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McGrath RentCorp (NASDAQ: MGRC)
Q3 2024 Earnings Call
Oct 24, 2024, 5:00 p.m. ET
McGrath RentCorp Reports Significant Developments in Q3 2024 Earnings Call
Key Highlights from Q3 Earnings Call
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, welcome to McGrath RentCorp’s third quarter 2024 earnings call. This call is being recorded today, Thursday, October 24th, 2024. Please note that any comments made by the company management that are not historical facts are forward-looking statements. These statements relate to management’s expectations and involve risks that could cause actual results to differ. For further details, please refer to the Risk Factors outlined in our Form 10-K and other SEC filings.
Joining us today are Joe Hanna, Chief Executive Officer, and Keith Pratt, Chief Financial Officer. I’ll now turn the call over to Mr. Hanna.
Joseph F. Hanna — President and Chief Executive Officer
Thank you, Jess. Good afternoon, everyone, and thank you for joining us today. This quarter has been particularly eventful. On September 18th, we mutually agreed to terminate our planned acquisition by WillScot, which resulted in McGrath receiving a termination fee of $180 million. Since announcing the merger in January 2024, we had been operating under the expectations of being acquired, which was an unusual situation for us. Despite this uncertainty, we maintained our competitive position in the market.
Resilience Amid Challenges
I instructed our teams to stay focused on our strategy and keep the company healthy. Throughout this period, we supported each other, reduced costs, and enhanced revenue streams. I am proud of our team for maintaining low turnover rates during this challenging time.
Moving forward to our latest results: for the third quarter, total revenues increased by 10%, and adjusted EBITDA rose by 13%.
Performance Overview
The modular business demonstrated strong performance, with rental revenues rising by 9% and sales revenues by 14%. Our education and commercial sectors saw growth, with success spanning various geographical regions and market verticals including government and technology.
The education sector benefited from modernization projects in both public and private schools. We managed our pricing and fleet utilization effectively, though we did notice some market demand softness. This led to a slight decrease in utilization, which ended the quarter at 76.5%, still considered a healthy range.
In the services sector, we expanded our revenues, with mobile modular plus, site-related services, and custom modular sales all showing growth this quarter. However, our portable storage business faced challenges, experiencing a decline in rental revenues of 11%, largely due to lower commercial construction activity attributed to interest rate impacts. New project shipments fell short of expectations, while project completions outpaced replacements, leading to broader geographical effects.
At TRS-RenTelco, we saw a rental revenue decrease of 10%. This reflects ongoing slowdowns in the test and measurement equipment markets. We took action to ensure stability, including selling excess equipment and reducing new equipment purchases.
Resilience Against Natural Disasters
I want to briefly discuss the impact of the Helene and Milton hurricanes. Despite significant regional storm damage, our operations remain secure and fully operational with minimal disruption.
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McGrath’s Q3 Performance: A Cautious Outlook Amid Recovery Efforts
Recent storms may hinder McGrath’s short-term customer projects, but opportunities for growth are on the horizon.
In the coming months, storms could negatively affect current and planned projects. While recovery efforts progress, McGrath anticipates limited new business opportunities. However, the company remains ready to offer space and storage solutions to those in need. As recovery operations continue, we expect to learn more about storm-related demand soon.
The demand environment appears unpredictable for the fourth quarter and the entirety of 2024. Ongoing soft demand in portable storage and TRS businesses may persist into 2025. At Mobile Modular, our diverse growth initiatives and positive pricing trends are expected to counterbalance any market softness. Easing interest rates in the coming quarters could enhance demand conditions, but substantial improvements may not materialize until well into 2025.
Despite short-term uncertainties, McGrath’s long-term growth prospects look bright. Our strategic focus on expanding the modular business, through organic growth and targeted acquisitions, is yielding encouraging results. With an expanded geographic footprint from new branches and acquisitions, we are well-positioned for fleet investments to meet customer needs for many years ahead.
Our pricing strategies and processes are sound, and as our fleet matures, we anticipate a favorable revenue tailwind. Initiatives such as Mobile Modular Plus, site-related services, and custom modular sales are creating added value for customers. We serve a diverse and high-quality customer base that spans the commercial and educational markets.
Opportunities in our commercial sector are expanding, including involvement in megaprojects, government infrastructure, and the growing data center market. Moreover, our education segment faces a multiyear period filled with modernization needs and new construction projects driven by shifting student populations. Our position to support both private and charter schools across different regions is strong.
In portable storage, we find ourselves in early growth phases across various markets and see potential for future expansion. Notably, our TRS business is recognized as a leading technology provider.
The increasing demand for bandwidth and faster device speeds lays a promising path for recovery. Overall, we believe in our multi-year opportunity to provide additional value through expanded services while enhancing our customer base and geographic reach. Commitment to long-term shareholder value remains central to our strategy, demonstrated through disciplined capital allocation and consistent execution. McGrath stands strong following the termination of a merger agreement.
