Mc Grath Rent Corp (MGRC) Q1 2019 Earnings Call Transcript
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Mc Grath Rent Corp (NASDAQ: MGRC)
Q1 2019 Earnings Call
April 30, 2019, 5:00 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp First 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 April 30th, 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 the 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.
Joseph F. Hanna -- President and Chief Executive Officer
Thank you, Liz. Good afternoon and thank you for joining us on today's call. I will start the call with some comments on our first quarter 2019 performance. And then Keith will provide additional detail in his financial review. The good news is, we are off to a strong start for the year and the business is firing on all cylinders. The first quarter sets the pace for the year and can be influenced by a number of factors. Whether it was a challenging factor this year, but despite a colder than usual January, business demand was overall very positive.
Companywide we realized 11% rental revenue growth and 24% improvement in operating profit. Activity for our customer base was healthy from school district bookings, to commercial construction, to electronic testing and communications and general purpose applications. We are very pleased with how the quarter unfolded.
At Mobile Modular for the quarter, we grew rental revenues by 14% and operating income by 26%. We increased spending in our production facilities in part to ready equipment due to school districts placing orders earlier than usual. Some projects moved through state and local approval processes faster than planned in California, Florida and the Mid Atlantic. Accordingly, we put equipment on the line right away and are shipping in billings and rental orders earlier in the season.
Sales bookings for both commercial and education projects also materialized nicely. Our portable storage business continues to gain traction with rental revenue growth of 15% in the first quarter. Our efforts to build out our branch network continue in earnest and we plan to open two new greenfield locations this year. At TRS-RenTelco, we are seeing demand from both general purpose as well as communications customers. Rental revenues increased 10% and operating income grew 6%. Utilization of general purpose equipment is high and we are buying to meet demand with much of the new equipment going on rent right away.
Our fleet management has been effective and we are meeting internal targets to sell equipment out of the inventory at the right times in the technology cycle. There has also been increased activity with 5G as carriers are beginning to install the new technology. 5G will provide a significant increase in network bandwidth and will have a profound effect on how society receives information from the Internet. As a result, we expect it to be a multi-year and multipronged deployment that has begun with R&D work in the labs and is now moving to the field. Our TRS-RenTelco business is well positioned with key supplier relationships to respond to customer demands quickly and effectively and we are monitoring developments closely.
At Adler Tank Rentals, demand growth continued from oil and gas customers in both upstream and downstream markets. Rental revenues grew 7% and operating profit increased 36%. Our strategy of selectively directing our sales force. The more profitable transactions is working. As rates improved this quarter by 6% and utilization at the end of the quarter was over 59%. The best first quarter and the utilization we have realized since 2015. We believe that the industry is on a more healthy footing and we hope for further improvements as the year progresses.
On March 27th, we celebrated the 40th anniversary of McGrath RentCorp. As I think about our 40th anniversary, Company culture jumps to the forefront. It is clear that the environment Bob and Joan McGrath created 40 years ago. When they started McGrath RentCorp. Defined our Company's success in the early days. And is still alive and well today. One of our enduring core values is a relentless commitment to the exceptional customer experiences. Every day and with every interaction. Feedback we receive from ratings and reviews online.
Net Promoter Score surveys and direct customer communications is something we monitor very closely. The feedback consistently shows a team committed to serving the customer. This has been an important aspect of our success and I believe it will continue in the future. Our drive to improve performance continues as we remain focused on generating strong financial returns from our deployed fleet and from new investments. We are glad to see the year has started on a good note and we'll be working hard to deliver on our commitments to customers and shareholders throughout this anniversary year.
So now, let me turn the call over to Keith, who will take you through our financial review.
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
Thank you, Joe. For the first quarter of 2019, total revenues increased 16% to $122 million, from $105.1 million for the same period in 2018. The Company's 24% operating profit increase for the quarter was driven by a $3.8 million increase in gross profit from rental revenues and a $1.9 million increase in gross profit on sales. Net income increased 28% to $18.4 million from $14.5 million and earnings per diluted share increased 27% to $0.75 from $0.59.
