Keith Pratt - CFO Joe Hanna - President and CEO

Joe Box - KeyBanc Capital Markets Scott Schneeberger - Oppenheimer Marc Riddick - Sidoti & Company

Thank you, Takia. Good afternoon, and thank you, for joining us on today's call.

I'm Joe Hanna, McGrath RentCorp’s President and CEO, and with me is, Keith Pratt, our Executive Vice President and CFO. This is my first earnings call while in the seat for the quarter as CEO, and I am pleased to be here today talking about our results and look forward to the opportunity again in future quarters.

I'm going to give a summary of Q1 and some operational highlights, and then Keith will review the financial results. After that, we will open up the call to questions.

We were pleased with our first quarter performance, as each of our rental businesses achieved higher operating profit and contributed to the company's 11% operating profit increase compared to a year ago. Mobile Modular, TRS-RenTelco and Adler Tank Rentals, each contributed higher operating profit of approximately $0.5 million.

Mobile Modular rental revenues for the quarter increased 8% from a year ago, as fleet utilization, rental rates and equipment on rent, all increased. Rental revenue growth was healthy across education and commercial markets, as well as our portable storage business.

Each of our modular regions, California, Texas, Florida and the Mid-Atlantic achieved growth in rental revenues. We continued to invest in new modular rental equipment, primarily in regions outside California and for our portable storage business, and grew the rental fleet by 5% year-over-year.

As a result of our ROIC work during 2016, we ended this year with a sharpened focus on the market segments, transactions and pricing that should improve long-term Modular performance. While we are still early in this journey, we are encouraged by the progress so far in 2017.

TRS-RenTelco rental revenues for the quarter declined 6%, driven primarily by lower communications test equipment business activity in a continuing highly competitive environment. Communications test equipment rental revenues declined by 15%, but a 3% increase for general-purpose test equipment partially offset the decline.

While average equipment utilization increased, average rental rates declined for the quarter, primarily due to the changes in business activity mix. As communications market demand has declined, we have reduced the amount of communications test equipment we own, while selectively investing in general-purpose test equipment for growth opportunities.

As a result of these actions, we delivered 9% higher first quarter operating profit year-over-year, with 6% less average rental equipment and 14% lower depreciation expense. I am very proud of the job our team has done in managing through the communications market cycle as it continues to trough.

Rental revenues for the quarter at Adler increased 1% from a year ago. Upstream oil and natural gas rental revenue declined from 11% to 6%.

This was more than offset by growth in other markets. Outside of upstream oil and gas, improved market conditions in construction, refinery and industrial services, all contributed to a 7% increase in total rental revenues at Adler.

Average equipment on rent increased to $161 million from $155 million a year ago and average utilization improved, although rental rates continue to be pressured. Market conditions continue to be highly competitive and our visibility is limited as a result of the shorter rental terms of typical Adler transactions.

Our fleet size was unchanged year-over-year and we anticipate very limited new equipment purchases during 2017. During the quarter, we continued our ROIC work to identify initiatives that should improve long-term company performance and we invested selectively in new rental equipment for modular buildings, portable storage units and general-purpose test equipment.

Most importantly, we have increased the focus of our teams on achieving more with the rental equipment assets that we already own and leveraging the market presence that we have established within each of our divisions. In summary, while end market conditions remain challenging for Adler Tank Rentals, and to a lesser extent TRS-RenTelco, we are encouraged by our first quarter results and we will be working hard to build upon this good start to the year.

I'd like to turn the call over to Keith now for his financial review.

Thank you, Joe. For the first quarter of 2017, total revenues increased 1% to $94.8 million from $93.7 million for the same period in 2016.

Net income increased 21% to $8 million from $6.6 million. And earnings per diluted share increased 22% to $0.33 from $0.27.

Reviewing the first quarter results for the company's Mobile Modular division compared to the first quarter of 2016. Total revenues increased $3.2 million, or 7%, to $48.3 million on higher rental, rental-related services and sales revenues.

Rental revenues increased $2.5 million, or 8%, and rental margins increased to 55% from 53%. Depreciation as a percentage of rents was flat at 16% and other direct costs, as a percentage of rents, decreased to 29% from 31%.

The combined result was that gross profit on rents increased $2.2 million, or 13%, to $18.7 million. Sales revenues increased $0.3 million or 12% to $3 million on higher new and used equipment sales.

