McGrath RentCorp

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath Rent Corp first quarter 2025 earnings call. At this time, all 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, April 24th, 2025. Before we begin, note that the matters the company manager 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 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 it's Form 10-Q for the quarter ended March 31st, 2025. 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 today for McGrath Rencorp's first quarter 2025 earnings call. I am pleased to report on our performance over the past quarter and to provide an update on our outlook for this year. I will also address current possible effects of tariffs on the business. First, I will review our quarterly results. For the quarter, total company revenues increased 4 percent and adjusted EBITDA increased 3 percent compared to a year earlier. This performance was driven by continued progress from our modular strategic growth initiatives, as well as some recovery at TRS. Mobile Modular's rental revenues grew 3%. Both commercial and education rentals were positive. The commercial wins we experienced were geographically broad-based in a wide variety of market verticals, including government, technology, and healthcare. We continue to win education business in both public and private schools across all our geographies. The architectural billing index data and other macro indicators of construction-related demand continue to indicate some weakness and some project delays. Our quote activity was up for the quarter, while new rental bookings were below the prior year due to the softer construction markets. This reflects longer closed cycles and some mixed shift. Sales revenues were lower for the quarter, reflecting typical quarter-to-quarter variability. Our new modular sales growth initiative continued to be on a positive trajectory as we see more acceptance of modular solutions for construction projects across many market segments. Mobile Modular Plus and site-related services performed well and saw healthy increases in the quarter, helping to offset lower units on rent. Turning to our portable storage business, rental revenues declined by 13 percent, in line with what we expected and reflecting ongoing commercial construction softness. We entered the year with a rental revenue run rate that was below the start of 2024 and it will take some time for it to recover. At TRS Rentalco, rental revenues grew slightly. We had an encouraging start to the year with broad-based improvement across multiple equipment categories. Our rental pipeline is up from the prior year, and some previously delayed projects were started. We have been effectively managing the fleet to maximize opportunities to sell unutilized equipment. utilization improved substantially to end the quarter at 65%, up from 59% in the fourth quarter. Now, let's look at how 2025 is unfolding amidst the uncertainty present in the broader economy. Overall, we expect the impact of tariffs in 2025 to be a limited headwind to the business. As a reminder, we own our fleet, so the investments generating our revenue are substantially made. Cost increases for materials we use to operate the business for repair and maintenance that are subject to tariffs are not significant cost drivers, and in some cases, we have purchased ahead, so the 2025 exposure is limited. Our exposure to China tariffs is also limited. At TRS, only 4% of our current rental fleet was sourced from China. At Portable Storage, China is the primary source of new containers, but with current fleet utilization at 60%, we do not expect to make significant new equipment purchases in the near to medium term. We shared in our fourth quarter call that the key driver for our performance in 2025 will be the demand conditions across all our business segments. At present, we have good activity levels in the field related to current projects. As we look further ahead and into the second half of the year, we have concerns that in the overall market, some companies may be slowing new project starts due to uncertainty around the impact of tariffs costs, overall economic growth, and possible government spending cuts. We have been very clear in past quarters that our strategic focus is on the modular business and on the implementation of our plans to be a solutions provider to our customers. None of that has changed nor will it change due to current economic uncertainty. Our mobile modular plus, site-related services, and custom sales have been good revenue contributors since their launch, and we will continue to work on growing them. Our efforts at increasing revenue per unit are still yielding results, and we believe we have more room to continue that progress. Our expansion into new geographies will continue as we invest to grow the top line responsibly. We have a robust M&A pipeline that should yield results in future quarters. In looking at the total company, McGrath has a resilient business model. Our broad base of customers and the recurring rental revenues that they drive provide some stability if economic conditions soften. Additionally, if demand declines, we generally incur lower expenses to satisfy customer orders, and we can reduce rental equipment capital spending, which improves cash flow. These dynamics were evident in 2020 as we navigated the COVID pandemic and enabled McGrath to finish 2020 in a healthy financial state despite the unprecedented market disruptions. In closing, McGrath has successfully managed through all sorts of economic challenges for more than 40 years, always with a focus on returning value to our shareholders and on our company's sustainability. We have an experienced leadership team, management continuity, and a long-tenured base of team members throughout the company. While the exact economic impact of the current tariff and trade disruptions are not completely clear, I am confident we have the skill set to continue to manage through this latest economic challenge and execute our strategy effectively. As always, we will be working diligently to maximize opportunities to keep the business strong and deliver results for our shareholders. With that, I will turn the call over to Keith, who will take you through the financial details of our quarter and updated outlook for the full year.

