Q2 2022 McGrath RentCorp Earnings Call

Ladies and gentlemen, thank you for standing by.

Welcome to the Mcgrath Bancorp second quarter 2022 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. Please press star one on your telephone keypad.

This conference call is being recorded today Thursday July 28 2022.

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.

<unk> statements regarding our full year 2022 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.

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-Q, and other SEC filings.

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 and.

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-Q for the quarter ended June 30th 2022.

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 go ahead Sir.

Thank you Chelsea and good afternoon, and thank you everyone for joining us on today's call.

For our second quarter, we delivered excellent results.

Business momentum that we highlighted previously in our first quarter continued in the second quarter and translated into positive performance across our business units.

On a companywide basis rental revenues improved by 17% together with strong sales growth of 29%.

Focus on our growth strategy and corresponding execution is continuing to show results and we remain very energized on driving our strategic initiatives to fruition.

Market conditions were favorable and we took advantage of tailwind to move the business forward for the benefit of all our stakeholders.

Turning now to observation specific to each of our business divisions first I will highlight our results for mobile modular our largest business segment.

Rental revenues grew 22% and reflected strength in our legacy business and the acquisitions, we completed in 2021.

Units on rent pricing and deployment of new fleet all grew in the quarter.

Our commercial business and education business performed well for the quarter.

Construction activity was robust and we continue to serve many diversified end customers.

Infrastructure projects, serving government needs and large commercial projects continued at healthy levels, including unit supplied to applications as diverse as military bases fire stations and space exploration companies.

Our capabilities to fulfill both rental and sales projects across both commercial and education markets continued to be a strong selling point as <unk>.

We are able to serve any combination of these customers depending on the need and project type.

Funding was good and fueled activity levels across all of our geographies.

Our education customers continue to proceed with both modernization and growth projects, depending on the geographies and particular school district needs.

Student population increases continued to be considerable drivers of business for us as districts cannot build facilities fast enough and high growth areas.

Additionally, student population shifts in states like California drove orders.

In any state there can be growth demand in counties gaining students. While also continued modernization demands and districts with no enrollment growth.

Turning to our portable storage business. This particular operation within the modular segment delivered a 33% increase in total revenues in the second quarter.

Our legacy locations as well as newer branches all continued to see growth as we gained scale and pricing was healthy.

We have been selectively adding fleet to organically grow this segment.

Our sales teams again executed very well in the second quarter and continue to focus on providing an exceptional experience for our customers with each transaction, creating continued repeat business.

At Trs <unk> and telco, we were pleased by the performance of the business for the second quarter.

Rental revenues grew by 7%.

We continue to see healthy growth in our general purpose rentals, which generally have longer rental terms.

Demand was broad based and reflected investment in R&D projects by the major technology companies as well as major companies and aerospace and defense.

Our communications rentals also grew nicely and continue to support efforts by the primary telecom carriers to implement five G.

Both field work and infrastructure work, such as fiber optic cable installation drove demand in the quarter.

Our proactive ordering a fleet in the first quarter enable us to fulfill increased customer requirements. During the second quarter. Despite some supply chain delays from suppliers.

Our highly experienced product management team does an excellent job keeping the fleet technologically up to date and positioned to fulfill customer orders.

At Adler tank rentals, we realized 18% rental revenue growth for the quarter.

Demand was broad based both in the vertical markets, we serve such as environmental services, which positively affected all of our geographic locations.

Industrial activity continued to be strong, which translated into tank and box needs for maintenance and plant work during the quarter.

Our national branch locations allow us to take advantage of projects of all sizes and to be responsive and able to help customers quickly meet their needs.

Our three business divisions have been firing on all cylinders year to date.

So now as we continue our strategic work to grow our modular business I would like to remind you about the opportunities, we see and where we are focusing our efforts.

We continue to gain traction on our solutions based approach to serving our modular customers.

Beginning with the core rental or sale of a modular building or container, we can provide everything the customer needs to use with the building on.

On the inside we can provide an array of needs, including desk chairs meeting tables and other ancillary items. We can also provide options for the customer on the outside of the units from electrical connections to ramps stairs walkways overhead covers and more.

If the project is larger we can provide turnkey assistance and hand, the finished project over to the customer when complete this.

