McGrath RentCorp (MGRC) Earnings Call Transcript & Summary

Okay. We're going to get started. Good morning, everybody, and welcome to day 1 of the 43rd edition of our Barclays Industrial Select Conference. I'm Ronan Kennedy. I'm a proud member of Barclays Business Information and Professional Services team, Manav's team BIPS as we're affectionately referred to. And I do the business services side of the coverage for Manav, which includes a host of names, including Cintas who we just heard from, Ecolab, Rollins and of course, McGrath RentCorp. So we're very pleased to be joined by McGrath, a leading B2B and services provider of rental and related services, specialing in modular, portable storage and electronic test equipment in the U.S. Our chat this morning comes at an important moment in the company's history because we approach an executive transition at the CEO seat that was announced just under 2 weeks ago. We're joined by their leadership trio, representing both the strategic legacy and future direction of McGrath. So to my right, we have incoming CEO and current Chief Operating Officer, Phil Hawkins; outgoing CEO, Joe Hanna; and the EVP and CFO, Keith Pratt. I'll also just note for those who aren't as familiar, we just initiated McGrath as an overweight. But we're very pleased to have you guys here today. So thank you for joining us. I think Joe, if I'm not mistaken, you have a safe harbor you'd like to quickly touch on before.

Thank you, Ronan, and we are very happy to be here today. We'd just like to remind everyone that any forward-looking statements we might make today are not guarantees of future performance, and actual events could differ materially. Please review our relevant SEC filings for a full review of our business and its risk factors.

Very good. Thank you for that. So as I alluded to, we initiated on you guys as overweight, relatively safer way to have kind of one foot in the door from a potential cyclical recovery in the U.S. nonrecovery -- recovery of non-resi construction. This comes following the termination of an agreement to be acquired by your comp, WillScot, and where you guys have a reinvigorated focus on your stand-alone strategy. We also appeal -- find appealing the potentially attractive financial framework, consistent results and disciplined capital allocation. We'd like to touch on all that to various degrees, but it may make sense perhaps Keith or whoever is so inclined to just give an overview of the company for those who are less familiar, given it's your first time here at the conference.

Sure. I'll start. And if you look at the business today, it's really built around what we call our Modular Solutions strategy, and that encompasses our core modular business, Mobile Modular, our Portable Storage business. We also have a related new modular unit manufacturing business called Enviroplex, that's all part of what we call modular solutions. And we'll talk about all the opportunities we see around that business. We also have an electronics business, TRS-RenTelco, a very high-performing business, high return business. But when we look at the company today and we look at the last couple of years, where our initiatives for growth are and where the focus for our capital deployment has been, we really see more opportunity on the modular side. So that's the business today. Think of it as 75-25 or 80-20 in terms of focus on modulars, but a very high-quality electronics business that is also part of the McGrath family.

That's helpful. And then it may be helpful if you just touch on your -- what you would see as your 3 competitive differentiators. A lot of people might reference WillScot as a comp in consideration and evaluation of you as a company. So how do you articulate the core value proposition? And today, particularly in a still challenging non-resi environment?

Sure. I can take that. I would say that a significant contributor to our differentiation in the market is our culture and the amount of service that we provide our customers. We -- one of our core values is we provide exceptional experiences. It's our lifeblood. And as a business services company, that's really important. When you have a modular building project, especially with the school as an example, school, let's just say that school is going to open in -- on August 20. If you don't have that classroom there and ready to set up to the specifications that the district wanted and it's not on time, those kids are not going to have a classroom to be in. And so that hallmark of us doing things when we say we're going to do them, get them done to an exceptional level is definitely something that has, I think, propelled the company very well in the past lifetime of the business. The other, I think, differentiator is our ability to be able to supply customers with large projects. Modular building projects can become quite complicated if they're modified to the customer specifications. We have the production facilities, the inventory centers, the means to be able to provide those products to our customers to their specifications and sometimes that's a complicated and difficult thing for them to go from concept to actually getting that product in the field. That's been a big differentiator for us. The other thing, too, that I would say that's been very important for the company has been our ability to have folks in the field that are very familiar with all the rules, the regulations, the codes, everything that are relevant for a modular building project, particularly in the education field. There's a lot of things that you need to know when you get a classroom in place for someone. And we have the skill in our sales force, a lot of long-tenured people, that are very cognizant of all the requirements for codes and regulations that set us apart from the competition. It's been very good for us.

Very good. I understand -- we understand part of our analysis was that, that education exposure is enviable, I think, for peers, primarily because of the consistency of results that it provides. So could you talk about broadly your end market exposures in education, commercial and otherwise, and how your products and segments serve those respective end markets?

Phil, would you like to take that?

Sure about 1/3 of the business is education focused, so modular classrooms and the services and accessories that go along with that as Joe and Keith have talked about the importance of service, you have kids in those classrooms, service is very important. Being able to maintain that. And typically, those stay out for much longer terms, especially if they're associated with a growth project tied to student enrollment growth. And then the other 2/3 commercial, so that be industrial, government, typical nonresidential construction is a piece of that, but a wide variety of customers and verticals that are running things from modular offices on a job site to growth space for their employees before they build a new facility, all the way to portable storage container that's used for storing materials during a project.

