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McGrath RentCorp
Earnings Call Analysis
Q2-2024 Analysis
McGrath RentCorp
In the second quarter of 2024, McGrath RentCorp showcased solid results with total revenues increasing by 5% year-over-year, reaching $212.6 million. Adjusted EBITDA grew by 9% to $83.7 million, reflecting the company's resilience in a challenging market. The Mobile Modular division led this performance with notable rental revenue growth of 10%, supported by increases in both commercial and education sectors. The broad client base across diverse market verticals enabled the company to achieve consistent performance despite headwinds in some areas.
The Mobile Modular division continues to be a cornerstone of growth, with total revenues up by 4% and adjusted EBITDA increasing 20% to $53.4 million. This growth was driven primarily by a 10% increase in rental revenues and a 4% rise in rental-related services. However, there was a 6% decline in sales revenues, primarily due to timing issues. Overall, the backlog for sales projects remains robust, which bodes well for future growth.
Both education and commercial sectors showed promising signs, with education rental revenues increasing by 6%. There is a continuing trend of deferred maintenance in school districts, creating a consistent demand for rental facilities. The overall rental backlog increased by 24% year-over-year, which indicates a healthy pipeline for the company. It's noteworthy that the third quarter is typically the strongest for the education sector, suggesting potential for even greater demand ahead.
In contrast, the Portable Storage segment experienced a decline, with rental revenues decreasing by 4% due to a slowdown in commercial construction activities. The TRS-RenTelco segment also faced challenges, with total revenues down 14% year-over-year, primarily due to decreased rental and sales in the test and measurement equipment sector. Adjusted EBITDA in this segment declined by 16%. Companies are seeing fewer shipments and higher returns, which have impacted overall revenue performance.
To address these challenges, McGrath has effectively reduced new equipment capital spending and focused on selling idle equipment. This strategy successfully minimized the negative impact of declining demand. The management reported that rental bookings for July showed consistent strength on a daily basis, especially in light of an upward trend in billing rates. This is encouraging for the latter half of the year.
The company reported growth in its Mobile Modular Plus and Site Related Services, with revenues from Mobile Modular Plus increasing from $6.7 million to $7.5 million year-over-year. This initiative aims to enhance customer value by providing additional amenities bundled into rental contracts. The company's average monthly revenue per unit also showed improvement, rising 18% to $793. As these initiatives continue to evolve, they promise to contribute positively to the revenue stream.
While the company navigates some headwinds, such as rising interest expenses and transaction costs associated with the merger with WillScot Mobile Mini, the overall outlook appears stable. The company incurred $12.4 million in transaction costs during the quarter. Their disciplined approach in managing costs and improving efficiencies reflects on their ability to generate cash flow—net cash provided by operating activities was $139 million, compared to $72 million a year ago. Furthermore, the effectiveness of maintaining pricing discipline amidst a softer market is noteworthy.
The merger with WillScot Mobile Mini is progressing, with shareholders having approved the transaction. Both companies are cooperating with the FTC's review process, and any updates are expected as they navigate this complex situation. No specific financial guidance for future quarters was offered, but the management expressed confidence in performance continuity and ongoing solid financial results.
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Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Second Quarter 2024 Earnings Call. [Operator Instructions] This conference call is being recorded today, Thursday, July 25, 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, backlog 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 June 30, 2024.
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. Please go ahead, sir.
Thank you, David. 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 results for the second quarter. I will start with some overall comments on the quarter, and Keith will provide additional detail in his financial review before we open the call up for questions.
The company delivered solid second quarter results. Rental revenues increased 3%. Sales revenues increased 14% and adjusted EBITDA grew by 9%. Our Mobile Modular division continued to perform well with rental revenues increasing 10%. We realized growth in both our commercial and education sectors. In our commercial business, we serve many market verticals, including commercial construction, government, industrial, residential, to name a few. Our broad reach gives us a diversified base of clients that have a wide variety of space needs, which we are well suited to serve. On the education side, both modernization and enrollment growth drove rentals. There continues to be a significant backlog of deferred work the districts are busy addressing in all of our markets.
