McGrath RentCorp

Until that time, spare lines will be placed on hold until the conference begins. Again, ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, spare lines will be placed on hold until the conference begins. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Ladies and gentlemen, thank you for standing by. Welcome to the McGrath-Randcorp second quarter 2021 conference call. At this time, all conference participants are in a listen-only mode. Later, we will conduct a question and answer session. At the time, if you have a question, you will need to press star 1 key followed by the number 1 on your telephone keypad. This conference call is being recorded today, Tuesday, August 3, 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 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. In addition to risks associated with the ongoing COVID-19 pandemic and related economic dynamics, 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 10Q and other SEC filings. Forward-looking statements are made only as of the date hereof, except as otherwise required by law. We assume the obligation to update any forward-looking statements. In addition to the press release issued today, the company also filled with the SEC, the earning release on Form 8K, and it's Form 10Q for the quarter ended June 30, 2021. Speaking today will be Joe Hane, Chief Executive Officer, and Keith Pratt, Chief Financial Officer. I will now turn the call over to Mr. Hane. Go ahead, sir.

Thank you, Franzi. Good afternoon, and thank you, everyone, for joining us on today's call. I will start the call with some comments on our second quarter 2021 performance, as well as our look ahead. Keith will provide additional detail in his financial review and outlook comments. Our second quarter was a very busy one for us. In addition to managing the business during our seasonally busier time of order bookings and preparation for summer deliveries, we completed two acquisitions and began our integration processes for both. Our core rental business is running well with a 10% company-wide rental revenue increase year over year. Mobile modular rental revenues grew by 14% with about half of that growth coming from the acquisitions of design space and kitchens to go. Portable storage rental revenues were up 23%. Rental revenue also grew at TRS and Adler. I'm pleased to report that all of our business units are contributing to year-over-year expansion in rental growth for the corporation. So let's take a look at each of our businesses and our progress with the acquisitions. At Mobile Modular, we saw across-the-board strength in our commercial rental business. Projects were broad-based across many different market verticals, such as government, private business, general construction, and infrastructure, to name a few. In terms of commercial business pipeline, our quote volume for the quarter was strong and the project inquiries were quality in nature. Our education business realized some benefit from the flow of federal stimulus money into states and subsequently into education funding. In California, we saw some districts allot funds for classrooms to accommodate additional administrative staff offices, and teaching space. Nationwide, work to modernize facilities as well as accommodate student population growth continued. Funding has been generally available to continue projects. At TRS Rentalco, our 7% rental revenue growth was driven by broad-based demand from the 5G, aerospace and defense, and semiconductor segments. Testing work in the R&D labs was healthy for the quarter. In our communication segment, network improvements continued in the field. Contractors required test equipment with more demand for wired infrastructure expansion, but less for wireless segment activity. At Adler, our teams achieved a 4% revenue increase driven by increases in our environmental services and industrial services segments. Four of our five Adler geographic regions realized rental revenue growth. Some plant and refinery projects that had been previously delayed were turned on in the general economic recovery during the quarter. Partially offsetting that was less pipeline work than the prior years as projects concluded and new ones did not replace them. We continue to manage the business to maximize cash flow. Now that I've reviewed rental revenues for our businesses, I would like to address another important revenue stream, and that is new equipment sales at Mobile Modular, EnviroPlex, Design Space, and Kitchens To Go. New building sales are often a viable option for customers seeking modular solutions, and it is a service we are enthusiastic to provide. As the economy recovers, from the pandemic and construction activity increases, we are seeing some effect of supply chain disruptions and cost escalations, and this has impacted our sales for the second quarter and our new equipment sales outlook for the rest of the year. Some projects are being reduced in scope, put on a slower timeline, and a few have been put on hold. We believe this is a reaction to the economy operating at a higher pace and believe the disruptions to be temporary in nature. The demand is there, and so is robust funding, so project adjustments and timing accommodations are being made, but the overall sentiment is still very positive. Our pipelines and backlogs are healthy, and we are looking forward to continued activity as more and more customers value the typically lower cost and reduced timelines compared to conventional construction. integration of design space and kitchens to go are progressing nicely and as planned we acquired both companies to expand our geographic footprint