Emerging from such processes can often leave companies vulnerable, but McGrath has remained resilient. Our success is rooted in a culture we pride ourselves on, with a team dedicated to customer care unlike any other I have encountered in my 34 years of experience.
The commitment of our team has driven our success through these uncertain times. Coupled with our strategic execution plans, we are well-positioned for growth and performance. We aim to benefit shareholders, customers, partners, and team members. My gratitude extends to our team for their outstanding efforts as we strive for a strong conclusion to 2024.
Now, I’ll hand the call over to Keith, who will outline our financial performance for the quarter and our outlook for the full year.
Keith E. Pratt — Executive Vice President, Chief Financial Officer
Thank you, Joe, and good afternoon, everyone. As Joe noted, we achieved solid results in the third quarter, largely driven by our mobile modular sector’s performance. The corporate results for Q3 showed total revenues from continuing operations up 10% to $267 million, while adjusted EBITDA climbed 13% to $104 million.
During this quarter, we received a $180 million payment from WillScot Mobile Mini due to the termination of the merger agreement. Transaction costs driven by this process totaled $39 million. Thus, the net income contribution for Q3 was $104 million, equating to $4.21 per diluted share.
Focusing on mobile modular’s performance reflects the effectiveness of our growth strategy. Adjusted EBITDA rose 23% to $71.4 million, while total revenues grew by 13% to $191.4 million. We observed improvements across all operational revenue streams, with rental revenues up by 9%, rental-related services up 23%, and sales revenues climbing 14%. The increase in sales is primarily due to rising new equipment sales and progress in our modular sales initiatives.
Rental margins increased to 62%, up from 59% a year ago, thanks to revenue growth and reduced inventory costs. Our disciplined fleet management remains effective, with a 5% rise in average rental equipment and an average fleet utilization rate of 77.1%, compared to 79.9% last year. Additionally, our third-quarter monthly revenue per unit rose 18% year-over-year to $820, with the average monthly revenue for new shipments increasing by 16% to $1,191.
Mobile Modular Plus continues to contribute to our growth. For the third quarter, revenues rose to $7.9 million from $7.6 million the previous year, while site-related services increased to $12.8 million, up from $10.1 million. Now, let’s review the portable storage business.
Adjusted EBITDA for portable storage was $10.8 million, reflecting a 10% decrease from prior year figures. The quarter experienced weaker demand, primarily due to reduced commercial construction activity. This caused total revenues to decline by 11% to $23.1 million, with rental revenues also dropping by 11% to $17 million. However, rental margins improved to 86%, compared to 84% a year ago.
Average rental equipment on rent decreased by 12%, while average utilization for the quarter was 62.8%, down from 76.5% last year. In response to the softer market, we have moderated new equipment spending and managed operational costs carefully. Moving on to TRS-RenTelco, adjusted EBITDA reached $18.9 million, down 10% from the previous year, with total revenues declining 11% to $34.8 million.
Rental revenues decreased 10% as the industry continued to face end-market weaknesses, leading to an average utilization rate of 57.3%, compared to 59.4% last year. Rental margins for the quarter were 37%, down from the previous year.
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McGrath Industries Reports Financial Update Amid Changing Market Conditions
In the latest financial report, McGrath Industries shared that sales revenues declined by 13% to $7.6 million. The company noted a significant increase in gross margins, which rose to 52% from 35% a year prior. To adjust to the challenging market conditions, McGrath is focused on minimizing capital spending on new equipment and is strategically managing operational costs, with an emphasis on increasing sales of used equipment.
Fleet Value and Administrative Costs
The total value of McGrath’s fleet, based on the original equipment costs, stood at $357 million at the end of September. This figure has decreased by $11 million since the second quarter and is down $26 million year-over-year. The company’s selling and administrative expenses in the third quarter increased to $49.3 million, reflecting a rise of $0.8 million. Notably, transaction costs of $39 million related to a terminated merger were deemed nonoperating and have been excluded from these expenses.
Debt and Tax Overview
Interest expenses amounted to $12.6 million during this period, which marks an increase of $1.6 million due to rising interest rates and elevated debt levels. The effective tax rate for the third quarter was reported at 26.4%, a decrease from 27.3% in the previous year, primarily influenced by changes in the company’s business distribution across states.
Year-to-Date Cash Flow and Investments
Year-to-date, McGrath generated a net cash flow of $338 million from operating activities, a substantial increase compared to $119 million in the previous year. This rise is largely attributed to a $180 million payment from WillScot Mobile Mini, adjusted for $61 million in transaction costs. The company spent $167 million on rental equipment purchases this year, slightly down from $171 million last year, focusing on the modular business while curtailing spending at TRS and portable storage in light of decreased demand.
