McGrath RentCorp

ladies and gentlemen your conference is scheduled to begin momentarily please continue to stand by and thank you for your patience Thank you. Ladies and gentlemen, thank you for standing by. Welcome to the McGrath Rent Corp First Quarter 2022 Earnings Conference 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 is being recorded today, Thursday, April 28, 2022. Before we begin... Note that the matters the company management will be discussing today are not statements of historical facts or 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 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-Q and other SEC filings. Forward-looking statements are made only as the date of hear of, 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 release on Form 8K and its Form 10Q for the quarter ended March 31, 2022. 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. Please go ahead, sir.

Thank you, Norma. Good afternoon, and thank you, everyone, for joining us on today's call. I am pleased to report that McGrath Rent Corp has begun the year with strong first quarter performance from all of our business units. Company-wide, rental revenues increased an impressive 21%. This strong double-digit performance reflects favorable market conditions, focused execution, and the benefit of the three strategic acquisitions we completed last year. Mobile Modular, our largest business segment, realized a 32% increase in rental revenues. Strong demand in both our commercial and education market segments, as well as the new geographies added as a part of our acquisitions last year, contributed to this robust growth. Our commercial projects served broad-based needs, such as commercial interim offices, as well as offices for municipalities and government agencies. Quite a few of the commercial projects we closed in the first quarter were custom and fit well with our unique production center capabilities that can modify our units to specific customer requirements. Funding for education projects has been generally good, and activity for modernization and growth projects is healthy as districts emerge from COVID-related slowdowns. Booking activity A key measurement of rental activity for the business more than doubled in the first quarter compared to a year ago. Units on rent also improved, utilization at quarter end improved, even while we added new fleet, and pricing improved. All these positive conditions combined create what I call a trifecta for our rental business and are a testament to the effective work being done each and every day by our teams. I would like to acknowledge our teams in the field who have been very busy preparing equipment for rent. I also want to highlight the progress we are making within our modular business segment in our portable storage business. Total revenues improved by 35% for the quarter. We have been increasing pricing steadily over the past several quarters and realizing unit on rent growth in our legacy locations as well as those acquired last year. Order volume for ground level offices at construction sites has been robust as customers appreciate the portability and ease of use of a container-based office at their locations. Our teams are executing very well in a healthy end market environment. In addition, We have stepped up our spending to support the strong rental order activity we are experiencing. As inflation has reached highs not seen in many years, we have made it a priority to bring cost and price increases into as much alignment as possible to mitigate the longer-term effect on our margins. Fortunately, the environment to move up pricing is good, and we are doing so appropriately. Mobile modular sales revenues increased in the quarter and indicate that we are making progress in our strategic focus on our largest division. New equipment sales can be an important and viable option for those who choose not to rent. We are bringing more solutions to our customers that have a need for a modular building. A deeper look at our progress so far this year shows a healthy backlog. with booked new equipment sales projects to deliver this year ahead of where we were at this time last year. TRS Rentalco's rental revenues increase was driven by an increase in our communications rentals where we saw robust demand for fiber testing and higher demand for 5G field installations as activity is increasing to get various carriers more dense coverage nationwide. General-purpose rentals also increased, and confidence from our customers remains healthy. During the quarter, we launched our new TRS Rentoco website, which is e-commerce capable and positions us as a leading resource in the industry. The site has many helpful features, including a total cost of ownership calculator that helps customers make decisions on when to rent or buy equipment. This is a tool that we believe is competitively unique to TRS, and we are excited to promote this for our customers. I would encourage a visit to the website to review some of the features. At Adler, we deliver double-digit rental revenue growth from healthy project activity across all of our geographies. We saw particular strength in the environmental services market vertical in the first quarter, and all verticals were healthy. Feedback from customers is that project activity should remain elevated throughout the year, so we are optimistic about Adler's outlook for 2022. The team is doing great work as they continue to run the business to capture opportunities and maximize cash. Our first quarter results are encouraging, and our teams across the country continue to deliver exceptional service and dedication to fulfill our customers' needs and expectations. As we have shared on prior calls, our strategic priorities are centered on our modular business. We are in the early innings of increasing the value we bring to customers' rental solutions when choosing a modular building. with continuing work to expand our custom modular solutions, site-related services, and mobile modular plus offerings. We are excited to continue investment organically and through acquisitions to deploy growth capital and accelerate our priorities. With an experienced leadership team, track record of execution, strong balance sheet, and healthy free cash flow generation, we are well positioned for long-term growth. Looking ahead, all of our business units are on a positive trajectory. Barring any significant deterioration in the macroeconomic conditions, we are on a good footing as we enter the busiest time of the year. I am very pleased with our start to 2022 as we continue to execute our strategy. Now, Let me turn the call over to Keith.