Selling and administrative expenses increased 11% to $13.8 million, primarily as a result of increased salaries and employee benefit costs and higher allocated corporate expenses. The higher gross profit on rental revenues, partly offset by lower gross profit on rental-related services revenues and higher selling and administrative expenses, resulted in an increase in operating income of $0.5 million, or 6%, to $8.6 million.

Finally average modular rental equipment for the quarter was $745 million, an increase of $35 million. Average fleet utilization for the first quarter increased to 76.8% from 76.1%.

Turning next to the first quarter results for the company's TRS-RenTelco division compared to the first quarter of 2016. Total revenues decreased $2.7 million, or 10%, to $25.3 million due to lower sales, rental and rental-related services revenues.

Rental revenues decreased $1.2 million or 6%. However rental margins increased to 42% from 38% as depreciation as a percentage of rents decreased to 41% from 45% and other direct costs as a percentage of rents was flat at 17%.

The net result was an increase in gross profit on rents of $0.4 million or 5% to $8.3 million. Selling and administrative expenses decreased 2% to $5.7 million.

The higher gross profit on rental revenues and lower selling and administrative expenses were partly offset by lower gross profit on rental-related and sales revenues. The net impact was a 9% increase in operating income to $5.7 million.

Finally average electronics rental equipment at original cost for the quarter was $246 million, a decrease of $15 million. Average utilization for the first quarter increased to 62.2% from 59.6%.

Turning next to the first quarter results for the company's Adler Tanks division compared to the first quarter of 2016. Total revenue of $20.5 million was comparable to the same period in 2016, as higher rental, rental-related services revenues were offset by lower sales revenues.

Rental revenues increased $0.1 million or 1% and rental margins increased to 57% from 54% as depreciation as a percentage of rents decreased to 27% from 28% and other direct costs as a percentage of rents decreased to 16% from 18%. The net result was an increase in gross profit on rents of $0.4 million, or 6%, to $8.2 million.

Selling and administrative expenses were $7.3 million, which was comparable to the same period in 2016. The higher gross profit on rental and rental-related services revenues, together with comparable selling and administrative expenses, resulted in an increase in operating income of $0.6 million, or 36%, to $2.3 million.

Finally average rental equipment for the quarter was $307 million, a decrease of $1 million. Average utilization for the first quarter increased to 52.3% from 50.3%.

On a consolidated basis, interest expense for the first quarter 2017 decreased $0.8 million, or 22%, to $2.8 million from the same period in 2016. As a result of the company’s lower average debt levels and lower average interest rates and the expensing in 2016 of $0.5 million of prepaid debt issuance costs in conjunction with the company's 2016 new line of credit.

The first quarter provision for income taxes was based on an effective tax rate of 39.9% in 2017, compared to 39.5% in 2016. The first quarter effective tax rate included an $18,000 excess tax benefit related to the implementation of ASU 2016-09.

Next I'd like to review our 2017 year-to-date cash flows highlights. Net cash provided by our operating activities was $25.8 million, a decrease of $13.7 million compared to 2016.

The decrease was primarily attributable to $11 million income tax refund received in 2016, and by an increase in prepaid expenses in 2017. We invested $15.9 million for rental equipment purchases compared to $22.8 million for the same period in 2016.

Property, plant and equipment purchases increased $5 million to $5.8 million in 2017. Net borrowings decreased $2.4 million from $326.3 million at the end of 2016 to $323.8 million at the end of the first quarter 2017.

Dividend payments to shareholders were $6.2 million. At quarter end, the company had capacity to borrow an additional $248.1 million under its lines of credit and the ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.98 to 1.

First quarter 2017 adjusted EBITDA increased $0.1 million to $36.3 million, compared to the same period in 2016, with consolidated adjusted EBITDA margin at 38% in 2017 compared with 39% in 2016. Our definition of adjusted EBITDA and a reconciliation of adjusted EBITDA to net income are included in our press release for the quarter.

Turning next to the 2017 financial outlook, the company reconfirms its expectation that total company operating profit will increase 3% to 5% above 2016 results. That concludes the prepared remarks on our quarterly results.

Takia, you may now open the lines for questions.

Good afternoon.

Hi Joe.

So I want to dig into the difference between rental revenues and sales revenues. Obviously the rental component was really good, put up the highest grown rates since 2Q ‘15, that somewhat offset by the sales trends here.

