McGrath RentCorp (MGRC) 2021 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Fourth Quarter 2021 Earnings Call. (Operator Instructions) This conference call is being recorded today, Wednesday, February 23, 2022.

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 2022 financial outlook as well as the 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 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, 2021.

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, Peter. Good afternoon and thank you, everyone, for joining us on today's call. I will start the call with some overall comments on our fourth quarter and full year 2021 performance as well as our look ahead. Keith will provide additional detail in his financial review and outlook comments. Our fourth quarter rental revenue performance was impressive with a 20% company-wide increase. Key to our success was the dedication and hard work of all of our team members as we delivered exceptional service to our customers across the country.

In our modular business, we saw the benefit from the 2 acquisitions we completed earlier in the year as they added very nicely to our total rental revenue growth of 29% for the division. At TRS-RenTelco and Adler Tanks, rental revenues grew 4% and 19%, respectively. Overall, our total company rental revenue growth reflected improving market conditions and customer activity as projects continued at a brisk pace throughout the quarter. This strong top line growth drove a 12% increase in EBITDA.

Taking a deeper look at our largest business, Mobile Modular, 2 of the metrics we track closely that indicate the health of the business, our pricing and overall units on rent, both of these metrics were up in the fourth quarter. Average rental rate pricing was up 8% and units on rent were up notably by 21%. Complementing our core modular business strength, I should highlight our portable storage performance for the quarter that delivered a 36% increase in rental revenues, reflecting robust demand and strength in execution as we continue to expand in the markets where we operate.

In addition to higher rental revenues, modular equipment sales revenues increased $8.2 million for the quarter. The benefits of modular construction have gained momentum and customers are now thinking about a modular solution as a primary alternative to conventional construction from day 1 of a project. We have positioned ourselves to take full advantage of that trend, and we have built an internal team to serve this exciting and growing sector of the market.

2021 was a significant year for the company and I am proud of all that we accomplished. It was a year of strategic growth investments with particular emphasis on the modular acquisitions. We expanded our geographic coverage, added new customers and welcomed new team members. I am extremely grateful to our team members who worked tirelessly throughout the year to serve our customers and integrate our new acquisitions. We saw gradually improving market conditions, despite some continuing COVID disruptions, supply chain challenges and cost inflation pressures as headwinds. The business demonstrated continued resiliency by generating $136 million in free cash flow for the year, representing a 7% increase over 2020.

Turning to 2022, I'm pleased to note that this year marks our 31st consecutive year of dividend growth, as we announced today a 5% dividend increase. McGrath RentCorp has the rare distinction of being one of around 130 publicly listed companies currently known as dividend champions, all of whom have increased their dividends more than 25 consecutive years. We are especially proud that the performance of the business has allowed us to consistently return value to shareholders in this manner.

Looking ahead now, I will take the next few minutes to summarize our assessment of the demand outlook for each of McGrath's businesses. As I mentioned earlier, Mobile Modular is our largest and most strategic business. We've been working hard to provide value as a solutions provider, not just an equipment provider. We start by providing a high quality modular building for rent or sale that can be customized to specific requirements.

We then provide furniture and other products inside the building through Mobile Modular Plus to allow for a comfortable and effective use of the building by the occupants. However, we do not stop there. We also provide services outside the building such as site preparation, connections to electrical and plumbing, overhead protections and other exterior enhancements. And with Kitchens To Go, we further broadened the offerings we bring to our customers. While we are still in the early innings, we are now serving the customer with more of their needs when procuring a modular solution and we have been steadily developing these capabilities and receiving very good reception from the market.

On the commercial side of the modular business, construction starts are robust and the entrance of federal infrastructure funding is likely to positively affect our opportunities more forcefully in the future, creating demand across all of our geographies. Mobile Modular is well positioned to capture larger infrastructure-related projects due to our extensive in-house capabilities to customize our units, allowing us to tailor the building to specific customer requirements. These units typically have longer rental terms and favorable pricing.

On the education side of the modular business, demand is driven by 2 factors. One is modernization of older classrooms and the other is through both student population growth and relocation. Both of these factors are still very much in play in our markets and the outlook for 2022 is solid, given that funding conditions are good. As a result, we anticipate growth in our classroom rentals during the year. Our start to the year has been very encouraging with combined commercial and education modular building rental bookings in January, more than doubling over the same period last year.

At TRS- RenTelco, testing demand for general purpose equipment has been healthy, especially serving the aerospace and defense, semiconductor and 5G market segments. As I mentioned on previous earning calls 5G product development is a longer term positive driver for us as our customers have many testing requirements. We continue to manage our general purpose fleet to have the right equipment available and ready for immediate customer needs. I might add that we will be releasing a brand new TRS-RenTelco website shortly with many enhanced features for our customers as well as e-commerce capabilities.

