Q4 2022 McGrath RentCorp Earnings Call
Speaker 1: I'll see you next time.
Speaker 2: Ladies and gentlemen, thank you for standing by. Welcome to the McGrath Rent Corp. fourth quarter 2022 earnings call. At this time, all conference participants are in a listen only mode. Later we will have 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.
Speaker 2: Wednesday, February 22, 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. 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.
Speaker 2: 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 8K and is Form 10K for the year ending December 31, 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.
Speaker 3: Thank you, Gretchen. 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 strong finish to the year and positive outlook for 2023. I will start with some overall comments on our 4th quarter and full year 2022 performance as well as our look ahead. Keith will provide additional detail in his financial review and outlook comments to complete our prepared remarks before we open the call up for questions. On a total company basis, we delivered impressive results in the 4th quarter. Rental revenue increased 16%, sales revenues increased 18%, and EBITDA grew by 23%. Notably, all of our rental businesses grew in the quarter.
Speaker 3: This robust progress was achieved with a combination of good market conditions and solid execution of our strategy. Market conditions aside, our success is clearly attributable to our people. Without the dedicated work of our teams across the country, we would not have realized these strong results. I would like to thank everyone for a job well done and for continuing to provide our customers the exceptional service they have come to appreciate from McGrath. Global Modular had a strong fourth quarter performance. We saw healthy growth in units on rent, pricing, and utilization, all while adding new equipment to the rental fleet. Units on rent were up by 4%, which equates to over 1,000 additional units deployed. We maintained our focus on pricing strategically, with solid gains on fleet average pricing, as well as pricing on new orders compared to a year ago. Additionally, the performance of portable storage for the quarter was robust, with a 34% increase in rental revenues, and a
Speaker 3: reflecting solid demand and strength in execution as we continue to expand in the markets where we operate. Our strategy to be a solutions provider to our customers is yielding results. In addition to higher rental revenues, modular equipment sales revenues increased an impressive 77% for the quarter. The benefits of modular construction have gained momentum and customers are now considering a modular solution as a primary alternative to conventional construction from day one of a project. We have positioned ourselves to take full advantage of that trend and we have built an internal team to serve this exciting and growing sector of the market. At TRS Rentelco, rental revenues grew 8%, reflecting favorable market conditions in both our general purpose and communications rentals.
Speaker 3: TRS has a very strong market position and is a high ROIC business with consistent profitability and steady growth over time. We have a highly competent team capable of keeping business operations growing now and in the future. It is one of the top two competitors in its market and is positioned well to capture upside opportunities in the growing technology space. On February 1st, we announced the simultaneous acquisition of Vesta Modular and divestiture of Adler Tank Rental's business. These transactions provided a unique opportunity to leverage the value of a non-core business and to increase investment in our growing modular business. While Adler had been a part of the McGrath family of businesses for over 14 years, the sale to Ironclad Environmental was a way to give the business a new opportunity. Going forward, it will be part of an industry-leading provider of specialty waste management solutions.
Speaker 3: to accelerate and strengthen our long-term growth momentum. This work culminated in the Vesta acquisition and Adler divestiture. Now, I'll speak to 2023 and our views on the demand outlook for both Mobile Modular and TRS Rentelco. Overall, the year is off to a good start. These are the
Speaker 3: First, for Mobile Modular, on the commercial side of the business, project velocity has continued to be strong so far in 2023. We continue to believe the entrance of federal infrastructure funding is likely to be a tailwind, creating demand across all of our geographies and offsetting to any potential effect of a slower economy. With the addition of Vesta, we now have more regions to grow. With high overall fleet utilization, we are entering the year with the opportunity to deploy more growth capital by adding new equipment across key geographies. On the education side of the modular business, bond monies and local tax revenues have been healthy and we do not anticipate a slowdown in school modernization projects. We have a strong position in the education market and the addition of Vesta will help to broaden our coverage. At TRS Rentalco, we expect demand to be healthy.
Speaker 3: On the general purpose side of our business, we see solid opportunities, particularly serving the aerospace and defense markets, which may be partly offset by some anticipated softness in the computer and semiconductor markets. On a communications side, the 5G network is a longer-term positive driver for us. We expect both wired and wireless communication rentals to hold up well, driven by the continued need for more bandwidth, despite some potential uncertainty in the broader macroeconomic environment. Our TRS team is seasoned, and we are confident in their plans to seize on growth opportunities. On a total company level, we announced an increase to our dividend today, marking our 32nd consecutive year of dividend growth. McGrath has the rare distinction of being one of around 130 publicly listed companies.
