McGrath RentCorp Q1 2023 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Mcgrath <unk> first quarter 2023 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 you will need to press the star key Fob.
But the one key on your telephone this conference call is being recorded today Thursday may 4th 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.
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 date to update any forward looking.
<unk> 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 March 31st 2023 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 Travis good afternoon, everyone. Thank you for joining us on our call today.
We were very pleased with our first quarter, which was unlike any other in our history.
I'm incredibly proud of all that we accomplished to transform and grow Mcgrath.
We divested Adler a noncore asset acquired Vesta modular a strategic target and worked on two tuck in portable storage companies Breaky storage, which we announced on March 3rd and Dixie temporary storage, which we announced on April 3rd.
During the quarter, we also navigated the effects of unusual weather with flawless execution and delivered on a total company basis from continuing operations, 31% higher total revenues and 23% higher adjusted EBITDA.
I will begin my comments with mobile modular.
We realized rental revenue growth in all of our geographic markets and growth in our market verticals was broad based.
Customers are continuing construction projects at a strong pace 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 continue to grow nicely with a 27% increase in rental revenues and the recent tuck in acquisitions are integrating nicely and as planned.
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 than first quarter 2022.
As the fleet cycles. This rate differential works its way into the installed base increasing rates in total.
The overall effect on the bottom line is an improvement in rental operations gross profit, which we achieved in the quarter.
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 close ratios have remained consistent.
At Trs <unk> and telco the business had positive rental revenue growth, while we felt the effects of.
The computer semiconductor business slowdown as chip demand has softened worldwide.
All of our other market verticals were up for the quarter and quote volumes were above 2022.
We have taken steps to mitigate the softer demand by emphasizing sales of equipment to improve utilization.
We also felt the effects of incoming equipment that due to lead times had to be ordered well ahead of projected demand.
Secondary sales market was healthy in the quarter 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 manage 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 two divisions. We have shared on past calls that our strategic direction is to focus on growth in our modular business.
With the completion of the vast acquisition as well as work on the two tuck ins during the quarter. It should be clear that we are up holding that commitment.
The vast acquisition provides an even greater platform for growth, giving us access to 13 additional markets as well as greater density and 15 others.
The mix of commercial and education customers fits ideally with our installed base and we can effectively integrate our operations for greater efficiency.
We have been very impressed with Vesta team as they have a depth of experience and customer focus that has a great culture fit 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.
The teams have thoroughly planned the integration steps and we are in a rigorous schedule to ensure that all items are completed.
To date, we are progressing as planned.
Our first quarter 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 Tim Mcgrath for 2023 and beyond.
And our portable storage operations, we have achieved significant organic growth over the last few years too.
To expand our geographic coverage, we pursued two notable tuck ins to completion over the past few months.
Breaky opens up the Colorado market with a fleet of 2700 units, which is an excellent jumpstart for us and a vibrant and growing state.
<unk>, 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, which is another growth area for us.
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 in various locations across the U S.
We are well positioned to support these projects in the areas we operate.
The acquisitions, we completed over the past two years have provided a much larger geographic footprint and access to greater customer base.
<unk> projects are our specialty as we are a capable and experienced project management group that has been augmented with the Vesta acquisition.
With our large inventory and production centers unique in the industry. We can customize units to customer specifications, which is work we not only charge for but also gain additional loyalty from customers as they get units tailored to their needs.
This capability has been a hallmark of mobile modular for many years.
Circling back to my opening statement, we were very pleased with our first quarter 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're off to a strong start for the year and our outlook for the remainder of the year is positive.
Our on full throttle execution to grow our modular business and the steps we took in the first quarter clearly demonstrate the organization has the capability to execute M&A.
So organically and deliver excellent results.
We are confident in our outlook for 2023 and have raised guidance based on the performance of the business.
So now I will turn the call over to Keith who will expand on my overall comments with greater financial detail.
Thank you Joe and good afternoon, everyone.
As Joe highlighted we delivered strong results in the first quarter with healthy performance across the board.
Our mobile modular segment saw notable contributions from the best of modular acquisition.
With two months of performance included in our first quarter results.
Additionally, our core rental businesses, excluding the performance from our recent acquisitions.
Can you to reflect broad based organic growth during the quarter.
In my financial review today, I'm going to provide highlights from our first 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 best of modular and concurrent divestiture of Adler tank rentals.
The effects of these transformational transactions were included in the first quarter results.
As a result of the divestiture of our Adler tanks business. The company recognized a net gain on the sale of discontinued operations of $58 9 million during the quarter.
Which was included in both income from discontinued operations and the company's combined net income for the period.
The rest of my comments will be focused on our results from continuing operations.
Which excludes the impact from the Adler gain on sale and the income from the discontinued Adler operations.
