McGrath RentCorp

Please stand by, we're about to begin. Ladies and gentlemen, thank you for standing by. Welcome to the McGrath Rent Corp first quarter 2024 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 do 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, April 25th, 2024. 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 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-K 10Q, excuse me, for the quarter ended March 31, 2024. 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, Beau. Good afternoon, and thank you, everyone, for joining us on today's call. We are pleased to be together today and look forward to providing additional perspective on our results for the first quarter. I will start with some overall comments on our first quarter, and Keith will provide additional detail in his financial review before we open the call up for questions. On a total company basis, we had a good first quarter. Rental revenue increased 9%, sales revenues increased 48%, and adjusted EBITDA grew by 17%. Mobile modular was the highlight of our first quarter, with rental revenue increasing 19%. We have been diligently executing our strategy of offering an expanded range of modular solutions to our customers, and it continues to show in the results. Our teams are focused and clear about what success is for our customers and the business, and they've been doing an excellent job delivering on those commitments. We finished the quarter with a rental backlog that is the highest in the company's history. The high backlog was driven by our education segment, which was very active as school districts addressed both modernization and growth projects in our operating geographies. This is a positive sign as we now have many units under contract that are already scheduled for shipment. Therefore, we have front-loaded much of our planned CapEx spend for the year. Modular sales revenues were also up very nicely for the quarter, increasing 49%. With our custom modular solutions initiative, we have positioned ourselves as a provider of modular solutions that range from very small installations to projects larger and more complex in scope, and the market opportunities are many. Some are rental projects and some are sales. We want both. We've been very pleased by the development of this capability within the business and have a talented team in place to grow this segment. Commenting specifically now on our other growth initiatives, we are expanding contract scope and realize strong growth increases in both Mobile Modular Plus and site-related services of 26 percent and 31 percent respectively. Our customers value the benefit of having their buildings arrive with additional amenities included in their rental contract as well as the value of services provided on the outside of the building to make it completely ready for use. We are gaining traction as each quarter passes and customer acceptance has been positive. At Portable Storage, rental revenues increased 8%. Consistent with recent ABI data and other macro indicators of construction related demand, project activity was slightly muted in the quarter and returns were higher year over year. Importantly, we executed well and our close ratios remained steady. At TRS Rentalco, Rental revenues decreased by 13% year-over-year, reflecting continued industry-wide weakness in the computer and semiconductor portion of the business. We continued adjusting for the softer market conditions. We reduced purchases of new rental equipment and sold fleet, which has collectively reduced our fleet size by $7 million during the quarter. Our team has significant depth of experience and we are confident in our ability to manage the portfolio effectively through cycles. Since we announced the merger agreement with Will Scott Mobile Mini on January 29th, and while the transaction is still pending, we continue to operate with a business as usual mindset. During this period, our teams remained very focused on delivering exceptional service to our customers and to each other. I could not be more pleased with their performance and commitment. Thank you, everyone, for your dedication and strong execution in the quarter. As always, and now during the pending merger, our focus will remain on the execution of our strategic plans and delivering positive financial results. The preliminary Form S-4 has been filed and we are working with Will Scott Mobile Mini on effectiveness of that document so we can call a special meeting of shareholders to approve the merger. As stated last quarter, we will not be providing any financial guidance or future outlook. Now, let me turn the call over to Keith.