At Adler, business momentum is considerably healthier than we were in 2022 at the same time last year, which was also reflected in our strong fourth quarter rental revenues. We anticipate that especially in the environmental, industrial and construction segments of the business should prove to be areas of growth as the economy continues to improve. With better economic conditions and a focus on optimizing business performance with our current asset base, we are confident in our continuing ability to maximize cash generation in this business. We will continue to be disciplined with our investments in new rental fleet. Our team is doing great work as they continue to run the business with the highest standards of service for our customers.

Our strategic priorities for the next few years are centered on our modular business. We see significant opportunities to further expand our geographic coverage and to broaden the value we bring to customers, rental solutions, site related services and new modular equipment sales.

As we demonstrated in 2021, we expect to utilize a disciplined combination of organic investments and acquisitions to deploy growth capital and accelerate these priorities. With an experienced leadership team, track record of execution, strong balance sheet and healthy free cash flow generation, we are well positioned for growth. I feel good about our start to the year and our opportunities for the long term.

Now, let me turn the call over to Keith.

Thank you, Joe, and good afternoon, everyone. As Joe described, we delivered strong performance from our core rental businesses in the quarter compared to the fourth quarter of 2020. In my financial review today, I will provide highlights from our fourth quarter results and specifics of our outlook for full year 2022 performance.

Before getting into details, as a reminder, our fourth quarter 2021 results included 2 acquisitions: Kitchens To Go, which closed on April 1; and Design Space which closed on May 17. Together, these acquisitions contributed approximately $16.9 million to total revenue, $6.1 million to adjusted EBITDA, and $0.13 to earnings per diluted share for the quarter. The Titan container acquisition was completed on December 31 and had no impact on fourth quarter operating results.

So now, onto the details. Looking at the overall corporate results for the fourth quarter, total revenues increased 18% to $175.9 million. The revenue increase was from both improved rental operations and sales revenues, with Mobile Modular, TRS-RenTelco and Adler Tanks each growing rental revenues year-over-year, reflecting generally improved business conditions. Fourth quarter adjusted EBITDA increased 12% to $73 million and consolidated adjusted EBITDA margin was 41%.

Breaking the results down by rental division operating performance, compared to the fourth quarter of 2020, Mobile Modular total revenues increased $23.6 million or 31% to $99.7 million. The primary drivers were $13.9 million higher rental revenues and $8.2 million higher sales revenues, with approximately 3/4 of the increase in rental revenues attributed to Design Space and Kitchens To Go. The average monthly rental rate for the quarter was 2.7%, which was 8% higher than a year ago, reflecting stable and improving pricing conditions, as well as some mix impact from the acquisitions.

Average fleet utilization for the quarter increased to 76.9% from 76.2%, reflecting generally improved market demand conditions. Higher rental revenues were partly offset by 38% higher inventory center costs and 32% higher depreciation expense, resulting in rental margins of 63% compared to 65% a year ago. The higher inventory center costs reflect the addition of the acquired businesses, higher business activity levels and some inflationary pressures for materials and labor costs. Sales revenues increased $8.2 million to $20.2 million from both increased new and used equipment sales.

At TRS-RenTelco, total revenues were comparable to the previous year at $37.7 million. Rental revenues for the quarter increased 4%. We saw continued strength in general purpose test equipment rentals, which grew 5% with communications equipment rentals increasing 2% compared to a year ago. The average monthly rental rate for the quarter was 4.05%, down 1% compared to a year ago. This slightly lower average rental rate reflects a continued mix shift towards more general purpose equipment rentals that tend to have longer term transactions and longer asset lives compared to communications.

Overall, market pricing conditions remain stable. Average utilization for the quarter was 65.9% compared to 68.4% a year ago and rental margins were 42% compared to 44% a year ago. Sales revenues declined 13% year-over-year to $7.6 million with gross profit decreasing 7% to $3.8 million. Gross margins were 51% compared to 47% a year ago. Sales and related gross margins can fluctuate, depending on customer requirements, related mix of equipment sold, equipment availability and funding.

At Adler Tank rentals, total revenues increased $3.4 million or 18% to $22.3 million on higher rental, rental-related services and sales revenues. Rental revenues for the quarter increased 19%. Demand improvement was broad based with growth in all 5 of our geographic regions and all 6 of our industry verticals. The average monthly rental rate for the quarter was 3.3%, up 3% compared to a year ago, with improved pricing for both tanks and boxes during the quarter. Average utilization for the quarter increased to 50.1% from 42.6% and rental margins improved to 52% compared to 51% a year ago.