Now let's review rental division performance compared to the first quarter of 2018. Mobile Modular total revenues increased $11.2 million or 21% to $65.1 million on higher rental, rental related services and sales revenues. Rental revenues for the quarter increased 14% from a year ago, primarily driven by a 7% improvement in average rental rates and 6% higher average equipment on rent. Sales revenues increased $3.4 million or 74% on a higher 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 cost or other direct costs of rental operations increased $2.3 million or 22% to $12.6 million. The increased other direct costs in 2019 was attributable to higher workload volumes to support earlier rental demand in our education markets and due to higher labor and material costs. Rental margins decreased to 57% from 58%. The combined result of higher rental revenue and lower rental margin with a 13% increase in gross profit on rents. Average modular rental equipment for the quarter was $778 million which was an increase of $32 million. Average fleet utilization for the first quarter increased to 78.8% from 77.3%.
TRS-RenTelco total revenues increased $2.6 million or 9% to $30.7 million on a higher rental and sales revenues. Rental revenues for the quarter increased 10% primarily driven by 10% higher average equipment on rent. Rental margins decreased to 42% from 44%. The combined result was a 6% increase in gross profit on rents. Test equipment rental revenues for general purpose and communications increased by 10% and 8%, respectively. We continued to invest in general purpose test equipment for growth opportunities.
Average electronics rental equipment for the quarter was $284 million, which was an increase of $20 million. Average utilization for the quarter increased to 64.3% from 62.7%. Adler tank rentals total revenues increased $2.3 million or a 11% to $23.4 million on higher rental, rental related services revenues, which were partly offset by lower sales revenues. Rental revenues for the quarter increased 7% primarily driven by 6% higher average rental rates and 1% higher 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 59%. The combined result was a 5% increase in gross profit on rents. Adler's rental revenue growth was broad-based with increases in four of our six vertical markets. Upstream oil and natural gas rental revenues accounted for 12% of total rental revenues, while our average fleet size was up only 1% year-over-year. We continue to focus on better utilization of the existing fleet.
Now, with this review -- division review complete, the remainder of my comments will be on a total Company basis. Total Company equipment sales revenues increased to $16.8 million from $12.1 million a year ago. Timing of sales revenues can fluctuate from quarter-to-quarter and year-to-year depending on customer requirements. At this point, we expect total sales revenues for the first half of 2019 to be comparable to the same period in 2018. Therefore, given the earlier timing of higher first quarter sales revenues, we currently expect lower total sales revenues in the second quarter compared to a year ago.
Selling and administrative expenses increased $1.6 million or 6% to $29.7 million, primarily due to higher salaries and employee benefit costs. Interest expense for the first quarter 2019 was $3.1 million. Higher net average interest rates were partly offset by lower average debt levels. The first quarter 2019 provision for income taxes was based on an effective tax rate of 23.9% which was comparable to the first quarter of 2018.
Next I would like to review our 2019 first quarter cash flow highlights. Net cash provided by our operating activities was $46.5 million, an increase of $15.3 million compared to 2018. The 49% increase was primarily attributable to improved income from operations, deferred income and other balance sheet changes. We invested $34.1 million for rental equipment purchases compared to $24.2 million for the same period in 2018, primarily due to higher purchases of Mobile Modular. Property, plant and equipment purchases were $2.8 million comparable to a year ago. Dividend payments to shareholders were $8.2 million.
Net borrowings decreased $9.1 million from $298.6 million at the end of 2018 to $289.5 million at the end of the first quarter 2019. At quarter end, the Company had capacity to borrow an additional $242.5 million under its lines of credit and the ratio of funded debt to the last 12 months' actual adjusted EBITDA was 1.38 to 1. First quarter 2019 adjusted EBITDA increased 16% to $49.9 million compared to the same period in 2018.
Consolidated adjusted EBITDA margin was 41% in the first quarters of 2019 and 2018. 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. We reconfirm our expectation that total Company operating profit for the full year 2019 will increase between 5% and 10% over 2018 results.
