McGrath RentCorp

Please stand by. Your program is about to begin. If you need assistance during your conference today, please press star zero. Ladies and gentlemen, thank you for standing by. Welcome to the McGrath Rent Corps third 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 one on your telephone keypad. This conference call is being recorded today, Thursday, October 24, 2024. Before we begin, note that the matters that 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 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 September 30th, 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, Jess. Good afternoon, everyone, and thank you for joining us on our call today. It has been quite an eventful quarter. On September 18th, we announced that we had mutually agreed to terminate our pending acquisition by Will Scott. In accordance with the terms of the merger agreement, McGrath received a termination fee of $180 million. From the announcement of the merger in January 2024, we navigated a nine-month period where McGrath operated as a company anticipating being acquired. Needless to say, this stretch was an unfamiliar operating environment for our company. We maintained our independent competitive positioning in the marketplace throughout this period. My direction to our teams was very simple. First, stick to our strategy and execute as we have always done. Second, deliver our financial plan, and keep the company healthy. Through the nine-month period across the company, we kept our teams together, found ways to reduce cost and to enhance revenue streams, and supported one another throughout. I truly think it is a testament to our strong culture and the dedication and commitment of our team members to each other and to our customers that we lost very few people to turnover through this challenging period. I could not be prouder of everyone's accomplishments during such an uncertain time. With that, we are back to normal quarterly earnings reporting and discussion. So let's turn now to our latest results. For the third quarter, total company revenues increased 10%, and adjusted EBITDA increased 13%. The modular business performed very well, while our portable storage and TRS businesses experienced market demand headwinds during the quarter. Mobile modular had a strong quarter, with rental revenues growing 9% and sales revenues growing 14%. Both our commercial business and our education rentals grew during the quarter. The commercial wins we experienced were geographically broad-based and at a wide variety of market verticals, including government and technology. Our education business benefited from modernization and growth projects and encompassed both public and private school customers. We maintained our focus on solid execution. Our team actively managed pricing, fleet utilization, and deployment of new fleet. Consistent with recent ABI data and other macro indicators of construction-related demand, we experienced some delays and softness in the demand environment. Utilization dipped slightly year over year and ended the quarter at 76.5%. We still consider this to be a healthy range. Based on quote volumes and bookings, we have opportunities to improve this number. In addition to our core rental revenue drivers, we also continued the expansion of our revenues in the services portion of our customer offerings. Revenues from Mobile Modular Plus, site-related services, and custom modular sales all grew in the quarter, and we remain excited about the opportunities these additional services offer our customers. Turning to our portable storage business, rental revenues declined by 11% in the quarter from a year ago. Recent ABI data and other macro indicators of construction-related activity reflect delays and softness in the demand environment. Less activity in commercial construction driven by interest rate headwinds appears to be a primary factor driving our portable storage decrease. Shipments for new projects were below expectations and returns were higher than planned as projects completed and were not replaced as quickly. The effect was widespread across our geographies and not concentrated in any one area. At TRS Rentalco, Rental revenues declined by 10%, with both our general purpose and communications rental revenues impacted. This reflected the continuing industry-wide slowdown in test and measurement equipment markets, both at OEM and rental equipment providers. We took appropriate measures in the quarter to continue to keep the business on a stable footing. We sold excess equipment and scaled back purchases of new equipment. Shifting gears beyond the third quarter, I would like to take a moment now to comment about the Helene and Milton hurricanes. Our operations are secure and we are up and running in all locations with negligible disruption. Despite the extensive regional storm damage and heartbreaking photos and coverage of these natural disasters, events like this are typically not a big needle mover for McGrath. Near term, The storms in some cases could have a negative impact with delays to customer projects either in the field now or planned. Also, until recovery efforts reach further stages, we are not anticipating much in the way of new business opportunities for McGrath. Nevertheless, we are positioned to provide both space and storage for