Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Third Quarter 2022 Earnings Call. At this time, all conference participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] This conference is being recorded today, Thursday, October 27, 2022. Before we begin, note that the matters the company management will be discussing today that are not statements of historical facts or 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 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-Q 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-Q for the quarter ended September 30, 2022. 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.

Good afternoon, and thank you everyone for joining us on McGrath’s earning call today. I hope you are all doing well. Keith and I will look forward to your questions after we each highlight aspects of McGrath’s progress in the third quarter during our prepared remarks. We were very pleased with our third quarter results which reflected strength in all of our business units. Total company rental revenues increased by 15% and sales revenues increased by 20%. The third quarter continued our strong performance year-to-date, and reflects effective execution of our strategic priorities as well as favorable market conditions. Turning to each of our business units. Mobile modular once again had a very impressive quarter. Rental revenues grew by 17% with noteworthy increased performance from our education segment where we are seeing recovery post pandemic, and as school districts continue modernization projects in all of our regions. Our strong presence in growth markets, where student population is increasing, also drove rentals as districts cannot accommodate students fast enough in permanent facilities. Education rentals, which account for a third of our business mix grew by 9%, which was the largest increase since the beginning of the pandemic in the first quarter of 2020. Commercial rentals also increased a healthy 20% driven by continued investment in many different end market requirements. We excel at providing complexes, which are multi floor units, typically customized to specific configurations that are needed by large construction contractors and demand was robust for those products. Examples include datacenters, municipal building refurbishment, and industrial expansion projects. We again achieved what I describe as the trifecta in our modular division as we did in the second quarter and that is improvement in utilization and pricing, while also adding new equipment to grow the fleet. I cannot stress enough the…

Thank you, Joe. And good afternoon, everyone. As Joe highlighted up front, we delivered excellent results in the third quarter with continued positive performance across the board. Our results reflect broad based organic strength across all of our core rental businesses. Looking at overall corporate results for the third quarter, total revenues increased 16% to 200.5 million. The revenue increase was primarily from improved rental operations, along with higher sales revenues with mobile modular TRA-RenTelco and Adler tanks each growing rental revenues year-over-year reflecting sustained momentum and healthy business conditions. Third quarter adjusted EBITDA increased 13% to 74.7 million and consolidated adjusted EBITDA margin was 37%. Breaking down the operating performance by rental division, compared to the third quarter of 2021, mobile modular had an impressive quarter. This quarter was the first opportunity we had to see the full comparable organic growth generated by our larger modular business as the acquisitions of design space and kitchens to go were completed in the first half of last year. Mobile modular total revenues increased 15.4 million or 14% to 125.8 million. There were increases across all revenue streams, including 17%, higher rental revenues, 12%, higher rental related services revenues, and 10% higher sales revenues. We saw broad based strength across our commercial, education and portable storage customer bases. Education rental revenues increased 9% representing our strongest growth since the first quarter of 2020 and demonstrating post pandemic recovery in this important customer base. Sales revenues increased 2.6 million to 28.9 million primarily from increased used equipment sales. We addressed strong demand conditions with disciplined fleet management and achieved average fleet utilization of 80.1% which I will reemphasize is a level we have not seen achieved by modulars since 2008. This 80.1% is up significantly from 76.5% a year ago, and we ended…

At this time, the floor is now open. [Operator Instructions] Our first question comes from Scott Schneeberger from Oppenheimer.

Thank you very much. Good afternoon, guys. I’ll start in the modular segment. A very high achieve utilization and that’s great. You mentioned that you grew – that you grew fleet and fleet on rent. Good. Very good to see. But you’re getting high in utilization. Are there any supply chain constraints that are still an issue? Did you get everything you wanted and needed this for season for fleet and then a follow up on that? Thanks.

Hi, Scott. Sure, I can answer that. I would say short answer is yes. I mean, we were able to fulfill our customer orders. One of the good things that we’re seeing not only in turning our used fleet, but we have a pretty good pipeline into the supply chain into the manufacturing base. And we increased our new equipment that we put on rent for the quarter by 18.9 million. So it was a robust quarter for us to get used equipment turned and new equipment. And we’ve been able to fulfill orders and really haven’t had to turn a lot of orders away or been unable to fulfill them. So overall firing well on all cylinders.

