McGrath RentCorp Q1 2023 Earnings Call Transcript

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May 4, 2023

There are 5 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp First Quarter 2023 Earnings Call. This conference call is being recorded today, Thursday, May 4, 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.

Operator

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 ks 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 will see earnings release on Form 8 ks and its Form 10 Q for the quarter ended March 31, 2023. Speaking today will be Joe Hanna, Chief Executive Officer and Keith Pratt, Chief Financial Officer.

Operator

I will now turn the call over to Mr. Hanna. Please go ahead, sir.

Speaker 1

Thank you, Travis. Good afternoon, everyone. Thank you for joining us on our call today. Are proud of all that we accomplished to transform and grow McGrath. We divested Adler, a non core asset, acquired Vesta Modular, have a strategic target and worked on 2 tuck in portable storage companies, Breccy Storage, which we announced on March 3rd and Dixie Temporary Storage, which we announced on April 3.

Speaker 1

During the quarter, we also navigated The effects of unusual weather with flawless execution and delivered on a total company basis from continuing operations, And we saw no evidence of a slowdown. On the education side, rental revenues grew 8% and we heard from school districts that modernization projects are being planned as expected and specifically in our growth markets, Student population influx is continuing and driving demand on a consistent basis. The Portable Storage business continued to grow nicely with a 27% increase in rental revenues At Mobile Modular for the quarter, our focus on consistent execution enabled us to increase pricing, deploy new equipment and improve utilization. We had very healthy rental rates on new shipments, which were 25% higher will be conducting a reconciliation of our financial results. The overall effect on the bottom line Noteworthy during the quarter for mobile modular and portable storage, our quote volumes were greater this quarter than in the same quarter last year, and customers.

Speaker 1

At TRS RenTelco, the business had positive rental revenue growth, while we felt the effects have equipment to improve utilization. We also felt the effects of incoming equipment that due to lead times and we have put in place extra incentives for the sales team to move equipment. I am confident in the steps the team is taking. We have managed cycles many times, so we are pulling appropriate levers to normalize our KPIs and to keep the business strong. Turning back now to focus on the larger of the 2 divisions, we have shared on past calls that our strategic direction is to focus are on growth in our modular business.

Speaker 1

With the completion of the Vesta acquisition as well as work On the 2 tuck ins during the quarter, it should be clear that we are upholding that commitment. The Vesta acquisition provides have an even greater platform for growth, giving us access to 13 additional markets as well as greater density in 15 others. Efficiency. We have been very impressed with the Vesta team as they have a depth of experience and customer focus that is a great culture sit with us. Turning to integration efforts, we are on schedule and we've been pleased with the progress made in just a few short weeks since we closed the transactions.

Speaker 1

The teams have thoroughly planned the integration steps, and we are on a rigorous schedule to ensure that all items are completed. Due date, we are progressing as planned. Our Q1 financial results were in line with expectations. We have clear visibility on the most important items to get right, and I feel very confident that Vesta operations will be an important contributor to McGrath for 2023 and beyond. In our portable storage operations, we have achieved significant organic growth over the last To expand our geographic coverage, we pursued 2 notable tuck ins to completion over the past few months.

Speaker 1

Breccy opens up the Colorado market with a fleet of 2,700 units, which is an excellent jump start for us in a vibrant and growing state. Dixie, which we completed just after the quarter end, has a fleet of 800 units that will open up new geography in the South Carolina market, Our pipeline of additional tuck in acquisitions is robust And we are continuing to execute our strategy. We see further opportunities to augment our strong organic growth with portable storage tuck ins and this can be an effective way to smartly deploy growth capital. On the modular building side, our capabilities tie into some of the large infrastructure projects that are underway The acquisitions we completed over the past few years have provided a much larger geographic footprint and access to a greater customer base. Large projects are our specialty as we have a capable and experienced project management group that has been augmented with the Vesta With our large inventory and production centers unique in the industry, we can customize units to customer specifications, This capability has been a hallmark of Mobile Modular for many years.

