McGrath RentCorp (NASDAQ:MGRC) Q4 2023 Earnings Call Transcript

McGrath RentCorp (NASDAQ:MGRC) Q4 2023 Earnings Call Transcript February 21, 2024

McGrath RentCorp isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Fourth Quarter 2023 Earnings Conference Call. At this time, all conference participants are in a listen-only mode. Later, we will conduct a question and answer session. [Operator Instructions] This conference call is being recorded today, Wednesday, February 21, 2024. 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 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 for the quarter ended December 31, 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.

Joe Hanna: Thank you, Bill. Good afternoon, everyone. Thank you for joining us on our call today. We are pleased to be together today and look forward to providing additional perspective on our strong finish to the year. I will start with some overall comments on our fourth quarter and full year 2023 performance and Keith will provide additional detail in his financial review before we open the call up for questions. On a total company basis, we delivered strong results in the fourth quarter. Rental revenue increased 19%, sales revenues increased 12%, and adjusted EBITDA grew by 12%. This progress was achieved with a combination of stable modular and storage market conditions and solid execution of our strategy. Along with a good market, our people made all the difference.

Without the dedicated work of our teams across the country, we would not have realized these strong results. Mobile modular had impressive fourth quarter performance. Rental revenue increased 37%. Equipment on rent increased for the fourth quarter, both from Vesta equipment integrated into the fleet and augmented with organic growth. Pricing also continued to see healthy gains with higher new shipment rates driving total fleet pricing positively. We maintained our focus on pricing optimization 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 healthy with a 13% increase in rental revenues. This increase reflected strength and execution as we expanded in the markets where we operate.

Our strategy to be a solution provider to our customers yielded results. We realized healthy growth with our mobile modular plus and site-related services initiatives. These initiatives provided convenience and value to our customers. In addition, modular equipment sales revenues increased 21% for the quarter. The organization infrastructure we have built to enable custom modular sales gained traction in the market and our team was more productive. At TRS-RenTelco, rental revenues decreased by 11% reflecting continued weakness in the computer and semiconductor part of the business. To adjust for the softer market conditions, we reduced purchases of new equipment and sold fleet, reducing our fleet size by 9.5 million during the quarter. Our team was very focused on managing the portfolio effectively in varied market conditions.

We continued work on the Vesta integration during the year. In November, we successfully moved all Vesta transaction and financial systems over to McGrath and we are now fully integrated. Overall, Vesta has performed very well and we saw many successes in the combined businesses during the fourth quarter and for all of 2023. I'm very proud of everything we accomplished in 2023. Integrating Vesta was a lot of extra effort for our teams who tirelessly worked to ensure we achieved all of our internal milestones on time and with success. Simultaneously, we executed well on our growth initiatives with positive moves in pricing and utilization while also finding opportunities to deploy new fleet. In addition, we completed three portable storage tuck-in acquisitions, opening some new markets and increasing density in others.

We also grew new modular sales as we continued to position ourselves as a solutions provider to a wider customer base. All of this demonstrated successful execution of our strategy that we implemented over the past few years. Reflecting on the impressive performance track record for McGrath, none of it would have been possible without the dedication and commitment of our entire McGrath workforce. This is a special company filled with people who truly understand the meaning of service to each other and to our customers. The engagement and level of commitment has been truly inspiring to me and I'm privileged to lead such a wonderful group of people. To everyone, I would like to extend my sincere thank you for a job well done in 2023. You should all be very proud.

On January 29th, we announced the merger with WillScot Mobile Mini for $3.8 billion. This marks a transformation for McGrath as we become part of a new organization. Our focus will remain on execution of our plans and delivering positive financial results. We will not be providing any financial guidance or outlook for 2024. This conference call will address only our fourth quarter and full year 2023 results. Additional information about the merger will be set forth in the joint proxy statement that we will file together with WillScot. Now, let me turn the call over to Keith.

An engineer carrying a housing panel for a modular building across a construction site.

Keith Pratt: Thank you, Joe, and good afternoon, everyone. As Joe highlighted, we delivered strong results in the fourth quarter, driven by the performance in our mobile modular and portable storage businesses. Looking at the overall corporate results for the fourth quarter, total revenues increased 21% to $221.6 million, and adjusted EBITDA increased 12% to $87.9 million. During the fourth quarter, we determined that our portable storage business met the accounting standards criteria for separate recognition in a reportable segment. Our discussion today will therefore include separate reviews of both our mobile modular and portable storage disaggregated segments. Turning to review of Mobile Modular's operating performance, as compared to the fourth quarter of 2022, mobile modular had an impressive quarter, with adjusted EBITDA increasing 27% to $54.1 million.