Funding is available and project backlogs are healthy. Our teams continue executing efficiently in the field, and we are in our busy summer season with all cylinders firing to get jobs completed on time for our customers.
Modular sales revenues decreased 6% for the quarter but were up 11% year-to-date. Sales projects can be affected by timing, which we saw in play for this quarter. Our backlog for sales projects is very strong and our strategy to provide customers with custom sales opportunities has been very positively received. We remain confident in the future growth of this portion of the business.
We continue to make progress with our other Mobile Modular growth initiatives with growth in Mobile Modular Plus and Site Related Services in the quarter. Our customers value the benefit of having their buildings arrive with additional amenities included in the rental contract as well as the convenience of services provided on the outside of the building to make it completely ready for use. We are gaining traction as each quarter passes and customer acceptance has been positive.
Our revenue per unit in Mobile Modular showed healthy gains for the quarter, with new shipment rates up nicely compared to the prior year. This momentum is a positive tailwind for overall fleet rates which should increase as rental units cycle during normal business operations.
At Portable Storage, rental revenues decreased 4%. Specifically, commercial construction project activity has slowed and we saw fewer shipments and higher returns year-over-year. Close ratios are still very good, and we have been maintaining our pricing discipline despite softer market conditions.
At TRS-RenTelco, rental revenues decreased by 11% year-over-year, reflecting industry-wide weakness in test and measurement equipment rentals. Both our general purpose and communications equipment rental revenues decreased for the quarter, with the exception of wired communications rentals.
Data center work and associated infrastructure to support projects were a bright spot. We continued adjusting for the softer market conditions. Our fleet CapEx has been reduced, and we have been successfully selling idle equipment to adjust for less demand. We were fully focused on winning rental bookings and managing the fleet given tougher market conditions and will continue to do so.
We continue to operate as an independent company, notwithstanding the merger announcement with WillScot Mobile Mini in January. Our team is in the front office, in our production centers and in the field continue to provide the exceptional service to our customers and each other. I've been impressed by the engagement and commitment shown by everyone during this period. Thank you for all your ongoing dedication and hard work.
On July 11, our shareholders voted to approve the merger. Now that the significant milestone has passed, we are continuing to cooperate with the FTC in their analysis of the transaction. During this time, we have plenty of work to do to deliver ongoing solid financial results for our shareholders. As stated last quarter, we will not be providing any financial guidance or future outlook.
Now let me turn the call over to Keith.
Thank you, Joe, and good afternoon, everyone. As Joe highlighted, we delivered solid results in the second quarter, driven by the performance of our Mobile Modular business.
Looking at the overall corporate results for the second quarter. Total revenues from continuing operations increased 5% to $212.6 million and adjusted EBITDA increased 9% to $83.7 million. During the second quarter, the company incurred $12.4 million in transaction costs attributed to the pending merger with WillScot Mobile Mini, negatively impacting earnings per diluted share by $0.36.
Reviewing Mobile Modular's operating performance as compared to the second quarter of 2023, Mobile Modular had another impressive quarter with adjusted EBITDA increasing 20% to $53.4 million. Total revenues increased 4% to $144.5 million, primarily driven by 10% higher rental revenues and 4% higher rental-related services revenues partly offset by a 6% decline in sales revenues. The sales revenues decrease was primarily due to lower new equipment sales.
We continued our disciplined fleet management on a larger fleet with 6% higher average rental equipment on rent and average fleet utilization of 78.4% compared to 79.3% a year ago. Rental margins were 60%, up from 54% a year ago, primarily because of rental revenues growth and lower inventory center costs. We continue to make progress delivering on our modular business strategy.
Second quarter monthly revenue per unit on rent increased 18% year-over-year to $793. For new shipments over the last 12 months, the average monthly revenue per unit increased 13% to $1,124. 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 second quarter, Mobile Modular Plus revenues increased to $7.5 million from $6.7 million a year earlier, and Site Related Services increased to $5.8 million, up from $5.7 million.