Dividend Payments and Debt Ratios
Thanks to robust cash generation, McGrath disbursed $35 million in dividends to its shareholders. As of the end of the quarter, net borrowings totaled $609 million, and the ratio of funded debt to the last 12 months’ adjusted EBITDA was reported at 1.75:1. Looking ahead, the company anticipates total revenue for the full year to fall between $910 million and $920 million, with adjusted EBITDA expected between $345 million and $351 million. Gross rental equipment capital expenditures are predicted to range from $180 million to $190 million.
Fourth Quarter Outlook
For the final quarter, McGrath expects modular rental revenues to see slight growth compared to the third quarter, while revenues from modular rental-related services are anticipated to match second-quarter levels. The company projects a decrease in site-related service projects compared to the busier third quarter. In modular sales, revenues are expected to dip slightly, and performance in TRS and portable storage is anticipated to be below third-quarter figures, reflecting seasonal demand softness. Additionally, total selling and administrative expenses, excluding merger-related costs, are expected to see a sequential uptick from the third quarter, with interest expenses estimated to range between $10.5 million and $11 million.
In summary, McGrath Industries expresses confidence in its financial stability and is committed to enhancing long-term shareholder value through strategic focus, disciplined capital expenditure, and consistent operational performance. Despite challenges such as the merger process and fluctuating market demand, the company has achieved solid results this year and looks to maintain a strong execution focus through the end of the year.
Questions & Answers:
Operator
Thank you. [Operator instructions] We’ll begin with Scott Schneeberger from Oppenheimer. Your line is open. Please go ahead.
Scott Schneeberger — Analyst
Thank you. Good afternoon, Joe and Keith. I’d like to start by discussing mobile modular, particularly in the commercial and education sectors.
You mentioned that both markets have seen improvements in rental. Can you share more about the magnitude of these increases? I would assume education is performing better, but what are the details?
Joseph F. Hanna — President and Chief Executive Officer
Sure. Actually, both sectors performed quite evenly this quarter. Education rental was up 10%, while commercial rentals increased by 8%.
Keith E. Pratt — Executive Vice President, Chief Financial Officer
That’s correct.
Scott Schneeberger — Analyst
Great, thank you. Can we delve into price versus volume in this context? Based on what we’ve seen in charts, pricing appears robust. Can you provide insights on your pricing strategy and volume relationship? Do you expect strong pricing to persist next year?
Joseph F. Hanna — President and Chief Executive Officer
Our pricing efforts are indeed yielding positive results, and we anticipate continuing this trend into next year.
Keith E. Pratt — Executive Vice President, Chief Financial Officer
Pricing remains strong overall. We’ve also focused on providing additional services which enhance revenue per rental unit. Equipment on rent increased by about 5% compared to a year prior, despite a slight overall decline in units rented due to fleet turnover and the introduction of newer, higher-priced assets.
Scott Schneeberger — Analyst
Thanks for the insights. Now, regarding quoting activity and deliveries, what trends are you observing? In particular, how do these trends compare year-over-year, keeping in mind that classroom activity tends to slow this time of year?
Joseph F. Hanna — President and Chief Executive Officer
Quote volumes and resulting opportunities saw a strong increase this quarter, influenced by our recent acquisition of Vesta. We’ve experienced double-digit growth, which is encouraging and has remained consistent throughout the year.
Scott Schneeberger — Analyst
Perfect. Thanks, Joe. Moving on to portable storage, which appears more cyclically pressured. Could you share your insights on quoting and deliveries in this segment? I also noticed in your guidance that expectations for the fourth quarter appear lower than the third quarter. What’s driving this trend?
Keith E. Pratt — Executive Vice President, Chief Financial Officer
… [This section would continue with Keith’s response regarding trends in portable storage.]
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Struggles Continue for Portable Storage Rental Revenue as Market Demand Dips
Current Market Dynamics Impacting Performance
In a candid discussion, executives highlighted an alarming trend. As we progressed through the year, the rental revenues in portable storage have dropped from Q1 to Q3. This downward trajectory is disappointing and indicative of the challenging demand conditions currently facing the sector. As it stands, the company expects to see rental revenues fall further in Q4 compared to Q3, signaling a lower overall performance in this segment.
This decline is not an isolated issue; a drop in rental revenues correlates with a noticeable decrease in quote opportunities, bookings, and shipments. All relevant metrics indicate a troubling demand environment, mirroring sentiments expressed at the end of Q2. The feedback strongly reinforces the notion of ongoing difficulty.
Pricing Challenges Amid Declining Demand
Despite the unfavorable conditions, efforts have been made to maintain pricing levels, albeit with some slight reductions. According to the CEO, there hasn’t been a significant deterioration in pricing, which suggests that the company is actively working to stabilize that aspect of their business amidst difficult market conditions.