Speaker 1

Circling back to my opening statement, we were very pleased with our Q1 results and everything we accomplished in the business. This was a huge collective effort, and I want to thank everyone at McGrath who went above and beyond to make this happen. We are off to a strong start for the year and our outlook for the remainder of the year is positive. We are on full throttle execution To grow our modular business and the steps we took in the Q1 clearly demonstrate the organization has the capability to execute M and A, And have raised guidance based on the performance of the business. So now, I will turn the call over to Keith,

Speaker 2

Thank you, Joe, and good afternoon, everyone. As Joe highlighted, we delivered strong results in the Q1 Our Mobile Modular segment saw notable contributions from the Vesta Modular acquisition with 2 months of performance included in our Q1 results. Additionally, our core rental businesses, Excluding the performance from our recent acquisitions, continued to reflect broad based organic growth during the quarter. In my financial review today, I'm going to provide highlights from our Q1 results and specifics of our current outlook Before getting into my detailed comments, As a reminder, on February 1, we completed the acquisition of Vesta Modular and concurrent divestiture of Adler Tank Rentals. The effects of these transformational transactions were included in the Q1 results.

Speaker 2

As a result of the divestiture of our Adler Tanks business, the company recognized a net gain on the sale of discontinued operations The rest of my comments will be focused on results from continuing operations, which excludes the impact from the Adler gain on sale Looking at the overall corporate results For the Q1, total revenues increased 31 percent to $163,700,000 The revenue increase Each growing rental revenues year over year. 1st quarter adjusted EBITDA increased 23% are subject to $61,800,000 and consolidated adjusted EBITDA margin was 38%. Breaking the results down by Rental division operating performance as compared to the Q1 of 2022, Mobile Modular had an impressive quarter with adjusted EBITDA increasing 40% reached $42,400,000 Total revenues increased $36,000,000 or 40 percent to $126,700,000 There were increases across all revenue streams, In addition to the contribution from the Vesta acquisition, Our rental operations sustained strong organic growth across our commercial, education and portable storage customer bases. Sales revenues increased 70% or $7,200,000 to 17,600,000 Demonstrating progress with our initiative to grow modular sales projects, Vesta contributed 6,000,000 achieved average fleet utilization of 79.6%, up from 77.1% a year ago. This utilization achievement was accomplished while also growing our fleet and increasing average rental rates.

Speaker 2

With our strategic investment focus on modulars further supported by our recent acquisitions, The average fleet size for the quarter increased by $170,000,000 or 17% And average equipment on rent increased by $160,500,000 or 21 percent 2.89%, which was 9% higher than a year ago and reflects our focus on pricing optimization as well as continued healthy market conditions. Higher rental revenues were partly offset by 29% Higher inventory center costs and 21% higher depreciation expense, resulting in rental margins of 56%, up are in the range of 50 5 percent a year ago. At TRS RenTelco, Adjusted EBITDA was $20,600,000 which was comparable to last year. Total revenues increased 2,600,000 Rental revenues for the quarter increased 2%. We saw continued demand for both general purpose equipment and communications rentals, was 4.14%, up 3% compared to a year ago.

Speaker 2

This higher average rental rate, Average utilization for the Q1 was 59.2% compared to 64 point were 6% a year ago and rental margins were 40% compared to 41% a year ago. The decline in average utilization during the quarter reflects the softer demand from the computer semiconductor market Sales revenues increased are currently conducting a record of 30% year over year to $5,100,000 with gross profit increasing 19% to $2,900,000 The remainder of my comments will be on a total company basis from continuing operations. 1st quarter selling and administrative expenses increased $24,900,000 to $57,500,000 The increase included $14,200,000 in acquisition and divestiture related transactions costs And $3,000,000 of Vesta expenses. Interest expense was $7,500,000 An increase of $5,200,000 as the result of higher average interest rates and $142,100,000 higher average debt levels during the quarter, which was primarily the result of the funding of the Vesta and Breccy acquisitions. The 4th quarter provision for income taxes was based on an effective tax rate of 23.8% compared to 23.5% a year earlier.

Speaker 2

Turning to our year to date cash flow highlights. Net cash provided by operating activities excluding equipment received from the Vesta acquisition, were $77,700,000 compared to $39,400,000 in the prior year. With healthy modular demand pipelines and high fleet utilization, we have front loaded some of our new rental equipment capital are standing for the year. The total cash paid for acquisitions of VASTAT and BREKI was $453,600,000 And the acquisitions in the quarter, healthy cash generation allowed us to pay $11,400,000 in shareholder dividends. At quarter end, we had net borrowings of $658,800,000 comprised of $100,000,000 notes outstanding have a record record of $158,800,000 under our credit facility, with capacity to borrow an additional $91,200,000 under our lines of credit.