Turning to the review of portable storage. Adjusted EBITDA was $11 million, a decrease of 11% compared to the prior year. During the quarter, we saw lower rental and rental-related services revenues. Demand conditions were weaker, primarily because of lower commercial construction project activity. Higher sales revenues partly offset rental weakness resulting in a total revenue decrease of 6% to $24 million. Rental revenues for the quarter decreased 4% to $17.8 million and rental margins were 86%, comparable to a year earlier. Average rental equipment on rent decreased 6% while average utilization for the quarter was 66.1% compared to 78.2% a year ago.
Turning now to the review of TRS-RenTelco. Adjusted EBITDA was $18 million, a decrease of 16% compared to last year. Total revenues decreased $5.2 million or 14% to $32.7 million. Rental revenues for the quarter decreased 11% as the industry experienced continued end market weakness. Average utilization for the quarter was 56.5% and compared to 58.2% a year ago, and rental margins were 36% compared to 38% a year ago. Sales revenues decreased 22% year-over-year to $5.8 million with gross profit decreasing to $3.1 million.
To address the softer business conditions we reduced new equipment capital spending, focused on sales of used equipment and reduced fleet size based on original cost of equipment to $368 million at the end of June.
The remainder of my comments will be on a total company basis from continuing operations. Second quarter selling and administrative expenses increased $14.3 million to $61.4 million. The increase was primarily the result of $12.4 million in transaction costs incurred due to the pending merger with WillScot Mobile Mini. Interest expense was $13 million, an increase of $3.1 million as a result of higher average interest rates and higher average debt levels during the quarter. The second quarter provision for income taxes was based on an effective tax rate of 28.8% compared to 25.7% 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 $139 million compared to $72 million in the prior year. Rental equipment purchases were $145 million compared to $128 million in the prior year. In addition to continued investments in new fleet, healthy cash generation allowed us to pay $23 million in shareholder dividends. Proceeds from sales of property, plant and equipment were $12 million.
At quarter end, we had net borrowings of $794 million, comprised of $175 million notes outstanding, $544 million under our credit facility and a term loan of $75 million. The ratio of funded debt to the last 12 months actual adjusted EBITDA was 2.43:1.
We are proud of McGrath's second quarter performance, and we are fully focused on solid execution for the remainder of the year. That concludes our prepared remarks. David, you may now open the lines for questions.
I apologize for the technical delay. [Operator Instructions] We'll take our first question from Scott Schneeberger with Oppenheimer.
Joe and Keith, I've got a few and then can go around the segments a bit. I'll start with modular. Could you speak to the 2 main business lines you serve, education and commercial. Just if you could compare and contrast, first quarter, you mentioned the highest rental backlog in company history and that was largely driven by education. It sounds like both education and commercial are up year-over-year. If you can just delve in a little bit more to that on the rental side.
Sure. Scott, you're correct. Both education and commercial was up. Commercial was up 14% and education was up 6%. So we -- even though commercial construction has been a little bit softer as we've highlighted from the Portable Storage business. We were seeing good results from government and private industry, health care, things like that, which have offset that a little bit. And we've been pleased with the progress that we made. And again, our rental backlogs have been very good. The backlog is 24% up from a year ago. And so that's good.
And on the education side, the continuing lack of sufficient funding in school districts to do all the work that they need to do to fix decrepit facilities is just continuing. Funding is there, but it's never enough. And so that's just a continuing cycle of opportunity for us. And it's happening in virtually all the regions that we operate in. In areas like Florida, where there's continued student population growth, we're also seeing districts that just can't keep up. And so they open a school and it just doesn't have enough room. They need rental buildings, and we're there to provide them for them. So that has been in play for this quarter for us.
Joe, just following up on that. You said commercial up 14%, education up 6%. I would have thought education was bigger, but is that just because we're in the second quarter and the real big activity occurs. You have a big backlog there, but the real big activity would occur more so in the third quarter? Is that why that one was not actually stronger on the print?
