McGrath RentCorp

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath Rent Corp. Second Quarter 2024 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, July 25, 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, backlog, 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 8K and its Form 10Q for the quarter ended June 30, 2024. Speaking today will be Joe Hanna, Chief Executive Officer, and Keith Pratt, Chief Financial Officer. I'll now turn the call over to Mr. Hanna. Please go ahead, sir.

Thank you, David. 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 second quarter. I will start with some overall comments on the quarter and Keith will provide additional detail in his financial review before we open the call up for questions. The company delivered solid second quarter results. Rental revenues increased 3%, Sales revenues increased 14% and adjusted EBITDA grew by 9%. Our mobile modular division continued to perform well with rental revenues increasing 10%. We realized growth in both our commercial and education sectors. In our commercial business, we serve many market verticals, including commercial construction, government, industrial, residential, to name a few. Our broad reach gives us a diversified base of clients that have a wide variety of space needs which we are well suited to serve. On the education side, both modernization and enrollment growth drove rentals. There continues to be a significant backlog of deferred work that districts are busy addressing in all of our markets. Funding is available and project backlogs are healthy. Our teams continue executing efficiently in the field, and we are in our busy summer season with all cylinders firing to get jobs completed on time for our customers. Modular sales revenues decreased 6% for the quarter, but we're up 11% year to date. Sales projects can be affected by timing, which we saw in play for this quarter. Our backlog for sales projects is very strong, and our strategy to provide customers with custom sales opportunities has been very positively received. We remain confident in the future growth of this portion of the business. We continue to make progress with our other mobile modular growth initiatives, with growth in Mobile Modular Plus and site-related services in the quarter. Our customers value the benefit of having their buildings arrive with additional amenities included in their rental contract as well as the convenience 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. Our revenue per unit in mobile modular showed healthy gains for the quarter with new shipment rates up nicely compared to the prior year. This momentum is a positive tailwind for overall fleet rates, which should increase as rental units cycle during normal business operations. At portable storage, rental revenues decreased 4%. Specifically, commercial construction project activity has slowed, and we saw fewer shipments and higher returns year over year. Close ratios are still very good, and we have been maintaining our pricing discipline despite softer market conditions. At TRS Rentalco, rental revenues decreased by 11% year-over-year, reflecting industry-wide weakness in test and measurement equipment rentals. Both our general purpose and communications equipment rental revenues decreased for the quarter, with the exception of wired communications rentals. Data center work and associated infrastructure to support projects were a bright spot. We continued adjusting for the softer market conditions, Our fleet capex has been reduced and we have been successfully selling idle equipment to adjust for less demand. We were fully focused on winning rental bookings and managing the fleet given tougher market conditions and will continue to do so. We continue to operate as an independent company notwithstanding the merger announcement with Will Scott Mobile Mini in January. Our teams in the front office in our production centers and in the field continue to provide the exceptional service to our customers and each other. I've been impressed by the engagement and commitment shown by everyone during this period. Thank you for all your ongoing dedication and hard work. On July 11th, our shareholders voted to approve the merger. Now that this significant milestone has passed, We are continuing to cooperate with the FTC in their analysis of the transaction. During this time, we have plenty of work to do to deliver ongoing solid financial results for our shareholders. 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 solid results in the second quarter, driven by the performance of our mobile modular business. Looking at the overall corporate results for the second quarter, total revenues from continuing operations increased 5% to $212.6 million, and adjusted EBITDA increased 9% to $83.7 million. During the second quarter, the company incurred $12.4 million in transaction costs attributed to the pending merger with Will Scott Mobile Mini, negatively impacting earnings per diluted share by $0.36. Reviewing Mobile Modular's operating performance as compared to the second quarter of 2023, Mobile Modular had another impressive quarter, with adjusted EBITDA increasing 20 percent to 53.4 million. Total revenues increased 4 percent to 144.5 million, primarily driven by 10 percent higher rental revenues and 4 percent higher rental-related services revenues, partly offset by a 6 percent decline in sales revenues. The sales revenues decrease was primarily due to lower new equipment sales. We continued our disciplined fleet management on a larger fleet with 6% higher average rental equipment on rent and average fleet utilization of 78.4% compared to 79.3% a year ago. Rental margins were 60%. up from 54% a year ago, primarily because of rental revenues growth and lower inventory center costs. We continue to make progress delivering on our modular business strategy. Second quarter monthly revenue per unit on rent increased 18% year over year to $793. For new shipments over the last 12 months, the average monthly revenue per unit increased 13% to $1,124. 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 second quarter, Mobile Modular Plus revenues increased to $7.5 million from $6.7 million a year earlier, and site-related services increased to $5.8 million up from $5.7 million. Turning to the review of portable storage, adjusted EBITDA was $11 million, a decrease of 11% compared to the prior year. During the quarter, we saw lower rental and rental-related services revenues. Demand conditions were weaker, primarily because of lower commercial construction project activity. Higher sales revenues partly offset rental weakness, resulting in a total revenue decrease of 6% to $24 million. Rental revenues for the quarter decreased 4% to $17.8 million. and rental margins were 86%, comparable to a year earlier. Average rental equipment on rent decreased 6%, while average utilization for the quarter was 66.1%, compared to 78.2% a year ago. Turning now to the review of TRS or Intelco. Adjusted EBITDA was $18 million, a decrease of 16% compared to last year. Total revenues decreased $5.2 million, or 14%, to $32.7 million. Rental revenues for the quarter decreased 11% as the industry experienced continued end market weakness. Average utilization for the quarter was 56.5%. compared to 58.2% a year ago, and rental margins were 36% compared to 38% a year ago. Sales revenues decreased 22% year-over-year to $5.8 million, with gross profit decreasing to $3.1 million. To address the softer business conditions, we reduced new equipment capital spending, focused on sales of used equipment, and reduced fleet size based on original cost of equipment to $368 million at the end of June. The remainder of my comments will be on a total company basis from continuing operations. Second quarter selling and administrative expenses increased $14.3 million to $61.4 million. The increase was primarily the result of $12.4 million in transaction costs incurred due to the pending merger with Will Scott Mobile Mini. Interest expense was $13 million, an increase of $3.1 million as a result of higher average interest rates and higher average debt levels during the quarter. The second quarter provision for income taxes was based on an effective tax rate of 28.8% compared to 25.7% a year earlier. The increase 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 $139 million compared to $72 million in the prior year. Rental equipment purchases were $145 million, compared to $128 million in the prior year. In addition to continued investments in new fleet, healthy cash generation allowed us to pay $23 million in shareholder dividends. Proceeds from sales of property, plant, and equipment were $12 million. At quarter end, we had net borrowings of $794 million. comprised of $175 million note-side standing, $544 million under our credit facility, and a term loan of $75 million. The ratio of funded debt to the last 12 months' actual adjusted EBITDA was 2.43 to 1. We are proud of McGrath's second quarter performance, and we are fully focused on solid execution for the remainder of the year. That concludes our prepared remarks. David, you may now open the lines for questions.