McGrath RentCorp (NASDAQ:MGRC) Q3 2023 Earnings Call Transcript

McGrath RentCorp (NASDAQ:MGRC) Q3 2023 Earnings Call Transcript October 26, 2023

McGrath RentCorp beats earnings expectations. Reported EPS is $1.49, expectations were $1.25.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Third Quarter 2023 Earnings Call. [Operator Instructions] This conference call is being recorded today, Thursday, October 26, 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. 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-Q for the quarter ended September 30, 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, Travis. Good afternoon, everyone. Thank you for joining us on our call today. Our third quarter 2023 reported earnings reflect further progress with our strategic growth focus on the modular business. We delivered impressive results for a third consecutive quarter this year. Rental revenues increased 22%, total revenues increased 40% and adjusted EBITDA from continuing operations increased 47% in the third quarter. Once again, our teams executed very well. My sincere thank you to all our team members for your hard work and focus on what matters to our customers, our shareholders, and to each other with your incredible team coverage and delivery. As a reminder, on February 1 this year, we simultaneously acquired Vesta Modular and sold our Adler Tank business.

Since then, we have been focused on integrating Vesta into our Mobile Modular business. Progress on key integration milestones is on schedule. All aspects have gone extremely well. During the third quarter, we completed our organization work and associated changes and have now fully integrated the Vesta team into our McGrath operating structure. Our new team members are very capable and engaged in each of the key integration areas. We have been impressed with the number of ideas generated towards achieving our synergy targets. We have completed a bottom-up synergy analysis and feel confident in our ability to achieve our $8 million EBITDA synergy target. While still early, the cross-selling and geographic expansion opportunities we anticipated with the Vesta acquisition are being realized.

Across the country, both Mobile Modular and Vesta sales reps have won incremental orders by being able to access our broader combined fleet. Our combined sales teams are working well together to leverage relationships in national accounts to win orders. They have begun sharing contacts in key accounts where one party may have had a stronger presence, resulting in more one business and sturdier relationships. Shifting now to provide a few highlights specific to our modular business. We were very pleased with overall business performance in the quarter. Rental revenues grew 36% and reflected not only more units on rent, but also continued benefit of the pricing appreciation trends that we have been realizing in prior quarters. Keith will provide more details on these trends in his remarks.

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Q&A Session

Both our commercial business as well as our education rentals grew during the quarter. The wins we experienced are geographically broad-based and in a wide variety of market verticals, including government and technology. We also want business as a result of customers’ investments in plants and manufacturing capacity that is reshoring. Our education business benefited from modernization and growth projects and encompassed both public and private school customers. We maintained our focus on solid execution. Our team actively managed pricing, fleet utilization and deployment of new capital and achieved a healthy 79.7% utilization at quarter end. In addition to our positive core revenue drivers, we also continued expansion of our revenues in the services portion of our customer offerings.

Revenues from Mobile Modular Plus, site-related services and our custom modular sales group all grew nicely in the quarter and we remain excited about the opportunities these additional services offer our customers. Portable Storage rental revenues grew 18% in the quarter. We are also quite pleased at the pace that this business is growing. We continue to make progress on pricing with new shipment pricing up considerably compared to fleet averages. The acquisition of Design Space in 2021 and the acquisition of Vesta this year opened up opportunities for us to expand the Portable Storage business into new geographies. The Colorado market tuck-ins this year were also strategic initiatives to support this growth. They have been fully integrated and are performing to expectations.

Turning now to TRS-RenTelco, the softness we experienced earlier in the year around the semiconductor and computer business has not yet abated. Rental revenues decreased 10% for the quarter. We continue to take countermeasures to account for these business conditions and we are moving the needle. We have reduced our capital expenditures for new fleet considerably and continued to execute consistent fleet sales of underutilized equipment to a net positive result as we ended the quarter, with utilization up over 60%. Our efforts to right-size the fleet for current market conditions are an important step to manage the business responsibly. Finally, on a macroeconomic level, we recognize that there is some uncertainty in the economic outlook and some softening conditions as indicated by the recent ABI reporting.

However, we are generally seeing steady business demand at McGrath for the remainder of the year and early indicators into 2024 appear positive. I am very pleased with our progress this year. We have good momentum with our pricing and services initiatives, which have considerable growth potential ahead. Additionally, with our acquisitions, we have the opportunity for densification at locations with low presence currently. So we remain very positive on the future growth potential for the business. We will be working hard to maximize every dollar we spend over the months ahead and are looking forward to finishing 2023 on a good note. With that, I will turn the call over to Keith who will expand on my overall comments with greater financial detail.

Keith Pratt: Thank you, Joe and good afternoon everyone. As Joe highlighted, we delivered strong results in the third quarter driven by the performance in our Mobile Modular segment. Looking at the overall corporate results for the third quarter, total revenues increased 40% to $243.5 million and adjusted EBITDA increased 47% to $95.3 million. Before the contributions from Vesta, McGrath had 20% total revenue growth and 25% higher adjusted EBITDA. During the third quarter, the company sold two properties used by the recently divested Adler Tanks business, which resulted in a $3.6 million net gain on sale and increased earnings per diluted share by $0.11. The total diluted earnings per share for the quarter, excluding this transaction was $1.54, an increase of $0.43 when compared to a year ago.

These property sales are reflected in other income on the income statement. Turning now to review of Mobile Modular’s operating performance as compared to the third quarter of 2022. Mobile Modular had an impressive quarter with adjusted EBITDA increasing 83% to $73 million. Total revenues increased $69 million or 55% to $194.9 million. There were increases across all revenue streams, including 36% higher rental revenues, 45% higher rental related services revenues, and sales revenues which more than doubled. Vesta contributed $34.9 million total revenue and $14.4 million adjusted EBITDA to the current quarter results. Before these contributions from Vesta, Mobile Modular also had an impressive 27% total revenue growth and 47% higher adjusted EBITDA.