McGrath RentCorp

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath Rent Corp fourth quarter 2021 earnings call. At this time, all conference participants are in a listen-only mode. Later, we will conduct a question and answer session. At that time, if you have a question, you will need to press the star key followed by the one key on your telephone. This conference call is being recorded today, Wednesday, February 23rd, 2022. 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 2022 financial outlook, as well as the 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 press release issued today, the company also filed with the SEC the earnings released on Form 8K and its Form 10K for the year ended December 31, 2021. 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.

Thank you, Peter. Good afternoon, and thank you, everyone, for joining us on today's call. I will start the call with some overall comments on our fourth quarter and full year 2021 performance, as well as our look ahead. Keith will provide additional detail in his financial review and outlook comments. Our fourth quarter rental revenue performance was impressive with a 20% company-wide increase. Key to our success was the dedication and hard work of all of our team members as we delivered exceptional service to our customers across the country. In our modular business, we saw the benefit from the two acquisitions we completed earlier in the year as they added very nicely to our total rental revenue growth of 29% for the division. At TRS Rentalco and Adler Tanks, rental revenues grew 4% and 19% respectively. Overall, Our total company rental revenue growth reflected improving market conditions and customer activity as projects continued at a brisk pace throughout the quarter. This strong top line growth drove a 12% increase in EBITDA. Taking a deeper look at our largest business, Mobile Modular, two of the metrics we track closely that indicate the health of the business are pricing and overall units on rent. Both of these metrics were up in the fourth quarter. Average rental rate pricing was up 8%, and units on rent were up notably by 21%. Complementing our core modular business strength, I should highlight our portable storage performance for the quarter that delivered a 36% increase in rental revenues, reflecting robust demand and strength in execution as we continue to expand in the markets where we operate. In addition to higher rental revenues, modular equipment sales revenues increased 8.2 million for the quarter. The benefits of modular construction have gained momentum, and customers are now thinking about a modular solution as a primary alternative to conventional construction from day one of a project. We have positioned ourselves to take full advantage of that trend, and we have built an internal team to serve this exciting and growing sector of the market. 2021 was a significant year for the company, and I am proud of all that we accomplished. It was a year of strategic growth investments with particular emphasis on the modular acquisitions. We expanded our geographic coverage, added new customers, and welcomed new team members. I am extremely grateful to our team members who worked tirelessly throughout the year to serve our customers and integrate our new acquisitions. We saw gradually improving market conditions despite some continuing COVID disruptions, supply chain challenges, and cost inflation pressures as headwinds. The business demonstrated continued resiliency by generating $136 million in free cash flow for the year, representing a 7% increase over 2020. Turning to 2022, I'm pleased to note that this year marks our 31st consecutive year of dividend growth as we announced today a 5% dividend increase. McGrath Rent Corp has the rare distinction of being one of around 130 publicly listed companies currently known as dividend champions, all of whom have increased their dividends more than 25 consecutive years. We are especially proud that the performance of the business has allowed us to consistently return value to shareholders in this manner. Looking ahead now, I'll take the next few minutes to summarize our assessment of the demand outlook for each of McGrath's businesses. As I mentioned earlier, Mobile Modular is our largest and most strategic business. We've been working hard to provide value as a solutions provider not just an equipment provider. We start by providing a high-quality modular building for rent or sale that can be customized to specific requirements. We then provide furniture and other products inside the building through Mobile Modular Plus to allow for comfortable and effective use of the building by the occupants. However, we do not stop there. We also provide services outside the building such as site preparation, connections to electrical and plumbing, overhead protections, and other exterior enhancements. And with Kitchens2Go, we further broaden the offerings we bring to our customers. While we are still in the early innings, we are now serving the customer with more of their needs when procuring a modular solution, and we have been steadily developing these capabilities receiving very good reception from the market on the commercial side of the modular business construction starts are robust and the entrance of federal infrastructure funding is likely to positively affect our opportunities more forcefully in the future creating demand across all of our geographies mobile modular is well positioned to capture larger infrastructure related projects and due to our extensive in-house capabilities to customize our units, allowing us to tailor the building to specific customer requirements. These units typically have longer rental terms and favorable pricing. On the education side of the modular business, demand is driven by two factors. One is modernization of older classrooms, and the other is through both student population growth and relocation. Both of these factors are still very much in play in our markets, and the outlook for 2022 is solid, given that funding conditions are good. As a result, we anticipate growth in our classroom rentals during the year. Our start to the year has been very encouraging, with combined commercial and education modular building rental bookings in January more than doubling over the same period last year. At TRS Rentalco, testing demand for general-purpose equipment has been healthy, especially serving the aerospace and defense, semiconductor, and 5G market segments. As I mentioned on previous earning calls, 5G product development is a longer-term positive driver for us as our customers have many testing requirements. We continue to manage our general-purpose fleet to have the right equipment available and ready for immediate customer needs. I might add that we will be releasing a brand new TRS Rintelco website shortly with many enhanced features for our customers as well as e-commerce capabilities. At Adler, business momentum is considerably healthier than we were in 2022 at the same time last year. which was also reflected in our strong fourth quarter rental revenues. We anticipate that especially in the environmental, industrial, and construction segments of the business should prove to be areas of growth as the economy continues to improve. With better economic conditions and a focus on optimizing business performance with our current asset base, We are confident in our continuing ability to maximize cash generation in this business. We will continue to be disciplined with our investments in new rental fleet. Our team is doing great work as they continue to run the business with the highest standards of service for our customers. Our strategic priorities for the next few years are centered on our modular business. we see significant opportunities to further expand our geographic coverage and to broaden the value we bring to customers rental solutions, site-related services, and new modular equipment sales. As we demonstrated in 2021, we expect to utilize a disciplined combination of organic investments and acquisitions to deploy growth capital and accelerate these priorities. With an experienced leadership team, track record of execution, strong balance sheet, and healthy free cash flow generation, we are well positioned for growth. I feel good about our start to the year and our opportunities for the long term. Now, let me turn the call over to Keith.