I guess, what I'm looking for is just any color around the guidance that you guys gave before for rental revenues to be up 1% to 3% for the full-year, and then I think it was sales to be flattish year-over-year in ‘17. Does that still stand or you're going to update that?

Yes, maybe I'll just take the comments of financial outlook right upfront, and I think, Joe, when we start the year - and it's only about nine weeks since we gave our full-year outlook - obviously it's our best judgment on what we think the business can accomplish. We've had a really good start to the year.

We are really pleased with that. But if you look across the businesses, there is a few things to note.

First of all, the majority of our earnings occur in the second half of the year with two of our businesses, Adler and TRS, they are relatively short rental term businesses, so we will see a lot of turnover of transactions in the months ahead. And as you also know with the modular business, the education segment is very important to us and really we know a lot more when we are through part of the education season, which is typically in the summer months.

So when we look at the outlook, I want to make a few upfront comments, we are very pleased with these start to the year. We'll simply know a lot more when we are further into the year as to whether the outlook is going to be significantly different from what we had at the start of the year.

It's a little too early in the year to make any adjustments. Rental revenue growth in the first quarter was broadly in line with the percentage range we indicated when we started the year.

Sales were just slightly lower in the first quarter and that was related to the electronics business having lower sales in Q1 compared to the first quarter of the year before. But really the sales portion of the business can move around a lot quarter-to-quarter, and I don't think there is anything to panic about that it was a little bit lower in Q1 again primarily in the electronics business.

So I don't know if that's helpful but that's framing how we've given our outlook and our recommendation and believe that we want to be a little further into the year before we make any changes if that's merited, but we are very pleased with the start to the year.

That is helpful. Thanks Keith.

And then, looks like pretty good execution across the board on your other cost bucket, particularly in your Mobile Modular segment. Can you maybe just put some context around that type of improvement?

Did you have any sort of new initiatives that you are pursuing, were there any one-time items, and maybe just any color, context on how we could see that trend as we move into the seasonal uptick?

Sure. This is Joe.

Yes, we - I believe we've had flat performance there on the other costs like a DCRO [ph]. It's very volume-driven and we've had a pretty consistent throughput in our facilities both on the modular side and electronics over the time period and it's performed as expected.

So we anticipate that we'll finish the year in a pretty good place without other cost bucket, if that makes sense.

It does. Thanks.

And then, just one last one for me. Just looking at TRS, can you maybe go back to the last 4G deployment cycle?

What I'm really trying to understand is what percentage of your TRS fleet was geared to that rollout? Was it incredibly meaningful to the business?

Maybe what you're hearing from your customers relative to 5G and how we should think about the overall electronics, or I guess, the telecommunications component of the electronics business?

Sure. Well, first thing is we had a very nice run with that part of the business several years ago during the 4G deployment.

Right now what we know is that 5G development is in the standard setting stage with the carriers. They have not determined what all of the correct protocols or signal protocols are going to be as they deploy this next technology.

And until they do that, it just won't go to the field. We expect them to get that straightened out over the next year and we expect them for deployment of 5G to take place following that in the not too - further future from then.

And we should anticipate - we are going to anticipate being able to take advantage of that deployment. It depends on how much signal testing that the carriers need to do.

It may be less than what they've done in the past. It depends on the particular carriers but we do anticipate increased revenues from that communication segment as 5G gets deployed.

It's just going to be a year or two from now.

Okay, that's perfect. And I guess, follow-up to that.

Do you think that you have the right equipment right now or would you have to make a significant investment to do that? Is there an obsolescence fact with your existing fleet there?

Yes. Joe, this is Keith.

Just to remind you that the electronics business is a little different from our other businesses in that we routinely cycle equipment through that business. We buy it.

We typically keep it for a few years. We sell it into the used equipment market and where we see new business opportunities, we continue to invest in the latest technology.

So specifically to your question - and I think it's a very impressive accomplishment by our team at TRS - we certainly bought equipment to pursue the business opportunities during the big wireless network build-outs. Most of that equipment has either been sold off or is almost completely fully depreciated in our equipment pool.

So if you look at just the year-over-year comparison - and Joe mentioned some of this in his prepared remarks. In the first quarter of this year, we had a smaller equipment pool.

