Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp's Third Quarter 2024 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 call is being recorded today, Thursday, October 24, 2024. Before we begin, note that the matters that 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 relating to the company's expectations, strategies, prospects, backlog 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 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 September 30, 2024. 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.

Thank you, Jess. Good afternoon, everyone, and thank you for joining us on our call today. It has been quite an eventful quarter. On September 18, we announced that we had mutually agreed to terminate our pending acquisition by WillScot. In accordance with the terms of the merger agreement, McGrath received a termination fee of $180 million. From the announcement of the merger in January 2024, we navigated a 9-month period where McGrath operated as a company anticipating being acquired. Needless to say, this stretch was an unfamiliar operating environment for our company. We maintained our independent competitive positioning in the marketplace throughout this period. My direction to our teams was very simple. First, stick to our strategy and execute as we have always done. Second, deliver our financial plan and keep the company healthy. Through the 9-month period across the company, we kept our teams together, found ways to reduce cost and to enhance revenue streams and supported one another throughout. I truly think it is a testament to our strong culture and the dedication and commitment of our team members to each other and to our customers that we lost very few people to turn over through this challenging period. I could not be prouder of everyone's accomplishments during such an uncertain time. With that, we are back to normal quarterly earnings reporting and discussion. So let's turn now to our latest results. For the third quarter, total company revenues increased 10% and adjusted EBITDA increased 13%. The Modular business performed very well, while our Portable Storage and TRS businesses experienced market demand headwinds during the quarter. Mobile Modular had a strong quarter with rental revenues growing 9% and sales revenues growing 14%. Both our commercial business and our education rentals grew during the quarter. The commercial wins…

Thank you, Joe, and good afternoon, everyone. As Joe highlighted, we delivered very good results in the third quarter, driven by the performance of our Mobile Modular business. Looking at the overall corporate results for the third quarter, total revenues from continuing operations increased 10% to $267 million and adjusted EBITDA increased 13% to $104 million. During the third quarter, the company received a $180 million payment from WillScot Mobile Mini attributed to the termination of the previously announced merger agreement. The transaction costs incurred during the quarter due to the now [ph] terminated merger process were $39 million. The proceeds received, partly offset by the transaction costs incurred and an increase in provision for income taxes resulted in a $104 million net income contribution during the quarter or $4.21 per diluted share. Reviewing Mobile Modular's operating performance as compared to the third quarter of 2023. Mobile Modular had an impressive quarter as we continue to make progress delivering on our Mobile Modular business growth strategy. Adjusted EBITDA increased 23% to $71.4 million, and total revenues increased 13% to $191.4 million. There were increases across all operational revenue streams, including 9% higher rental revenues, 23% higher rental-related services revenues and 14% higher sales revenues. The sales revenues increase was primarily due to higher new equipment sales and demonstrated good progress with our initiative to grow modular sales projects. Rental margins were 62%, up from 59% a year ago, primarily because of the rental revenue growth and lower inventory center costs. We continued our disciplined fleet management on a larger fleet with 5% higher average rental equipment on rent and average fleet utilization of 77.1% compared to 79.9% a year ago. Third quarter monthly revenue per unit on rent increased 18% year-over-year to $820. For new shipments over the last 12…

Thank you. [Operator Instructions] We'll go first to Scott Schneeberger with Oppenheimer. Your line is open. Please go ahead.

Thank you. Good afternoon, Joe and Keith. A few questions. I'm going to start in Mobile Modular with the end markets, commercial and education. You mentioned both are up in rental, and it sounds good. Could you give us a sense of the magnitude? I would imagine education is a good bit stronger, but can you give us a sense of the magnitude of how much each of them is up? Thanks.

Sure. Scott, actually, it was pretty balanced for the quarter. There was not a big divergence there as far as how those - both those segments performed. I think education was up 10% and commercial was up 8% for the quarter.

Yeah. That's correct.

So pretty, pretty balanced.

Great. Thanks. And could we speak to price versus volume with regard to that? It looks when we saw the charts in the deck that you're still getting very strong pricing. I guess, so there's two questions in this. One, do you anticipate strong pricing to continue into next year? It sounds like the demand environment is solid. And then how was the price volume split? Thanks.

Yes. I would say -- I'll answer the first part, and Keith can follow up. I would say we are - we have a nice tailwind there. Our pricing efforts have paid off for us, and we anticipate that same dynamic will go into next year.

Yes. Scott, just in terms of price volume, pricing overall remains healthy. We've also been working hard, as you know, to add in additional services to contract. So that helps with the statistics on revenue per unit on rent. So we're making progress there. You'll see in some of our published statistics that the value of equipment on rent increased for the third quarter compared to a year earlier. It was up about 5%. Having said that, there is a dynamic as we churn the fleet and we introduce newer assets that are more expensive. Units on rent were actually down slightly year-over-year. So there's a lot of moving parts there, a lot of mix issues as well, but those are some of the dynamics that we saw in the third quarter.

