McGrath RentCorp

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath Rent Corp second 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 touchtone phone. Conference call is being recorded today, Thursday, July 27th, 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 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 the press release issued today, the company also filed with the SEC the earnings release on Form 8-K and its Form 10-Q for the quarter ended June 30, 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, Mike. Good afternoon, everyone. Thank you for joining us on our call today. I am very pleased to report impressive results for our second quarter. For the period, our rental revenues increased 24%, sales revenues increased 33%, and EBITDA increased 33%. This performance is the result of our diligent efforts to transform the company into a more streamlined and focused business. I can say that these efforts are paying off as we delivered another consecutive quarter of strong results for our shareholders. Reflecting another strong quarter and confidence in our business, we are increasing our outlook and currently expect 2023 revenues and adjusted EBITDA to be in the range of $805 to $830 million and $306 to $320 million, respectively. We have been very busy implementing our strategy. As a reminder, on February 1st of this year, we completed the divestiture of Adler and acquisition of Vesta Modular. The strategic shift in our business mix can be seen in our second quarter results. as our modular business accounted for 81% of McGrath's total revenues and 72% of total adjusted EBITDA. After the Adler sale is completed, we provided customary transition support to the new owner, and those support activities will be completed by the end of July. Our teams have taken on extra work to handle those tasks while they run the normal business operations and also integrate Vesta. I am very grateful for their hard work and selfless effort. Our integration of Vesta is progressing as planned. We have been reviewing in detail new opportunities to function more efficiently together. Our commitment to deliver 8 million EBITDA in synergies as a result of our investment in this acquisition is realistic and we are focused on making that happen. Strategically, the acquisition of Vesta is a terrific addition to McGrath as it brings more opportunities, resources, and geographic coverage for us as a significantly larger modular building solutions provider. I am happy to report that we are already seeing examples of how these combined businesses operate even more effectively together. For example, in our combined custom modular solutions group, we are sharing resources and expertise across the country to bring more projects to fruition, and we are very excited at the opportunities in front of us. As the weeks go by and we get to know each other better, I continue to be impressed by the capabilities and contributions from our new VESTA team members. Turning to Mobile Modular, in total, our core business engine fired on all cylinders during the second quarter. Despite some macroeconomic uncertainty, both our commercial and education rental quote activity was healthy, and year-to-date units quoted were up. before the Vesta Business Edition. It has been a full two years since our May 2021 Design Space acquisition. Our investment in Design Space enabled further rental revenue growth, and we are taking advantage of the additional geographic coverage that the business provides for us. As an example, our rental revenues grew in the second quarter by over 20%, in the Pacific Northwest, where a mobile modular had no presence prior to that acquisition. Just as important, we have applied learnings from the Design Space acquisition to our Vesta acquisition. Our integration process is improved and better organized, therefore increasing the level of success we are expecting from Vesta. Taking a few minutes to focus on our portable storage business, Our team achieves strong performance, delivering a rental revenue increase of 23%. Quoting levels continue to be healthy, and pricing continues to show gains year over year. We have many opportunities to grow this business both organically and with portable storage tuck-in acquisitions. In addition, the modular acquisitions also opened up new opportunities to rent containers from the same locations. We are executing on all of these. We closed two tuck-ins in the first quarter, Brecke and Dixie, and another inland storage just after the end of the second quarter. To provide some additional color on what tuck-ins can do for us, we had no business in Colorado six months ago, and with the earlier two tuck-in acquisitions we completed there, We now have a fleet of over 3,000 units, a branch to operate from, and a customer list to build. This is a wonderful way to jumpstart our business. Our pipeline of opportunities for tuck-ins is robust, and we have many possibilities in new geographies to plant the flag and begin to grow. The portable storage team has been executing well, and I have high confidence that we will continue to see strong growth from them over the next several years. Returning to our TRS Rentalco business, softness in the computer and semiconductor business continued into the second quarter with rental revenues declining by 4%. The other market verticals were flat to last year. The slowness we are seeing in the semiconductor accounts is broad-based and not concentrated in any single account. This industry is recovering from some of the severe demand fluctuations resulting from the pandemic. Currently, it appears that many customers are conserving cash and projects that have been planned are taking longer to get moved from plans to reality. We believe that the second half of the year should result in more project opportunities closing as there are many in the queue. We have seen and successfully managed through cycles like this before. Our TRS team has been taking several important steps to improve our results. We have been selling equipment to right size the fleet and improve utilization. In addition, we have reduced new equipment purchases and will continue as needed to ensure demand and our inventory availability are matched appropriately. Our efforts have resulted in a small fleet size reduction quarter over quarter, and we will work to make further progress for the remainder of the year. As I have shared before, the level of competence in our management team at TRS is very high, and they are focused on ensuring the business operates optimally. As we enter the back half of 2023, I could not be more pleased with the opportunities we have to continue our robust growth. We are in a multi-year effort to focus our business on modular