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Mc Grath Rent Corp (MGRC) Q1 2021 Earnings Call Transcript

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MGRC earnings call for the period ending March 31, 2021.

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Mc Grath Rent Corp (MGRC -1.55%)
Q1 2021 Earnings Call
Apr 28, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp First Quarter 2021 Conference Call. [Operator Instructions]. This conference call is being recorded today, Wednesday, April 28, 2021. 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 2021 financial outlook as well as statements relating to the company's expectations, strategies, prospects or targets. These forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties that could cause our actual results to differ materially from those projected.

Furthermore, it should be noted that the impact of the COVID-19 pandemic on the company continues to evolve. As such, continued uncertainty remains regarding the full magnitude of impact the pandemic will happen on the company's financial condition, liquidity and future results of operations. The following discussion by management about the company's expected future financial condition is subject to the ongoing effects of the COVID-19 pandemic. In addition to risks associated with the COVID-19 pandemic, 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 at 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 March 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. Please go ahead, sir.

Joseph F. Hanna -- President, Chief Executive Officer

Thank you, Livia. Good afternoon, and thank you, everyone, for joining us on today's call. I will start the call with some comments on our first quarter 2021 performance as well as our look ahead. Keith will provide additional detail in his financial review and outlook comments. Our first quarter typically sets the pace for the year, and I'm pleased with how the quarter unfolded. Due to lingering effects of the pandemic and some weather-related headwinds, we began the quarter with slower activity levels, but that improved as the quarter progressed, and we finished on a good pace. Companywide rental revenues were down 4% year-over-year compared to a very strong start to 2020 as we were still pre pandemic for much of the first quarter last year. Most of the decline was in our Adler Tank business. The Modular division rental revenue was down only 2%, and our Electronics business only 1%. At Mobile Modular, we were pleased to see more activity from our education and commercial customers. Education rental bookings improved as the quarter progressed and were a mix of modernization and growth projects. Since school districts are now turning to the task of physically having students in seats, we expect the need for temporary facilities to continue. As I've reviewed on past calls, classroom demand to support facilities modernization projects remains a growth opportunity. Many facilities are past their prime and requiring repairs. In addition, there continues to be student population growth in many of the states that we serve. In terms of the funding outlook, federal funds from the $1.9 trillion American Rescue Plan Act are making their way into state budgets. However, we have yet to see how and when the education portion will be allocated.

Our commercial customers also appear to be more positive, and project starts are occurring with increasing frequency. While overall construction starts are still below pre pandemic levels, they have been on a consistent uptrend each month this year. I would also like to acknowledge our Portable Storage business. We saw healthy demand from almost all of our markets for Portable Storage, and this part of the business is off to a very nice start of the year with rental revenue and utilization gains. We recently increased pricing across the board and overall metrics were solid from the Portable Storage business. We continue to invest to grow Portable Storage into a more meaningful contributor to company profitability. At TRS-RenTelco, demand for general purpose equipment was healthy as projects in semiconductor, aerospace and defense and 5G research and development continued. Field work for wireless equipment rentals was slow for the quarter, mostly due to weather and pandemic related delays. We are hearing from our customers that work is expected to pick up in the months ahead. Equipment rentals for wired testing was healthy as carriers were continuing to improve backhaul communications via increased bandwidth from fiber installations. We've been effectively managing the fleet by making investments in key technologies to support demand and selling off lesser utilized assets. Overall utilization was very strong, while pricing remained stable during the quarter. We are well positioned to meet future needs from our customers. At Adler, activity in upstream oil and gas was slow. We experienced some project completions that resulted in equipment returns over the quarter that were part of the normal course of business.

We benefited from work to repair freeze-related damage in the Gulf Coast and that work continued through the quarter. Maintenance work at refineries was also slower than last year as companies are operating to preserve cash until demand improves. Our outlook for the business is cautiously optimistic, and our customers are expecting improved conditions as we move forward. On April 9, we announced the acquisition of Kitchens To Go, a national provider of both temporary and permanent modular foodservice facilities. This acquisition for our Modular business expands our solutions offerings to our customers. Typical clients include higher education, government, healthcare and hospitality industries, among others. Kitchens To Go has been a partner with us on several projects over the years. With our combined geographic and market reach, coupled with Kitchens To Go's foodservice industry expertise, we will have opportunities to be the go-to supplier for projects on a national level. We have been impressed with this team and are looking forward to growing the business together. This latest acquisition is a further step in our work over the past few years to expand the solutions capabilities of our Modular business. three years ago, we added Blast Resistant Modulars to our fleet to support customers needing extra protection in hazardous operating environments.