Thanks. Keith and just following on that, and then we'll move to another segment. But the - how is your quoting activity and your deliveries there? I realize this time of the year for classrooms is probably quiet until you get to the first quarter and also for commercial modulars. But what type of trends are you seeing there maybe on a year-over-year basis or however you care to comment? Thanks.

Yeah, Scott, actually, quote volumes and opportunities resulting from those quotes were up very nicely in the quarter. I'm talking - some of that was influenced by the addition of Vesta, but we're in the double-digit range very easily there. And so we were very encouraged and that has remained strong virtually the entire year so far.

Great. Thanks. Appreciate that. Over in Portable Storage, obviously, a little bit more cyclically pressured. Could you answer the same question, please, either one of you on the quoting and deliveries? And specifically, I kind of missed it, Keith, you said something about fourth quarter, just now in the guide, portable fourth quarter versus third quarter. Is it expected to be down despite seasonal? I know you don't do a lot of seasonal relative to maybe some others in the industry. But if you could just speak to that trend. Thanks.

Yeah. Just to start with your last comment, Scott. Yeah, if you plot a chart and just look at the rental revenues at Portable storage this year, they've actually gone down as we went Q1 to Q2 to Q3. And it's disappointing. It reflects the very difficult demand conditions we've seen there. And at this point, we don't see any change around those demand pressures. So we think the fourth quarter most likely will see rental revenues lower than the third quarter and therefore, overall performance of that part of the business, we would expect to be lower than Q3. So that's sort of the first comment. Without necessarily going into all the percentage detail, if you look at the drop in rental revenues in Q3, we saw similarly a reduction in quote opportunities, reductions in bookings, reductions in shipments. All the metrics were consistent with a difficult demand environment and similar to some of the comments we made, I think, at the end of Q2. So difficult conditions and definitely what we experienced.

Thanks. Keith, and just one more in that segment. Given everything you just said, how is the pricing environment? Just any elaboration on that topic? Thank you.

Yeah. Pricing has - we've had to reduce slightly, but we've really worked to hold our pricing as much as possible. And so I haven't - we haven't seen a significant deterioration there, Scott.

Thanks, Joe. And then in TRS, kind of, I guess, Joe, for you, the standard questions, one, if you could speak to what you're seeing with regard to semiconductors and 5G. And then the last question on this segment would be just this has been a pretty prolonged cyclical downturn. Could you speak to the duration of past downturns and how you would compare and contrast it, if possible? Thanks.

Sure. As we reported earlier in the year, the weakness that we had first seen in the business was with semiconductor, computer and semiconductor part of the business, but that has actually spread a bit. It is now - we're seeing slowness in the wireless part of the business, and that's mostly tower work and things like that, that the service providers are doing out on site, and we're just seeing less of that than we had anticipated. Wired communications, on the other hand, which is supporting all of the bandwidth requirements for data centers and things like that has actually been very strong. So we're seeing two different kind of mixes in that business. To address your question about longevity, this has been a longer downturn than typically we've seen. And so we'd like it to turn. We think it will turn. One of the things notable in the business that I think is worthy of mentioning is that from a sequential quarter-over-quarter basis, the business has been performing in a very narrow band. So we really haven't seen a deterioration there as the year progresses. So I have to hope that we're in a kind of a situation right now where things have leveled out and that we have upside ahead of us.

Thanks. And then last one for me is just on the $180 million cash inflow. Keith, you quantified it on the call as post your legal and other expenses and post taxes. I think it was $104 million left over. How is that going to be applied across the business?

Sure, Scott. And I just want to expand upon your comment. You're absolutely right with what was said regarding the third quarter results and the contribution that we got related to the $180 million reverse termination fee. But if you look at it more broadly and go back all the way to the fourth quarter when we began to incur transaction-related expenses, you may recall we disclosed approximately $2 million of expense back in that quarter. And then we had additional expenses in the first and second quarter of this year. Really, the entire journey of the transaction process caused us to incur $63 million in expenses. If you take that number against the $180 million and then apply a tax rate to the sort of gain that we had, really, the net proceeds to McGrath are much closer to $86 million. So that's the first comment. Everything you said was right about the third quarter. I like to look at it in terms of the overall economic impact on McGrath when we look at the full journey that we've been on with the terminated transaction. In terms of what we do with the money, a couple of comments. I think the first thing to keep in mind is we just got the funds slightly over a month ago, and we're assessing our options. If we look at the business, really, it gives us a little bit more flexibility in terms of our capital allocation choices. We routinely look across the business and look at all the normal areas for capital allocation. We start with organic investment in the business. We look at our M&A opportunities in the landscape that can complement what we're doing organically. Obviously, we have a long track record with our shareholder dividends and increasing those dividends. And then periodically, we will look to repurchase our shares. So any excess capital in the near term that is not immediately allocated to one of those areas is used to pay down debt, and that's what we did at the end of the third quarter. But we'll be looking at those normal areas of capital allocation as we go forward, and we will try to make wise choices that benefit the shareholder over the long term.