Thank you, Joe, and good afternoon, everyone. As Joe highlighted, we delivered strong results in the first quarter. driven by the performance of our mobile modular and portable storage businesses. Looking at the overall corporate results for the first quarter, total revenues from continuing operations increased 15% to $187.8 million, and adjusted EBITDA increased 17% to $72.1 million. During the first quarter, the company sold a property which resulted in a 9.3 million net gain and contributed 28 cents in earnings per diluted share. These types of sales are infrequent and are excluded from adjusted EBITDA. Reviewing Mobile Modular's operating performance as compared to the first quarter of 2023, Mobile Modular had an impressive quarter. with adjusted EBITDA increasing 34% to $43.3 million. Total revenues increased 23% to $127.6 million. There were increases across all revenue streams, including 19% higher rental revenues, 49% higher sales revenues, and 12% higher rental-related services revenues. As a reminder, the prior year first quarter included just two months of Vesta Modular from the acquisition date of February 1st, 2023. The extra month of Vesta in the first quarter 2024 contributed approximately $5 million rental revenue and $2 million adjusted EBITDA. The rental revenue growth reflected overall positive business conditions across our commercial and education customer bases. Sales revenues increased $8.4 million to $25.3 million, demonstrating continued execution of our initiative to grow modular sales projects. We continued our disciplined fleet management on a larger fleet with 18% higher average rental equipment on rent. and average fleet utilization of 78.7%, compared to 79.4% a year ago. We have achieved this healthy total fleet utilization throughout the integration process of Vesta, while concurrently investing in new rental fleet for growth. Rental revenues increased by 19%, while inventory center costs decreased 6%, and depreciation expense increased 14%, resulting in rental margins of 57%, up from 49% a year ago. Similar to last quarter, I will share additional data that help illustrate our progress delivering on our modular business strategy. First quarter, monthly revenue per unit on rent increased 18% year over year, to $772. For new shipments over the last 12 months, the average monthly revenue per unit increased 9% to $1,063. Progress with Mobile Modular Plus is embedded in these data points and is an additional growth driver. We continue to make progress with our modular services offerings. For the first quarter 2024, Mobile Modular Plus revenues increased to $7.2 million from $5.7 million a year earlier. And site-related services increased to $3.2 million, up from $2.4 million. Turning to the review of portable storage in the first quarter, adjusted EBITDA for portable storage was $1.5 million. an increase of 15% compared to the prior year. During the quarter, we saw increases in all revenue streams, resulting in a total revenue increase of 9% to $24.8 million. Rental revenues for the quarter increased 8% to $18.4 million, and rental margins were 87% up from 85% a year earlier. Average equipment on rent increased 2%, while average utilization for the quarter was 69.8% compared to 80.8% a year ago. Turning now to review of TRS for Intelco. Adjusted EBITDA was 18.5 million, a decrease of 10% compared to last year. Total revenues decreased $2.4 million, or 7%, to $33.8 million. Rental revenues for the quarter decreased 13%, as the industry experienced continued softness in semiconductor-related demand. Average utilization for the quarter was 56.5%, compared to 59.2% a year ago, and rental margins were 36%, compared to 40% a year ago. Sales revenues increased 33% year-over-year to $6.8 million, with gross profit increasing $1 million to $3.9 million, a result of higher sales revenues and improved margins. To address the softer business conditions at TRS, we continued to maintain our return on capital discipline. We reduced new equipment capital spending, focused on sales of used equipment, and reduced fleet size based on original cost of equipment from $378 million at the end of December to $371 million at the end of March. We continue to make progress with reducing fleet size to better align with current demand conditions. The remainder of my comments will be on a total company basis from continuing operations. First quarter selling and administrative expenses increased 2.3 million to 59.8 million. The increase was primarily the result of higher employee salaries and benefit costs, partly offset by reduced marketing and administrative costs. 2024 costs included 9.4 million of transaction expenses from the pending Will Scott merger. 2023 costs included $14.1 million in VESTA acquisition and Adler divestiture related transaction costs. Interest expense was $12.7 million, an increase of $5.2 million as the result of higher average interest rates and 215 million higher average debt levels during the quarter, which was primarily the result of funding of last year's acquisitions. The first quarter provision for income taxes was based on an effective tax rate of 23.6% compared to 23.8% a year earlier. The decrease was primarily due to changes in business mix by state. Turning to our year-to-date cash flow highlights, net cash provided by operating activities was 59 million, compared to 36 million in the prior year. Rental equipment purchases were 79 million, compared to 78 million in the prior year. In addition to continued investments in new fleet, healthy cash generation allowed us to pay 12 million in shareholder dividends. Proceeds from sales of property, plant, and equipment were $12 million. At quarter end, we had net borrowings of $799 million, comprised of $175 million, notes outstanding, and $624 million under our credit facility. On April 23rd, the company entered into an incremental borrowing facility amendment, which provided for a $75 million term loan. This loan was used to pay down our existing bank lines of credit and creates additional borrowing capacity for general corporate purposes and working capital needs, including the front loading of our 2024 modular capital spending to support positive demand conditions and for incremental transaction expenses. The ratio of funded debt to the last 12 months actual adjusted EBITDA was 2.43 to 1. We are very proud of McGrath's strong first quarter performance, and we are fully focused on solid execution for the remainder of 2024. That concludes our prepared remarks. So, you may now open the lines for questions. Thank you very much, Mr. Pratt.