and to provide a more complete solution to our customers with an expanded product line these acquisitions represent long-term investments and we're excited at the opportunities we have ahead of us the teams have been working exceptionally hard and making the integration process advanced swiftly so we can realize benefits and and it is showing in our progress. We are already seeing positive synergies from combining resources. Foremost is the cultural fit, which is critical for us to be able to implement operational improvements as we share better ways to serve our customers. We are sharing leads between each of the businesses and have already uncovered opportunities and have closed orders. The Design Space team has access to our California mobile modular fleet which should help improve utilization and our ability to provide the best building solution for our customers. Additionally, we are already handling leads for classroom rentals in our new design space locations, so this opens up additional revenue opportunities for us. Looking forward, the second half of the year is typically the stronger half. At Mobile Modular, our commercial business is healthy and quote activity is strong entering the third quarter. In particular, commercial activity has been a big positive driver of growth in our portable storage business, and we expect that to continue. Sentiment with our school districts is positive, and we are well positioned to accommodate third quarter orders based on final student head counts once classes resume. At TRS, 5G opportunities are expected to continue both in the R&D labs and in the field. Expansion of bandwidth to accommodate more data traffic is a constant test equipment driver. At Adler, we have weathered some turbulence and believe we are coming out the other side as sentiment has improved and we are feeling more optimistic about opportunities across the business. Like many companies today, we are managing through supply chain issues, increased costs for materials, and some wage pressures. We are carefully watching these trends and are adjusting pricing when possible using sophisticated tools to help in the process. Before I hand the call over to Keith for his remarks, I'd like to take a moment to sincerely thank our teams for their hard work and long hours spent making our integration of design space and kitchens to go move along as planned, while also delivering a solid quarter of organic growth. The combined efforts of all of our teams, new and old, and some signs of economic recovery have given us the confidence to increase our overall financial outlook for the year. With that, I'm going to turn the call over to Keith, who will take you through our financial review.

Thank you, Joe. As Joe described, compared to the second quarter of 2020, we had solid performance from our core rental businesses. and we were encouraged by continued improving business demand trends over the course of the quarter. For today's review, I will provide highlights from our second quarter results, a discussion of the impact from our acquisitions, and our outlook for full-year performance. When comparing this year to last year, keep in mind that despite the initial impact from the pandemic, we had a very strong second quarter of 2020, helped by strong sales revenues, a modest decline in rental revenues, and low inventory center and SG&A costs as the pandemic abruptly reduced activity levels. Our second quarter results include two acquisitions. On April 1st, we closed Kitchens to Go for $18.3 million. On May 17th, we closed the design space acquisition, which was an all-cash transaction with a purchase price of $266.5 million. So, our second quarter results included a full quarter of kitchens to go and just six weeks of design space revenues, but included a significant portion of the related transaction and initial integration costs. Together, These acquisitions contributed $5.5 million total revenue, a $2.6 million increase to adjusted EBITDA, and a $0.02 reduction to earnings per share for the quarter. Looking at the overall corporate results for the second quarter of 2021, total revenues increased 6 percent to $146.4 million. The majority of the revenue increase was for rental and rental-related services at Mobile Modular, TRS Rentalco, and Adler, all of which I will discuss further in the segment reviews. Each of our rental segments grew rental revenues year over year and sequentially, reflecting the generally improved business conditions Joe described earlier. The company's 3.1 million operating profit decline for the quarter was primarily the result of 5.7 million increased selling and administrative expenses and 5.1 million increased inventory center costs, identified as direct costs of rental operations other on our income statement. The higher SG&A costs were primarily the result of our two acquisitions. while the higher infantry center costs were the result of higher business activity levels, the addition of the acquired businesses, and impacts from cost inflation pressures for materials and labor. The second quarter adjusted EBITDA increased 1 percent to 58.5 million compared to a year ago, and consolidated adjusted EBITDA margin was 40 percent, compared to 42 percent a year ago. Now I will break the results down by reviewing rental division operating results and performance compared to the second quarter of 2020. Mobile modular total revenues increased 7.8 million, or 10 percent, to 84.6 million. The primary driver was 6.6 million higher rental revenues with approximately $4 million of the increase attributed to rental revenues earned during the quarter from new design space and kitchens-to-go