That concludes the prepared remarks on our quarterly results. Liz, you may now open the lines for questions.
Questions and Answers:
Operator
(Operator Instructions) Our first question comes from line of Scott Schneeberger with Oppenheimer. Your line is now open.
Scott Schneeberger -- Oppenheimer and Company -- Analyst
Thank you. Good afternoon. Certainly a strong start to the year. I'm going to start off with a bit of a maintenance question now. Keith you mentioned that the second quarter a little bit lower in equipment sales year-over-year and that's in light of the strong first quarter. I'm just curious how those two are going to net out in the first half? I know it's difficult to predict. And then ramifications for the full year, I didn't see any change to guidance on sales so I assume not, but just how you're thinking about it? Is it going to be a net flat or was there a little bit something particularly large in this first quarter of the year? Thanks.
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
Yeah, Scott. Sure happy to try and add more clarity there. I think the first comment is, we were delighted with first quarter sales, really strong results for the Company overall $17 million up from $12 million a year ago, that's a 39% increase. So very strong. Most of the increase was related to new equipment sales on the modular side of the business. The thing I commented on and we periodically talk about this is the timing of sales is all driven by the customer, it's all related to customer projects, particularly on the modular side.
So at this point, when we look at how the year is playing out, we certainly had a very strong start to the year, when we look today at what we see likely to occur in the second quarter, we don't think it will be as high as the second quarter a year ago. Our expectation is for the full first half, total Company sales will be pretty similar to what they were a year ago.
And then to answer your question about the full year, no change at this point in our outlook we mentioned in February that we think full year sales will be comparable to what they were in 2018, and keep in mind, we had exceptionally strong sales in 2018 and even the prior year 2017. So keeping at that kind of a level for the business is very strong performance. And as Joe mentioned in some of his prepared remarks, overall pipeline of opportunity for sales in 2019 looks very good.
Scott Schneeberger -- Oppenheimer and Company -- Analyst
Excellent. And then thanks, because it -- certainly feels conservative with such a good start. Moving over to rental and modular. A very strong start there. Could you speak to the pricing environment and what you feel is left out there to obtain? Thanks.
Joseph F. Hanna -- President and Chief Executive Officer
Sure. Scott, this is Joe. Pricing environment has been good. We've realized good rate improvement on a year-over-year basis and we're not done, we still have room to be able to raise rates across the Board and in most of the regions that we operate in. So there is still room there.
Scott Schneeberger -- Oppenheimer and Company -- Analyst
Thanks. I'm now going to TRS next. And, Joe you touched on it in your prepared remarks. If 5G obviously is going to be significant and at last call you were talking about more it's in the research room than out in the field, it sounded like your commentary was a little bit more balanced as far as how McGrath is seeing it, this quarter could you elaborate a little bit please?
Joseph F. Hanna -- President and Chief Executive Officer
Sure and let me just say a few things about 5G and hopefully that I'll set the stage for how we're looking at it. I mean we're in the early innings of a significant technology cycle, there's still a lot of things that we need to learn about how this is all going to unfold. Much of the work to-date that we've seen has been work on devices and chip development and that's been in the lab and there hasn't been much happening in the field yet on the towers. This is a real positive for our general purpose business.
Testing in the labs we think we'll have more of an opportunity for 5G than there was 4G. Testing in this case for 5G will go beyond smartphone connections and tower upgrades that we saw with 4G. And they're calling 5G wireless fiber. It's going to 100 times faster than 4G. So there is devices and equipment that hasn't even been invented yet. That will be taken advantage of the Internet of Things and a lot of that's going to take place in the lab. So we see this future unfolding of 5G as a balanced business opportunity for us in the lab and in the field. Hopefully that explains it a little bit more clearly.
Scott Schneeberger -- Oppenheimer and Company -- Analyst
That's good. That's helpful. I'd just ask one more and then I'll turn it over. In adware, it sounds like things are going well there. Utilization flattish year-over-year but good rate I believe I saw. Could you speak to industry capacity conditions, because I think that's an interesting dynamic there. And then also how is your visibility across the end markets you serve. If you wouldn't mind going around the hone a little bit on that? Thank you.