And, Scott, if I could just add, I think our teams have done a really good job from an execution point of view. The supply chain issues have been around now for a number of quarters. And our teams have been creative and resourceful and looking at new avenues for supply particularly on the container side of the business, where the supply has been quite tight for quite some time. So the sort of achievements of growing the fleet and increasing the utilization are a result of that really good focus and execution.

And then Joe you what you were talking about not pushing too hard on price. So you get the right utilization. It sounds like you’re happy striking the balance. Sounds like pricing was good, but it sounds like maybe you have opportunity that you’re not necessarily taking. Can you just talk about your approach to price? You’re obviously running this high utilization and winning business. So is there more upside available on pricing particularly in an inflationary environment, are you happy with the level you’re achieving relative to cost inflation? Thanks.

Yes, the answer is yes, we are happy. And anytime that we have the opportunity to increase price we’re doing it and so the good thing is we have pretty sophisticated tools that really share on a real time basis what our close ratios are. So we’re able to make those adjustments in our operating profile pretty rapidly. And anytime we can increase price, we do it. The environment is good for doing that right now. And that’s something that’s definitely a focus with the sales team. So I think, as I said in the prepared remarks, achieving that balance is important to us. And we want to see both of those things, improve utilization and pricing. And so wherever we can do both of them, we’re very happy to do that.

And I think you said something about orders going out and into 2023. You’re happy they are pacing as you expected. What comprises those? Are you seeing infrastructure bills funding for that and projects for that starting? Is it energy based? Is it sizable manufacturing where you can put out modulars and portables at big projects? Just curious what you’re seeing out on the horizon in the magnitude of how strong it is? Sounds like it’s consistent with what you expect not seeing deterioration yet. Maybe you can just address the visibility you have how far out that is, would be helpful. Thanks.

Sure. Scott, you actually hit a lot of those topics that we’re seeing increased business at. And I would say we don’t have visibility too far into 2022. I am sorry, 2023. But what we do see are significant projects. And I would say that there are numerous very large projects that we become involved with that require these complexes that I talked about in my remarks. And those are typically associated with projects that last one, two, three years, and which provide a very, very good rental stream. So we see activity in those areas right now. And it’s as expected, and we’re very happy with that. And it’s very broad based. It could be government work. It could be private industry that are doing expansions in their facilities. And so it could be municipalities like I’d said, airport expansions, and renovations, all those things. One thing we haven’t seen too much yet is money from the infrastructure bill that was passed. And I recently heard some commentary that not very many projects have been funded out of that infrastructure bill yet. The number has been relatively small. And so we’re hoping that as that spending and project activity starts to ramp, that we’ll see more of that. And we’re in a very good position to do that. We have government contracts. We’re in position to take advantage of that. And we believe that should definitely be improving as we go into the next year.

Real quick, just because I’ll touch on the other segments as well. Could you delve a little bit into the 5G penetration now, TRS and how that shaping up? Thanks.

Sure. There is two aspects of this bandwidth that these clients are seeking, one is wired. And that is all the infrastructure that goes up to these towers, the bandwidth in fiber optic cable and things like that. And so we’ve been seeing and are continuing to see healthy demand in that part of our communications fleet. And then the other in terms of the tower work that’s being done there’s other tools and other products that we have in our fleet that are designed to test cell phone tower signals and things like that. And we’re seeing healthy demand there too. So I would say it’s in both of those aspects of our wired and wireless communications fleet that have been very good. And that’s all tied to 5G. And so we’ve been very pleased with that.

And then lastly, and I’ll turn it over. Could you speak to AdWords sustained markets that you that you segment to any weakness, particular strengths of each one individually? Thanks.

They were all up as we had shared. And I would say that two of them were up more than others and one was up significantly and that was our environmental services segment. And that’s environmental cleanups, spills, plant cleanup projects that might be at a petrochem plant or something like that. And that was up considerably in the quarter. And right behind that was construction our construction work. And that’s all dewatering and things like that, that you’ll see on a construction site. So overall pleased that they were all up and those two I would say were the highlights for the quarter.

Our next question comes from Marc Riddick from Sidoti.

So I wanted to start within a mobile modular. If we could talk a little bit about the rental services growth, because the profitability, the pace of the profitability certainly outpaced the revenue growth so which was pretty good as well. So let me talk a little bit about those services and we’ve talked over the years about the driver shortage is in the light, but certainly given the profitability growth there versus revenue, it certainly would indicate that you’re getting some pricing there. And there’s a lot of activity there.

