Q1 2024 McGrath RentCorp Earnings Call

Participants

Joseph Hanna; President, Chief Executive Officer; McGrath RentCorp

Keith Pratt; Executive Vice President, Chief Financial Officer; McGrath RentCorp

Scott Schneeberger Schneeberger; Analyst; Oppenheimer & Co., Inc.

Marc Riddick; Analyst; Sidoti & Company

Presentation

Operator

Please standby. We're about to begin. Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp earnings conference call. (Operator Instructions) This conference call is being recorded today, Thursday, April 25, 2024.
Before we begin, note that the matters the company management will be using 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 -- 10-Q, 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.

Joseph Hanna

Thank you, Boe. 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 a 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 (technical difficulty) 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 address 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 project larger and more complex 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 realized strong growth increases in both Mobile Modular Plus and site-related services of 26% and 31%, 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 that 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. The returns were higher year over year. Importantly, we executed well, and our close ratios remained steady.
At TRS-RenTelco, 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 just collectively reduced our fleet size by $7 million during the quarter. Our team has significant depth of experience, and we are confident on our ability to manage the portfolio effectively through cycles.
Since we announced the merger agreement with WillScot Mobile Mini on January 29, and while the transaction is still pending, we continue to operate with a business-as-usual mindset. During this period, our team has remained very focused on delivering exceptional service to our customers and to each other. I could not be more pleased with our 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 WillScot 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.

Keith Pratt

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 $0.28 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 including 19% higher rental revenue, 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 1, 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 initiatives 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 as 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 $15.4 million (sic - see press release, "$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 TRS-RenTelco. 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 software business conditions with 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 continued 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 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 WillScot merger.
2023 costs included $14.1 million investment acquisition and Adler divestiture related transaction costs. Interest expense was $12.7 million, an increase of $5.2 million as a result of higher average interest rates and $215 million higher average backlog 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 23, 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 the graphs strong first quarter performance, and we are fully focused on solid execution for the remainder of 2024. That concludes our prepared remarks. Boe, you may now open the lines for questions.

Question and Answer Session

Keith Pratt

(Operator Instructions) Scott Schneeberger, Oppenheimer.

Scott Schneeberger Schneeberger

Thanks very much. Good afternoon, guys. Hey, for the first question, and I have a bunch, I think you said it about in dollar terms and I have another chance to go back and reconcile, what was the organic growth in modular versus the Vesta distribution since we were dealing with a partial quarter? Thanks.

Keith Pratt

Yeah. On the rental revenue side, approximately 12% organic.

Scott Schneeberger Schneeberger

Thanks. Appreciate that. With regard to pricing, and this is a question relating to slide 24, and I have the feeling Vesta played into this answer here. But your units shipped over the last 12 months, modular grew 9% year over year in the first quarter. The total portfolio -- plus 18% year over year.
I'm little confused. I mean, both nice numbers, but I'm a little bit confused by the magnitude of each, and I suspect it has to do it. I read the footnote you started including Vesta in November of '23. Is that the main difference there? And could you take us through that a little bit, please, Keith?

Keith Pratt

Yeah, I think that is the main difference, Scott. Again, that is the data, the footnotes are important as you understand the data. As you'd lean from the footnotes, we're reflecting the data we have available from our systems. And Vesta, we've incorporated into the data capture on the 1st of November.
And I think the trends are still positive across the business. We are getting more revenue per unit on rent. I think that reflects a couple of things. One is units are more expensive, both the purchase and maintain. So we have to charge accordingly. And importantly, we're adding more services into the business. So with some of our contract, capturing more of the Mobile Modular Plus services to further enhances the revenue per units.

Scott Schneeberger Schneeberger

All right. Thanks. Some volume questions. I think Joe may have referenced that ABI's been bouncing around on recently. I think he addressed it when he was speaking to portable storage containers. But just curious what are you seeing in the demand environment for both of the two major asset classes in mobile modular, both portable and modulars since we last spoke in mid-February? Thanks.

Joseph Hanna

Yeah. Scott, actually, as I referenced in the comments, our rental backlog right now is very strong, and that's mostly supported by really good orders that we've received so far for our education. So that's been a highlight, I think, of the quarter. Actually, not only in bookings that we made, but the actual billings too. So that part of the business is strong.
I would say, a little bit more muted in the commercial construction market, just not quite the activity level that we've seen in prior years, but still hanging in there, still pretty steady. And so I would say that would be the two major differences.