Joseph F. Hanna -- President and Chief Executive Officer
Sure. Industry capacity I mean, we're seeing from our competitors that utilization is improving and ours is improving also. It's not where we want it to be at this point but it is improving and we're very happy about that. So we think the demand picture is healthier than it was a year ago and we're very glad to see that.
From a regional perspective, all five of our regions actually grew on a year-over-year basis so we are very happy about that and four of six of the industry verticals that we serve also were growing. And that was really strength -- the strength that we saw there was in oil and gas and both upstream and downstream. So that's kind of a brief recap for you.
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
And Scott, if I could just add while Adler's utilization on average for the quarter was down very slightly, we did have period and utilization that was up nicely compared to a year ago and higher than the average for the quarter. That was at 59.2%.
Scott Schneeberger -- Oppenheimer and Company -- Analyst
Thanks. And then just following up on that. It seems like you guys are quite disciplined on price and the industry is improving there. So going forward, should we look to anticipate all your -- operating metrics aligning in that segment to the positive or is that not something you'd feel comfortable stating at this point?
Joseph F. Hanna -- President and Chief Executive Officer
Yeah. Scott I think that challenge on this business and it's similar to our electronics business with these shorter transactions, shorter rental term transactions a lot can change every few months. So I think you've got a sense of the disciplines that our teams apply in pursuit of the business. But again, we're going to ride the wave of general overall market conditions and competitor behavior and then try and do well in that context. So if the industry is healthy, if the market demand is there, we'll keep working on the things we've been working on, disciplined pricing looking to utilize more of the equipment we already own.
Scott Schneeberger -- Oppenheimer and Company -- Analyst
All right, great. Thanks, Keith appreciate that.
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
Thanks, Scott.
Operator
Our next question comes from the line of Marc Riddick with Sidoti. Your line is now open.
Marc Riddick -- Sidoti & Company -- Analyst
Hi. Good afternoon.
Joseph F. Hanna -- President and Chief Executive Officer
Hi, Marc.
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
Hi, Marc.
Marc Riddick -- Sidoti & Company -- Analyst
I was wondered -- I was wondering if you could spend a little more time on the comments that you made around education and the order patterns being maybe a little head of what you've seen in the past. And why don't if you just sort of give us a little bit more color there. And maybe from a sense of -- was there anything about locales that were a little ahead of where you've seen in the past and maybe what that might do for visibility and how you then make get the benefit from that?
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
Sure. Well first of all there has been quite a bit of bond money and on a state and local level that's been put into the market and made available for school districts. And so, what we're seeing is that most of -- some of the school districts, some of the customers that we deal with are actually just getting through their projects. And the timing of which they're ready to release those funds can vary. And this particular year some of the districts were ready earlier than in other years.
And so it just depends and sometimes it's earlier or sometimes it's later. Most of the strength we saw was in California but we also saw our Florida school districts and Mid Atlantic as I said in my prepared remarks were also up. So we're very pleased about that and we're happy to put equipment not only on the line earlier, but ship it and bill it earlier too.
Marc Riddick -- Sidoti & Company -- Analyst
Okay. And then I'm curious as too and I'm not -- is there a way for you to tell whether part of that demand strength was related to any prior weather related damage or because it seems as though maybe -- I'm not sure if that was something that might have been beneficial to you. I was wondering if you can sort of touch on that if that's something that you're aware of?
Joseph F. Hanna -- President and Chief Executive Officer
Sure. We did take advantage of some weather related items in the past and that was mostly in Q4. So the impact to our rental revenues were small in that case.
Marc Riddick -- Sidoti & Company -- Analyst
Okay. And then you touched on looking at a couple of new locations, I was wondering if you maybe sort of give us maybe a longer-term view on some of geographic expansion opportunities that you may see or that's -- if that's advanced a little bit over the last couple of quarters you saw?