Thank you, Joe, and good afternoon, everyone. As Joe highlighted, we delivered solid results in the first quarter, driven primarily by the performance of our mobile modular business. Looking at the overall corporate results for the first quarter, total revenues increased 4% to 195.4 million, and adjusted EBITDA increased 3% to 74.5 million. Reviewing mobile modular's operating performance as compared to the first quarter of 2024, Mobile Modular had a strong quarter with adjusted EBITDA increasing 10% to $47.6 million. Total revenues increased 3% to $131.9 million. 3% higher rental revenues and 22% higher rental-related services revenues were partly offset by 11% lower sales revenues. Rental margins were 60%, up from 57% a year ago, primarily because of the rental revenue growth and the lower inventory center costs. Sales revenues decreased $2.8 million to $22.5 million as a result of lower new and used sales projects during the quarter. Average fleet utilization was 74.6%. compared to 78.7% a year ago. First quarter monthly revenue per unit on rent increased 8% to $831. For new shipments over the last 12 months, the average monthly revenue per unit increased 12% to $1,194. There is still a positive pricing tailwind opportunity as our fleet churns. We continue to make progress with our modular services offerings. Mobile modular plus revenues increased to 8.6 million from 7.2 million a year earlier, and site-related services increased to 4.1 million, up from 3.2 million. Turning to the review of portable storage in the first quarter, adjusted EBITDA for portable storage was 8.6 million, a decrease of 25% compared to the prior year. Weak demand conditions continued, primarily because of low commercial construction project activity. Rental revenues for the quarter decreased 13% to 16.1 million, and rental margins were 84%. done from 87% a year earlier. Average rental equipment on rent decreased 10%, while average utilization for the quarter was 60.2%, compared to 69.8% a year ago. Turning now to a review of TRS Rentelco, adjusted EBITDA was $17.9 million, a decrease of 3% compared to last year, Total revenues increased 1.3 million, or 4%, to 35 million. Rental revenues for the quarter were up slightly at 25.5 million, which was the first quarterly increase since the first quarter of 2023. Average utilization for the quarter was 61.6%, compared to 56.5% a year ago, reflecting improved demand conditions and our continued focus on fleet management. Rental margins were 40% compared to 36% a year ago. Sales revenues increased 17% to $8 million, with gross profit of $3.7 million. The remainder of my comments will be on a total company basis. First quarter selling and administrative expenses increased 1% to $50.9 million. Interest expense was $8.2 million, a decrease of $4.5 million, as a result of lower average interest rates and lower average debt levels during the quarter. The first quarter provision for income taxes was based on an effective tax rate of 24.6% compared to 23.6% a year earlier. Turning to our year-to-date cash flow highlights, was 54 million compared to 59 million in the prior year. Rental equipment purchases were 12 million compared to 79 million in the prior year, consistent with lower fleet utilization and our plans to use available fleet to satisfy customer orders. Healthy cash generation allowed us to pay $12 million in shareholder dividends and reduce debt by $31 million. At quarter end, we had net borrowings of $559 million, comprised of $175 million and $384 million under our credit facility. And the ratio of funded debt to the last 12 months' actual adjusted EBITDA was 1. While it is difficult to accurately assess the impacts of the tariff and trade policy developments, I will provide several additional comments on the potential impact on the graph. First, some comments on the demand outlook, starting with domestic revenues, which account for over 95% of our business. We are more cautious regarding the potential demand strength and upsides for the second half of this year. There are certain examples of construction industry project delays and cancellations that are surfacing in the overall market. And if this becomes more widespread, it could negatively impact our modular and portable storage businesses. Total McGrath international revenues have ranged between 2% and 4% over the past three years and occur in our TRS business. Tariffs may erode the economic attractiveness of some of our international transactions at TRS. Next, some comments on capital spending. Given current utilization levels, we have less need to add new rental equipment this year. Some suppliers of rental equipment are beginning to contemplate tariff-driven price increases, with some estimates in the 5 to 15 percent range. However, some of our spending on rental equipment for 2025 has already been secured, which should limit any negative tariff impact this year. Lastly, operating costs incurred as we maintain our rental fleets may also experience some tariff-driven increases. We're still working to determine the scope and size of increases and how much can be passed along to customers or offset by efficiency and cost management initiatives at McGrath. All of these comments are based on limited information and our views may change going forward. In summary, our business performance was solid in the first quarter and looks positive for the second quarter. Based on what we know today, we currently expect tariff and trade policy disruptions to have a relatively limited impact on 2025 financial performance. Our primary concern is that the overall economic uncertainty could result in some delays or fewer rental and sales projects in the second half of the year. so we have updated our full-year financial outlook to reflect this. We currently expect total revenue between $920 and $960 million, adjusted EBITDA between $343 and $355 million, gross rental equipment capital expenditures between $115 and $125 million. We are proud of McGrath's first quarterly focused on solid execution for the remainder of 2025. That concludes our prepared remarks. Jess, you may now open the lines for questions.