McGrath RentCorp

NASDAQ:MGRC

Earnings Call Analysis

McGrath Posts Strong Results Amid Merger

McGrath reports robust fourth quarter earnings, with rental revenue up by 19% and sales revenues up by 12%, leading to a solid adjusted EBITDA growth of 12%. This was driven by stable market conditions and pricing optimization. Mobile Modular's rental revenue soared by 37%, contributing significantly to these results thanks to Vesta integration and organic growth. Portable Storage also experienced a 13% increase in rental revenues. However, TRS-RenTelco faced challenges, with rental revenues decreasing by 11% due to weakness in the semiconductor sector. In a transformative move, McGrath announced a merger with WillScot Mobile Mini for $3.8 billion, and did not provide financial guidance for 2024.

Softening Demand and Portfolio Adjustments

The company experienced an 11% decrease in rental revenues due to continued softness in semiconductor-related demand, which is part of a broader trend affecting the business. In response to the challenging conditions, particularly within the TRS segment, the firm has implemented a disciplined capital return approach. This includes reducing new equipment capital spending, focusing on selling used equipment, and downsizing the fleet's original cost of equipment from a peak of $398 million to $374 million by the end of the year to better align with market demand.

Rising Operational Costs and Debt Levels

Fourth-quarter operational expenses climbed by $15 million to $54.5 million, primarily reflecting the addition of Vesta, higher variable compensation, and M&A transaction expenses. The company also faced a significant increase in interest expense by $8 million, due in part to increased average interest rates and a $317 million rise in average debt levels during the quarter, most of which is attributed to funding acquisitions.

Cash Flow and Debt Management

Net cash provided by operating activities dropped to $95 million from $194 million the previous year, with tax payments relating to the sale of Adler Tank rentals being a major factor in this decrease. The company proceeded with substantial investments in new fleet and acquisitions, still managing to distribute $46 million in shareholder dividends. At the end of the quarter, net borrowings stood at $763 million with a debt to EBITDA ratio of 2.34 to 1, signifying a robust balance sheet despite substantial outlays for growth initiatives.

Positive Trends in Equipment Rental and Contributions from Acquisitions

The equipment on rent in the modular segment saw a 32% uptick in the fourth quarter, driven significantly by the Vesta acquisition. However, excluding Vesta's impact, organic growth in the modular fleet was approximately 9%. In parallel, equipment on rent for the Portable Storage segment increased by around 6%, largely due to three tuck-in acquisitions made during the year. The company witnessed contributions from acquisitions and overall positive but slightly softer conditions in the market, especially within the retail segment of the business.

Synergies from Vesta Acquisition

The integration initiatives related to the Vesta acquisition are complete, with the management expressing satisfaction with the process and the outcome. The targeted EBITDA synergy run rate of $8 million by 2024 is on track, reflecting successful integration and the consequent advantages expected from the merger.

Sector Headwinds and Opportunities

TRS continues to contend with cyclical softness, particularly in the semiconductor sector, which has been ongoing throughout the year. The company is cognizant of the industry cycle and is closely monitoring customer feedback as well as trends in technological shifts, such as the 4G to 5G transition.

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Fourth Quarter 2023 Earnings Conference Call.[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 year 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. Please go ahead, sir.

[Joseph Hanna, executive]

Thank you, Bo. 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. 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 in execution as we expanded in the markets where we operate.Our strategy to be a solutions 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 3 portable storage tuck-in acquisitions, opening some new markets and increasing density in others. We also grew new modular sales as we continue 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 29, 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.

[Keith E. Pratt, executive]

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.The Vesta Modular acquisition was an important contributor to fourth quarter results and accounted for approximately 2/3 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 disciplined 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 review of TRS-RenTelco. Adjusted EBITDA was $20.7 million, a decrease 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 continue 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 accounted 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 notes outstanding 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 1.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.

[Operator]

Thank you very much, Mr. Pratt. [Operator Instructions] And we'll take our first question this afternoon from Scott Schneeberger at Oppenheimer.

[Scott Schneeberger, analyst]

I want to start out, just volume trends in Mobile Modular, if you could address, I guess, now we haven't broken them out, but in Modular and Portable Storage, I understand you're not going to provide guidance for 2024. But I'm curious what type of momentum you have as you're exiting 2023? Sounds good, but I just want to get a sense of, is that something that can persist or are we near a tail?