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
Sure. The locations or the business that actually I mentioned that we'll be opening locations was reportable storage and we analyzed markets on an annual basis. We're always looking for opportunities for expansion. And there we operate in a select number of markets today we see room to be able to expand in the future and we're -- we've got plans to be able to do that, but nothing firm at this point beyond the two that we mentioned this year.
Marc Riddick -- Sidoti & Company -- Analyst
Okay, and forgive me if I missed this before. But the port -- the expansions in portable storage that's in markets that you already have operations in other areas or this is discrete, I'm sorry.
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
These will be Greenfield.
Marc Riddick -- Sidoti & Company -- Analyst
Yeah. That's interesting. Okay. Excellent. Thank you very much.
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
You're welcome.
Operator
Our next question comes from the line of Sam England with Berenberg. Your line is now open.
Samuel England -- Berenberg Capital -- Analyst
Hi guys. Just a couple for me. The first one, it was obviously a strong quarter on the cash side. So just wondering how are you thinking about capital allocation for the rest of this year which divisions do you think you'll look to expand the fleet over the rest of 2019?
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
Yeah, Sam. Strong cash flows definitely a highlight as we started the year and driven by the very strong operating profitability from the business. If you look through the details on the CapEx spend, our CapEx was up, we spent in the first quarter $34 million. That's up from $24 million a year ago. And really reflecting some good opportunities particularly in the modular business for organic investment in the business. That's always the first thing that we look at if market conditions are healthy and we see opportunities that meet our criteria. And that will continue to be a focus for us.
We keep our eye out on the M&A front for any small tuck-ins or opportunities if there's a good piece of business at a fair price that's always on our radar as well. And obviously the dividend we uptick that nicely as we discussed in our call in February. So those remain priorities and we'll continue with that for the rest of the year.
Samuel England -- Berenberg Capital -- Analyst
Right. Thanks. I mean then the next one was just looking at the Mobile Modular business. I was wondering if you could elaborate a bit more on the segments that drove the growth aside from just education which you will see, heard about or any?
Joseph F. Hanna -- President and Chief Executive Officer
Sure on the commercial side of the business, we're seeing growth in a number of different sectors, governments and private industry. There's a lot of infrastructure projects that are taking place. There's private industry that need space and expansion for corporate expansions and new headquarters buildings and things like that. So when we're seeing that growth virtually across the country in all of the regions that we operate in. And also too, I don't want to let out our petrochem business which has been strong also in the Gulf Coast.
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
And Sam I'd also add into the mix as you'll recall we had last year we added the blast resistant module product offering to the modular mix and not -- that's not included in our numbers and gives us a little bit of a lift compared to a year ago.
Samuel England -- Berenberg Capital -- Analyst
Okay, great. I mean then the last one just a small one on TRS. It looks like there was a bit of an uptick obviously on the selling and administrative expense side and you mentioned some higher salaries and benefits, et cetera. Was It just that that drove the increased selling and admin expenses in TRS or also anything else you'd point to?
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
Yeah, up slightly I think as well there can be some corporate allocated expenses that can be a factor as we allocate corporate overhead across the divisions but that combined with this customary health and benefit type cost increases drove the number.
Samuel England -- Berenberg Capital -- Analyst
Okay, great. Thanks, that's all for me.
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
Thank you.
Joseph F. Hanna -- President and Chief Executive Officer
Thank you.
Operator
(Operator Instructions) I'm showing no further questions in queue at this time. I'd now like to turn the call back to Mr. Hanna for closing remarks.
Joseph F. Hanna -- President and Chief Executive Officer
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 June during our annual shareholders meeting in late July to review our second quarter 2019 results.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.
Duration: 33 minutes
Call participants:
Joseph F. Hanna -- President and Chief Executive Officer
Keith E. Pratt -- Executive Vice President and Chief Financial Officer
Scott Schneeberger -- Oppenheimer and Company -- Analyst
Marc Riddick -- Sidoti & Company -- Analyst
Samuel England -- Berenberg Capital -- Analyst
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