opportunities and have a lot of runway to continue to grow EBITDA for the next few years. The acquisitions we closed are performing well and provide not only new geographies within which to expand, but also to improve the density in areas we already operate. It has been encouraging for us to see that there has been very little overlap for rental opportunities between the Mobile Modular and Vesta sales teams. That means we are serving different customers. This should result in continued growth opportunities as we deploy our extensive systems, logistics, and inventory center capabilities for both sets of customers. I shared in our first quarter call that we have a notable difference in the prices we are shipping for new rental opportunities compared to average pricing levels for our overall current fleet of units on rent. This dynamic remains in place as we continue to deploy equipment for new rental orders, and this is a tailwind that the business should benefit from for the foreseeable future. We are continuing to see results from our Mobile Modular Plus and site-related services opportunities as the sales teams gain traction and we become more proficient and experienced at providing these services to our customers. Year to date, we have realized over $20 million in revenues from the combination of both of these initiatives, and the trajectory is up and to the right. Vesta did very little of this type of business, so the addition of their fleet and sales resources should accelerate our path over time. We are very well positioned to deliver a meaningful revenue stream from both of these two initiatives. Our third initiative, Custom Modular Solutions, is also growing well. This is an area where we knew Vesta also had capable and experienced resources. So we saw that the combination of mobile modular and Vesta would put us in an even stronger position to provide customers with larger custom rental and sales projects across the country. The strategic value of custom modular solutions is that there is clearly a secular shift in the acceptance of modular buildings as a viable and cost-effective solution for space in myriad applications. Our pipeline of opportunities is substantial. We are very pleased with how many customers are considering modular buildings as a first choice for their projects. As we successfully manage the company's strategic growth, we must also deploy capital effectively. We have many places to invest and are doing it smartly and in areas that are offering solid returns and long-term potential. For example, looking at our two largest recent acquisitions, Design Space and Vesta, they are both bringing opportunities to deploy capital in new fleet and the growth rates we are seeing are healthy. But that is just one example. With overall utilization just shy of the 80% level, we also have legacy locations that need equipment. This continues to be encouraging, especially as we improve pricing, increase utilization, and deploy new fleet. As I have shared several times on prior calls, positive progress in all three operating metrics is an indicator of a very healthy business and a responsible way to manage our opportunities, inventory, and capital deployment. I call it our trifecta and we are there right now before I turn the call over to Keith I cannot hide my level of enthusiasm in today's call not only due to our results for the second quarter and year-to-date but also because we have significant opportunities to continue to deliver EBITDA growth over the next several years our strategy to focus and streamline the business and to take advantage of our modular growth opportunities is working. When we can navigate a year like 2023, which is full of macroeconomic and geopolitical uncertainty, while increasing our full-year financial outlook for the second time this year, it is a message I am proud to deliver. I would like to thank our leadership and entire employee team across all our businesses and corporate groups as everyone has been doing an exemplary job for our customers, with and for each other, and for our shareholders. We are executing successfully as the new McGrath, and we are very well positioned to deliver solid financial results for the remainder of 2023. So now, I'll 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 second quarter, driven by the performance in our mobile modular segment. My comments today 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 second quarter, total revenues increased 32% to $203 million, and adjusted EBITDA increased 34% to $77 million. Before the contributions from Vesta, McGrath had 13% total revenue growth and 15% higher adjusted EBITDA. Turning now to review Mobile Modular's operating performance as compared to the second quarter of 2022, Mobile Modular had an impressive quarter with adjusted EBITDA increasing 59% to $56.8 million. Total revenues increased $52.9 million or 47% to $164.3 million. There were increases across all revenue streams, including 37% higher rental revenues, 56% higher rental-related services revenues, and 59% higher sales revenues. Vesta contributed 29.7 million total revenue and 10.4 million adjusted EBITDA to the current quarter results. Before these contributions from Vesta, Mobile Modular had an impressive 21% total revenue growth and 30% higher adjusted EBITDA. In addition to the contribution from the Vesta acquisition, our rental operations experienced strong organic growth across our commercial, education, and portable storage customer bases. Sales revenues increased 59%, or $14.5 million to $39.4 million, demonstrating good progress with our initiative to grow modular sales projects. Vesta contributed $11.2 million of the total increase in sales revenues. We continued our disciplined fleet management and achieved average fleet utilization of 79.1%. up from 78.1 percent 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 302 million, or 30 percent, and average equipment on rent increased by $250 million, or 31%, as we successfully improved utilization. The average monthly rental rate for the portfolio was 2.84%, which was 4% higher than a year ago, and reflects our focus on pricing optimization, as well as continued healthy market conditions. Rental revenues increased by 37 percent, while inventory center costs increased 4 percent and depreciation expense increased 33 percent, resulting in rental margins of 60 percent, up from 51 percent a year ago. Turning to review of TRS Rentalco, adjusted EBITDA was 21.5 million, a decrease of 3 percent compared to last year. Total revenues increased 0.5 million or 1% to 37.8 million. We saw an increase in sales revenues, partly offset by a softening in rental operations revenues. Rental revenues for the quarter decreased 4%. We experienced