Total revenues increased 36% to $150.7 million. There were increases across all revenue streams, including 37% higher rental revenues, 50% higher rental-related services revenues, and 21% higher sales revenues. Vesta Modular acquisition was an important contributor to fourth quarter results, and accounted for approximately two-thirds of mobile modular rental revenue growth. In addition to the contributions from Vesta, our rental operations experienced strong organic growth across our commercial and education customer bases. Sales revenues increased $7.4 million to $42.3 million, demonstrating execution of our initiative to grow modular sales projects. We continued our discipline fleet management on a much larger fleet, and achieved a 32% higher average rental equipment on rent, with average fleet utilization of 79.7% compared to 80.5% a year ago.

Keep in mind that we have achieved this healthy total fleet utilization while integrating Vesta's fleet, which was utilized in the mid-70s at time of acquisition. The average monthly rental rate for the portfolio was 2.75%, which was 4% higher than a year ago, and reflects our focus on pricing optimization, as well as healthy market conditions. Rental revenues increased by 37%, while inventory center costs increased 29% and depreciation expense increased 37%, resulting in rental margins of 63%, up from 62% a year ago. Similar to last quarter, I will share additional data that help illustrate our progress with our modular business strategic focus. Fourth quarter monthly revenue per unit on rent increased 15% year-over-year to $743, for new shipments over the last 12 months, the average monthly revenue per unit increased 13% to $1,059.

These pricing dynamics are significant positive revenue drivers. As the rental fleet churns, we expect a rental revenue tailwind as the average rental unit pricing for all units on rent moves towards current market rates. Progress with Mobile Modular Plus is embedded in these data points, and is an additional growth driver. We continue to make progress with our modular services offerings. For the full year 2023, Mobile Modular Plus revenues increased to $27.5 million from $19.1 million a year earlier, and site related services increased to $24.5 million, up from $14.1 million. As I mentioned earlier, we are now providing portable storage information as a separate segment, disaggregated from the Mobile Modular segment. So I will now provide a review of portable storage in the fourth quarter.

Adjusted EBITDA for portable storage was $12.8 million, an increase of 20% compared to the prior year. During the quarter, we saw increases in all revenue streams at portable storage, resulting in a total revenue increase of 18% to $27 million. Rental revenues for the quarter increased 13% to $19.8 million, and rental margins were 87%, up from 86% a year earlier. The average monthly rental rate was 4.02%, an increase of 7%, which reflects healthy market conditions. Average rental equipment on rent increased 6%, while average utilization for the quarter was 74.8%, compared to 84.9% a year ago. Turning now to a review of TRS-RenTelco, adjusted EBITDA was $20.7 million, a decreased of 18% compared to last year. Total revenues decreased $6.2 million, or 15%, to $35.2 million.

Rental revenues for the quarter decreased 11%, as we experienced continued softness in semiconductor-related demand. The average monthly rental rate was 4.16%, a decrease of 1%. Average utilization for the quarter was 58.9%, compared to 63% a year ago. And rental margins were 41%, compared to 42% a year ago. Sales revenues decreased 34% year-over-year to $5.8 million, with gross profit decreasing to $3.2 million as a result of lower sales revenues and decreased margins. To address the challenging business conditions at TRS, we maintained 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 a peak of $398 million at the end of March to $374 million at the end of December.

We continued to make progress with reducing fleet size to better align with demand conditions. The remainder of my comments will be on a total company basis from continuing operations. Fourth quarter selling and administrative expenses increased $15 million to $54.5 million. The increase primarily reflects the addition of Vesta, higher variable compensation, and $1.7 million of M&A transaction expenses. Interest expense was $12.1 million, an increase of $8 million, as a result of higher average interest rates and $317 million higher average debt levels during the quarter, which was primarily the result of funding of our acquisitions. The fourth quarter provision for income taxes was based on an effective tax rate of 26.7%, compared to 21.8% a year earlier.

The increase 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 $95 million, compared to $194 million in the prior year. Tax payments related to the gain on sale of Adler Tank Rentals had funded for most of the reduction. Rental equipment purchases, excluding equipment received from recent acquisitions were $230 million, compared to $188 million in the prior year. The total cash paid for acquisitions year-to-date of Vesta, Brekke, Dixie, and Inland was $462 million. Proceeds from the sale of Adler Tank Rentals were $268 million. In addition to significant investments in new fleet and the acquisitions, healthy cash generation allowed us to pay $46 million in shareholder dividends.

At quarter-end, we had net borrowings of $763 million, comprised of $175 million note-side standing and $588 million under our lines of credit, with capacity to borrow an additional $62 million under these lines of credit. The ratio of funded debt to the last 12 months actual adjusted EBITDA was $2.34 to one. We are very proud of McGrath's strong fourth quarter and full-year performance, and we are fully focused on solid execution in 2024. That concludes our prepared remarks. Bo, you may now open the lines for questions.

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