This can include larger installations, such as administrative buildings government buildings military buildings and commercial projects for infrastructure like power plants and airport expansions.

We are in the early innings of this effort and are very encouraged by the progress we have made so far.

I would also like to thank everyone in our company for the enthusiasm they show and the relationships they have with our customers and each other.

Without our dedicated and performance oriented team, we could not deliver the type of results we realized this quarter.

Gratulation, everyone for a job well done.

Looking ahead, we have a good foundation to build from including a strong first half of the year performance runway.

Our bookings are healthy and customer feedback indicates a positive outlook.

As such we are increasing our full year guidance.

I am very pleased with our second quarter and first half performance in 2022, as we continue to execute our strategy.

Now, let me turn the call over to Keith.

Thank you Joe and good afternoon, everyone.

As Joe highlighted upfront, we delivered excellent performance in the second quarter with continued positive performance across the board.

Our core rental businesses were healthy organically, along with incremental contributions from the acquisitions of design space.

Titan storage containers completed last year as part of our strategic expansion objectives for our modular business.

Looking at overall corporate results for the second quarter total revenues increased 21% to $177 million.

The revenue increase was primarily from improved rental operations, along with higher sales revenues.

With mobile modular Trs with telco and Adler tanks, each growing rental revenues year over year, reflecting increased demand and healthy business conditions.

Second quarter, adjusted EBITDA increased 13% to $66 3 billion.

And consolidated adjusted EBITDA margin was 37%.

Breaking the operating performance started by rental division compared to the second quarter of 2021.

Mobile modular total revenues increased $26 8 million or 32% to $111 4 billion.

There were increases across all revenue streams.

Including 22% higher rental revenues.

31% higher rental related services revenues.

68% higher sales revenues.

Approximately half of the increase in rental revenues was probably design space and tightened storage containers acquisitions.

While the core organic modular wins increased a healthy 11%.

Commercial and education revenues, both increased with particular strength in commercial.

Sales revenues increased $10 billion to 2440 $8 million from both increased new and used equipment sales.

Consistent with our initiatives to character more modular equipment sales projects.

The total fleet average monthly rental rate for the quarter was $2 seven 2%.

Which was 5% higher than a year ago and reflects improved pricing conditions.

Average fleet utilization for the quarter increased to 78, 1%.

From 75, 5% a year ago.

Even as we added more fleet.

Reflecting continued improvement in market demand conditions.

Higher rental revenues were partly offset by 51% higher inventory center costs, and 10% higher depreciation expense, resulting in rental margins of 51% compared to 57% a year ago.

The higher inventory center costs reflect the addition of the acquired businesses.

Higher business activity levels, as we prepare to equipment to meet strong order activity levels.

As well as some inflation pressures for materials and labor costs.

As we experienced some rental margin pressure in the quarter. It is important to note that expenses to prepare equipment are realized in the period occurred.

But offsetting price increases that are included in rental revenues are realized over the term of the lease.

Trs with telco.

Total revenues increased three 6 million or 11% to $37 3 million.

We saw increases in both rental and sales revenues with rental revenues, increasing $1 9 million in sales revenues, increasing one 6 million.

Rental revenues for the quarter increased 7%.

We saw improved demand for communication equipment rentals, which increased 9% and continued strength in general purpose rentals up 6% compared to a year ago.

The average monthly rental rate for the quarter was 4.0% to 2%.

Up 2% compared to a year ago.

Higher average rental rate, coupled with 4% higher average equipment on rent reflects good demand and pricing for general purpose and communications equipment rentals.

Average utilization for the second quarter was 64, 5% compared to 67, 7% a year ago, resulting in rental margins of 40% unchanged from the previous year.

Sales revenues increased 35% year over year to $6 4 billion with gross profit, increasing 23% to $3 6 million.

At Adler tank rentals total revenues increased $3 7 million or 19% to $23 7 million on higher rental and rental related services revenues.

Rental revenues for the quarter increased 18%.

We continue to see demand improvement, which was broad based across our five geographic regions and six industry verticals and reflects further recovery from pandemic lows in adlers markets.

The average monthly rental rates increased 2% for the quarter to $3 three 5%.