continued softness in semiconductor related demand, resulting in lower general purpose rentals during the quarter while communications rentals were flat compared to a year ago. The average monthly rental rate was 4.16%, up 3% compared to a year ago, which reflects a shift in mix and stable pricing conditions for both communications and general-purpose equipment. Average utilization for the quarter was 58.2%, compared to 64.5% a year ago, and rental margins were 38% compared to 40% a year ago. The decline in average utilization during the quarter reflects the softer demand from the semiconductor market, as well as extended supply lead times for new equipment. Sales revenues increased 17% year-over-year to $7.5 million. with gross profit increasing 12% to $4.1 million. The increase in sales revenues demonstrates our focus on reducing inventory to better align with current market demand. The remainder of my comments will be on a total company basis from continuing operations. Second quarter selling and administrative expenses increased 13.2 million to 47 million. The addition of Vesta Modular increased selling and administrative expenses by 6.6 million, which included 1.2 million amortization of intangibles. Interest expense was 9.9 million, an increase of 6.9 million as the result of higher average interest rates and $239 million higher average debt levels during the quarter, which was primarily the result of funding of our acquisitions. The second quarter provision for income taxes was based on an effective tax rate of 25.7 percent compared to 22.9 percent a year earlier. Turning to our year-to-date cash flow highlights, Net cash provided by operating activities was 71 million, compared to 82 million in the prior year, with transaction expenses accounting for most of the reduction. Rental equipment purchases, excluding equipment received from recent acquisitions, were 128 million, compared to 95 million in the prior year. The total cash paid for acquisitions of Vesta, Brecke, and Dixie was $456 million, emphasizing our strategic initiatives to grow the modular and portable storage businesses. In addition to significant investments in new fleet and acquisitions, healthy cash generation allowed us to pay $23 million in shareholder dividends. At quarter end, we had net borrowings of $673 million, comprised of 100 million notes outstanding, and $573 million under our credit facility, with capacity to borrow an additional $77 million under our lines of credit. The ratio of funded debt to the last 12 months' actual adjusted EBITDA was 2.18 to 1. Turning next to our updated 2023 financial outlook. For the full year, we currently expect results from continuing operations to be total revenue between 805 and 830 million. Adjusted EBITDA between 306 and 320 million. Gross rental equipment capital expenditures between 190 and 200 million. Our updated outlook reflects a stronger revenue outlook for new modular sales projects. Our rental operations outlook is largely unchanged, with an incrementally stronger outlook at mobile modular, largely offset by a somewhat softer outlook at TRS. We have also reduced our pace of rental equipment investment at TRS partly offset by ongoing modular investments, leading to the overall slightly lower gross capital expenditure outlook. Before closing, I am going to take a bit more time to expand on the comments Joe made earlier with respect to McGrath's longer-term growth opportunities centered on our modular segment. I would like to share a few data points that help illustrate our progress and point to the opportunities that lie ahead. This data is from our legacy modular business and excludes VESTA units, which have not yet been successfully and fully integrated into our reporting systems. All the data I will highlight will be included in our second quarter investor presentation, which is available on our investor relations website today. First, I will expand on Joe's pricing comments. For our modular building and classroom fleet, during the second quarter, the monthly revenue for the average unit on rent increased year over year from $613 to $670, a 9% increase. For new shipments over the last 12 months, the average monthly revenue per unit was $995. A year earlier, this last 12-month average revenue was $867. So we see a positive trend with new unit pricing, which is up 15% on a full year-over-year basis. Keep in mind that a number of factors can impact monthly revenue per unit. Pricing changes over the last few years have been necessary to offset the higher capital costs for new rental equipment and the higher operating costs incurred to support customers and maintain our fleet. Also, pricing can vary significantly based on product type, region, contract term, and other factors. These pricing dynamics are significant positive long-term revenue drivers. As the rental fleet churns, we expect a rental revenue tailwind as the average rental unit pricing for all units on rent moves towards current market rates, which have, in turn, been moving higher. Our early progress with Mobile Modular Plus is embedded in these data points. and is an additional growth opportunity for us. As Joe mentioned earlier, year-to-date, our Mobile Modular Plus and site-related services initiatives contributed over $20 million in revenue, just for our legacy modular business, even before Vesta and portable storage. Mobile Modular Plus contributed $12.4 million year-to-date, up from 8.5 million a year earlier. Site-related services contributed 8.2 million year-to-date, up from 4.9 million a year earlier. We are in the early innings with these initiatives, and they are making positive, growing contributions. We have also been making good progress with our sales of new modular equipment. Back in 2018, we achieved 18 million of new sales, while last year we achieved 50 million. With the addition of Vesta, we expect to see further growth this year and beyond. On top of all this, we have further opportunities to grow our rental fleets for modulars and portable storage. As we have demonstrated, We have opportunities to continue to increase our geographic presence in many markets through a disciplined combination of organic investment and strategically focused acquisitions. As Joe highlighted, with the significant transformation of our business well underway, we are excited about the near and long-term opportunities that lie ahead. We are very proud of McGrath's strong second quarter performance. As we look ahead, for the remainder of this year, we will be working hard to continue to integrate the acquired businesses while staying focused on furthering our long-term modular growth strategies. That concludes our prepared remarks. Mike, you may now open the lines for questions.