Speaker 3: currently known as dividend champions, all of whom have increased their dividends more than 25 consecutive years. We are especially proud of that performance of the business that has allowed us to consistently return value to shareholders in this manner. For 2023, we will be focused on disciplined operational execution, our customers, our expanding marketplace relationships, and, as always, delivering value to our shareholders. With the acquisition of Vesta, successful integration and the realization of synergies will be priorities. In addition to deploying capital for organic growth, we have a pipeline of potential tuck-in acquisitions to smartly add new locations and add density to places where we already operate.
Speaker 3: We have an experience leadership team, track record of execution, strong balance sheet, and healthy cash flow generation to continue our long-term path of growth. Our start to 2023 has been positive, and I'm looking forward to a successful year. Now let me turn the call over to Keith. Thank you, Joe, and good afternoon everyone. As Joe highlighted, we delivered excellent results in the fourth quarter, with positive performance across the board. Our results reflect broad-based, organic strength across each of our core rental businesses. In my financial review today, I will provide highlights from our fourth quarter results. And specifics of our current outlook for full year 2023 performance. Before getting into my detailed comments, as a reminder, on February 1st, we completed the acquisition of Vesta Modular and concurrent divestiture of Advertank rentals. Both were completed subsequent to the fourth quarter. Therefore, these transactions had no operating impact during the fourth quarter to 2022 reporting period, on which I will now comment.
Speaker 3: So now on to the fourth quarter, 2022 details. Looking at the overall corporate results for the fourth quarter, total revenues increased 20% to 210.9 million. The revenue increase was from both improved rental operations and sales revenues. With mobile modular, TRS-RENTELCO and Adler tanks, each growing rental revenues year over year, reflecting generally improved business conditions in each segment. The division operating performance as compared to the fourth quarter of 2021.
Speaker 3: Mobile Modular had an impressive quarter. Total revenues increased 34.2 million, or 34%, to 133.9 million. There were increases across all revenue streams, including 18% higher rental revenues, 41% higher rental-related services revenues, and 77% higher sales revenues. In our rental operations, we saw broad-based strength across our commercial, education, and portable storage customer bases. Sales revenues increased 77%, or 15.7 million, to 35.9 million, demonstrating strong progress with our initiative to grow modular sales projects.
Speaker 3: We continued our disciplined fleet management and achieved average fleet utilization of 81.2%, up from 76.9% a year ago.
Speaker 3: This substantial utilization achievement was accomplished while also growing our fleet and increasing average rental rates. With our strategic investment focus on modules, the average fleet size for the quarter increased by 56.7 million or 6 percent and average equipment on rent increased by 89.2 million or 12 percent as we successfully improved utilization.
Speaker 3: The average monthly rental rate for the quarter was 2.86%, which was 6% higher than a year ago and reflects continued healthy pricing conditions. Higher rental revenues were partly offset by 6% higher inventory center costs and 3% higher depreciation expense, resulting in rental margins of 67% compared to 63% a year ago. At TRS Rentelco, total revenues increased 3.7 million, or 10%, to 41.4 million.
Speaker 3: We saw increases in both rental and sales revenues, with rental revenues increasing $2.3 million and sales revenues increasing $1.2 million. Rental revenues for the quarter increased 8%. We saw healthy demand for both general purpose equipment and communications rentals, which increased 8% and 9% respectively. The average monthly rental rate for the quarter was 4.2%, up 4% compared to a year ago. This 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 fourth quarter was 63%, compared to 65.9% a year ago, and rental margins were 40%, compared to 42% a year ago. Sales revenues increased 15% year over year.
Speaker 3: to $8.7 million, with gross profit increasing 42% to $5.4 million. At Adler Tank Rentals, total revenues increased $5.7 million, or 26%, to $28 million, on higher rental and rental-related services revenues. Rental revenues for the quarter increased 20%. Demand improvement was broad-based, with growth in all five of Adler's geographic regions and all six of its industry verticals. In addition, the business had a seasonally strong finish to the year. The average monthly rental rates increased 5% for the quarter to 3.5%, reflecting an improving pricing environment. Average utilization for the fourth quarter increased to 58% from 50.1%, and rental margins improved to 65% compared to 52% a year ago, reflecting healthy demand conditions and strong operating leverage. Business conditions were strong throughout the quarter.
Speaker 3: with ending utilization at 57.1%. The remainder of my fourth quarter comments will be on a total company basis. Selling at administrative expenses increased $8 million, or 21%, to $47.3 million. $4.1 million of the increase was a result of transaction costs related to the Vesta acquisition and Adler divestiture. Interest expense was $5.2 million, an increase of $2 million as the result of higher average interest rates, partly offset by lower average debt levels during the quarter. The fourth quarter provision for income taxes was based on an effective tax rate of 21.8% compared to 28.3% a year earlier. The reduction in effective tax rate this year was due to increased business activity levels in lower tax rate states. For the full year,
Speaker 3: the effective tax rate was 23.2% compared to 26.3% in 2021. Turning to our year-to-date cash flow highlights, net cash provided by operating activities was $194.4 million, which was comparable to the prior year. Rental equipment purchases were $187.7 million compared to $114.1 million in the prior year, reflecting strong organic investment in the business with a focus on our modular segment. In addition to high organic investment in new fleet, healthy cash generation allowed us to pay $44.3 million in shareholder dividends and paid on $12.7 million of debt. At quarter end, we had net borrowings of $413.8 million.