Reflecting a generally stable pricing environment.

Average utilization for the second quarter increased to 51, 6%.

44%.

Average margins average rental margins improved to 54% compared to 49% a year ago, reflecting improved demand conditions.

The remainder of my second quarter comments will be on a total company basis.

Selling and administrative expenses increased $4 5 million or 13% to $48 million.

The primary driver of the increase was $3 1 billion higher employee salaries and benefit costs, primarily due to the addition of design space employees.

Interest expense was $3 million, an increase of $7 million. The result of higher average debt levels attributable to our strategic acquisitions last year and an increase in average interest rates.

The second quarter provision for income taxes was based on an effective tax rate of 22, 8% compared to 24, 6% a year earlier.

The reduced rate this year was primarily due to higher excess tax benefit from stock compensation.

Given the recent increase in interest rate outlook.

And our higher rental equipment capital spending for growth, which incremental increases total debt.

We don't expect full year interest expense to be approximately 14 $5 million to $15 million compared to our April estimate of $13 million to $14 million.

Turning to our year to date cash flow highlights.

Net cash provided by operating activities was 82 billion a decrease of $16 million as higher net income was offset by changes in working capital and deferred income taxes.

Rental equipment purchases.

$4 8 billion compared to $58 9 million.

The prior year.

Reflecting increased demand compared to a year ago.

Corresponding increased investment for organic growth in modular and portable storage fleet.

Healthy cash generation allowed us to pay $22 $1 million in shareholder dividends.

At quarter end, we had net borrowings of 441 5 million comprised of $160 million notes outstanding and 281 5 million under our credit facility.

The ratio of funded debt to the last 12 months actual adjusted EBITDA was $1 69 to one.

We were pleased to announce on July 15, we completed an extension of our credit facility to July of 2027, while also increasing our borrowing capacity from $420 million to $650 million.

This increased borrowing capacity makes us well positioned to continue strategic investment in our business.

Finally, we are raising with financial outlook that was previously provided in February and confirmed in April .

The positive rental and sales demand trends across each of our business segments continue to be encouraging.

For the full year.

We currently expect total revenue between 695 and $720 million.

Adjusted EBITDA between 266 and 276 million.

Gross rental equipment capital expenditures between 145 and $155 million.

That concludes our prepared remarks.

Chelsea you May now open the lines for questions.

Thank you Sir.

And at this time, if you would like to ask a question. Please press the star key followed by the one key on your Touchtone phone.

You may from this yourself from the queue at any time by pressing star Q.

Once again that is star one to ask a question.

And our first question comes from Scott Schneeberger with Oppenheimer. Your line is now open.

Thanks, very much good afternoon.

I guess I'd like to say, hey, I'd like to take us around the segments.

So.

First off just overall in mobile modular last year, some supply chain constraints.

Kicking in around this time of year and you were involved with the acquisition just curious how things have improved in that time period.

And your thoughts on sustainability overall for the segment.

I know you don't want to give 2023 guidance, but the strength youre seeing it sounds like youre comfortable through year end is it something that you believe can persists thereafter.

Yes, Scott.

Take it and.

Just to address the supply chain question Youre right. It was about this time last year that we really started talking about it it's been something that we've been.

Working through and continue to work through.

I wouldn't say that those issues have abated in any.

In a significant way, but I think we have taken definite steps to make them less acute in terms of how they've affected the business number one.

Our ordering processes.

Found different suppliers. We've ordered ahead, we've planned better or to be able to deal with some some delays also the price increases that we've experienced.

<unk> implemented a number of different price.

Increases in various parts of the business like surcharges in rental rate increases and things like that so I think we are.

We're in much better shape than we were this time last year and I feel good that we've got that under control.

In terms of the second part of your question and that is the momentum that we're seeing.

Right now.

<unk> R.

And so it was still enthusiastic about the work that they have in front of them and I'd like to point out that.

We have a couple of different places in the business, where we have a lot of resiliency.

Number one we have a lot of education business the funding dynamics in that part of the business are very strong.

There's a lot of bond money, that's been passed and so it's a matter of just selling those bonds and that typically continues even in less stable economic conditions. So that's good the technology push that we continue to see across the Trs business in terms of increasing bandwidth.