Two years ago, we organically expanded our offerings for site-related services and custom modular solutions. Our site-related services provide a one-stop solution to customers when they begin a new rental by providing everything they need for a successful project inside and outside the building. Our custom modular or turnkey solution supports customers who want to purchase a new permanent facility or have unique design considerations with the benefits of shorter lead time and attractive costs compared to conventional construction. Customer reactions to these expanded offerings have been positive, and we look forward to growing them over time. To conclude, I'm pleased with our start to the year. I am excited by the strategic initiatives we have under way, and we are encouraged by recent customer and field feedback on potential project activity. We will be working hard to capitalize on this positive momentum as the year continues.

With that, I'm going to turn the call over to Keith, who will take you through our financial review.

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Thank you, Joe. Echoing Joe's comments, overall, compared to a very strong first quarter of 2020, we had a solid start to the year from our core rental businesses, and we were encouraged by improving business demand trends over the course of the quarter. For the first quarter of 2021, total revenues decreased 6% to $121.2 million. The majority of the revenue decline was for rental-related services at Mobile Modular and for rental revenues at Adler, both of which I will discuss further in the segment reviews. The company's $5.8 million operating profit decline for the quarter was primarily the result of gross profit declines of $3.3 million from rental revenues and $1.2 million from rental-related services revenues. In addition, we had a $1.2 million higher selling and administrative expenses, which included a $2.1 million nonoperating legal expense. First quarter 2021 adjusted EBITDA decreased 10% to $49.1 million compared to a year ago. And consolidated adjusted EBITDA margin was 41% compared to 42% a year ago. Now I will break the results down by reviewing Rental division operating results and performance compared to the first quarter of 2020. Mobile Modular total revenues decreased $4.6 million or 6% to $68.6 million. The primary driver was $4.1 million lower rental-related services revenues as we had fewer site related services projects in the first quarter of 2021 compared to a year earlier, reflecting these sometimes uneven timing and size of such work across quarters. Rental revenues for the quarter decreased by only 2%, with both commercial and education rental revenues dropping from a year ago, though rental revenues for our Portable Storage business increased compared to 2020.

The average monthly rental rate for the quarter was 2.45%, which was comparable to a year ago and reflecting generally stable pricing conditions. Average fleet utilization for the first quarter decreased to 75.8% from 78.7%, reflecting the softer market demand conditions from the ongoing effects of the pandemic. Lower rental revenues, coupled with 2% higher equipment preparation costs, resulted in rental margins of 60% compared to 61% a year ago. Sales revenues increased $0.4 million to $7.6 million, primarily due to higher new equipment sales. At TRS-RenTelco, total revenues decreased $0.5 million or 1% and to $33.6 million on lower rental and rental-related services revenues. Rental revenues for the quarter decreased 1%. We saw a continued strength in general purpose test equipment rentals, which grew 6%, offset by lower rental revenues from communications test equipment, which declined 18%. Communications rentals continue to be impacted by less field work on the communications infrastructure, partly as a result of delays caused by the pandemic. The average monthly rental rate for the quarter was 3.99%, down compared to a year ago. This lower average rental rate reflects a continued mix shift toward more general purpose equipment rentals that tend to have longer-term transactions and longer asset lives compared to communications. Overall market pricing conditions were generally stable. Average utilization for the first quarter increased to 68.1% from 65.3%, and rental margins were 42% in 2021 and compared to 41% a year earlier. Sales revenues were comparable year-over-year at $5.1 million. At Adler Tank Rentals, total revenues decreased $3 million or 14% to $17.7 million on lower rental and rental-related services revenues.

Rental revenues for the quarter decreased 17%, reflecting weaker demand caused by pandemic-related market disruptions and an unusually cold winter in certain regions, with all major end markets and geographies having lower rental revenues compared to last year's first quarter. The average monthly rental rate for the quarter was 3.21%, down 1% compared to a year ago. Overall market pricing conditions continue to be competitive. Average utilization for the first quarter decreased to 40.3% from 47.8%, and rental margins decreased to 48% and from 55%. Moving on, the remainder of my first quarter comments will be on a total company basis. Selling and administrative expenses increased $1.2 million or 4% to $31 million, which included a $2.1 million nonoperating legal expense, partly offset by lower travel, meals and meeting expenses. Interest expense was $1.8 million, a decrease of 33%, the result of lower average debt levels and lower average interest rates. The first quarter provision for income taxes was based on an effective tax rate of 21.3% compared to 24.3% a year earlier. The lower rate in 2021 was in part due to increased excess tax benefits from stock-based compensation. For the full year 2021, we currently expect an effective tax rate of between 25% and 26%. Next, I'd like to turn to our first quarter 2021 cash flow highlights. Net cash provided by operating activities was $37.6 million, a decrease of $8.1 million, primarily attributable to lower income from operations and net working capital balance sheet changes. We reduced rental equipment purchases to $18 million, down from $35 million in 2020, consistent with lower fleet utilization across most of our segments. Healthy cash generation during the quarter allowed us to pay $10.6 million in dividends and to reduce debt by $13.9 million. At quarter end, the company had net borrowings of $209 million and capacity to borrow an additional $323 million under its lines of credit.