Speaker 3: comprised of 100 million notes on standing and 313.8 million under our credit facility, with capacity to borrow an additional 336.2 million under our lines of credit. The ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.45 to one. Finally, turning to our 2023 financial outlook. For 2023, we currently expect a total of 3.5 million notes of our financial outlook. The total is $2.5 million. The total is $2.5 million. The total is $2.5 million. The total is $2.5 million. The total is $2.5 million.
Speaker 3: Total revenue between $780 and $810 million, compared to $734 million in 2022. Adjusted EBITDA between $294 and $309 million, compared to $289 million in 2022. Gross rental equipment capital expenditures between $190 and $210 million, compared to $188 million in 2022. Please note that our adjusted EBITDA outlook excludes transaction costs related to the Vesta acquisition and Adler divestiture, and also excludes the anticipated gain on sale from the Adler divestiture. I have some additional comments on how the divestiture of Adler and acquisition of Vesta are expected to impact our 2023 financial statements.
Speaker 3: In conjunction with the sale of Adler, we have arranged to lease certain McGrath properties to Iron Flat, which will generate approximately $7 million income in 2023. This property lease income will be included in other revenue on the income statement and will offset approximately $7 million of annual McGrath fixed overhead previously allocated to Adler that is not transferred as part of the divestiture. With the addition of Vesta, we expect an increase in sales revenue mix and estimate approximately $190 to $210 million in revenue.
Speaker 3: of McGrath sales revenue for 2023, compared to 151 million in 2022. We estimate 2023 direct costs of rental operations other, which are primarily inventory center costs to maintain and repair rental equipment, to be approximately 119 to 125 million, compared to 117 million a year earlier. We estimate 2023 SG&A expenses, excluding transaction costs and amortization of intangibles related to the recent acquisition and divestiture of approximately 182 to 188 million.
Speaker 3: Interest expense is expected to increase to approximately $38 to $40 million as a result of higher debt levels resulting from our Vesta acquisition, combined with anticipated higher interest rates. We expect an effective tax rate of between 26% and 27%. Closing out my prepared remarks, we are very proud of McGrath's strong full year 2022 and fourth quarter performance. As we look ahead for 2023, we will be working hard to make sure that our
Speaker 3: to continue to grow our business while maintaining our focus on return on capital and furthering our modular growth strategies. That concludes our prepared remarks. Gretchen, you may now open the lines for questions. At this time, we will open the floor for questions. If you would like to ask a question, please press the star key followed by the one key on your touchtone phone. If at any time you would like to remove yourself from the question, please press star 2. Again to ask a question, please press star 1. Our first question comes from Scott Schneeberger from Oppenheimer. Thank you very much. Good afternoon. Joe, I will start out with TRS Rentelko and then a few questions over in modular. I wasn't clear when you spoke to the long-term opportunity of 5G, how are we to take the near-term business conditions on that?
Speaker 3: I'm aware that it's a very good long term opportunity, but how are you thinking about that for 2023? Thanks. Yeah, sure we anticipate that 2023 will be similar to 2022. The demand picture really has not changed significantly during the start of the year. And so we're, you know, we're optimistic on how that's going to transpire for the rest of the year. All right, sounds good. Appreciate that. Swinging over to mobile modular. The, I guess this is kind of jumping right into the model, maybe keep bringing you in, but how should we think of cadence now, particularly with sales as there's an increased sales component with Vesta. Just how should we think about the rental and sales revenue cadence as we move through the year? Yeah, Scott, let me try and offer a few comments to be helpful. I think for our business mix.
Speaker 3: look at the progress we've been making year over year with our initiatives and modulars and this is going to be an important part of the business mix. It will be bigger with the addition of Vesta and we see a lot of opportunity. A little bit trickier to call it quarter to quarter. I would look at maybe the last year or two and to get some ideas but there will be
Speaker 3: And so as Keith alluded to, there certainly will be some lumpiness here and there, but we've got a lot of projects that are scheduled to close in all of the different quarters for the year. And so they're spread out pretty well. And that's a good thing. We're very busy with a very full pipeline. It takes that actually jumps to what I was going to ask next joke.