The <unk> rollout those things.

I think are going to continue even if economic conditions get softer and then when you turn to Adler, we've come off of pandemic lows in that business and we.

We're we're still not anywhere where we could be really if that business was really.

Firing on all cylinders, and we have improved quite a bit but we have still a long way to go so even if things get soft I just don't see.

See that really affecting that business significantly because yes.

Coming off of a low point so.

Hopefully that's that's helpful and explains a little bit about our.

At least our sentiment in the next months ahead here and you are right 2023, we haven't done that planning yet, but we'll be doing that in October and November .

Okay. Thanks, Joe curious.

With regard to.

The education vertical.

You mentioned data certainly sufficient funding.

Availability there.

Could you just kind of compare and contrast, this environment now.

To historical time periods in the past.

And.

It is this is it.

Better or worse average.

What youre seeing in that vertical historically and things that could speed it up or slow it down.

Actually on the horizon. Thanks.

Yes, sure actually I think it's pretty good.

We hit a little bit of a slow period during the pandemic when districts were.

Turning their attention to just trying to educate kids in a completely new environment and now the kids are back in the classrooms.

We're seeing attention turned back to facilities.

And I believe that.

I believe that.

The momentum there.

Is pretty good and I would compare it.

The equivalent of what we've seen pre pandemic.

And so.

I feel good about that part of the business.

Hi, great. Thanks, I appreciate that color.

You touched a bit on on Trs before I wanted to hone in.

As we often do on <unk> penetration.

Would you kind of where would you put us what inning of the ballgame or however, you want to term it.

Where would you put us in that process are we still very early with many many years to go.

Have you seen it accelerate at all.

From the last few quarters, just curious on an on cadence in an activity there. Thanks.

Sure Yeah, I would say we're in inning number two or three.

I mean.

From a personal perspective, I mean, I don't even have a <unk> phone and I don't really know a lot of people that do at this point so the whole network really hasnt been rolled out and in.

And a real serious matter here and so there is a lot of field work that needs to be completed and then all of the.

The data centers all of the infrastructure the backhaul the all of the fiber optic cables that need to increase.

Bandwidth there those are still being installed.

And that's going to continue so I think we're still very early I think we're going to continue to see upside from five <unk> in that part of the business I don't think it's going to be a huge spike or anything, but I think it's a nice gradual.

Increase that we'll see in a very nice part of that business that will continue to deliver for us. So overall positive sentiment there.

Thanks, and you've seen that momentum building in recent quarters out of the pandemic.

Obviously, you just forecast it which is more important than anything it will persist, but that's exactly the pattern <unk> seen yes, yes.

Yes excellent.

Alright, Thanks on that last last segment Adler.

You touched a bit on a few of the end markets served and everything sounded quite good could you confirm are you seeing growth across all the end markets that you serve or are there any that are lagging.

<unk>.

And then just any particular anecdote, particularly in the oil and gas category of what you might be seeing thanks.

Yes, I think.

We're seeing we're seeing growth and.

And pretty much all of our locations I think the one that might be a little bit.

Slower for this quarter was construction.

But the other ones that we monitor closely have really grown very nicely.

And I think the construction.

Was not necessarily any kind of slowdown indicative of what's happening in the business at all its just from quarter to quarter, sometimes we have projects come on and off ramp and it's just more a cycle type thing that we see in the business on a regular basis.

But I would I would say that turning to oil and gas.

We.

A small part of the business for US right now, it's like 5% of rental revenues in Adler and so we've really worked to have that be less of a.

And impact on the business because of the cyclicality of it but when it's strong and Thats very good for us and when there is a high price of oil that creates.

Activity in the plants.

There is more and more people that are out driving now the price of gas and <unk> and.

And everything has the plants running at full capacity.

And that situation they need to have us there in case, there is a maintenance issue or something like that that they need to address and so that type of a demand environment is always very good for us.

And like I said before we're not really depending on oil and gas to fuel that business.

To use that particular word so we're happy to see really broad based.

Demand.

Across that business, which is which really insulates us from any issues that we might have in one of the verticals.

Thanks, Joe I enjoyed the pun there.

The just a clarification in Adler with.

Youre, saying construction, just a little bit of a cyclical dynamic there.