The ratio of funded debt to the last 12 months actual adjusted EBITDA was 0.89:1. The Kitchens To Go acquisition was an all-cash transaction with a purchase price of $18.3 million. For the full year 2020, this business had total revenues of approximately $17 million and adjusted EBITDA of approximately $2.5 million. The transaction is expected to be modestly accretive to 2021 results. And we believe that the combined capabilities and sales reach should result in longer-term revenue growth and margin expansion. Finally, turning to our financial outlook. We have updated our full year outlook to account for the expected contributions of Kitchens To Go to revenue and EBITDA. The outlook for the rest of our business is unchanged. We currently expect total revenue between $570 million and $610 million, adjusted EBITDA between $232 million and $247 million, gross rental equipment capital expenditures between $90 million and $110 million. While the market environment remains uncertain as we recover from the impact of the pandemic, we are encouraged by our start to the year and the overall improving business activity levels we have recently seen.

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

Questions and Answers:

Operator

[Operator Instructions] And our first question coming from the line of Scott Schneeberger with Oppenheimer. Your line is open.

Scott Schneeberger -- Oppenheimer -- Analyst

Thanks very much. Good afternoon, guys. I'm going to go bouncing around in order today. On Adler, Joe, I heard you say cautiously optimistic from here? Obviously, seasonally a tough quarter and some tough weather for sure. So a lot of challenges. Just if you could put a little bit more color around what you're seeing ahead. Thanks.

Joseph F. Hanna -- President, Chief Executive Officer

Sure. Scott, what customers are telling us at this point is that some of the deferred projects that they did not accomplish in 2020, they're actually looking to fund and complete in this next year. And that's coupled with just increasing demand for oil and gas, if you're looking at that part of the market, the refineries and downstream and all that part of the business. So we're just hearing more positive news, and we're hearing that folks are actually going to be doing more projects than they did last year. And so that's our -- that's really giving us our optimistic viewpoint on things at this point.

Scott Schneeberger -- Oppenheimer -- Analyst

All right. Great. On the Modular, I'll keep that brief and just ask on Kitchens To Go. First off, the change in the guidance is solely Kitchens To Go? I think Keith just said it, but I missed it, and I want to be sure that that's the case. And then secondly, if you could just provide a little bit more in-depth about how they fit in the portfolio and then what you like most about them?

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Sure. Scott, I'll take the first part. And you are correct. There's no change in the underlying financial outlook for the business, even though we had a little bit of a slower start, as we discussed in the prepared remarks. And the incremental increase in the revenue and adjusted EBITDA for the full year, that is tied to Kitchens To Go.

Joseph F. Hanna -- President, Chief Executive Officer

And Scott, I can finish the second part of your question. We were introduced to Kitchens To Go a number of years ago, and that was when they had a project where they were providing a temporary food service facility, and they needed additional space for folks to use as a dining hall as an example. And so we got introduced to them and did a project with them and realized, "Hey, this is a really nice fit." Because there's a lot of cross-selling that we can do and teaming up on projects that we can do to serve customers. So we thought this was a great add to the portfolio. The nice thing is Kitchens To Go has a great reputation, a quality company. They serve customers nationally. And we're going to be right there with them. And I think we are already cross communicating leads, and we're going to be able to introduce them to more of our customers. And they have a nice customer base, too, that we'll be able to, I believe, provide modular buildings for. So really good fit for us. Really pleased.

Scott Schneeberger -- Oppenheimer -- Analyst

Okay. Great. I actually do have one more into the broader Mobile Modular space. You mentioned portable storage pricing increased. Could you just share a little bit more about that? What were you seeing in the industry that gave you the confidence to do that? Or was it more a company-specific move? Just a little context behind that.

Joseph F. Hanna -- President, Chief Executive Officer

Sure. Yes. I think through the pandemic, pricing has held in there very nicely. And we've got disciplined competitors. And so we've -- the environment right now, we feel with increasing utilization and demand is allowing us to increase pricing. And so that's exactly what we're going to do. We passed the price increase along in March, and we'll continue to do that as if and when the opportunity presents itself as the year unfolds. So overall, a healthy part of the business, and we're very pleased.

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Scott, the only thing I would add to that is, keep in mind, new equipment costs are also increasing. Industry conditions, when you look at acquiring new assets for the fleet, those price points have gone up recently. And so it's another reason to be disciplined and make sure we get appropriate returns overall in the business and to take the kind of steps that Joe described.