The remainder of my fourth quarter comments will be on a total company basis. Selling and administrative expenses increased $9.7 million or 33% to $39.3 million, $5 million of the increase was a result of the acquisitions, which included $1.7 million higher amortization of intangible assets. The remainder of the increase reflected a return to more normalized SG&A spending compared to a year ago. Interest expense was $3.2 million, an increase of $1.3 million as the result of higher average debt levels, partly offset by lower average interest rates.

The fourth quarter provision for income taxes was based on an effective tax rate of 28.3% compared to 20.7% a year earlier. The increased rate this year was due to increased business activity levels in higher tax rate stakes. For the full year, the effective tax rate was 26.3% compared to 22.8% in 2020. For 2022, we expect SG&A expenses of approximately $163 million to $166 million, interest expense of approximately $12.5 million to $13 million and an effective tax rate of between 26% and 27%.

Turning to our year to date cash flow highlights, net cash provided by operating activities was $195.7 million, an increase of $15.2 million. We paid $292.2 million for the acquisition of substantially all of the assets of the Design Space, Kitchens To Go and Titan container businesses. Rental equipment purchases were $114.1 million compared to compared to $86.3 million in the prior year. This excludes the $135.4 million estimated fair value of the acquired Design Space, Kitchens To Go and Titan Container rental assets.

Healthy cash generation allowed us to pay $42.2 million in dividends. Total net borrowings on bank lines of credit and private placement notes increased $203.7 million. At quarter end, we had net borrowings of $426.5 million comprised of $160 million notes outstanding and $266.5 million under our credit facility with capacity to borrow an additional $165.5 million under our lines of credit. The ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.73:1.

Finally, updating our financial outlook, the positive rental demand trends across each of our business segments are encouraging. For 2022, we currently expect total revenue between 675 and $705 million compared to $616.8 million in 2021, adjusted EBITDA between 260 and $275 million compared to $246.6 million in 2021 and gross rental equipment capital expenditures between 117 and $127 million compared to $114.1 million in 2021.

That concludes our prepared remarks. Peter, you may now open the lines for questions.

(Operator Instructions) Your first question will come from Scott Schneeberger with Oppenheimer.

Hey, Joe, nice ending to the year. I wanted to start off by asking -- you sound more upbeat with regard to current business conditions and outlook than I've heard in a while and it feels like sales were limited due to supply chain in third quarter. Appears that you got a bounce back in the fourth quarter and then we've seen a month of good development in January. So, Joe, you still sound very optimistic after that. That's uncharacteristic. You're a pretty conservative guy. What's behind this sense I have that you're feeling really good about 2022?

Yes, the answer to me is pretty easy and that is the activity levels that we're seeing right now are just indicative of strength in the business. I was really encouraged to get the stats on our January bookings for Modulars considering that as I had said in my prepared comments that they had more than doubled. And so, that is not usual in the month of January for us and the fact that happened, I don't view it as a timing issue and that we're getting a lot of projects that are just hitting in January. I'm viewing it as broad-based activity that we're seeing from across the business. And so, that really gives me a lot of confidence as we enter this year.

And I think how we finished the year, of course, is important too and sometimes the seasonal downturns and the seasonal slowdown during the holidays can affect the business. This year, we saw less of that. More folks held on to their equipment and that was also encouraging. So, we came into the year on a good footing and based on bookings, we're off to a good start. That's why I feel good about it.

All right, sounds good. Just curious as a follow up on that question. January (inaudible) strong and bookings looking good, is that commercial education, both -- which is it? It sounds like both from your prepared remarks, but is it more from one than the other? Just a little bit more background on that.

Yes, no problem. Well, I think as you know and with the acquisition of Design Space, our fleet has -- our business mix has turned more commercial. And so, we are seeing strong activity from the commercial part of the business, but we saw -- we actually got some nice education orders. So, I think it was a fairly good mix there, but more oriented towards our commercial segment.

And then staying in Modular, in the press release, there was a highlight on expanding geographic coverage, rental strength, sales strength and site related services strength, you touched on that a little bit. And it sounded like you were alluding to further acquisitions. I know you've got the big 2 in the earlier in 2021. And then, a storage tuck in, late in 2021. It sounds like you're actively pursuing modular acquisitions. Is it modular? Is it storage? Is it both? And am I reading that right? You sound confident on organic, but inorganic as well?

The answer to that is absolutely. It is -- we're looking at modular acquisitions and storage acquisitions and we view that as a definite place for us to deploy capital this year and we hope that, that happens.