Looking at the overall corporate results for the first quarter.
Total revenues increased 31% to $163 7 million.
The revenue increase was from both improved rental operations and sales revenues with mobile modular and Trs rental code each growing rental revenues year over year.
First quarter, adjusted EBITDA increased 23% to 61 8 million.
And consolidated adjusted EBITDA margin was 38%.
Breaking the results down by rental division operating performance as compared to the first quarter of 2022.
Mobile modular had an impressive quarter.
With adjusted EBITDA, increasing 40% to $42 4 million.
Total revenues increased 36 million or 40%.
$126 7 million.
There were increases across all revenue streams, including 32% higher rental revenues, 43% higher rental related services revenues and 70% higher sales revenues.
Vesta contributed $17 6 million total revenue and.
$6 8 million adjusted EBITDA for the current quarter results.
In addition to the contribution from the best acquisition, our rental operation sustained strong organic growth across our commercial education and portable storage customer basis.
Sales revenues increased 70% or $7 2 million to $17 6 million.
Demonstrating progress with our initiatives to grow modular sales projects.
<unk> contributed 6 million of the total increase in sales revenues.
We continued our disciplined fleet management and 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.
With our strategic investments focus on modular is further supported.
Reported by our recent acquisitions.
The average fleet size for the quarter increased by $170 million or 17%.
Average equipment on rent increased by $165 million or 21% as we successfully improved utilization.
The average monthly rental rates for the portfolio was 289%, 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%.
55% a year ago.
At Trs <unk> telco adjusted EBITDA was $20 6 million.
Each was comparable to last year.
Total revenues increased $2 6 million or 8% to $36 1 million.
Increases in both rental operations and sales revenues rental.
Rental revenues for the quarter increased 2%.
We saw continued demand for both general purpose equipment and communications rentals, partly offset by softer demand from the computer semiconductor market.
The average monthly rental rate with $4, one, 4% up 3% compared to a year ago.
Higher average rental rate, coupled with comparable average equipment on rent.
Stable demand and pricing for both general purpose and communications equipment rentals.
Average utilization for the first quarter was 59, 2%.
Third to 64, 6% a year ago.
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 as well as extended supply lead times for new equipment.
Sales revenues increased 30% year over year to $5 1 million with gross profit, increasing 19% to $2 9 million.
The remainder of my comments will be on a total company basis from continuing operations.
First quarter, selling and administrative expenses increased $24 9 million to 57 5 million.
The increase included $14 2 million in acquisition and divestiture related transaction costs.
And $3 million of best expenses.
Interest expense was seven 5 million an increase of $5 2 million as the result of higher average interest rates and $142 1 million higher average debt levels during the quarter, which was primarily the result of the funding of the best and Breaky acquisitions.
The fourth quarter provision for income taxes was based on an effective tax rate of 23, 8% compared to 23, 5% a year earlier.
Turning to our year to date cash flow highlights net cash provided by operating activities was $35 7 million compared to $51 7 million in the prior year with transaction expenses accounting for most of the reduction.
Rental equipment purchases, excluding equipment received from the best acquisition were $77 7 million compared to $39 4 million in the prior year.
With healthy modular demand pipelines and high fleet utilization, we have frontloaded some of our new rental equipment capital spending for the year.
The total cash paid for acquisitions of best Denton Breaky was $453 6 million.
Emphasizing our strategic initiatives to grow the modular segment.
In addition to significant investments in new fleet and the acquisitions in the quarter healthy cash generation allowed us to pay 11 4 million in shareholder dividends.
At quarter end, we had net borrowings of $658 8 million comprised of 100 million notes outstanding and $558 8 million under our credit facility with capacity to borrow an additional $91 2 million under our lines of credit.
The ratio of funded debt to the last 12 months actual adjusted EBITDA was $2 two to one.
One.
Finally, turning to our updated 2023 financial outlook for.
For the full year, we are increasing our outlook and currently expect results from continuing operations to be <unk>.
Total revenue between 790 and $820 million.
Adjusted EBITDA between 300 and $315 million.
Gross rental equipment capital expenditures between $190 and $210 million.
Please note that our adjusted EBITDA outlook excludes transaction costs related to divest acquisition and Adler divestiture.
It also excludes the income from discontinued operations and the gain on sale from the Adler divestiture.
We're very proud of <unk> strong first quarter performance as.
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.
Thank you Sir at this time, if you would like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue at any time by pressing star to once again that is star one to ask a question, we'll pause for a moment to allow questions to queue.
We do have a question from Scott Schneeberger with Oppenheimer.
Thanks, Good afternoon guys.
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.
The key asset classes, there are categories commercial education and portable.