Scott Schneeberger -- Oppenheimer -- Analyst

Keith, how is your capacity utilization in that -- in the Portable Storage area specifically? And would this be above or below or an average year for capex in that space?

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Yes. It's an area we have been funding and we'll continue to fund. It's an important growth area for us. We've covered more geographies over the last few years, and there's more places we want to go. And even in many of the geographies where we have a presence, we're still building our share in those markets. So it will continue to be a priority area for us to continue to fund. And utilization of that part of the fleet is very healthy. It's been edging up, but we still have a good amount of equipment, and we'll be adding to it.

Joseph F. Hanna -- President, Chief Executive Officer

Thanks, Keith, that's exactly what I was going to say.

Scott Schneeberger -- Oppenheimer -- Analyst

I'll just sneak one last one in and then pass it along. It sounded this -- I was a minute or two late on to the call. Keith, the legal charge, the legal expense, not common for you all. Could you please elaborate a little bit on what that is.

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Yes, I can't really provide any extra details at this time. Again, it's really a nonoperating item. So when you look at the run rate in SG&A, I would adjust it accordingly. That was $2.1 million of the first quarter SG&A, and I wouldn't build that into your run rate.

Scott Schneeberger -- Oppenheimer -- Analyst

Okay, thanks very much. I'll pass it on.

Operator

And our next question coming from the line of Sam England with Berenberg Capital. Your line is open.

Alison -- Berenberg Capital -- Analyst

Hi guys, This is Alison [Phonetic] for Sam. The -- our first question is around the Kitchens To Go acquisition. Does this suggest that you guys are looking to do more tuck-on M&A going forward? And are there any other specialty modular rental niches that you might look to enter?

Joseph F. Hanna -- President, Chief Executive Officer

Well, we have an active pipeline, and we're always looking at M&A. We're -- I think those folks who have followed the company for a while realized that we are choosy, and we want it to be accretive. We want it to have good products. We want it to have the right culture. And those companies don't always present themselves. But when they do, we're certainly very interested, and we will continue to be interested. So that was the case with Kitchens To Go, and we hope there's more opportunities like that out there.

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Yes. It's a good avenue for us to continue to build the business. And I think as we've said many times, the strategic fit has to be right, just as Joe described it, and the value has to be fair to both parties. And those are things you have to look for very hard. They're not easy to find.

Alison -- Berenberg Capital -- Analyst

Sure. And how much of a benefit might you guys see from increased infrastructure spending as well as other proposed policies from the new administration?

Joseph F. Hanna -- President, Chief Executive Officer

Yes. That's a good question, Sam. There is, at this point, so many different packages that are being proposed. It's hard to really know exactly what's happening. I think for us, there's two potential areas. One, in the American Rescue Plan Act, there was roughly $100 billion that was allocated in there for education. And as I said in my prepared comments, that money has started to make its way into states. And -- but we just -- from what we understand at this point, it's a fairly open ability for these states to spend this money, however they want to. And so if and how that makes its way into facilities, we just don't know at this point. My belief is that, yes, some of it will but we know it's going to things like HVAC upgrades and PPE and things like that for schools. But I think the most important thing from that is it's funding that will enable students to get back into the classroom, and that's good for us. Because what I think is going to happen is once districts get their kids back into seats and they do rolls, they're going to realize that their accounts for what they thought their student population was and what it actually is, is going to be way off. And that's when we're going to get a call.

And that typically happens right as the school year is opening. And we're really well prepared to be able to meet those very quick emergency needs as districts really try to calibrate the number of students that they have. And after a year of not having kids in classrooms, the chances are that things are going to be really off from what districts think that they are. So I think that's the real opportunity for us. And of course, all the funding and everything that's been in place for modernization projects and things like that is still there and will continue to be deployed. And I think as educators now are more less focused on teaching kids in a virtual environment, they're going to worry more about their facilities now, and I think that's going to be a plus for us. The other thing, just on the other part of the question you had about infrastructure, I think very early because the administration is only proposing monies for that at this point. But I believe that any infrastructure funding that gets passed will definitely be a benefit for McGrath RentCorp.

Alison -- Berenberg Capital -- Analyst

Great, thanks guys.

Joseph F. Hanna -- President, Chief Executive Officer

Thank you.

Operator

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.

Joseph F. Hanna -- President, Chief Executive Officer

All right. I'd like to thank everyone for joining us on the call today and for your continuing interest in our company. We wish you all health and safety in the months ahead, and we look forward to speaking with you again in late July 2021 to review our second quarter results.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Joseph F. Hanna -- President, Chief Executive Officer

Keith E. Pratt -- Executive Vice President, Chief Financial Officer

Scott Schneeberger -- Oppenheimer -- Analyst

Alison -- Berenberg Capital -- Analyst

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