That's a great point. And yes, you are correct. Third quarter is typically our best quarter for education and fourth quarter.
Appreciate that. Just a sense on the commercial side, you hit on it a little bit, but I want to ask is, are the super -- like mega projects and particularly large projects carrying the day. I imagine, in modular, you might have some softness on the smaller projects due to the interest rate sensitivity. And I'm going to ask a similar question on storage in a minute. But just curious what you're seeing large and small customers in modular. And any other breakout you care to share that would be insightful with regards to the end markets being served.
Yes. Scott, you're absolutely right. It's the smaller projects that are associated with commercial construction that we've seen less of, and it's due to exactly what you said. It's higher construction costs, interest rate issues that have precluded the start of some of those projects. But the mega projects and large infrastructure projects that we've been involved with and continue to be involved with have been there. And we definitely are seeing that as a continuing rental demand issue for us. And so we're right there for those projects, and we're glad to be part of them, and they're continuing very nicely.
So just to clarify something you said a moment earlier. Did you say in commercial, the backlog was up 24% year-over-year in this quarter.
No, that's overall modulars, yes, overall, correct...
And I would assume that's heavier weighted to education and commercial, but good in both. Is that the right way to think about it?
I think that's accurate, yes.
Okay. Just wrapping up on modular. I'm curious about shipments or even quoting activity, which is a little bit more of a leading indicator. But you and Keith spoke to shipments on the call. Just that ties into that backlog. But how are you -- how does it look there for you in your deliveries, your shipments?
Sure. Our quoting levels have been quite strong, and they were up 14% on a year-over-year basis. So we've been very pleased with how that's panned out so far for the year. Shipments were comparable about to a year ago. And so with strong quoting activity, that usually means future shipments for us. And I think that will pan out as the year progresses. So we're happy to see that.
In that answer, was that commercial alone? Or was that modular overall, the way you...
Modular overall. Overall modular, correct.
And then my last 1 is modular, just the pricing environment, I heard what Keith mentioned about and see it on your slide. Slide 24 that, for instance, your shipments, the pricing is up 13% in the last 12 months and that sounds strong. What are you seeing for the pricing environment out there looking out over the balance of the year?
It's been healthy. And we've been able to really increase the revenue per unit based on the Mobile Modular Plus that we're providing for our customers and also modest pricing increases, too. So you combine those 2 things together, our revenue per unit has gone up very nicely. We're happy to see that.
And I'm going to segue over to the portable storage segment now. I guess, let's just go with pricing because we were talking about it. It sounds like you're holding the line and still have solid pricing, although volumes are off, which I'll ask about next. But could you just speak to the pricing, I guess, integrity that you're experiencing?
Yes. I think that's accurate. We are -- our preference is to hold pricing and that's what our teams have been doing, and they've been doing a very nice job of it. And so we've been happy to see that there is good industry discipline there. And we're going to continue to try to maintain pricing wherever we can. Keep in mind, too, that we are also putting additional services inside our containers, which is helpful on overall revenue per unit for our Portable Storage business too. So that's an impact on overall pricing in a positive way.
Understood. And then just swinging it on Portable Storage to volumes. It just sounds like commercial construction, a little more exposure there to rate-sensitive projects. But anything else to add there? I assume that's the answer, but if you could just take it a little bit more broadly, please?
Yes, I think that's accurate. Our -- overall, that business has the most exposure to commercial construction and that's where we've seen the weakness. There's -- it's a lot of smaller projects that we've talked about earlier that were not as many starts in the first half of the year and as projects rolled off, we've gotten returns that were a little bit higher than what we had planned. And so that's overall affected our revenues for the business. But I think really, fundamentally, that's where the softness, that's the softness we're seeing in that business.
And I guess the last one in this segment, just the quoting and the shipments, that question again, just to get a sense of lead indicator. Are you -- are we getting near a bottom there? Are we bouncing along the bottom? Just what's the more quoting activity, less quoting activity? Just what are you getting a sense of from the customers?