Excellent. One more for both you and Keith, and then one for Keith. So this one is for both of you. Just with the supply chain issues, labor issues that we're seeing broadly out in the economy, how are you handling that with pricing? Are you comfortably seeing the offset? The fourth quarter numbers say yes, but it's been persistent into this year. So if you could each address that. And then, Keith, I'll have a follow-up.

Yes, I'll go first and Keith can follow up. I would say the pricing environment is good and we're finding numerous opportunities to be able to pass price increases along to customers, not just necessarily in the building rental, but in our onetime charges and fees that we charge to customers, and we have not only done some across-the-board price increases in our portable storage business, but we've really tweaked our strategic interfaces that we use and our pricing engine that we use for both those businesses and turn them more towards profit as opposed to volume. And so, the business is definitely seeing that there is an opportunity to continue to increase pricing and we're very positive about that.

Yes. All I'd add, Scott, is it's a journey. It's a work in progress. The good news is the demand environment is healthy. The good news is, as you saw in our update, we're seeing opportunities to change pricing and move it upwards in the most critical parts of the business, and we're going to continue to do that. So, coming into this year, I think the difference is we're conditioned and aware of some of these challenges that exist in the broader marketplace and we're working through them. So, we're prepared. And as Joe said, business is on a good footing entering the year, and we're looking forward to it.

Keith, the follow-up I had for you was implied in the guidance, the 2022 revenue growth, if I'm counting right, that looks like it's 9% to 14% after you guys did 7%, 8% in 2021. How much of that revenue growth is just the solid environment you're seeing versus how much is that of a cleanup of maybe lower-than-expected sales that occurred in 2021? And there's a part 2 of this question. The guidance, you had a down year in margin in 2021 and the guidance for 2022 implies the same. Does that have to do with the acquisition integration? Or are there other factors at play there? Obviously, the absolute numbers are going up. But just curious about the margin as well following the growth question.

Sure. Scott, let me try and step through those a couple of different parts. I think your read on our outlook for this year is accurate. It's a better environment so we're looking for further growth in the rental revenues across the different segments and we also think it will be a better year for sales. As you rightly pointed out, it was a choppy year for us, particularly around the third quarter of last year from a new modular equipment sales point of view. We are hopeful that we're well enough organized and we're seeing enough demand that we can do better overall with the new equipment sales in 2022 and we're taking a kind of the fact that we've got to manage through some of these supply chain challenges, but we're aware of that, and we've got a plan for it. So, I think a good outlook for growth in the business, rental operations will be a big part of it, but we also see a good opportunity to grow the sales side as well. I think that addresses the first part of your question.

And really, that leads into some of the margin comments. What we're seeing is with some of these mix shifts in the business, clearly, the new modular equipment sales come with a different margin profile than the rental side of the business. So that puts a little bit of pressure from a margin point of view. We don't think it's substantial, but there is a different business mix there. And also, the addition of Kitchens To Go, which you may recall, that business also has a different margin profile.

We think over the longer term, we'll help that business accomplish better margins, but in the near term, it is a different margin profile than the rest of the modular business. So those are factors that are a bit of pressure on the EBITDA margin as we enter the year, but over time, particularly with this pricing environment, we'll be working all the possibilities there to retain and keep the margins in a healthy neighborhood.

(Operator Instructions) Your next question will come from Marc Riddick with Sidoti.

Just wanted to go -- just a couple of things. If you -- I don't know if you'd sort of give a bit of an update as to the acquisition pipeline outlook that we have there.

Sure. I can touch on that. There's always activity out there. And they're -- as I'm sure you know, Marc, the market is fragmented. And so, we keep a close eye on that pipeline and not all those businesses are always up for sale, but there are several out there. There are some that are potential acquisitions for us. And we -- that some of the work that we do over the time frame is to keep in touch with those folks and see what's going on there, but we continuously do that and it's just part of our natural progression here as we run the business.

Great. And then I was wondering if you could talk a little bit about the acquisition pipeline, particularly the regional opportunities. There seems to have been several deals along those lines to sort of in the industry. Just wondering if you could talk about maybe how attractive that may look and maybe what that pipeline looks like and maybe what the valuations look like at this point?

Sure. I think it's tough to go into valuations because each of those businesses have different profiles and the owners of those businesses want different things when they put them up for sale, but I would say that there are opportunities out there. And again, they don't always come at predictable times and intervals, but it's something that we keep track of and keep pulse of as we move through the year. We'll continue to do that. And some of those folks are very good opportunities for us that we'd be very interested in. Some could fold into our current operating geographies. Some could open up new geographies for us. Just depends where they are in the country and those are always considerations as we evaluate each of these opportunities. So, I would say the pipeline is alive and well and healthy, and we're on it.

(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 remarks.

All right. Thank you very much. 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 2022 to review our first quarter results.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.