Thank you, Joe, and good afternoon, everyone. We delivered strong results in the first quarter with positive performance across the board. Our core rental businesses were healthy, along with incremental contributions from the acquisitions of Design Space, Kitchens to Go, and Titan Storage Containers, completed last year as part of our strategic expansion objectives for our modular business. Together, these acquisitions contributed approximately $18.2 million to total revenue, $4.9 million to adjusted EBITDA, and six cents to earnings per diluted share for the quarter. Looking at the overall corporate results for the first quarter, total revenues increased 20 percent to $145.4 million. The revenue increase was primarily from improved rental operations along with higher sales revenues, with Mobile Modular, TRS Rentalco, and Adler Tanks each growing rental revenues year over year, reflecting improved business conditions. First quarter adjusted EBITDA increased 15% to $56.7 million, and consolidated adjusted EBITDA margin was 39%. Breaking the operating performance down by rental division compared to the first quarter of 2021, mobile modular total revenues increased $22 million, or 32%, to 90.6 million. There were increases across all revenue streams, including 32 percent higher rental revenues, 31 percent higher rental-related services revenues, and 36 percent higher sales revenues, with approximately two-thirds of the increase in rental revenues attributed to the design space, kitchens to go, and tightened storage containers acquisitions. while the core organic modular rents increased a healthy 11 percent. Commercial and education rental revenues both increased, with particular strength in commercial. The average monthly rental rate for the quarter was 2.64 percent, which was 8 percent higher than a year ago and reflects improved pricing conditions. Average fleet utilization for the first quarter increased to 77.1 percent from 75.8 percent, even as we added more fleet, reflecting improved market demand conditions. Higher rental revenues were partly offset by 57 percent higher inventory center costs and 35 percent higher depreciation expense. resulting in rental margins of 55% compared to 60% a year ago. The higher inventory center costs reflect the addition of the acquired businesses, higher business activity levels as we prepared equipment to meet the strong bookings levels that Joe mentioned earlier, as well as some inflation pressures from materials and labor costs. As we experienced some rental margin pressure in the quarter, It is important to note that expenses to prepare equipment are realized in the period incurred, but offsetting price increases that are included in rental revenues are realized over the term of the lease. Sales revenues increased $2.8 million to $10.4 million from both increased new and used equipment sales. consistent with our initiatives to capture more new modular equipment sales projects. At TRS Rentalco, total revenues were comparable to the previous year at $33.5 million. Rental revenues for the quarter increased 5%. We saw improved demand for communications equipment rentals, which increased 11%. and continued strength in general purpose rentals, up 2% compared to a year ago. The average monthly rental rate for the quarter was 4.01%, up 1% compared to a year ago. This slightly higher average rental rate, coupled with 4% higher average equipment on rent, reflects good demand and pricing for general purpose and communications equipment rentals. Average utilization for the first quarter was 64.6 percent compared to 68.1 percent a year ago, and rental margins were 41 percent compared to 42 percent a year ago. Sales revenues declined 24 percent year-over-year to $3.9 million, with gross profit decreasing 15 percent to $2.4 million. Our sales of used rental equipment and related gross margins routinely fluctuate and depend on customer requirements and funding, equipment availability, and related mix of equipment sold. At Adler Tank Rentals, total revenues increased 2.6 million, or 15%, to 20.3 million on higher rental, rental-related services, and sales revenues. Rental revenues for the quarter increased 17 percent. Demand improvement was broad-based across our five geographic regions and six industry verticals and reflects further recovery from pandemic lows in Adler's markets. The average monthly rental rate for the quarter was 3.17 percent, compared to 3.21 percent a year earlier, primarily due to mixed changes during the quarter. Average utilization for the first quarter increased to 48.3 percent from 40.3 percent, and rental margins improved to 51 percent compared to 48 percent a year ago. The remainder of my first-quarter comments will be on a total company basis. Selling and administrative expenses increased 6 million, or 18 percent, to 39.1 million. Drivers of the increase were 4.3 million higher employee salaries and benefit costs, primarily due to the addition of design space and kitchens-to-go employees. and $1.4 million higher amortization of intangible assets. Interest expense was $2.8 million, an increase of $1 million, the result of higher average debt levels attributable to our strategic acquisitions last year, partly offset by lower average interest rates. The first quarter provision for income taxes was based on an effective tax rate of 23.5 percent compared to 21.3 percent a year earlier. The increased rate this year was due to lower excess tax benefit from stock compensation and increased business activity levels in higher tax rate states. Given the recent increase in interest rate outlook, we now expect full-year interest expense to be approximately 13 to 14 million. compared to our February estimate of $12.5 to $13 million. Turning to our year-to-date cash flow highlights, net cash provided by operating activities was $51.7 million, an increase of $14.1 million. Rental equipment purchases were $39.4 million. compared to 18 million in the prior year, reflecting increased demand compared to a year ago. Healthy cash generation allowed us to pay 11 million in dividends and reduce debt by 2.5 million. At quarter end, we had net borrowings of 424 million, comprised of 160 million notes outstanding, and $264 million under our credit facility, with capacity to borrow an additional $168 million under our lines of credit. The ratio of funded debt to the last 12 months' actual adjusted EBITDA was 1.67 to 1. Finally, we confirm the financial outlook that was previously provided in February. The positive rental demand trends across each of our business segments continue to be encouraging. For 2022, we currently expect total revenue between $675 and $705 million, adjusted EBITDA between $260 and $275 million, and gross rental equipment capital expenditures between 117 and 127 million. That concludes our prepared remarks. Norma, you may now open the lines for questions.