It sounds like broad based strong, but more some places than others just kind of curious what you are seeing there and sustainability.
Yes, Scott Joe remarked, the 25% lift on modular deliveries year over year, we're seeing strong pricing there I would say the comment is overall very strong pricing and we've put a lot of technology to work a lot of new disciplines in how we price over the last few years.
That continues to yield benefit for us in the market and I would say all of that toolkit is used across the board 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 mad.
<unk> 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 was down slightly from the fourth 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.
We want to keep that in focus as well very good achievements by the business' strong gains on pricing very healthy utilization and absorbing the Vesta fleet.
Hey, Scott I'll just chime in there are two really quick we saw nice.
Pricing for new fleet, that's going out.
We saw a nice pricing.
Hi.
Increases there for both modular and portable storage so.
And both of those parts of the business.
Excellent Thanks Jo Ann.
A few more here.
Could you guys Hi, Joe.
You speak to the classroom environment.
Particularly California, but across your geography.
Prepared remarks sounds like Thats still strong it was good to hear whether did not really.
Obviously, a lot of your geographies endured some tough weather, but it sounded like you handled that very well in the quarter, but back to that back to the core of the question how does the classroom.
Outlook for this year it sounds it sounds good but if you can go into a little deeper would be appreciated. Thank you.
Yes, the classroom outlook is good.
Thats 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 has continued to happen over the last several election cycles and there is there is money out there available and so what we're seeing is.
Even with with shifting of population in California, we're seeing a lot of activity on the Central Valley right now.
Where there is.
Where there is.
Both in student population Thats, taking place and so that's been a very good.
Lay over on the East Coast as an example in some states that have typically been a little bit slower for us we're actually seeing a lot of money being deployed right now North Carolina as an example.
They just havent done much lately and they're actually really starting to spend money on growth because that's a that's a nice growth state with 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 where we are.
We have a good outlook for this year in terms of classroom placements.
Sounds good.
It's still in mobile modular.
Just curious an update on site related services and mobile modular plus.
Yeah.
Still early stages in both a little bit more advanced than say, Larry serious but just how are you progressing there I don't know that you've quantified or broken out that component but.
Anything qualitatively you can share would be great.
Yes, we have not broken that out at this point, but we're seeing growth and both of those areas as well as our custom sales that we've been emphasizing so we're still.
Really got the accelerator down on those things.
<unk> emphasized an 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 mobile modular plus and site related services, so all up into the right.
Thanks, a few more here one.
Yes.
It sounded like.
From your commentary you ordered ahead of time, I guess supply chain constraints anticipating certain demand that may not have arisen.
It sounds like semiconductor specifically, but.
You said you've incentivized.
Your sales team to rightsize the fleet appropriately it sounds like Thats for shadowing of even more challenging utilization levels to come.
Is that how we should interpret that or is this something that.
Is a shorter term speed bump that that youre going to navigate through successfully.
And move volume beyond quickly.
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 the first quarter. So it's really encouraging to see those indicators out there.
And.
Semiconductor softness.
Yes, we just have to manage through it.
Hopefully its not something thats going to be pervasive for an extended period here, but.
We have had some fleet come in that we ordered in the fourth quarter.
<unk> 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 incentive the salesforce to do that and Thats exactly whats taken place.
That really kicked off in early April so.
I see this as a as a cycle for us we manage these types of things before and I think we are well prepared to continue to do that so I'm not overly concerned about it.
Okay, Hey, you can maybe think about the electronics business is in normal healthy times.
Good utilization in that business is in the mid sixties, that's really good I think with Covid and the disruption to ordering equipment and the extended lead times as you commented it's harder on our team to get exactly the right product.
On the shelf so to speak in a timely fashion you have to make estimates much further ahead of the point of demand. So we've seen utilization drop more to the low <unk> level and I think that's probably an appropriate level with the disruptions to supply lead times and when we saw drop below.
60, that's just not common for us and Thats why Joe described the kinds of actions that we take it does take a few quarters to work through a situation like that it just means we're not running the business I would say at our optimum level because we've got one portion of the market, which has got weaker demand than we typically would expect.
All right. Thanks, that's helpful color I wanted to turn it now to two frontloading. The Capex could you delve in a little bit more to where that allocation is going.
Clearly overall robustness so.
I can probably guess, but Keith could you share.
Yes.
What kind of magnitude of full year expectations.
How youre thinking about capex for the full year.
And the cadence thank you.
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 190 to 210 that remain the same in her update.
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 are still funding portable storage very enthusiastically is while there is still good opportunity there on the modular building.
Side, we're supporting both the commercial side and the education side, we've seen very good market opportunities on the commercial side and I would say that the new capex is being tilted more towards markets, where we're still growing the business and essentially gaining share. So if you think of the <unk>.