customers who need it. we will likely know more about any new storm related demand in the months ahead as recovery operations continue. Continuing to look ahead for the fourth quarter and beyond 2024, there is clearly uncertainty in the overall demand environment. Soft demand that we have been experiencing in our portable storage and TRS businesses may continue into 2025. At Mobile Modular, our range of growth initiatives and positive pricing dynamics should remain positive and help to offset any market demand softness. With interest rates projected to ease in the quarters ahead, we are cautiously optimistic that demand conditions may improve, although that could take time and we will likely be well into 2025 before we see results. That said, Long term, I could not be more positive about the prospects for our growth and continued execution of our strategy. Our efforts to grow our modular business both organically and by strategic acquisitions continue to produce encouraging results. With our broader geographic coverage from our new branch locations and acquisitions, we have plenty of opportunities to make further fleet investments to serve customers. We have runway to continue to grow for many years ahead. Our pricing disciplines and processes are robust, and as the fleet turns over, we will have a revenue tailwind. The initiatives that we started, namely Mobile Modular Plus, site-related services, and custom modular sales, are adding value for our customers and growing. We have a large, diverse, and high-quality customer base across commercial and education markets. Our commercial opportunities are broad and include mega projects, government infrastructure, and data center growth. We believe our education business has a multi-year period of continuing school modernization needs new construction to support shifting student populations and growth opportunities in private schools and charter schools, and we are well positioned to serve those customers across multiple geographies. Our portable storage business not only has markets we are in that we are early in their growth phase, but also many new markets for us to enter over time representing future growth potential. Our TRS business is a leading technology provider. With the ongoing demands for more bandwidth and faster speeds in devices we use every day, we see a positive path ahead for the business to recovery. In summary, we believe our multi-year opportunity to bring additional value to our customers through expanded service offerings and are committed to continuing to increase our customer base and geographic coverage. We remain committed to building long-term shareholder value through sound strategic focus, disciplined capital allocation, and consistent execution. The graph is on a strong footing as we emerge from the terminated merger agreement. Sometimes companies emerging from a terminated merger process are damaged. We are not. Fundamental to our success is a culture that I am genuinely honored to be a part of. Our team members care about our customers and each other unlike anything I've seen in my 34 years of business experience. Their will to serve and lean in was the driver of our success through an uncertain period and I'm quite sure that coupled with our strategies and execution plans in place today, we have what it takes to move McGrath to another level of growth and performance. We will be focused on doing just that, benefiting our shareholders, customers, partners, and team members along the way. I would like to once again thank our team members and leaders for the outstanding job each of you has already done this year. We are focused as a team on a solid finish to 2024. With that, I'd like to turn the call over to Keith, who will take you through the financial details of our quarter and our outlook for the full year.

Thank you, Joe, and good afternoon, everyone. As Joe highlighted, we delivered very good results in the third quarter, driven by the performance of our mobile modular business. Looking at the overall corporate results for the third quarter, total revenues from continuing operations increased 10% to $267 million and adjusted EBITDA increased 13% to $104 million. During the third quarter, The company received a $180 million payment from Will Scott Mobile Mini attributed to the termination of the previously announced merger agreement. The transaction costs incurred during the quarter due to the now terminated merger process were $39 million. The proceeds received, partly offset by the transaction costs incurred and an increase in provision for income taxes, resulted in a $104 million net income contribution during the quarter, or $4.21 per diluted share. Reviewing Mobile Modular's operating performance as compared to the third quarter of 2023, Mobile Modular had an impressive quarter as we continued to make progress delivering on our modular business growth strategy. Adjusted EBITDA increased 23% to $71.4 million, and total revenues increased 13% to $191.4 million. There were increases across all operational revenue streams, including 9% higher rental revenues, 23% higher rental-related services revenues and 14 percent higher sales revenues. The sales revenues increase was primarily due to higher new equipment sales and demonstrated good progress with our initiative to grow modular sales projects. Rental margins were 62 percent, up from 59 percent a year ago. primarily because of the rental revenue growth and the lower inventory center costs. We continued our disciplined fleet management on a larger fleet with 5% higher average rental equipment on rent and average fleet utilization of 77.1% compared to 79.9% a year ago. Third quarter monthly revenue per unit on rent increased 18% year-over-year to $820. For new shipments over the last 12 months, the average monthly revenue per unit increased 16% to $1,191. 