Great. Thanks, Keith. And I appreciate your clarifying that over the life of the endeavor with WillScot now complete. So just a final question on that. Are all the costs that you anticipate to incur related to that done as of third quarter? Or might there be some trickle into the fourth quarter? And was that counted in your $86 million net? Thanks.

Yeah. Substantially all the costs, we believe, have been incurred at this point.

All right. Great. Thanks for filling all my questions. I'll turn it over.

We'll move next to Mark Riddick with Sidoti.

Hey. Good afternoon.

Hi, Mark.

Hi, Mark.

So I just wanted to follow up on the - and I appreciate all the commentary you've already provided. I wanted to talk a little bit about the debt reduction that did take place. I wonder if you could sort of give us a little additional commentary around the magnitude and what was taken, I guess, at the very end of the quarter? Or how should we think about the debt reduction from the end of 2Q to 3Q and maybe the timing and what we look at there?

Yeah. So we announced the termination of the merger process on September 18. And we promptly received the funds per the merger agreement from WillScot and that really came in just a few days after the announcement. And as I mentioned, we used the net proceeds to pay down debt in the third quarter, and that is reflected on the balance sheet. So if you look at where we are at the end of the third quarter, that's really net of all of that activity. The only item, if you look into the details, is that we will have some higher cash taxes in the fourth quarter. There'll be a few tens of millions there. But the fourth quarter is also a quarter where typically we have much lower rental CapEx expenditure and generally higher cash flows. So if you want to sort of look ahead and look at debt levels for the fourth quarter and year-end, I would say they're going to be comparable to what we saw at the end of Q3.

Okay. And that sort of then brings me to the - so just general long-term thought process maybe a reiteration of maybe how you guys have looked at leverage and comfort levels of ranges and things of that nature. How should we be thinking about things going forward? And then maybe you could talk a little bit about the potential of ramping up of acquisition pipeline, which was sort of - you guys have been on the sidelines on that during this process. Just wondering if you could talk a little bit about those opportunities maybe and the opportunity to start doing that again.

Sure. And I'll let Joe comment maybe on the broader how we think about M&A work. But just in terms of leverage, we ended the quarter at 1.75. Keep in mind with our loan agreements, we have a cap of 2.75. So from a leverage point of view, we're extremely comfortable. We're very comfortable running the business in the two's. And again, we look at that as we look at strategic opportunities and capital allocation. It's just one of the factors we weigh as to when we pull the trigger on M&A or any other big initiatives that are more sporadic in nature. But very comfortable with leverage at the end of Q3. It really speaks to the fact the company is on a very sound financial footing as we exit this process that we've been through.

Yeah, Mark, I can kind of comment on our M&A strategy. We're in the process of updating our priorities there. However, as in the past, our Portable Storage and Modular business will be the focus area for us if we do any M&A. We view that as a continuing viable option for us to either grow in areas that we are not present in or grow in areas that we have perhaps a newer footprint and could use an acquisition to help build out that area. But we will follow the same guidelines that we have followed in the past. We get - look for good quality businesses at fair prices, and that's exactly what our strategy would be moving forward.

Excellent. Thank you. And then I was wondering if you could talk a little bit about having gone through this process, and I appreciate your commentary around the strength and the culture and everything that your employees were able to sort of shoulder through this process. I was wondering if you could talk a little bit about maybe sort of what you're looking at as far as internal hiring needs or any areas that you might want to be sort of relooking at or if there are any places that maybe you may not have been active in during the course of the year that you'd like to sort of pick up as far as internal investment-wise, whether it's technology spend or anything like that? Are there any sort of areas that we should be thinking about going forward?

Sure. We are - there are some positions that we had put on delay essentially because of the merger agreement, and we're going to start hiring those. And that really varies across the business, some sales positions, some operational positions that we'll staff for. But nothing - we haven't had a significant decrease at all in turnover or in the number of folks that we had lost during the process. And so it's not like we're operating from a deficit there. And so I think in terms of other investments that we make, we perhaps delayed some investments in real estate. We put some IT initiatives on a slower path, and we'll get those projects going again, but nothing significant to report at this time.

Okay. Excellent. Thank you very much.

Mark, just to help you with one of the comments that I made in the prepared remarks regarding SG&A being higher in the fourth quarter than the third quarter of this year. If you just think of things like hiring, it's a lot more difficult to make hiring or actually achieve hiring in a period where there's a pending acquisition. So if you think of where we were in January, we had a few positions we would have liked to hire over the course of the year to support business growth. And in addition, like in any normal year, we have some turnover. If you look at the net effect of that, we're running with open positions in the organization that we're not very actively filling. And it's now easier to fill them because we're clearly an independent company, and we're charting our future here. So there's been a little bit of pent-up demand to do that, and that will be reflected on the expense side with some increase in that area, all normal for running the business.

Excellent. Thank you very much.

Thanks, Mark.

Ladies and gentlemen, that appears to be the last question. Now let me turn the call back over to Mr. Hanna for any closing remarks.

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 February to review our fourth quarter results.

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