Thank you, Joe, and good afternoon, everyone. As Joe described, we delivered strong performance from our core rental businesses in the quarter compared to the fourth quarter of 2020. In my financial review today, I will provide highlights from our fourth quarter results and specifics of our outlook for full year 2022 performance. Before getting into details, as a reminder, our fourth quarter 2021 results included two acquisitions, Kitchens to Go, which closed on April 1st, and Design Space, which closed on May 17th. Together, these acquisitions contributed approximately $16.9 million to total revenue, $6.1 million to adjusted EBITDA, and 13 cents to earnings per diluted share for the quarter. The Titan container acquisition was completed on December 31st and had no impact on fourth quarter operating results. So now onto the details. Looking at the overall corporate results for the fourth quarter, total revenues increased 18% to $175.9 million. The revenue increase was from both improved rental operations and sales revenues, with Mobile Modular, TRS Rentalco, and Adler Tanks each growing rental revenues year over year, reflecting generally improved business conditions. Fourth quarter adjusted EBITDA increased 12% to $73 million, and consolidated adjusted EBITDA margin was 41%. Breaking the results down by rental division operating performance compared to the fourth quarter of 2020, mobile modular total revenues increased 23.6 million, or 31%, to 99.7 million. The primary drivers were 13.9 million higher rental revenues and 8.2 million higher sales revenues. with approximately three-quarters of the increase in rental revenues attributed to design space and kitchens to go. The average monthly rental rate for the quarter was 2.7, which was 8 percent higher than a year ago, reflecting stable and improving pricing conditions, as well as some mixed impact from the acquisitions. Average fleet utilization for the quarter increased to 76.9% from 76.2%, reflecting generally improved market demand conditions. Higher rental revenues were partly offset by 38% higher inventory center costs and 32% higher depreciation expense, resulting in rental margins of 63% compared to 65% a year ago. The higher inventory center costs reflect the addition of the acquired businesses, higher business activity levels, and some inflationary pressures for materials and labor costs. Sales revenues increased 8.2 million to 20.2 million from both increased new and used equipment sales. At TRS Rentalco, total revenues were comparable to the previous year at 37.7 million. Rental revenues for the quarter increased 4 percent. We saw continued strength in general purpose test equipment rentals, which grew 5 percent, with communications equipment rentals increasing 2 percent compared to a year ago. The average monthly rental rate for the quarter was 4.05 percent, down 1 percent compared to a year ago. This slightly 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 remain stable. Average utilization for the quarter was 65.9% compared to 68.4% a year ago, and rental margins were 42% compared to 44% a year ago. Sales revenues declined 13% year-over-year to $7.6 million, with gross profit decreasing 7% to $3.8 million. Gross margins were 51% compared to 47% a year ago. Sales and related gross margins can fluctuate depending on customer requirements, related mix of equipment sold, equipment availability, and funding. At Adler Tank Rentals, total revenues increased 3.4 million or 18% to 22.3 million on higher rental, rental-related services, and sales revenues. Rental revenues for the quarter increased 19 percent. Demand improvement was broad-based, with growth in all five of our geographic regions and all six of our industry verticals. The average monthly rental rate for the quarter was 3.3 percent, up 3 percent compared to a year ago with improved pricing for both tanks and boxes during the quarter. Average utilization for the quarter increased to 50.1% from 42.6%, and rental margins improved to 52% compared to 51% a year ago. The remainder of my fourth quarter comments will be on a total company basis. Selling and administrative expenses increased 9.7 million, or 33%, to 39.3 million. Five million of the increase was a result of the acquisitions, which included 1.7 million higher amortization of intangible assets. The remainder of the increase reflected a return to more normalized SG&A spending compared to a year ago. Interest expense was $3.2 million, an increase of $1.3 million as the result of higher average debt levels, partly offset by lower average interest rates. The fourth quarter provision for income taxes was based on an effective tax rate of 28.3% compared to 20.7% a year earlier. The increased rate this year was due to increased business activity levels in higher tax rate states. For the full year, the effective tax rate was 26.3 percent compared to 22.8 percent in 2020. For 2022, we expect SG&A expenses of approximately 163 to 166 million, interest expense of approximately 12.5 to 13 million, and an effective tax rate of between 26 and 27 percent. Turning to our year-to-date cash flow highlights, net cash provided by operating activities was 195.7 million, an increase of 15.2 million. We paid $292.2 million for the acquisition of substantially all of the assets of the Design Space, Kitchens to Go, and Titan Container businesses. Rental equipment purchases were $114.1 million, compared to $86.3 million in the prior year. This excludes the $135.4 million estimated fair value of the acquired design space, kitchens to go, and tightened container rental assets. Healthy cash generation allowed us to pay $42.2 million in dividends. Total net borrowings on banked lines of credit and private placement notes increased $203.7 million. At quarter end, we had net borrowings of $426.5 million, comprised of 160 million notes outstanding and $266.5 million under our credit facility, with capacity to borrow an additional $165.5 million under our lines of credit. The ratio of funded debt to the last 12 months' actual adjusted EBITDA was 1.73 Finally, updating our financial outlook, the positive rental demand trends across each of our business segments are encouraging. For 2022, we currently expect total revenue between $675 and $705 million, compared to $616.8 million in 2021. Adjusted EBITDA between $260 and $275 million compared to $246.6 million in 2021. And gross rental equipment capital expenditures between $117 and $127 million compared to $114.1 million in 2021. That concludes our prepared remarks. Peter, you may now open the lines for questions.