We had a lower depreciation expense, and despite lower rental revenues we actually had an increase in profit. So I think it speaks to the fact in this business we know we have to manage through cycles, the wireless cycle that we went through a few years back with a very notable and large cycle and we do this as bread-and-butter taking care of business at TRS.

Got it. I’ll leave it at that.

Thanks guys.

Thank you.

Thank you. Good afternoon, guys.

Hi Scott.

There was some good coverage at TRS, so let's go over to Adler. Could you speak to - I thought I heard you say in prepared remarks, one of you, that rental - the winter rental duration was down in Adler.

Could you elaborate what - maybe you can put some quantified magnitude on that and discuss what's driving it?

Sure. Scott, this is Joe.

Actually we didn't comment to that. Our terms have not changed overall, and so that's not really impacting our - that part of the business right now.

I think the comment was that rental terms in Adler are just shorter. And so again the transactions turn over more quickly and it somewhat limits our visibility as to today being able to say what will be on rent at the end of this year.

We just don't have as much visibility for much of that business.

And you're comparing that to historical, it's the visibility has become lesser or is it just the general comment?

I think it’s always been generally that way.

Okay, thanks. I'm just wondering if there is any incremental.

Thanks. And then upstream shrunk as a percent of the business year-over-year but I would guess that there was probably signs of a pickup in this quarter just in terms of a lot more drilling activity.

Could you comment on what you're seeing? Obviously rates are low across the business but - in Adler, but could you just comment specifically on could we see an uptick in upstream?

Was there any indication in the first quarter, or is that just something you’re deemphasizing, so even if so you're not going to try and run with it?

Yes. Scott, this is Joe.

Of course increases in drilling activity and completions are something that we are interested in. And I will tell you that at the wellhead these days, there is a difference in terms of how these guys operate from a few years ago.

They are more efficient. They turn their equipment faster and there are typically less tanks used in these - when they are completing a well at this point.

So the opportunity isn't as big as it used to be. Now having said that, do we want to take advantage of those opportunities?

Absolutely. With increased rig counts as we've seen in the past, could we see improvement in our upstream E&P part of the business?

Yes, we could. Would we like that?

Yes, we would. So that's how I would sum that particular question out.

Does that answer it fine for you?

Yes. That was exactly, so thanks.

I’ll thrown one more in Adler if I could. Could you say - you mentioned visibility is not great.

But if you could just comment a little bit about rental rate and is it across the board softer or is it just maybe still upstream and that's enough to cause your whole segment to be affected? Just what you're seeing in downstream to any business comments that you want to take us a little bit deeper on?

Thank you.

Sure. I can comment on the pricing.

What is happening right now in that business because there is an overhang of equipment, the folks like us and our competitors, we are finding ourselves needing to deploy that equipment into other industry verticals. And because there is an overhang of equipment right now, it's causing rate pressure in virtually all parts of the business.

And so until that turns around, we anticipate that that rate pressure will continue. That downstream part of the business actually for us was up year-over-year and so we are encouraged by those initial results and we anticipate that despite that pricing pressure, there is opportunity to continue to deploy equipment into that non-upstream part of the E&P segment, and so we are actively working on that.

All right, thanks. And then I'm going to shift over to Modular for one.

You mentioned improvements across all geographies. Could you just take us to each one with particular interest on California of our course and maybe comment on education versus construction end markets and just as a sense of what you're seeing in each of these geographies?

Thank you.

Sure. Well, we are seeing strength across all of the regions and geographies, both in education and commercial.

In California in particular, the presence of good bond monies for education in the market right now are presenting opportunities for us for modernization and also for growth projects. So the pipeline there looks very favorable for us.

Due to the general economic conditions in California, construction work is also strong and we are deploying appropriate amounts of equipment into sectors that are outside of education. In moving to Texas, the exploration and production market there as well as all the downstream markets in that state are doing pretty well for us also.

There are a lot of preplanned plant expansion and activity - new plan activity in that whole Texas, Louisiana area and we anticipate good activity from there for the next foreseeable future. Mid-Atlantic, federal bond money is available for education based on school enrollment growth and a fairly good construction markets also up and down the eastern seaboard.

And I would say the same for Florida. Good education, growth based on student population and that's a pretty strong construction market there too.

So we are seeing very nice strength in all the market segments and a lot of the industry verticals that we play in right now.

Great. Thanks for that.