Scott Schneeberger Schneeberger

Thanks. And Joe, you mentioned that you pull forward CapEx, and this brings Keith into conversation. Pulled forward Capex is -- I know that moving away from the annual guidance here. But is this pull forward CapEx, are you looking to do more? Or is it just we'd do it earlier? And it sounds like it's predominantly on education, classroom modulars. Is this access for anything else? Or would you be doing actually [left] if not for the educational? Thanks.

Keith Pratt

Yeah, Scott, here's the way I'd frame it. It's really driven by the education market. As Joe commented, education market conditions have been good for the first part of the year. I think you'll recall the education market is seasonal. Most of the activations will be in the summer months. So we really have to front-load the CapEx to meet demand in that part of the market.
We're certainly adding some fleet selectively. But I would say the new CapEx focus is much more in the education side of the business, and it needs to happen early in the year to be effective.

Scott Schneeberger Schneeberger

Thanks, Keith. There's a question on portable storage utilization. You've only been reporting that segment separately the last two quarters. But it's been down about 1,000 basis points, give or take year over year, and we don't have the historical context prior. But what is the big difference there year over year if you could just elaborate a little bit? Thanks.

Joseph Hanna

Yeah. Scott, I would say we have a bigger fleet. So units on rent have actually hung in there pretty well. Utilization has dropped. And we've gotten more returns than we had planned, and bookings were quite as strong as we had planned in the quarter. So I think that's really what you're seeing in the numbers there.

Scott Schneeberger Schneeberger

And first quarter, Joe, is a seasonally soft this quarter, right?

Joseph Hanna

Correct. Absolutely.

Scott Schneeberger Schneeberger

All right. Thanks. I'm going to pivot over. I'm getting toward the end here. Thanks.
TRS-RenTelco still semiconductor softness. Are you seeing any sign to return, any visibility there? Is it's still tough to call?

Joseph Hanna

Yes, it's still pretty tough to call. And as you know, in that business, our rental terms are shorter, hard to see, out far over the hood there. And so we take it on a month by month by month basis. So a little bit tough to predict right now, but we're pulling all the right levers in the business to adjust for the current market conditions. So I'm pleased that the team is taking the steps that they are to keep the business healthy.

Operator

Any quick comments 4G to 5G? Just any progress report on that? Thanks.

Joseph Hanna

Not really. No big developments there on to speak of.

Scott Schneeberger Schneeberger

Okay, thanks. And then I'll wrap it up. Recently, a proxy out having to do with your pending transaction with WillScot Mobile Mini. It was provided revenue, EBITDA, and EBIT, unlevered free cash flow for the business through 2028. Just curious kind of high -- I mean, obviously, that's out there publicly for all the [C]. What was behind kind of some of the major assumptions that you're applying, particularly to the revenue line as that was put together? Thanks.

Joseph Hanna

(multiple speakers) Yeah, go ahead. I'm going to make a quick comment and Keith can give you more color. I would say that what we really wanted to do there as we put those projections together were to filter in the initiatives that we have that are going in the business too.
And so we tried to predict further penetration of those initiatives into all the work that we're doing on a current basis. And so we rolled all that forward. Keith, I don't know if you want to add anything to that.

Keith Pratt

That was going to be exactly my point, Joe, and really emphasizing that was our organic outlook for the business we own and operate. We see a lot of opportunities with it. A lot of those opportunities are based around the modular growth strategy that we've articulated over the last few years. And I think you see in today's report card that we continue to make progress in those areas.

Scott Schneeberger Schneeberger

Thanks. And for both uses such as with regard to initiative is, what you're doing with regard to add on inside and outside the assets? And then just maybe, Keith, maybe some consideration for what type of economic outlook is. I mean, it's a five year on outlook. So are you -- what type of K or GDP are you anticipating there? And anything else, just kind of -- as you know, acquisitions are in that number, but just wanted to clarify. Thanks.

Keith Pratt

Yeah, all organic, no acquisitions. When we put together any forecast, we really begin by looking at the overall economic backdrop. We review published studies that are out there. And then when we look at specific studies that are related to important end markets that we serve.
So things like ADI, construction spending and the like, outlook for school spending, school enrollment. All those kinds of things we'll take a look at as we formulate our forecast. So that's all in the normal course of business. And what is done is we develop the forecast with the information that is most current at the time they're put together.