That kind of a twofold question is that anything you are concerned about is that just a particular dynamic thats unique in construction with liquid storage containers.

And is that anything that projects to your view of construction overall, we're obviously your module or as you're serving and it sounds like it's going well.

Just kind of curious about that comment and share the difference in the patterns of those two businesses.

Yes, no no concern, it's just a normal cycle of ebb and flow in that business when projects come on and off ramp. So we're not concerned about it.

Okay, and confident about nonresidential construction and otherwise from what Youre seeing correct.

Onshore.

Yes, Thanks, Alright, great I appreciate that I will turn it over thanks for fielding all those.

Thanks Scott.

Alright, thank you.

Once again that is star one to ask a question.

Our next question will come from Marc Riddick with Sidoti. Your line is now open.

Yes.

Hi, good afternoon, everyone.

Hi, Mark.

So what.

I wanted to dive into sort of the pricing strength that you are.

We're seeing pretty much across the board, but just wanted to sort of hone in a little bit on maybe.

The execution of the pricing dynamic and maybe if you could talk a little bit about sort of how that's played out through the quarter, whether that was something that you were just able to take advantage of as you went along or was this sort of something that was.

It's greater visibility now than it has.

Well Keith I, let me start off and I don't know if you want to chime in there.

Mark I will tell you that that the.

The pricing work that we've done in the business has been very deliberate and a very focused effort to.

Improve whenever and wherever we can.

And we've I think we've shared on prior quarterly calls that we have some sophisticated tools in the business to help us do that so we watch our pricing very closely the pricing environment is healthy and we have been stepping it up wherever and whenever possible not only because we see that opportunity but.

We're very interested in mitigating the effects of the cost increases that we're seeing in the business too so.

Again, very deliberate and very focused effort on our part too.

Watch that.

Yes, Mark.

I'm sorry go ahead Keith.

Yeah, I'll highlight a couple of areas, where our teams have done a really nice work.

One area that will be no surprise is when we deliver product to customers. We're seeing the pressure of increased fuel costs and also really over the last couple of years increases in compensation for drivers. It's a challenge to find good drivers retain them.

Everybody is facing that challenge and we've made a lot of adjustments in the envelope business.

The portable storage business.

To make sure we're pricing appropriately for that part of the service and making sure we maintain a healthy margins and a lot of that work was.

Really done and reviewed and really strategically pressed on the first part of this year and we're really seeing results from that so really good work there. The other area that we've talked about it in a number of these calls as a challenge area some of the particularly the material price inflation and secondarily some.

Labor cost inflation that impacts our modular inventory centers, and that's where we're spending money to repair equipment and get equipment ready for the next rental opportunity. There I would say from a pricing point of view, we had paused or moderated some of the rate of ing.

Kris during the pandemic period, it really since the beginning of this year. We've made it a focus to look hard at adjusting pricing to help offset some of that challenge, particularly on the material cost inflation and make sure that the economics of our transactions will deliver a healthy margin over the full.

Rental terms, so again a lot of work being done in the last few months a lot of actions being implemented and I think we're paying close attention to what is still a fairly dynamic picture, but our team is doing a lot of good work on it and I think we've got the right approach.

Okay.

That's great. Thank you so much for that and then the last thing for me is I just wanted to touch a little bit on.

What youre seeing.

As far as the acquisition pipeline. There continues it seems as though there continues to be some.

Potential.

Target. So maybe just talk about the overall pipeline and your general appetite.

We're seeing currently is particularly within U S. Sterling. Thank you.

Yes, I can answer that yes.

The pipeline is healthy and we are.

Very interested in looking at opportunities and we will continue to do that.

We.

As evidenced by our transactions that we did last year. It is part of our growth strategy. It's an important part and it's one that we're going to continue to pursue so we're encouraged by the activity that we're seeing out there and as you see we are.

Did some refinancing and so we're positioning ourselves to.

To do more and we're excited about that.

With Aramark.

[laughter].

Alright, thank you.

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

Alright, Thank you very much.

We.

We are.

I'd like to thank everyone for joining us on today's call I apologize and for your continuing interest in our company. We look forward to speaking with you again in late October to review, our third quarter results.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation and you may now disconnect.

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