Speaker 2

The ratio of funded debt to the last 12 months actual adjusted EBITDA was 2.2:one. Finally, turning to our updated 2023 financial outlook. For the full year, we are increasing our outlook and currently expect results from continuing operations to be total revenue are in line with the company's call. Between $790,000,000 $820,000,000 adjusted EBITDA between $300,000,000 $315,000,000 Gross rental equipment capital expenditures between $190,000,000 $210,000,000 Please note that our adjusted EBITDA outlook excludes transaction costs related to the Vesta acquisition and Adler divestiture And also excludes the income from discontinued operations and the gain on sale from the Adler divestiture. We're very proud of McGrath's strong first quarter performance.

Speaker 2

As we look ahead for the remainder of the year, We will be working hard to integrate the acquired businesses, while staying focused on furthering our modular growth strategies. That concludes our prepared remarks. Travis, you may now open the lines for questions.

Operator

Thank you, sir. We do have a question from Scott Schneeberger with Oppenheimer.

Speaker 3

Thanks. Good afternoon, guys. I have a few questions. I'd like to start out, I guess, on mobile modular, It sounds like the pricing was quite strong. Could you speak, I guess, Keith, a little bit more specifically to each of The key asset classes, their categories, commercial, education and portable.

Speaker 3

It sounds like broad based

Speaker 2

Yes, Scott. Joe remarked the 25% lift on modular deliveries year over year. We're seeing strong pricing there. I I would say the comment is overall very strong pricing. We've put a lot of technology to work, a lot of new disciplines in how we price over the last in the market continues to yield benefit for us in the market.

Speaker 2

And I would say all that toolkit is used across As you know, when we run the business, we're balancing putting fleet to work with getting attractive pricing And our goal is to achieve overall good economic returns on the capital that we're managing. And you really see this with ongoing gains on the pricing front As well as really strong utilization. And I would point out our utilization, it was down slightly from the 4th quarter. That's a function of the Vesta fleet that we added, which was not quite as highly utilized as our legacy modular fleet. So I do want to keep that

Speaker 1

Hey, Scott, I'll just chime in there too really quick. We saw nice pricing in for new fleet that's going out. We saw nice pricing increases there for both modulars and portable storage, so

Speaker 3

Excellent. Thanks, Joe and Keith. A few more here. Could you guys probably Joe, could you speak to the classroom environment, particularly California, but across your geographies? In your prepared remarks, it sounds like that's still strong.

Speaker 3

It was good to hear weather did not really, since obviously a lot of your geographies endured some tough weather, but it sounds like you handled that very well in the quarter. But, yes, back to the core of the question, How is the classroom outlook for this year? Sounds good, but if you can go in a little deeper, I'd be appreciate it. Thank you.

Speaker 1

Yes. The classroom outlook is good, and that really ties back to funding. In California, since you asked about that specifically, The vast majority of local bond measures that get put out to voters get passed. And that's continued to happen over the have several election cycles and there's money out there available. And so what we're seeing is, even with shifting population in California, we're seeing a lot of activity out in the Central Valley right now, where there's, growth in student population that's taking place.

Speaker 1

And so that's been very good. Way over on the East Coast as an example in some states that have typically been are a little bit slower for us. We're actually seeing a lot of money be deployed right now. North Carolina is an example. They just haven't done much lately and they're actually really starting to spend money on growth because that's a nice growth state.

Speaker 1

People are moving there and they're realizing that their facilities scheduling is behind and they need to get more schools built. So That's been a good environment for us. Florida, really doing well down there. So it's just been a good environment and We have a good outlook for this year in terms of classroom placements.

Speaker 3

Sounds good. Still in Mobile Modular, just curious an update on site related services And Mobile Modular Plus, still early stages in both, a little bit more advanced in satellite services. But just how are you progressing there? I don't know that you've quantified or broken out that component, but anything qualitative you could share would be great.