I’ll turn it over.

Hi, good evening.

Hi Marc.

Hi there.

So I wanted to - because you already did a great job of covering some of the things that I was thinking about. I wanted to shift over toward the portable storage side of things and wanted to get, I guess, maybe a similar type of update of what you're seeing there?

We are now up to, I guess, if I remember correctly 9% of revenue and want to get a sense of what type of mix you're seeing and some of the opportunities in the pricing that you're seeing in that area?

Sure, Marc. I can answer that.

We're very pleased with how that business continues to grow. We have not expanded geographically over the last year but have focused primarily on expanding markets that we are already present in.

That's been a real push for us. Rents are up 17% and our EBIT grew very nicely year-over-year.

And so we are very pleased and we are seeing - in Q1, we are up in virtually all of the markets that we are operating in. So we've executed very well there and we are very happy with our progress.

Okay, great. And I wanted to touch base a little bit on - and you’ve touched on the funding in obviously in California.

What the visibility or what’s some of the pipeline that you're expecting there? I was wondering to get a sense of maybe some of the feedback that you may be getting on the local level and maybe get a sense of how much visibility you may have on some of the more local or instances, if you will, that might give you a starting point as to when you would expect to see more activity there?

Marc, just to clarify, when you say at the local level, are you speaking about local bond monies as opposed to at the state level?

No, I'm thinking more as far as the projects themselves. Not just the funding but as far as the timing of the projects, what's more conceptual as opposed to what’s more shovel ready to go?

Sure. Yes.

Well, what we have right now our school districts who are in a very vigorous planning mode right now, there is all this money that’s on the sidelines at this point. The local bond measures that were passed in 2014, that money is in the market.

We have the 2016 local bond measures that's really have not hit the market yet and the state on top 51 has not even sold bonds yet for that initiative and don't plan to until the fall. So that has not stopped school districts at this point.

They are planning and they are working with us right now on future projects that we know are around the corner and they are both modernization and growth-oriented.

Okay, great. So I guess that was where I was going with that.

Is that sort of - it seems so that's generally along the lines of maybe of - is that or maybe I shouldn't go that far but is that generally along the lines of what you would have been expecting to see at this point as far as that planning process kind of where they are in their relation to how they are communicating with you, and is that sort of in line with what you were originally expecting?

Yes, it is actually. Things are progressing just as we had thought.

Okay, great. And just switching gears, you mentioned as far as the - given nice feet on the regional opportunities and some of the funding measures that are there.

Are there sort of the - are there any regions that you would expect to target or focus as far as expanding on the Mobile - on the Modular side that might present opportunities maybe more so on the construction side as opposed to education that might be top of my prioritized from those opportunities?

I'm going to interpret that question as, is there a geographic expansion in the wings. Is that what you're asking?

Right, outside of just the education opportunities, I guess, if there is expansion priorities around maybe that was focused be a little more on the construction side?

So, okay, I understand the question now. We are - the most important thing that we are working right now is our return on invested capital.

And before we are looking at geographic expansion, we are going to get the appropriate returns for the fleet that we already have. And so our focus is on that initiative before we look at moving into another open geography at this point.

Okay, great. And then…

Yes, and just to be clear, Marc, the new capital that we have invested in modulars, most of that is directed in the modular regions outside of California, so primarily Mid-Atlantic, Texas, Florida, as well as some general investment in the portable storage business across multiple geographies.

Okay, great. And if I remember correctly, I guess, my last one is on leverage levels and sort of comfort level around that, if I recall you, ending the quarter at about 2x I guess I think it worse.

Yes, 1.98.

Okay, just want to see if there was an update as to your overall comfort level on leverage levels? Thanks.

Yes, we are very comfortable with leverage and debt levels. If you go back a year ago, we had just completed a very substantial buyback during 2015, our debt and leverage upticked slightly by year-end ‘15.

And then as you saw over the course of 2016, we reduced both total debt and leverage levels over the course of the year. And in a sense that gives us strike harder as we enter 2017 and gives us a lot of flexibility as we operate the business.

Okay, great. Thank you very much.

Thank you.

Thank you. I'd like to thank everyone for joining us on the call today and for your continuing interest in our company.

We would be pleased to welcome you our annual shareholder meeting here in Livermore on June 7. And we look forward to speaking with you again in early August to review our second quarter results.