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 third quarter, Mobile Modular Plus revenues increased to $7.9 million from $7.6 million a year earlier, and site-related services increased to $12.8 million, up from $10.1 million. Turning to the review of portable storage, Adjusted EBITDA for portable storage was $10.8 million, a decrease of 10% compared to the prior year. Demand conditions during the quarter were weaker, primarily because of lower commercial construction project activity. Higher sales revenues partly offset rental weakness, resulting in a total revenue decrease of 11% to $23.1 million. Rental revenues for the quarter decreased 11% to $17 million, and rental margins were 86% compared to 84% a year ago. Average rental equipment on rent decreased 12%, while average utilization for the quarter was 62.8% compared to 76.5% a year ago. We responded to the softer market demand conditions by reducing new equipment capital spending and carefully managing operating costs. Turning now to the review of TRS Rentalco, adjusted EBITDA was 18.9 million, a decrease of 10% compared to last year, and total revenues decreased 11% to 34.8 million. Rental revenues for the quarter decreased 10% as the industry experienced continued end market weakness. Average utilization for the quarter was 57.3% compared to 59.4% a year ago, and rental margins were 37% compared to 40% a year ago. Sales revenues decreased 13% to $7.6 million and gross margins were 52% compared to 35% a year ago. To address the softer business conditions, we continued to reduce new equipment capital spending, focused on sales of used equipment, reduced fleet size, and carefully managed operating costs. Total fleet value based on original cost of equipment was $357 million at the end of September. down 11 million from the second quarter, and down 26 million from a year ago. The remainder of my comments will be on a total company basis from continuing operations. Third quarter selling and administrative expenses increased 0.8 million to 49.3 million. During the quarter, the company determined that transaction costs totaling 39 million attributed to the terminated merger agreement were non-operating and therefore were excluded from selling and administrative expenses. Interest expense was $12.6 million, an increase of $1.6 million as the result of higher average interest rates and higher average debt levels during the quarter. The third quarter provision for income taxes was based on an effective tax rate of 26.4% compared to 27.3% 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 $338 million compared to $119 million in the prior year. The increase was primarily attributed to the $180 million payment received from Will Scott Mobile Mini, net of $61 million transaction costs. Rental equipment purchases were $167 million compared to $171 million in the prior year. New equipment purchases were primarily for the modular business. As we reduced spending at TRS and portable storage, in response to softer demand conditions. In addition to investments in new fleet, healthy cash generation allowed us to pay $35 million in shareholder dividends. At quarter end, we had net borrowings of $609 million, and the ratio of funded debt to the last 12 months adjusted EBITDA was 1.75 to 1. Finally, our 2024 financial outlook. For the full year, we currently expect results from continuing operations to be total revenue between $910 and $920 million, adjusted EBITDA between $345 and $351 million, gross rental equipment capital expenditures between $180 and $190 million. Our outlook reflects the following expectations for the final quarter of the year. Modular rental revenues up slightly from the third quarter. Modular rental-related services revenues at a level comparable to the second quarter. We expect fewer site-related services projects in the fourth quarter compared to the seasonally busier third quarter. Modular sales revenues down slightly from the third quarter. Overall performance at TRS and portable storage below third quarter levels, reflecting demand market softness and seasonality. Total McGrath selling and administrative expenses, excluding expenses related to the merger transaction, up sequentially from the third quarter. interest expense of approximately $10.5 to $11 million. In summary, McGrath is on a solid financial footing. We remain committed to building long-term shareholder value through sound strategic focus, disciplined capital allocation, and consistent execution. Despite distractions from the merger process and challenging end market demand conditions for two of our businesses, we have delivered strong year-to-date results, and we are fully focused on solid execution for the remainder of the year. That concludes our prepared remarks. Jess, you may now open the lines for questions.