Scott Schneeberger Schneeberger

Great. Thanks. I appreciate that. That's helpful.
One more and I'm going to sneak in, it's the real estate sale. Can you share a little bit more color on tha, and I'll turn it over. Thanks, guys.

Keith Pratt

Yeah, Scott, as you know, for certain key operating locations, we may own our property across our businesses. And in this particular instance, this is a property which Adler Tank Rentals was the division that used the property, and obviously, we divested that business last year. We had an opportunity to sell the property and can use that capital to redeploy it into the modular side of the business.

Scott Schneeberger Schneeberger

Sounds good. Thanks, guys.

Keith Pratt

Thank you.

Joseph Hanna

Thank you.

Operator

Marc Riddick, Sidoti.

Marc Riddick

Hi, good evening.

Keith Pratt

Hi, Marc.

Marc Riddick

So I was wondering if you could take us back to the strength of education for a moment because I think it's interesting, the commentary there. It seems as though things we're looking pretty good already as we got to the end of last year in that space. So can you maybe just take us through maybe a couple of puts and takes as to what was stronger than what you expected, whether it was a mix issue, pricing? Was it really a bumped-up education, maybe a little faster than what maybe you were expecting at the end of the year?

Joseph Hanna

Sure. I would say that's really the main driver of our education business. It's the amount of money that's out on local bond measures and state bond measures. Primarily, what we're seeing now is more local bonds. And so those go out on the ballot for election, they passed via a nice majority usually. And those are significant bonds that pass in these municipalities for modernization and for growth projects.
And over the past year or so, a lot of those have passed, and that money is now being deployed in the market right now. And we're positioned very nicely to take advantage of it. And it's really solid execution, our relationships with our education clients. That really bring those projects to fruition. So we're very pleased with how that market has developed.

Marc Riddick

So it's the funding availability that had been building the last couple of years. Folks are now more comfortable in releasing those and putting that work. Is that particularly in California and/or Texas? Or are there any particular areas that you're seeing, or is it across the board?

Joseph Hanna

It's across the board. You're absolutely right. That money is being deployed, and it's across the board.

Marc Riddick

Excellent. Excellent. And then so you talked about bringing forward some of the CapEx to address that. And obviously, there's the seasonal nature and the timing of when those will be delivered. Do you get any sense of any supply chain concerns as to what you'll need, or how should we think about?

Joseph Hanna

Yeah. So I would say supply chain issues, we manage that very carefully. We have excellent relationships with our suppliers. We work with them to reserve line time, and we're not seeing that being a hindrance to us at all for this year.
It's been tied in prior years, not quite as tight this year. But like I said, we manage it very carefully, and I think we're in very good shape there with our suppliers.

Marc Riddick

Okay, excellent. And finally, it seems as though with the pricing dynamic that you guys have been working on for quite some time continues to generally move in the right direction. I was wondering if you could talk a little bit about those efforts and if there any pieces that we should be aware of that maybe we have another chance to talk about as much lately?

Keith Pratt

Marc, as we commented earlier, the goal here is deliver more value to the customer. We're achieving better revenue per unit deployed. That's partly because of the services emphasis. It also reflects higher cost of new equipment and a higher cost of maintaining equipment and getting it went already.
So this is all about protecting our economics. We've talked about that over the last few years. And I think our teams have done really good work addressing these issues, and that's reflected in the numbers.

Marc Riddick

And then I guess the last one for me with given what's taking place, I was wondering if you could talk a little bit about how you see the labor market and development. I think the entire time I've covered you, I have always worried about not being able to get enough drivers. And I would imagine that could be something that could be undertaken as well. But maybe you could talk a little bit about the labor market and what your experience in that.

Joseph Hanna

Yeah. Actually, this year, we've been able to fill open positions pretty effectively. You're right, the driver market typically is one. That's very, very tight. And we have -- we're not experiencing any specific issues right now in filling those roles. So I feel very good that we have the right labor at the right places in the company to get the job done that we need to right now. So I think we're in pretty good shape.

Marc Riddick

Excellent. Thank you very much.

Joseph Hanna

Thank you, Marc.

Keith Pratt

Thank you.

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 comments.

Joseph Hanna

I'd like to thank everyone for joining us on the call today and for your continuing interest in our company.

Operator

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