McGrath RentCorp
Q1 2021 Earnings Call Transcript

Published: 28 Apr 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp First Quarter 2021 Conference Call. At this time, all conference participants are in a listen-only mode. Later, we will conduct a question-and-answer session. 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.

[Joe Hanna:]

Thank you, Olivia. 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. Company-wide 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.

[Keith Pratt:]

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 non-operating 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 the 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. The rental revenues for our Portable Storage business increased compared to 2020.

[Operator:]

Thank you. Our first question is coming from the line of Scott Schneeberger with Oppenheimer. Your line is open.

[Scott Schneeberger:]

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 it’s in 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.

[Joe Hanna:]

Sure. Hi, 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 and 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:]

All right. Great. Thanks. 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, you said it, but I missed it and I want to be sure 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 what you liked most about them? Thanks.

[Keith Pratt:]

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.

[Joe Hanna:]

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 us. So really good fit for us, really pleased.

[Scott Schneeberger:]

Okay, great. Thanks. I actually do have one more into the broader Mobile Modular space. You mentioned Portable Storage pricing increase. Can 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 of a company specific move? Just a little context behind that. Thanks.

[Joe Hanna:]

Sure. Yes, I think through the pandemic, pricing has held in there very nicely and we’ve got disciplined competitors and so 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 a 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, healthy part of the business and we’re very pleased.

[Keith Pratt:]

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:]

Thanks, Keith. How is your capacity utilization in the Portable Storage area specifically? And would this be above or below average year for CapEx in that space?

[Keith Pratt:]

Yes. It’s an area we have been funding and will 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.

[Joe Hanna:]

Yes, thanks, Keith. That’s exactly what I was going to say.

[Scott Schneeberger:]

All right. Thanks. I’ll just sneak one last one in, and then pass it along. It’s on this – I was a minute or two late onto the call. Keith, the legal charge or the legal expense, not common for you all, could you please elaborate a little bit on what that is? Thanks.

[Keith Pratt:]

Yes. I can’t really provide any extra details at this time. Again, it’s really a non-operating 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:]

Okay. Thanks very much. I’ll pass it along.

[Operator:]

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

[Unidentified Analyst:]

Hi, guys. This is Alex on for Sam. My 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?

[Joe Hanna:]

Well, we have an active pipeline and we’re always looking at M&A. I think those folks who have followed the company for a while, realize 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 Pratt:]

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.

[Unidentified Analyst:]

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

[Joe Hanna:]

Yes. That’s a good question, Sam. There’s 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. 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 roles, 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 we’ll 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.

[Unidentified Analyst:]

Great. Thanks guys.

[Joe Hanna:]

Thank you, Sam.

[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.

[Joe Hanna:]

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:]

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