[Keith E. Pratt, executive]

Yes, Scott, let me try and help there, and I'll give you a couple of data points, and you can see some of this in the new disaggregated segmentation. We had more equipment on rent in the Modular segment. Equipment on rent in the fourth quarter was up 32%. If you look at the increase, obviously, a big portion of that was related to the Vesta acquisition. But if you strip out the impact of Vesta, our organic growth in the Modular fleet was up about 9%. So about a 9% increase on original cost of equipment on rent. So I think that is a good indicator of positive market conditions and positive, really work done by our teams.If you look over in the Portable Storage side, we also had an increase in equipment on rent. In that part of the business, equipment on rent in the fourth quarter was up around 6%. And I would say most of that is related to the M&A that we did during the year 2023. As you may recall, we had 3 tuck-in acquisitions. And so what we saw in the fourth quarter was certainly a contribution from the acquisitions we had done, positive conditions in much of the market, slightly positive, but a bit softer conditions in the retail portion of the business.That is not a huge segment for us, but it is a segment we participate in, and we saw a sort of shorter and softer retail contribution in the fourth quarter when compared with a year ago.

[Scott Schneeberger, analyst]

Thanks, Keith. Appreciate that. And just 1 more on the volume theme. Any comments on quoting activity, new order activity, just what you're seeing, hearing from customers out there, large and small?

[Keith E. Pratt, executive]

Yes, I would say, again, good activity levels for the fourth quarter. And as we exited the year, business conditions overall, fairly stable.

[Joseph Hanna, executive]

I would agree with that. Stable is a good word.

[Scott Schneeberger, analyst]

Okay. Kind of the same question, but now on the pricing front, appreciate the charts you share, which tells a good story. But if either of you like to elaborate on the pricing momentum you have right now, maybe categorizing Modular or large-small projects, any way you'd like to break it out, but just curious what you're seeing overall and with a little bit of detail.

[Joseph Hanna, executive]

Yes. Scott, I mean, I would say that what we've experienced this year was continued momentum with pricing, and that just went all the way into Q4 for us. So we've been able to continue to increase pricing, both in our education and commercial part of the business. And that just follows the trend that we were following the entire year. And I believe it just reflects that there's still room to increase pricing, and we don't see that ending anytime soon.

[Scott Schneeberger, analyst]

Just a couple more from me. Just curious., Mobile Module Plus site-related services, maybe some discussion of the product categories where you're having some of the most success.

[Joseph Hanna, executive]

Well, with Mobile Modular Plus, I mean, it's our offering of product inside of the building. So, it could be furniture, it could be coffee makers, water coolers, whatever it is that holding tanks, things like that, damage waivers, and we're seeing growth in all of those areas. And so it's been pretty broad-based, and we've been very pleased with the traction that we've gotten within the sales force.Site-related services are things that are done outside the buildings for someone who wants more of a turnkey approach and that could be walkways, overhead covers, other types of landscaping or driveways, or whatever somebody wants to have to use when they have the building installed to make it more than just having a trailer delivered. And so, we had opportunities to do that in the quarter too, and it actually was a very nice quarter for us in our site-related services. So, those are just some of the applications for both of those segments.

[Scott Schneeberger, analyst]

Now, Vesta, congratulations. It looks like all your integration initiatives are now complete, and I know that's a big step. So, kudos there. Synergies, if you could remind us, I know that there was EBITDA synergy run rate, $8 million by 2024. Just maybe a progress report right here at this time at the end of '23, Joe or Keith about where you stand with that? And if there's any update to what you think you can procure there?

[Keith E. Pratt, executive]

Yes. I would say, Scott, as we really have indicated throughout the journey with Vesta, we're very pleased with the business. We're really pleased with the great work done by the joint team throughout integration. We feel very good about all of our financial goals, including synergies, in terms of what we expected and what we have accomplished to date and the outlook for the business.

[Scott Schneeberger, analyst]

And just one last one. At TRS, continuing to see a bit of cyclical softness, particularly semiconductors. I guess, if you can take us a level deeper onto where you are in that cycle, what you're hearing from those customers? And then, maybe just an update on 4G to 5G and trend there.

[Joseph Hanna, executive]

Sure. I mean, we've been dealing with this now for most of 2023. We would have expected to come out of this trough by now, and we're hoping that is definitely the case. I think usually, these cycles don't last for significant amounts of time. And in Q4, we saw just continued weakness in that particular sector. And so I can't speculate on when we think that's going to happen. But with the -- more of the AI initiatives and research going on, we'd like to be involved in that and are involved in that. And so that's certainly a bright spot that's out there.And then, for the continuing 5G, that's been, I would say, rolled out on a very, very slow basis. And tower modifications and backhaul upgrades and things like that for increased bandwidth to deal with 5G have been methodical, but I would say not in any kind of accelerated basis that we saw in 2023. It was pretty much kind of steady business that we got. I don't see that necessarily changing.

[Operator]

[Operator Instructions] 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 comments.

[Joseph Hanna, executive]

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 April to review our first quarter results.

[Operator]

Thank you, Mr. Hanna. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.