McGrath RentCorp

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath Rent Corp second quarter 2022 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, please press star 1 on your telephone keypad. This conference call is being recorded today, Thursday, July 28, 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 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 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 8K and its Form 10Q for the quarter ended June 30th, 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. Go ahead, sir.

Thank you, Chelsea. Good afternoon and thank you everyone for joining us on today's call. For our second quarter, we delivered excellent results. Business momentum that we highlighted previously in our first quarter continued in the second quarter and translated into positive performance across our business units. On a company-wide basis, rental revenues improved by 17%, together with strong sales growth of 29%. The focus on our growth strategy and corresponding execution is continuing to show results, and we remain very energized on driving our strategic initiatives to fruition. Market conditions were favorable, and we took advantage of tailwinds to move the business forward for the benefit of all our stakeholders. Turning now to observations specific to each of our business divisions. First, I will highlight our results for Mobile Modular, our largest business segment. Rental revenues grew 22% and reflected strength in our legacy business in the acquisitions we completed in 2021. Units on rent, pricing, and deployment of new fleet all grew in the quarter. Both our commercial business and education business performed well for the quarter. Construction activity was robust, and we continued to serve many diversified end customers. Infrastructure projects serving government needs and large commercial projects continued at healthy levels, including units supplied to applications as diverse as military bases, fire stations, and space exploration companies. Our capabilities to fulfill both rental and sales projects across both commercial and education markets continued to be a strong selling point as we are able to serve any combination of these customers depending on the need and project type. Funding was good and fueled activity levels across all of our geographies. Our education customers continue to proceed with both modernization and growth projects, depending on the geographies and particular school district needs. Student population increases continue to be considerable drivers of business for us, as districts cannot build facilities fast enough in high growth areas. Additionally, student population shifts in states like California drove orders. In any state, there can be growth demand in counties gaining students while also continued modernization demands in districts with no enrollment growth. Turning to our portable storage business, this particular operation within the modular segment delivered a 33% increase in total revenues in the second quarter. Our legacy locations as well as newer branches all continued to see growth as we gained scale and pricing was healthy. We have been selectively adding fleet to organically grow this segment. Our sales teams again executed very well in the second quarter and continue to focus on providing an exceptional experience for our customers with each transaction, creating continued repeat business. At TRS Rentalco, We were pleased by the performance of the business for the second quarter. Rental revenues grew by 7%. We continued to see healthy growth in our general purpose rentals, which generally have longer rental terms. Demand was broad-based and reflected investment in R&D projects by the major technology companies, as well as major companies in aerospace and defense. Our communications rentals also grew nicely and continue to support efforts by the primary telecom carriers to implement 5G. Both field work and infrastructure work, such as fiber optic cable installation, drove demand in the quarter. Our proactive ordering of fleet in the first quarter enabled us to fulfill increased customer requirements during the second quarter, despite some supply chain delays from suppliers. Our highly experienced product management team does an excellent job keeping the fleet technologically up to date and positioned to fulfill customer orders. At Adler Tank Rentals, we realized 18% rental revenue growth for the quarter. Demand was broad-based, both in the vertical markets we serve, such as environmental services, which positively affected all of our geographic locations. Industrial activity continued to be strong, which translated into tank and box needs for maintenance and plant work during the quarter. Our national branch locations allow us to take advantage of projects of all sizes and to be responsive and able to help customers quickly meet their needs. Our three business divisions have been firing on all cylinders year to date, so now As we continue our strategic work to grow our modular business, I would like to remind you about the opportunities we see and where we are focusing our efforts. We continue to gain traction on our solutions-based approach to serving our modular customers. Beginning with the core rental or sale of a modular building or container, we can provide everything the customer needs to use with the building. On the inside, we can provide an array of needs, including desks, chairs, meeting tables, and other ancillary items. We can also provide options for the customer on the outside of the units from electrical connections to ramps, stairs, walkways, overhead covers, and more. If the project is larger, we can provide turnkey assistance and hand the finished project over to the customer when complete. This can include larger installations such as administrative buildings, government buildings, military buildings, and commercial projects for infrastructure like power plants and airport expansions. We are in the early innings of this effort and are very encouraged by the progress we have made so far. I would also like to thank everyone in our company for the enthusiasm they show in the relationships they have with our customers and each other. Without our dedicated and performance-oriented team, we could not deliver the type of results we realized this quarter. Congratulations, everyone, for a job well done. Looking ahead, we have a good foundation to build from, including a strong first half of the year performance runway. Our bookings are healthy, and customer feedback indicates a positive outlook. As such, we are increasing our full year guidance. I am very pleased with our second quarter and first half performance in 2022 as we continue to execute our strategy. Now, let me turn the call over to Keith.

Thank you, Joe, and good afternoon, everyone. As Joe highlighted up front, we delivered excellent performance in the second quarter. with continued positive performance across the board. Our core rental businesses were healthy organically, along with incremental contributions from the acquisitions of design space and tightened storage containers completed last year as part of our strategic expansion objectives for our modular business. Looking at overall corporate results for the second quarter, total revenues increased 21% to $177 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 increased demand and healthy business conditions. Second quarter adjusted EBITDA increased 13%, to 66.3 million and consolidated adjusted EBITDA margin was 37%. Breaking the operating performance down by rental division compared to the second quarter of 2021, mobile modular total revenues increased 26.8 million or 32% to 111.4 million. There were increases across all revenue streams, including 22% higher rental revenues, 31% higher rental-related services revenues, and 68% higher sales revenues. Approximately half of the increase in rental revenues was from the design space and tightened storage containers acquisitions, while the core organic modular rents increased a healthy 11%. Commercial and education revenues both increased, with particular strength in commercial. Sales revenues increased 10 million to 24.8 million from both increased new and used equipment sales, consistent with our initiatives to capture more modular equipment sales projects. The total fleet average monthly rental rate for the quarter was 2.72%, which was 5% higher than a year ago and reflects improved pricing conditions. Average fleet utilization for the quarter increased to 78.1% from 75.5% a year ago, even as we added more fleet, reflecting continued improvement in market demand conditions. Higher rental revenues were partly offset by 51% higher inventory center costs and 10% higher depreciation expense, resulting in rental margins of 51% compared to 57% 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 strong order activity levels, as well as some inflation pressures for 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. At TRS Rentalco, total revenues increased $3.6 million, or 11%, to $37.3 million. We saw increases in both rental and sales revenues, with rental revenues increasing $1.9 million and sales revenues increasing $1.6 million. Rental revenues for the quarter increased 7%, we saw improved demand for communication equipment rentals, which increased 9%, and continued strength in general purpose rentals up 6% compared to a year ago. The average monthly rental rate for the quarter was 4.02%, up 2% compared to a year ago. This 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 second quarter was 64.5%, compared to 67.7% a year ago, resulting in rental margins of 40%, unchanged from the previous year. Sales revenues increased 35% year-over-year to $6.4 million. with gross profit increasing 23% to $3.6 million. At Adler Tank Rentals, total revenues increased $3.7 million, or 19%, to $23.7 million on higher rental and rental-related services revenues. Rental revenues for the quarter increased 18%, We continued to see demand improvement, which 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 rates increased 2% for the quarter to 3.35%, reflecting a generally stable pricing environment. Average utilization for the second quarter increased to 51.6% from 44% and average rental margins improved to 54% compared to 49% a year ago, reflecting improved demand conditions. The remainder of my second quarter comments will be on a total company basis. Selling and administrative expenses increased 4.5 million, or 13%, to 40.8 million. The primary driver of the increase was 3.1 million higher employee salaries and benefit costs, primarily due to the addition of Design Space employees. Interest expense was 3 million, an increase of 0.7 million, the result of higher average debt levels attributable to our strategic acquisitions last year, and an increase in average interest rates. The second quarter provision for income taxes was based on an effective tax rate of 22.8% compared to 24.6% a year earlier. The reduced rate this year was primarily due to higher excess tax benefit from stock compensations. Given the recent increase in interest rate outlook and our higher rental equipment capital spending for growth, which incrementally increases total debt, we now expect full-year interest expense to be approximately $14.5 to $15 million compared to our April estimate of $13 to $14 million. Turning to our year-to-date cash flow highlights, net cash provided by operating activities was $82 million, a decrease of $16 million as higher net income was offset by changes in working capital and deferred income taxes. Rental equipment purchases were $94.8 million compared to $58.9 million in the prior year, reflecting increased demand compared to a year ago. and our corresponding increased investment for organic growth in modular and portable storage fleet. Healthy cash generation allowed us to pay $22.1 million in shareholder dividends. At quarter end, we had net borrowings of $441.5 million, comprised of 160 million notes outstanding and $281.5 million under our credit facility. The ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.69 to one. We were pleased to announce on July 15th that we completed an extension of our credit facility to July of 2027 while also increasing our borrowing capacity from 420 million to 650 million. This increased borrowing capacity makes us well positioned to continue strategic investment in our business. Finally, we are raising the financial outlook that was previously provided in February and confirmed in April. The positive rental and sale demand trends across each of our business segments continue to be encouraging. For the full year, we currently expect total revenue between 695 and 720 million, adjusted EBITDA between 266 and 276 million, and gross rental equipment capital expenditures between 145 and 155 million. That concludes our prepared remarks. Chelsea, you may now open the lines for questions