Sure, Marc, I’d be happy to help you with that one. And in short, it’s been a focus area for us. You’re absolutely right. We’ve been working on margins, working on refining our pricing in that area, making sure that we’re adjusting pricing to reflect some of the cost pressures for fuel and for drivers. And our teams are really put a lot of work into that area over the course of this year. And we’re starting to see the impact of that work with nice improvement in the margins. So an organized program, something we identified early as a focus area. In addition, particularly on the portable storage deliveries, as we’ve got more density and a lot of our key markets, the economics of making deliveries and pickups have been improving. And that’s another ongoing focus area for us. So these are all execution issues, and really good progress by the teams.

And touching on portable storage, where are we ballpark as far as percentage of revenue for total company and we still sort of in that high single digit area?

Yes, portable storage represented 11% of McGrath’s total revenues.

And then shifting over to, we’ll come back to TRS, because it’s impossible not to jump over to Adler, given what we’ve seen there. Talking about the growth and the verticals that you mentioned within Adler that are performing really well, can we talk a little bit about the pace of that utilization growth, especially with the commentary as to where you ended on utilization with Adler’s is obviously very encouraging, especially given where we’ve been.

Sure, I mean utilization has just improved as you know, we’ve deployed more equipment. And I think we’ve been real clear about our strategy and past calls. And that is we haven’t been making new fleet investments. So when conditions improve, demand improves, and we can ship that equipment right out of our fleet, and from equipment that’s in the yard. That’s a good thing for us. And that’s exactly what we did in the quarter. So that’s why you see that improvement in utilization like we did.

And I just remind you, Marc, as we said, not only was utilization up, but pricing was up as well, and we got really good operating leverage, operating profit almost doubled in that segment in the third quarter.

And then I wanted to shift back to the education area because granted, I mean, you talked about the strength there and prior calls. I was wondering just talking about the execution of education for the quarter and then maybe, as far as what you were looking at profitability wise within education, vis-à-vis maybe last year, because I guess there’s greater, I guess I would imagine this greater certainty as this year as opposed to last and dealing with those customers. Maybe talk a little bit about what your experiences are and maybe what you think was achieved during the quarter.

Yes, I would say first of all, and Keith can follow up if you’d like to, if I miss something here but I would say the funding environment has been really good. And that’s what drives favorable conditions with that part of our market focus that we have. And I would say across the country that’s been in pretty good shape, you combine that with the fact that, again schools are getting older and older each year that passes, and maintenance just doesn’t keep up. And so that demand for modernization continues to be there. And we see that in every one of the markets that we serve. And then in other markets, where growth is quite high in terms of student population I mean, that really drives those long term growth rentals that we have too. So I mean we’re set up to be able to serve both of those needs that we see with school districts. And our teams are quite good at being able to support customers in either one of those two applications.

I think Joe hit all the highlights, Marc. The reason we pointed out the 9% growth in education, was if you look back over the last two years with the impact of the pandemic, education was a part of the business that was relatively flat. We didn’t lose much grind, but we didn’t gain much grind over the last six or so quarters, as we live through the very tough time with a pandemic for our education customers. So we’re hoping this is more of a return to normal, as Joe said, good demand levels, and really pleased with the evidence and the third quarter of a bunch back and this important customer base.

And then I wanted to touch a little bit within the TRS-RenTelco. Can you talk a little bit about sort of how the revenue mix shook out during the quarter? I mean, I think you did mention as far as 5G, but I mean, just sort of in the bigger picture as far as the general equipment versus kind of what you might see there? And are we seeing a little bit of a shift that might be beneficial from a revenue mix and margin perspective? Thanks.

Yes. No dramatic shift. I mean, roughly about a third of the business is communications related and about two thirds general purpose equipment related. So that mix is not shifted dramatically. And again, the good thing about that business is we’re constantly looking at the equipment that we own, making adjustments, selling some investing in new, really to address the market opportunities. So our team does an incredible job monitoring market demand, very nimble and making adjustments with our fleet and both segments. The good news is now several quarters in a row. Both segments are very healthy. Both segments are growing, and they deliver good returns for the company.

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.

I’d like to thank everyone again for joining us on the call today and for your continuing interest in McGrath and our company’s growth and success. We wish you a good evening and look forward to speaking with you again in late February to review our calendar year end results.

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