Speaker 1

Yes. We have not broken that out at this point, but we're seeing growth in both of those areas as well as our Some sales that we've been emphasizing. So we're still really got the accelerator down on those things. It's emphasized and important to the division to grow those initiatives and that's what's happening. So We're very pleased with all of the metrics that we're seeing from both the Mobile Modular Plus and site related services, so

Speaker 3

Thanks. A few more here. 1, in TRS, It sounded like from your commentary, you ordered ahead of time, I guess, supply chain constraints anticipating certain demand that may not have Your sales team to right size the fleet appropriately. It sounds like that's foreshadowing of Even more challenging utilization levels to come. Is that how we should interpret that?

Speaker 3

Or is this something that

Speaker 1

Yes, Scott, it's a good question. Here's what's interesting about what's happening right now. When we look at our quote volumes, We look at our activity on our website, specifically TRS because I checked into this, it's actually quite healthy. And our actually our pipeline right now is over 10% higher than it was at the same time last year in Q1. So It's really encouraging to see those indicators out there.

Speaker 1

And the semiconductor softness, Yes, we just have to manage through it. Hopefully, it's not something that's going to be pervasive for an extended period here. But we have had some fleet come in that we ordered in the 4th quarter That hit our shelves. And if we don't see us having a good eyesight on moving that equipment out for rental opportunities, we're going to sell it. And like I said in my prepared comments, we've incented the sales force to do that and that's exactly what's taken place and that really we've managed these types of things before and I think we're well prepared to continue to do that.

Speaker 1

So I'm not overly concerned about it. Okay.

Speaker 2

One way you could maybe think about the Electronics business is in normal healthy times, Good utilization in that business is in the mid-60s. That's really good. I think with COVID and the are cautioned to ordering equipment and the extended lead times. As you commented, it's harder on our team to get exactly the right product So we've seen utilization drop more to the low 60s level and I think that's probably an appropriate level with the disruptions to supply And when we saw a drop below 60, that's just not common for us. And that's why Joe described the kinds of actions that we take.

Speaker 2

It does take a few quarters to work through a situation like that. It just means we're not running the business, I'd say, at our optimum level because we've got one portion of the market, which has got weaker demand than we typically would expect.

Speaker 3

All right. Thanks. That's helpful color. I want to turn it now to front loading the CapEx. Could you delve in a little bit more to where that allocation is going, Clearly, overall robustness, so I could probably guess, but Keith, could you share what the kind of magnitude of follow your expectations, how you're thinking about CapEx for the full year and the cadence?

Speaker 3

Thank you.

Speaker 2

Sure. A couple of things, Scott. First thing is our overall CapEx plans for the year. At this point, we haven't made a change. If you look at the guidance, The initial range we gave in February, dollars 190,000 to $210,000,000 that remains the same in our update.

Speaker 2

We have front loaded and you can see that in the cash flow statement. The vast majority of the spend is going into the modular segment. And within that segment, it's more heavily weighted on the modular building side, although we're still funding portable storage are very enthusiastically as well. There's still good opportunity there. On the modular building side, we're supporting both on the commercial side and the education side, we've seen very good market opportunities on the commercial side.

Speaker 2

And I would say that the new CapEx is being are tilted more towards markets where we're still growing the business and essentially gaining share. So if you think of the will have years and we've seen a lot of opportunity to grow and add capital in an attractive manner. And that's what we're doing and that's where we're continuing to invest. And similarly, some of the East Coast markets, Joe referenced North Carolina as an example, those are markets where we've been in the region for a while, But we haven't really reached our targeted level of presence. And so those are still long term growth markets for McGrath and we're still in a prudent way continuing to invest in the market, add equipment where we see the right opportunity.

Speaker 2

So this is all part of the longer term strategy. The level of CapEx in what I call our very strong legacy markets But the balance is more on those growth markets, markets where we still have a lot of opportunity to take on a bigger role in the market.

Speaker 3

Sounds good. Congrats on your multiple acquisitions of Wade and the strong start to the year. I'll turn it over.

Speaker 1

Thank you, Scott. Thank you.

Operator

Our next question comes from Marc Riddick with Sidoti.

Speaker 4

Hi, good afternoon.

Speaker 2

Hi, Mark.

Speaker 4

So I wanted to and this is actually kind of a question I almost never asked, but I sort of was curious about given it's encouraging that you guys weren't hit with the weather given kind of almost everybody else was. I was sort of curious though as to maybe from an opportunistic standpoint. We've seen extreme weather not just in California, but in other parts of the country. So I wondered if you had any thoughts on whether or not that could either boost a little demand for classrooms, whether there's anything that could end up being an opportunity what you're seeing there relative to maybe prior years.

