I'll touch on a couple. I'll really kind of focus on the ones that were strong and it was really for us in the quarter, both upstream and downstream. Those were the highlights for Q2 for us, and it's probably all I'll say at this point.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [10]

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And what was the one that did not grow?

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Keith E. Pratt, McGrath RentCorp - Executive VP & CFO [11]

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Yes. Construction was down slightly. And again, a lot of this can just depend on which projects begin or end in particular periods when you do the year-over-year comparison. But as we noted, 5 of the other segments that we track at a high level all showed grow from the quarter, but construction was down a bit.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [12]

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So it doesn't sound like you're too concerned about it. It was just unique in the quarter. Is that -- or has that been the trend?

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Joseph F. Hanna, McGrath RentCorp - President, CEO & Director [13]

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That's correct. We're not overly concerned.

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Operator [14]

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And our next question comes from the line of Sam England with Berenberg.

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Samuel England, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [15]

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You mentioned healthy order backlogs for the second half. Does that apply to all segments? And are there any markets that are looking particularly strong with any of the segments that led you to say that?

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Joseph F. Hanna, McGrath RentCorp - President, CEO & Director [16]

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Yes. I can answer that. Our education season in the Modular business is typically all booked in the first half of the year. So second half, that's not typically a real strong area for us. But I will say that on the commercial side, it continues to be strong and that ranges anything from commercial construction to petrochemical plant work, all the things that are happening on the Gulf Coast, and those are some strong areas for us. And over at TRS, as we mentioned, communications test equipment business related to 5G is good, and also our general purpose equipment and virtually broad-based demand outlook there has been good too.

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Samuel England, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [17]

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Okay. And then the second one just in Mobile Modular. Obviously, utilization rate is running pretty high despite continued investment in the fleet. Just wondering, is there more on the commercial side or the education side that you've seen that bump up in utilization? And do you have any plans to increase the CapEx setting into second half of this year, given that you're running at close to sort of 80% utilization?

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Joseph F. Hanna, McGrath RentCorp - President, CEO & Director [18]

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Sure. 80% is a great number for us. We'd always like it to be a little bit higher. And I would say that demand has been good on both of those segments, both education and commercial. And we've been buying at a pretty healthy clip. I wouldn't see us accelerating that significantly in the second half of the year. We have our financial hurdle rates that we need to make sure that we hit before we invest in the equipment. We carefully look at that. And we're going to continue to do that, and we'll invest for the right opportunities if they're brought forward for the remainder of the year.

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Keith E. Pratt, McGrath RentCorp - Executive VP & CFO [19]

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And Sam just to build on that. If you look at year-to-date, we've actually spent $44 million on the Modular side of the business on new rental equipment CapEx, and that's up from $22 million a year ago. So we are spending pretty significantly, and we're well positioned. We are obviously really pleased with our team. The fact that they're managing to grow the fleet, increase the utilization and get overall improvement in rental rates is something that we're very proud of. They're just doing a phenomenal job.

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Samuel England, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [20]

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Great. And then just one other one. You talked about opening the greenfield sites this quarter. How are you thinking about opening new sites going forward? Are there still areas you want to add in? Are there any near-term plans for additional sites?

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Joseph F. Hanna, McGrath RentCorp - President, CEO & Director [21]

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Sure. I suppose you're talking mostly about our Portable Storage business. We are -- yes, we are glad that we're opening 2 locations, and as each year passes, we look where the business opportunities are and we evaluate that on a time and annual basis. We're not -- there's a lot of places in the country where we are not present at this point, and we look at those, and if they have a good financial backdrop, there's good economic activity, we're going to continue to expand the business.

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Operator [22]

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And our following question comes from the line of Marc Riddick with Sidoti.

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Marc Frye Riddick, Sidoti & Company, LLC - Business and Consumer Services Analyst [23]

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I was wondering if you can touch a little bit on one of the comments around the education pacing about sort of being earlier than maybe what you've seen historically. I was wondering if you can put a little more backdrop on that as to maybe where that's coming from or why that's taking place currently? And then I have a couple of quick follow-ups.

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Joseph F. Hanna, McGrath RentCorp - President, CEO & Director [24]

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Sure. It's interesting because as each year unfolds, we find school districts sometimes are more organized and prepared earlier in the year to place orders based on where their projects are and sometimes they're not. This year, in particular, was a year where we just had a number of school districts that were ready. I think with the activity in the market and utilization kind of where it is too, I think districts are more aware of availability of classrooms and sometimes they want to get their orders in earlier. And I think all of those things kind of came together this year and influenced their activity. And so we just -- we received orders earlier than usual. Aside from that, nothing particularly outstanding in terms of their behavior, but we're certainly glad to see that because we ship and install, and we can start billing earlier than in other years.

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Marc Frye Riddick, Sidoti & Company, LLC - Business and Consumer Services Analyst [25]

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Okay. That's certainly very helpful. And then wanted to touch -- I think you'd mentioned on -- with Adler having a favorable product mix being helpful as far as rentals. I was wondering if you could delve a little bit into that as well and maybe what some of those driving forces were?

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Keith E. Pratt, McGrath RentCorp - Executive VP & CFO [26]

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Yes. First thing, I would say, our team at Adler have done a really nice job in several areas year-to-date. One is rental rate and then the other thing, if you look at the details, our rental-related services is an area where we've grown the business and expanded our margins. But specifically on the rental rates, if you look at the improvement we had, it was up about 7% in the second quarter compared to a year ago. I'd say roughly 2/3 of that is related to getting better pricing on the tank rentals and the box rentals that we do and then the balance, about remaining 1/3 of the increase is essentially related to mix. And that's partly between the mix of box and tank rentals as well as ancillary products and some rent activity that we have in the overall business mix.

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Marc Frye Riddick, Sidoti & Company, LLC - Business and Consumer Services Analyst [27]

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Okay. Great. And then the last thing for me is, I was just wondering if you could sort of remind us as far as -- because if I remember correctly, there was maybe a little bit of a weather benefit the back half of last year or flooding. I was wondering if you could sort of refresh our memory on that as to sort of what to look for as far as looking at the comparison on the back half.

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Keith E. Pratt, McGrath RentCorp - Executive VP & CFO [28]

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Sure. And as I commented just at the beginning of the call, always tricky to make forecast in the business, particularly at Adler and TRS where we turn over the business quite rapidly, much shorter rental terms with both of those divisions. And I think when you get to year-end, specifically weather-related issues can certainly impact the Adler business in certain parts of the country. If we've got frozen ground or snow, projects just tend to wrap up, and there's a quiet period before projects kick off again in the new year. And so depending on the timing of the weather issues, which parts of the country they hit, just makes it very difficult to know what's going to happen with rental revenues. And even with our electronics business, there's something about year-end where sometimes for customers, if they've completed projects in that period between Thanksgiving and, say, Christmas, sometimes they're reluctant to kick off a new project and begin renting equipment, and they sometimes just wait until the New Year. So again with Adler, it's primarily weather-related. With TRS, it's just the sort of cycling of projects. But in both those businesses, it can be tricky to forecast. What I will say is, in 2018, we had a very healthy finish in both of those divisions at year-end. I mean, they both had very strong rental revenues for more of the fourth quarter than we might expect in an average year. So it does make the comp a little higher for us in the fourth quarter of this year.

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Operator [29]

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Thank you, and I'm showing no further questions at this time. I would now like to turn the call back to Mr. Hanna for closing remarks.

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Joseph F. Hanna, McGrath RentCorp - President, CEO & Director [30]

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I'd 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 late October to review our third quarter 2019 results.

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Operator [31]

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