<unk> space acquisition that opened up a presence in a lot of the western states, where now in those markets for a couple of years and we've seen a lot of opportunity to grow and add capital.
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 in the region for a while but we haven't really reached our targeted level of presence and so those are still long term.
<unk> markets from a graph and we're still in a prudent way continuing to invest in the market add equipment, where we see the right opportunity. So this is all part of the longer term strategy.
The level of Capex in what I call, our very strong legacy markets is not as is not as big a factor we already have a lot of equipment in California, we have a very good presence there, but the balances more on those growth markets markets, where we still have a lot of opportunity to take on a bigger role in the.
A market.
Sounds good congrats on.
Multiple acquisition of acquisition the weight and the strong start to the year I will turn it over.
Scott.
Our next question comes from Marc Riddick with Sidoti.
Hi, good afternoon.
Hi, Mark.
So I wanted to.
This is actually kind of a question I almost never ask what I sort of was curious about given it's encouraging that you guys were hit with weather given kind of almost everybody else. It was I was sort of curious, though as to maybe maybe from an opportunistic standpoint, we've seen extreme weather and not just in California, but in other parts of the country. So I Wonder if you had any.
Your thoughts on whether or not that could either boost a little demand for classrooms, whether there's anything that that could end up being an opportunity from what you're seeing there relative to maybe prior years.
Mark if it's tied to whether I wouldn't say, there's anything really really significant that's taking place.
In California. Just example, there were certain areas that got flooded.
Now that that had a tendency to kind of push some construction projects and things like that but and I think that we did get some school opportunities there because of flooding that took place, but overall kind of the weather as 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.
Okay, Great and then so I wanted to shift gears, a little bit we havent had a chance to talk as much about.
It's been I guess now, but at a little over a year I guess now actually it's more than a year at the time flash.
Since the design space.
Wondering sort of given an update on that because you did make mention of sort of some of the learnings that took place, particularly with design space and.
And sort of how that would play into the <unk>.
The integration efforts with Vesta says, maybe you could give a bit of an update there.
Yes.
Good question Mark.
When we when we close design space.
Graph actually hadn't completed it.
With a transaction of that size really ever and so.
We.
What I'd like to refer to the teams that you have to develop muscle tone for certain things like this and.
We actually hadn't developed that muscle tone, 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 develop for Vesta and I think we're coming into that.
Acquisition, more organized and with a with a more clear understanding of what we need to get in 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. We know exactly what we need to do the team is really highly oriented on getting it done and I think we've really developed.
Much better muscle tone, there and so we've learned a lot and we're deploying all of those learnings into the Vesta.
Vesta acquisition and integration so.
That's why I'm very pleased that is going well well so far.
Great and then I know, we sort of discussed this a little bit I guess.
I wanted to sort of highlight the acquisitions that were done sort of.
Since.
The assessor in Adler.
Sure I was wondering if you talk a little bit about sort of that expansion geographically.
Its footprints that you've added with those with those two acquisitions and then maybe sort of.
There is sort of a general target is to some key markets that you might want to get into that youre not in or are.
Or are there sort of.
Lead areas that 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.
So the great thing about tuck ins, especially in markets, where we do not have a presence is it is a complete jumpstart you get the equipment you get some personnel typically you get a facility that you can.
Jumpstart and expand from and so with the <unk> acquisition. As an example, we really didn't have much of a presence in Colorado that really gets us a presence there jumpstarts us there gets us.
Good customer list and a good rapid.
Gets us in with a company that has a good reputation and 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 it's a complete bonus when when we get to open up a new area like we did with <unk> and we did with Dixie now that always doesn't happen, sometimes somebody may come for sale in an area that we're already operating in and that's actually a plus two if we can get it for the right price because of it.
Increases our density.
<unk> brings with it new customers and so all.
All of these tuck ins.
That we're taking a look at it right now and the two that we pulled the trigger on quite happy with and we'd like to do more.
Good day.
Yes, if I could just add of course I'm sorry go ahead.
A lot of good local operators and some of whom have built really good quality fleets and when there is 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 ownership, all the tools that Jos described we bring to bear on that new operation. So we can look at pricing optimization, we can look at adding additional service services.
Mobile modular plus some of the offerings to put inside the box and for good operators and a good market with our banking we can generally grow the presence in the market. So they give us more places to deploy growth capital. We've done a few of these over the years. Many most of our growth in portable storage was complete.
The organic but we've been seeing.
This is the way to add to it.
Sounds great. Thank you very much guys.
Thanks, Mark Thank you.
Ladies and gentlemen, there appears to be the last question. Let me now turn the call back over to Mr. Hannah for any closing remarks.
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 July to review, our second quarter results.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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