Sector-Specific Insights on Telecommunications
Turning to the telecommunications segment, the executives provided an overview of current trends in semiconductors and 5G technology. Initially, weaknesses were mainly observed in the computer and semiconductor areas. However, there’s now a noted slowdown in the wireless aspect, particularly regarding tower work that service providers depend on. In contrast, wired communications, which cater to bandwidth demands for data centers, remain strong. The divergence in performance highlights the mixed landscape within the sector.
Looking back, this downturn has been extending longer than typical cycles in the past. The executives expressed hope for a turnaround but acknowledged the current lack of deterioration in performance from quarter to quarter, suggesting a possible stabilization.
Strategic Financial Moves Post-Termination Fee
In a recent development, the company reported a $180 million cash inflow resulting from a reverse termination fee, with approximately $104 million remaining after taxes and legal expenses. CFO Keith Pratt elaborated on how these funds would be utilized across the business moving forward, emphasizing the importance of strategic capital allocation. Considering their recent past of incurring transaction-related expenses amounting to $63 million, the net proceeds translate closely to $86 million after tax deductions.
This influx of cash provides flexibility in capital decisions. As the company assesses its options, they will explore investments in organic growth, potential M&A opportunities, and returning value to shareholders through dividends or share repurchases. Any excess capital not immediately allocated will firstly address debt reduction, which has already been reflected in the third-quarter results.
Clarification on Remaining Costs
As a follow-up, Scott Schneeberger inquired about any outstanding costs related to the terminated acquisition. CFO Pratt confirmed that most of the expenses have already been incurred, suggesting limited lingering impacts going into the fourth quarter.
Approaching Capital Allocation Decisions
Marc Riddick from Sidoti followed up by seeking clarity on debt reduction measures taken recently. Pratt noted that following the merger termination announcement on September 18th, they promptly received funds that were quickly directed toward debt repayment. The third-quarter financial position reflects this activity, although higher cash taxes are anticipated for the upcoming quarter.
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McGrath RentCorp Reflects on Financial Stability and Future Plans in Latest Earnings Call
Higher Cash Flow and Comfortable Debt Levels Anticipated
During the fourth quarter, McGrath RentCorp expects to maintain low rental capital expenditures and higher cash flows, with debt levels projected to be similar to those reported at the end of Q3.
Marc Riddick — Analyst
Can you provide insights on your long-term strategy regarding leverage and potential acquisitions? It seems you have been cautious due to recent processes.
Keith E. Pratt — Executive Vice President, Chief Financial Officer
Absolutely. We wrapped up the last quarter with a leverage ratio of 1.75, well below our loan agreements’ cap of 2.75. This gives us confidence to operate within that range as we explore strategic opportunities, including mergers and acquisitions (M&A).
Joseph F. Hanna — President and Chief Executive Officer
We’re currently refining our M&A strategy, but our primary focus remains on the portable storage and modular business sectors. We believe acquiring companies in these areas can help us expand our presence and better capitalize on market opportunities.
Hiring and Investment Plans Emerge as Priority
Looking ahead, McGrath’s leadership reflected on the company’s culture and resilience during recent transitions. They also addressed future hiring needs and investment in technology.
Marc Riddick — Analyst
Can you elaborate on potential internal hiring and investment areas you might be exploring following the recent developments?
Joseph F. Hanna — President and Chief Executive Officer
We had previously postponed certain positions due to the merger agreement, but we are set to resume hiring in various roles, particularly in sales and operations. Overall, we have not experienced significant turnover during this process, allowing us to focus on future growth.
Keith E. Pratt — Executive Vice President, Chief Financial Officer
Regarding SG&A expenses, higher costs in Q4 are expected due to increased hiring activities as we now operate as an independent company. We anticipate addressing a backlog of open positions, which reflects typical business operations.
Future Outlook and Gratitude Expressed
The call concluded with an expression of gratitude for the support from participants, emphasizing optimism for the quarters ahead and the upcoming review of fourth quarter results.
Joseph F. Hanna — President and Chief Executive Officer
Thank you all for being part of this call. We eagerly await our next discussion in late February to present our Q4 outcomes.
Operator
[Operator signoff]
Duration: 0 minutes
Call Participants:
Joseph F. Hanna — President and Chief Executive Officer
Keith E. Pratt — Executive Vice President, Chief Financial Officer
Scott Schneeberger — Analyst
More MGRC analysis
This article is a transcript of the conference call produced for The Motley Fool. While we aim for accuracy, please be mindful that there may be errors or omissions. We recommend conducting your own research and reviewing the company’s SEC filings for comprehensive insights.
The Motley Fool recommends McGrath RentCorp. The Motley Fool has a disclosure policy.
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