Yes. Quoting activity is down in that business. But when you look at some of the indicators that we see out there, like the construction backlog indicator, as an example, which really focuses on commercial construction starts. That actually has been on a slight uptick. It's not where it was last year. But for this year, it's below where it was last year, but it's still on a slight uptick. So we're not -- when I look at that, I see conditions that are not deteriorating in a significant way. So I'm hopeful and we believe that we could be in a trough situation here.
I'm just not seeing any significant macroeconomic issues that are really going to continue to have this part of the business on a downward trajectory. I believe with the potential to cut interest rates here that could happen in the second half that's also -- could be a positive demand driver in that business. So I just -- and the other thing, too, is that we have a retail business, typically in the second half of the year that is good for us and that hasn't really kicked in yet. So I'm overall positive that we're not going to see any significant deterioration there.
Just a couple more, and I appreciate you allowing this time. In TRS, just 2 important business lines of years, our semiconductor business and then 4G to 5G transition. If you could just comment on trends you're seeing in both of those.
Yes. What we've shared in last quarter was our computer and semiconductor business has just been slow and that's reflective of things that are taking place within that industry, Intel as an example, under massive reorganization internally. And so there just aren't as many projects that are taking place in that business. And we're seeing that trend continue.
And so if you look at -- switch over to the communications side, the wireless portion of the business and the 5G activity that has taken place in the field. It's -- we're just not seeing as much of it as we have in the past. The carriers are not as aggressively upgrading to 5G networks in the field. So we're not seeing as much activity there. But on the wired side, we're seeing quite a bit and that's associated with data centers and all the work and backhaul and everything that is associated with putting a data center in place. A lot of that work is going on.
So that was a positive impact for us for the quarter. But overall, we're seeing in that business, our trends are typically not off from what we're seeing from our OEMs that we buy from. Keysight as an example, and other OEMs have reported softness in their sales, and we're kind of -- we're seeing the same thing. And so we're confident that we're not giving up any market share, losing customers, anything like that and that we're maintaining our discipline with pricing in the market. And we just need to get through this trough that we're in at this point.
And just following real quick on the 5G part, that slowdown. Is that a cyclical thing? Or is that a secular thing that you're sensing?
I don't think it's cyclical. I think it's secular. There's just not as much activity taking place in the field. And we're -- the contractors that we work with that do that work just aren't as busy.
Okay. And any -- the last 1 and then I have a final on regulatory. But anything that gives you a sense we could see that turn in the TRS segment? Or is it kind of like how you answered portable storage kind of sounds like bouncing along the bottom and looking for indicators.
I think we're bouncing along the bottom. I will say that our -- we monitor our rental bookings, obviously, quite closely. And for the month of July, our rental bookings have been consistently stronger on a daily basis and our billing rate is on an upward trend. It's not significant, but it's not deteriorating. It's on an upward trend. So we're very glad to see that taking place and that gives me a positive feeling now for the rest of the year.
And then lastly, just on the FTC front with the pending acquisition by WillScot Mobile Mini. I saw just some things in the Q. It didn't seem like any meaningful new information, just you're not permitted to close the transaction before September 27. But it didn't sound -- I mean, it sounds like we're just still waiting on them to continue to research the situation. Is that the appropriate way to look at it? Or is there a meaningful update there? And then seems there's something with states attorney general. Could you comment on that, too?
Yes, Scott, you've read the 10-Q correctly, both ourselves and WillScot agreed to extend the time available to the FTC to review the transaction and agreed not to close before September 27. And then it's customary in situations like this that certain state attorney generals may want to review the transaction as well. So ours is subject to some similar review.
Thank you, Keith. Just a final follow-up on that. Does that mean that we're probably not going to hear from the FTC in their process until September? Or that's just legal wording and there's a chance we get here sooner.
Yes, we really can't speculate on when the FTC will be complete with its work.
Okay. Really appreciate it. I'll turn it over.
We'll take our next question from Marc Riddick with Sidoti.