customers. The average monthly rental rate for the quarter was 2.59 percent, which was 7 percent higher than a year ago, primarily due to mixed changes, including the impact of the acquisitions. Overall, market pricing conditions were stable. Average fleet utilization for the second quarter decreased to 75.5 percent from 77.7 percent, reflecting the softer market demand conditions from the effects of the pandemic during most of the last 12 months. Higher rental revenues partly offset by 28 percent higher inventory center costs and 23 percent higher depreciation expense resulted in rental margins of 57 percent compared to 61 percent a year ago. As mentioned earlier, the higher infantry center costs reflect higher business activity levels, the addition of the acquired businesses, and some impact from cost inflation pressures for materials and labor. Sales revenues decreased 0.5 million to 14.8 million primarily due to lower new equipment sales. At TRS Rentalco, total revenues increased 0.7 million, or 2%, to 33.8 million. On higher rental revenues, partly offset by lower sales revenues. Rental revenues for the quarter increased 7%. We saw continued strength in general purpose test equipment rentals, which grew 9%. Communications equipment rentals were flat compared to a year ago and continued to be impacted by less fieldwork on communications infrastructure, partly as a result of delays caused by the pandemic. The average monthly rental rate for the quarter was 3.93%, down 2% compared to a year ago. This lower average rental rate reflects a continued mixed shift towards more general-purpose equipment rentals that tend to have longer-term transactions and longer asset lives compared to communications. Overall, market pricing conditions continue to be stable. Average utilization for the second quarter increased to 67.7% from 63.9% a year ago. and rental margins were 40% compared to 41% a year ago. Sales revenues declined 20% year-over-year to $4.8 million, with gross profit increasing 3% due to higher gross margins on sale of 62%. At Adler Tank Rentals, total revenues increased 1.3 million, or 7%, to $20 million on higher rental, rental-related services, and sales revenues. Rental revenues for the quarter increased 4%, reflecting improved demand in multiple geographies and end markets compared to a year ago. The average monthly rental rate for the quarter was 3.27%, up 5% compared to a year ago, primarily due to mixed changes during the quarter. Overall market pricing conditions continued to be competitive. Average utilization for the first quarter decreased slightly to 44%, from 44.3%, and rental margins were 49% compared to 51% a year ago. Moving on, the remainder of my second quarter comments will be on a total company basis. Selling and administrative expenses increased 5.7 million, or 19 percent, to 36.3 million, primarily a result of the acquisitions. Employee salaries and benefit costs increased by 3 million, mostly due to increased headcount from the addition of design space and kitchens to go employees. The acquisitions also resulted in 1.7 million higher amortization of intangible assets and 0.9 million of transaction costs. Interest expense was 2.3 million, an increase of 3 percent, as a result of higher average debt levels, partly offset by lower average interest rates. The second quarter provision for income taxes was based on an effective tax rate of 24.6 percent compared to 26.4 percent a year earlier. The lower rate this year was in part due to increased excess tax benefits from stock-based compensation. For full year 2021, we currently expect an effective tax rate of between 25 percent and 26 percent. Next, I'd like to turn to our year-to-date cash flow highlights. Net cash provided by operating activities was 98 million, an increase of 0.5 million. We paid 284.3 million for the acquisition of substantially all of the assets of the design space and kitchens-to-go businesses. Rental equipment purchases were 58.9 million. compared to $57.5 million last year. This excludes the $186.6 million estimated fair value of Design Space and Kitchen to Go rental assets acquired this year. Healthy cash generation allowed us to pay $21.1 million in dividends. Total borrowings on bank lines of credit and private placement notes increased 250 million. At quarter end, we had net borrowings of 473 million, comprised of 160 million notes outstanding and 313 million under our credit facility, with capacity to borrow an additional 119 million under our lines of credit. The ratio of funded debt to the last 12 months' actual adjusted EBITDA was 2.01 to 1. Finally, turning to our financial outlook, the recent positive rental demand trends across each of our business segments are encouraging challenges for the remainder of the year. will include the fact that supply chain delays, labor shortages, and higher material costs are starting to extend project timelines and causing some new modular equipment sales to push out to later in the year or into next year, which could impact new sales for our modular business, including EnviroPlex and our acquisitions. We currently expect total revenue between $610 and $640 million. which is up from our previous outlook of 570 to 610 million. Adjusted EBITDA between 245 and 260 million, which is up from 232 to 247 million previously. Gross rental equipment capital expenditures between 100 and 120 million, which is up from 90 to 110 million previously. While the potential for pandemic-related disruption remains, we are encouraged by the overall improving business activity levels we have recently seen. That concludes our prepared remarks. Francie, you may now open the lines for questions.