Speaker 3: You spoke last call about already booking projects for 2023. And clearly that's going well from what you just said, but could you elaborate a little bit more? How is your visibility now versus historical and what type of projects are you seeing? Thanks. Sure. I would say that our visibility hasn't really changed too much. You know, it's obviously tougher to see in the second half of the year. But the good thing is a lot of these projects are, you know, they take a while to come to fruition. And you know, projects that we have in the pipeline now are scheduled to close at various times in the year, including Q3 and Q4, the second half of the year. So you know, overall, visibility hasn't changed too much and it's
Speaker 3: at this point, positive. In terms of the types of projects that we're seeing, it continues to be municipal and government work. There's private industry swing space that's in play. There's quite a bit of construction projects that are still taking place that we anticipate, and some of them are quite large in size and scope, that will be in the field for a while. We even got some business from the flooding that took place out here in California. So it's just been pretty broad-based and hitting a lot of different industry and market verticals.
Speaker 3: Thanks, just a couple more from me. Probably, Keith, this one's for you, I think. The synergy outlook for Vesta, you hadn't really seen their books when you announced two, three weeks ago, it was the same day as the close. Now that you've had a little bit more of a peek, is there any commentary or timing, magnitude or timing with regard to cost and revenue synergy opportunity? Yeah, Scott, I would say we don't know a whole lot more on that topic than we did just over three weeks ago, but just as a reminder, we established a goal of 8 million of EBITDA in 2024 through synergies and roughly two-thirds from the cost side, one-third from revenue opportunities. We feel very good in these early weeks with the teams coming together, discussing how to approach the market commercially, all really with a posture of doing good work for customers and winning in the marketplace.
Speaker 3: I think a lot of our work this year will be figuring out the smartest way to operate together, integrate the appropriate parts of the business. We may well have some opportunities in the second half of the year to achieve some of those efficiencies a little sooner, but I don't want to get ahead of us. There's a lot of work to be done as you will appreciate doing the work of integrating Vesta while at the same time there is work involved in the divestiture of Adler that is really quite taxing for some of our teams as we go through all this change, but we feel very good about both transactions. We see a lot of opportunity and we'll be working hard to make as much progress as we can during this year and to be set up for a very good 2024. Thanks. It's just too last one. They're very housekeeping. Could you just go over how we feel to think about in the model, some of the retained Adler assets and just how that plays into the model on.
Speaker 3: that dynamic that you expressed, which I think was new on this call versus when the deal was announced. I'll just recap and I can understand it was a level of detail that really as you said gets into some of the modeling of the value exchange, but just a recap a few of the details here if we look at the published numbers you can see today for the full year of add or ever at a very good finish to the year. And it resulted in total adjusted EBITDA for the Adler business of 37.7 million. And if you then look at the cost structure, which we provide the full detail and the full PNL, you'll see the SGNA for Adler for the full year at 28.4 million. Here's what I want to point out some of that SGNA and Adler. And first of all, I'll say three quarters of the SGNA Adler is all directly incurred in the division. But there is a portion of the portion approximately 7 million that is allocated fixed overhead of my graph. One way to think about it is some of the leadership and public company costs. For example, the cost of Joe or myself.
Speaker 3: We are allocated across the McGrath businesses. Some of that allocation is applied to Adler. So that's the kind of cost that is part of that $7 million of allocated fixed overhead to the division. Obviously, with the divestiture, that cost does not move out of McGrath. It remains in McGrath. Offsetting the fact that that cost remains at McGrath is also the fact that McGrath, for certain locations, owns the property where the Adler business operates. None of that McGrath-owned property was transferred in the transaction, and we are now a landlord to the new owner, and we will receive approximately $7 million in lease income related to the use of certain properties where the Adler business operates. So there's an exchange there where $7 million of cost remains.
Speaker 3: but we get the benefit of 7 million of lease income. Really the economic transfer of the net adjusted EBITDA impact is unchanged with what we reported in the full year results. Does that help just to recap that dynamic? Yeah, thanks. Appreciate that. And then just the tax rate this year, 22, was a good bit lower than 21, I believe. And it looks like you're guiding 23 a lot closer to the 21 rate. Just any any elaboration there on the moving pieces. Thanks. Yeah, Scott, the tricky thing is we have as is customary for a lot of the major rental companies. We have a pretty significant deferred tax life. It relates to the fact that we invest a lot of capital in rental equipment. We get some tax shielding. So we all tend to carry a large deferred tax liability. That deferred tax liability gets repriced when there's a change really in the business mix across the state.
Speaker 2: Ladies and gentlemen, that appears to be our last question. Let me now turn the call back over to Mr. Hanna for any closing remarks.
Speaker 3: 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 early May 2023 to review our 1st quarter results. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Speaker 1: The.