So I wanted to touch a little bit on sort of where we were the growth initiatives and maybe sort of how you're positioned there. As far as Modular Plus and Site Related Services certainly are -- have moved in nicely. I was wondering if you could talk a little bit about maybe how you're positioned or what you may need for the remainder of the year given the demand environment? Should we be looking for additional hiring? Or are there other things that you need to sort of support that growth as we go through the remainder of the year?
I think we're pretty well situated internally with the resources that we have to meet future demand. And so it's just a matter of having the sales force do their jobs effectively and provide the Mobile Modular Plus services to our customers. We're highly focused on that and I think we're set to do a good job there.
As far as Site Related Services go, we're also looking for any and all opportunities to provide that service to our customers. And those projects, sometimes are -- they're more lumpy than what we see with Mobile Modular Plus. And so you'll see -- especially if we have a larger project that we closed in a given quarter. So you'll see sometimes those revenues might go up at varying levels. But we feel we have the infrastructure and the training, the team, everything in place to be able to do that effectively.
Yes, you probably recall, the Mobile Modular Plus, think of that as attaching additional items to the contract for the building and that then becomes part of the recurring revenue stream. And as Joe pointed out, on the Site Related Services, think of that as really onetime typically at the time the unit is set up at the beginning of the contract. So that can be more lumpy. It's really tied to activations. Some of these projects are fairly large. So you'll see some of the comps can move around a little bit. But year-to-date in both areas, making good progress.
Okay. Great. And then it seemed as though in the commentary around education, it seemed as though there's the seasonal timing involved, but the demand certainly is still there and especially given the fact that it's going up against fairly not -- certainly not easy comparisons. I was wondering if you could talk a little bit about if you're seeing anything in particular region?
Are there any pockets of regional strength that are worth calling out? And then sort of as a follow-up on top of that, there's always kind of the thought process around the timing of funding initiatives and things that may be on the balance coming up for November and in some cases, September maybe. Maybe you could talk a little bit about are there any areas that we should be looking for, for potential funding changes?
Yes. Regarding funding, I don't see any significant changes in the public's acceptance of putting local bonds on the ballot to help with education facility projects. Most parents know the condition of schools and they want their kids to go to a school that's got good infrastructure. And so they've been overwhelmingly passing these local bonds.
I don't think that's going to change anytime in the future. And the success rate of these bonds passing has always been very high. So I just don't think that's going to change. We're seeing that same mentality and activity literally across the country. I wouldn't say there's any particular strong point. It's been pretty balanced and present in all the geographies we operate in.
Okay. And then sorry, just sort of curious, are you seeing any difference between public and private activity as far as demand in projects that are in the works?
I wouldn't say there's any -- there's significant difference there. The -- we have activity in both of those segments, both public and private. And it just depends on where in the U.S. that the project could be and for what size. We've got some very large sales projects in the private sector that we're working right now, and we'll continue to do that.
Okay. Great. And then I guess the last one, I was wondering if there are any particular areas where you're getting any push. It didn't seem as though there were any, but maybe you could sort of just put a fine point on whether or not you're seeing any pushback in any particular pricing dynamics in any parts of the business that we should be aware of? It didn't seem like in the numbers, but I was just sort of curious.
Yes. What I would say, Marc, is pricing in the last couple of years has gone up largely to account for higher costs. The cost of new units has gone up, cost of maintaining the existing fleets gone up. I think there's been some moderation in those inflationary pressures. So now what you're seeing is normal cycling of the fleet where new contract pricing is generally higher than legacy contract pricing. And there is some upward inflationary pressure, but not as acute as it was 2 or 3 years ago, and we were talking about that a lot. When it was causing us much higher costs.
So the environment, I think, overall is a little better from a cost point of view. And I think pricing has been stable with some positive effects as the fleet churns. And of course, as we mentioned earlier, our initiatives in areas like Mobile Modular Plus, which are all trying to capture more revenue per unit as we service the customer.
That's it from me. I appreciate it, thank you.
Thanks, Marc.
And ladies and gentlemen, that appears to be the last question. Let me now turn the call back over to Mr. Hanna 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.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect.