McGrath RentCorp

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath-Rentcourt First Quarter 2023 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, Thursday, May 4, 2023. 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 2023 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 any Significant risk 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 the press release issued today, the company also filed with the SEC the earnings release on Form 8K and as Form 10Q for the quarter ended March 31, 2023. 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, Travis. Good afternoon, everyone. Thank you for joining us on our call today. We were very pleased with our first quarter, which was unlike any other in our history. I am incredibly proud of all that we accomplished to transform and grow McGrath. We divested Adler, a non-core asset, acquired Vesta Modular, a strategic target, and worked on two tuck-in portable storage companies, Brecke Storage, which we announced on March 3rd, and Dixie temporary storage, which we announced on April 3rd. During the quarter, we also navigated the effects of unusual weather with flawless execution and delivered, on a total company basis from continuing operations, 31% higher total revenues and 23% higher adjusted EBITDA. I will begin my comments with Mobile Modular. we realized rental revenue growth in all of our geographic markets and growth in our market verticals was broad-based. Customers are continuing construction projects at a strong pace and we saw no evidence of a slowdown. On the education side, rental revenues grew 8% and we heard from school districts that modernization projects are being planned as expected and specifically in our growth markets, student population influx is continuing and driving demand on a consistent basis. The portable storage business continued to grow nicely with a 27% increase in rental revenues and the recent tuck-in acquisitions are integrating nicely and as planned. At Mobile Modular for the quarter, our focus on consistent execution enabled us to increase pricing, deploy new equipment, and improve utilization. We had very healthy rental rates on new shipments, which were 25% higher than first quarter 2022. As the fleet cycles, this rate differential works its way into the installed base, increasing rates in total. The overall effect on the bottom line is an improvement in rental operations gross profit, which we achieved in the quarter. Noteworthy during the quarter for mobile modular and portable storage, our quote volumes were greater this quarter than in the same quarter last year, and close ratios have remained consistent. We have not heard of any significant indications of a slowdown in projects planned from customers. At TRS Rentalco, the business had positive rental revenue growth while we felt the effects of the computer semiconductor business slowdown as chip demand has softened worldwide. All our other market verticals were up for the quarter and quote volumes were above 2022. We have taken steps to mitigate the softer demand by emphasizing sales of equipment to improve utilization. We also felt the effects of incoming equipment that, due to lead times, had to be ordered well ahead of projected demand. The secondary sales market was healthy in the quarter, and we have put in place extra incentives for the sales team to move equipment. I am confident in the steps the team is taking. We have managed cycles many times, so we are pulling appropriate levers to normalize our KPIs and to keep the business strong. Turning back now to focus on the larger of the two divisions, we have shared on past calls that our strategic direction is to focus on growth in our modular business. With the completion of the Vesta acquisition, as well as work on the two tuck-ins during the quarter, it should be clear that we are upholding that commitment. The Vesta acquisition provides an even greater platform for growth, giving us access to 13 additional markets, as well as greater density in 15 others. The mix of commercial and education customers fits ideally with our installed base and we can effectively integrate our operations for greater efficiency. We have been very impressed with the Vesta team as they have a depth of experience and customer focus that is a great culture fit with us. Turning to integration efforts, we are on schedule and we've been pleased with the progress made in just a few short weeks since we closed the transactions. The teams have thoroughly planned the integration steps, and we are on a rigorous schedule to ensure that all items are completed. To date, we are progressing as planned. Our first quarter financial results were in line with expectations. We have clear visibility on the most important items to get right, and I feel very confident that Vesta Operations will be an important contributor to McGrath for 2023 and beyond. In our portable storage operations, we have achieved significant organic growth over the last few years. To expand our geographic coverage, we pursued two notable tuck-ins to completion over the past few months. Brecke opens up the Colorado market with a fleet of 2,700 units, which is an excellent jumpstart for us in a vibrant and growing state. Dixie, which we completed just after the quarter end, has a fleet of 800 units that will open up new geography in the South Carolina market, which is another growth area for us. Our pipeline of additional tuck-in acquisitions is robust, and we are continuing to execute our strategy. We see further opportunities to augment our strong organic growth with portable storage tuck-ins, and this can be an effective way to smartly deploy growth capital. On the modular building side, our capabilities tie into some of the large infrastructure projects that are underway in various locations across the U.S. We are well positioned to support these projects in the areas we operate. The acquisitions we completed over the past two years have provided a much larger geographic footprint and access to a greater customer base. Large projects are our specialty. as we have a capable and experienced project management group that has been augmented with the Vesta acquisition. With our large inventory and production centers, unique in the industry, we can customize units to customer specifications, which is work we not only charge for, but also gain additional loyalty from customers as they get units tailored to their needs. This capability has been a hallmark of Mobile Modular for many years. Circling back to my opening statement, we were very pleased with our first quarter results and everything we accomplished in the business. This was a huge collective effort and I want to thank everyone at McGrath who went above and beyond to make this happen. We're off to a strong start for the year and our outlook for the remainder of the year is positive. We are on full throttle execution to grow our modular business and the steps we took in the first quarter clearly demonstrate the organization has the capability to execute M&A, grow organically, and deliver excellent results. We are confident in our outlook for 2023 and have raised guidance based on the performance of the business. So now, I will turn the call over to Keith who will expand on my overall comments with greater financial detail.

Thank you, Joe, and good afternoon, everyone. As Joe highlighted, we delivered strong results in the first quarter with healthy performance across the board. Our mobile modular segment saw notable contributions from the Vesta modular acquisition. with two months of performance included in our first quarter results. Additionally, our core rental businesses, excluding the performance from our recent acquisitions, continued to reflect broad-based organic growth during the quarter. In my financial review today, I'm going to provide highlights from our first quarter results and specifics of our current outlook for full year 2023 performance. Before getting into my detailed comments, as a reminder, on February 1st, we completed the acquisition of Vesta Modular and concurrent divestiture of Adler Tank Rentals. The effects of these transformational transactions were included in the first quarter results. As a result of the divestiture of our Adler Tanks business, The company recognized a net gain on the sale of discontinued operations of $58.9 million during the quarter, which was included in both income from discontinued operations and the company's combined net income for the period. The rest of my comments will be focused on results from continuing operations which excludes the impact from the Adler gain on sale and income from the discontinued Adler operations. Looking at the overall corporate results for the first quarter, total revenues increased 31% to $163.7 million. The revenue increase was from both improved rental operations and sales revenues. with Mobile Modular and TRS Rentalco each growing rental revenues year over year. First quarter adjusted EBITDA increased 23% to $61.8 million, and consolidated adjusted EBITDA margin was 38%. Breaking the results down by rental division operating performance as compared to the first quarter of 2022, Mobile modular had an impressive quarter with adjusted EBITDA increasing 40% to 42.4 million. Total revenues increased 36 million or 40% to 126.7 million. There were increases across all revenue streams, including 32% higher rental revenues, 43% higher rental related services revenues, and 70% higher sales revenues. Vesta contributed $17.6 million total revenue and $6.8 million adjusted EBITDA to the current quarter results. In addition to the contribution from the Vesta acquisition, our rental operations sustained strong organic growth across our commercial, education, and portable storage customer bases. Sales revenues increased 70%, or $7.2 million, to $17.6 million, demonstrating progress with our initiative to grow modular sales projects. Vesta contributed $6 million of the total increase in sales revenues. We continued our disciplined fleet management and achieved average fleet utilization of 79.6%, up from 77.1% a year ago. This utilization achievement was accomplished while also growing our fleet and increasing average rental rates. With our strategic investment focus on modulars further supported by our recent acquisitions, the average fleet size for the quarter increased by 170 million, or 17%. and average equipment on rent increased by 160.5 million, or 21%, as we successfully improved utilization. The average monthly rental rate for the portfolio was 2.89%, which was 9% higher than a year ago and reflects our focus on pricing optimization as well as continued healthy market conditions. Higher rental revenues were partly offset by 29% higher inventory center costs and 21% higher depreciation expense, resulting in rental margins of 56%, up from 55% a year ago. At TRS Rentalco, adjusted EBITDA was $20.6 million, which was comparable to last year. Total revenues increased $2.6 million, or 8%, to $36.1 million. We saw increases in both rental operations and sales revenues. Rental revenues for the quarter increased 2%. We saw continued demand for both general purpose equipment and communications rentals, partly offset by softer demand from the computer semiconductor market. The average monthly rental rate was 4.14%, up 3% compared to a year ago. This higher average rental rate, coupled with comparable average equipment on rent, reflects stable demand and pricing for both general purpose and communications equipment rentals. Average utilization for the first quarter was 59.2% compared to 64.6% a year ago, and rental margins were 40% compared to 41% a year ago. The decline in average utilization during the quarter reflects the softer demand from the computer semiconductor market, as well as extended supply lead times for new equipment. Sales revenues increased 30% year over year to 5.1 million, with gross profit increasing 19% to 2.9 million. The remainder of my comments will be on a total company basis from continuing operations. First quarter selling and administrative expenses increased 24.9 million to 57.5 million The increase included $14.2 million in acquisition and divestiture related transactions costs and $3 million of VESTA expenses. Interest expense was $7.5 million, an increase of $5.2 million as the result of higher average interest rates and $142.1 million higher average debt levels during the quarter. which was primarily the result of the funding of the VESTA and BRECI acquisitions. The fourth quarter provision for income taxes was based on an effective tax rate of 23.8%, compared to 23.5% a year earlier. Turning to our year-to-date cash flow highlights, net cash provided by operating activities was $35.7 million, compared to $51.7 million in the prior year, with transaction expenses accounting for most of the reduction. Rental equipment purchases, excluding equipment received from the Vesta acquisition, were $77.7 million, compared to $39.4 million in the prior year. With healthy modular demand pipelines and high fleet utilization, we have front loaded some of our new rental equipment capital spending for the year. The total cash paid for acquisitions of Vesta and Brecke was 453.6 million, emphasizing our strategic initiatives to grow the modular segment. In addition to significant investments in new fleet and the acquisitions in the quarter, healthy cash generation allowed us to pay 11.4 million in shareholder dividends. At quarter end, we had net borrowings of $658.8 million, comprised of 100 million notes outstanding and $558.8 million under our credit facility, with capacity to borrow an additional $91.2 million under our lines of credit. The ratio of funded debt to the last 12 months' actual adjusted EBITDA was 2.2 to 1. Finally, turning to our updated 2023 financial outlook, for the full year, we are increasing our outlook and currently expect results from continuing operations to be total revenue between 790 and 820 million, adjusted EBITDA between 300 and 315 million, gross rental equipment capital expenditures between 190 and $210 million. Please note that our adjusted EBITDA outlook excludes transaction costs related to the Vesta acquisition and Adler divestiture, and also excludes the income from discontinued operations and the gain on sale from the Adler divestiture. We're very proud of McGrath's strong first quarter performance. As we look ahead for the remainder of the year, we will be working hard to integrate the acquired businesses while staying focused on furthering our modular growth strategies. That concludes our prepared remarks. Travis, you may now open the lines for questions.