Speaker 1

Mark, if it's tied to weather, I wouldn't say there's anything really significant that's taking place. In California, just an example, there were certain areas that got flooded. Think that we did get some school opportunities there because of flooding that took place. But overall, kind of the weather is an event And we deal with that particular event when it happens and then we move on. So I'm not seeing any kind of long term effects that would affect the business at this point.

Speaker 4

Okay, great. And then so I wanted to shift gears a little bit. We haven't had a chance to talk as much about, it's spend, I guess, now about a year a little over a year, I guess now actually, I guess, more than a year, time flies, since Design Space and in Kitchens and I was wondering if you could sort of give an update on that because you did make mention of sort of some of the learnings that took place, particularly with Design Space And sort of how that would play into the integration efforts with Vesta. So maybe you could give a bit of an update there.

Speaker 1

Yes. It's a good question, Mark. When we closed Design Space, McGrath actually hadn't completed a transaction of that size really ever. And What I like to refer to the team is that you have to develop muscle tone for certain things like this. And we actually hadn't develop that muscle tone.

Speaker 1

And so we went through some learning there as we acquired that business and integrated it into our systems. And I think from that experience, we have a really good process that we developed for Vesta. And I think we're coming into that are in the position, more organized and with a more clear understanding of what we need to get and when we need to get it. And I'm really happy about that and it's working out very nicely for us. We've got very organized processes.

Speaker 1

We know exactly what we need to do. The team is highly oriented on getting it done and I think we've really developed a much better muscle tone there. And so we've learned a lot and we're deploying all those learnings into the Vesta acquisition and integration. So that's why I'm very pleased that it's going well so far.

Speaker 4

Great. And then I know we sort of discussed this a little bit, I guess, but I wanted to sort of highlight the acquisitions that were done sort of since the Avesta and Adler divestitures. Wondering if you talk a little bit about sort of that expansion geographically and the various footprints that you've added with those two acquisitions. And then maybe sort of is there sort of a general target as to some key markets that you might want to get into that you're not in or is are there sort of

Speaker 3

will lead areas that

Speaker 4

you would sort of highlight as to where you really want to be in and conversely are there places you don't necessarily want to be as far as how you expand throughout the country? Thanks.

Speaker 1

Yes. So the great thing about tuck ins, especially in markets where we do not have a presence, It is a complete jump start. You get the equipment, you get some personnel typically, you get a facility that you can That really gets us a presence there, jump starts us there, gets us with a good customer list and a good gets us in with a company that has a good reputation and so off we go. And so we look for those opportunities and Our list of potential acquisitions that we have is quite long and it's a complete bonus When we get to open up a new area like we did with Breccy and we did with Dixie. Now that always doesn't happen.

Speaker 1

Sometimes Somebody may come for sale in an area that we're already operating in and that's actually a plus too. We can get it for the right price because it increase Our density and brings with it new customers. And so all these tuck ins that we're taking a look Cat right now and the 2 that we pulled the trigger on quite happy with and we'd like to do more.

Speaker 2

Yes, if I could just add

Operator

Of course, of course, go ahead.

Speaker 2

A lot of good local operators at some of whom have built really good quality fleets. And when there's a situation where those operators are considering selling the business, when we look at the ones that are attractive to us, A number of things really start to happen. One is we've got to do the deal with the right economics for both parties. But under McGrath's ownership, all the tools that Joe's describe we bring to bear on that new operation. So we can look at pricing optimization.

Speaker 2

We can look at adding additional services like Mobile modular plus some of the offerings to put inside the box. And for good operators in a good market, with our backing, we can generally grow the have a presence in that market. So they give us more places to deploy growth capital. We've done a few of these over the years, not many. Most of our growth in portable storage was completely organic, but you can see that we're seeing this as a way to add to it.

Operator

Ladies and gentlemen, that appears to be the last question. Let me now turn the call back over to Mr. Hanna for any closing remarks.

Speaker 1

I'd like to thank everyone for joining us on the call today and for your continuing interest in our company. We look forward to speaking with you again in late

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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McGrath RentCorp Q1 2023
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