Very good. Can you talk about -- or could you characterize your exposure to the large long-duration projects versus a smaller, perhaps more rate-sensitive projects? And kind of the bifurcation of demand that you're seeing, I think peers are as well across the industry and the trends there?

Phil?

Yes. Joe and Keith talked about our sweet spot are these large projects, the capabilities and the expertise we have on our team, the size of our facilities and the size of our fleet, make us a perfect fit for those projects. Very few of our competitors can check all those boxes. And so from the beginning, whether it's a large school or a large commercial installation, our mix of business has tilted that way in the current environment. That's where we're still seeing strength, right? It's weaker in standard nonresidential commercial construction and building McDonald's down in the corner, that was weaker, but the mega projects, the data center work, manufacturing, from remanufacturing trends coming back to the U.S. those types of projects lend themselves to our capabilities and our fleet size.

Got it. And then can you talk about something you've talked about on recent calls, and we would expect to be the case going forward. what you're seeing from one of the key leading indicators for construction, non-resi construction, 6 to 9 months out as the ABI. People obviously look to the nonresidential square footage startage from Dodge as well. Can you talk about the trends you've seen there? And then in relation to your results within your segments?

Well, I can start and then Phil or Keith, you can fill in. I think what's been, I think, a little puzzling when you look at the ABI is that it's been weak for a number of quarters for a fairly long time, yet we have this bifurcation. We've got strength in the mega projects and data centers, things like that, but then the weakness on the smaller construction sites that we realize, which are smaller, less intensive projects for us. And so following really what the ABI and what Dodge and what the construction backlog indicators and things like that, following those over the last year has been a challenge for us. But we definitely see strength on the large projects, not so much on the smaller projects. Phil or Keith, anything to add there?

Yes. I think this theme of small project, large project, another way to see it is in our business segments. And if you look at our Portable Storage business, that is much more exposure to commercial construction broadly. And within that, more of those smaller local projects, that business over the last 2.5 years has seen utilization go from a number north of 80% to a number right around 60% currently. So it's been a painful adjustment. That's the first comment I'd make. As Phil noted on the modular side, those more complicated projects are more our sweet spot. We've got the inventory depth. We've got the skill set to do them, but there's still some local type projects in the mix. So with that as a backdrop, even in modulars, there are some challenges to grow in this environment. Our utilization data shows we've got fewer units out on rent in that environment than we did a year ago. But offsetting that, we've been very disciplined around how we price and very disciplined in introducing services to the customer that provide an opportunity for more revenue for every unit that goes out on rent. So even in this tough demand environment, we've actually shown good growth on the modular side of the business. And in Portable Storage, we noted for the third quarter, we actually grew that business, albeit only 1%, but it was the first growth we've seen in almost 2 years. So glimmers of hope there, and we hope to see more of that.

And the only thing I would add maybe is just a current snapshot of some of those metrics. You talked about the Architectural Billing Index, one of the leading indicators we pay attention to, improved slightly, still at 48.5% in December. So under that 50% level, I would say things are improving, but it's a little better. And then the other thing we pay attention to is this commercial -- nonresidential commercial backlog indicator, and so that was a little bit weaker. It's 8 months overall. But to this large project kind of bifurcation in the market we've been talking about the largest contractors, the largest GCs have backlogs that are still a year long. So for our business, the types of projects we play into and fit into, there's still a steady stream of work out there, and that's why you see this dynamic of plenty of projects to go forward with those larger GCs, the smaller ones, smaller project activity, still going to be struggling for a while.

Got it. And then can you speak to what -- even at a high level, what the driver of the consistency of the results was, solid results through 3Q? I think you raised your guidance as well. Can you talk about primarily what the drivers of that is across or was?

Yes. I think, first of all, with all the comments we just made at the macro level, it's a tricky environment. I think for anyone forecasting how a business is going to perform, whether it's for the full year or the next couple of quarters, this is a challenging period. It is for us. I think it is for many in this kind of an industry. I think when we got to the October time frame, we were pleased with our results for the third quarter and we had good momentum entering the fourth quarter. A couple of areas specifically. Portable Storage, which had such a tough time with those local projects declining in number over a 6-quarter-plus period, we were seeing signs of stability there. So that was a positive in that business. And we also commented that there was an opportunity for some seasonal retail business in the fourth quarter that further bolstered our positive feelings in that business for winding out the year. That was one factor. Another real positive story of 2025 that we saw progress each quarter was our electronics business. It had a very tough time in '23 and '24 with weaker demand conditions. That really turned at the start of '25 and we commented back in October that entering the fourth quarter, good momentum with that business. So those were positives. And I'd say modular in a pretty steady position as we looked at that business. So overall, gave us the encouragement to just edge up slightly our outlook for '25, and we'll have lots to say about that when we have our earnings call next week.

Thank you. And can you talk about the role or the contribution from the powerful dynamic of as assets come off lease. I think you currently have a 40% spread between your last 12 months delivered and what the average price on rent is. Can you talk about the power of that convergence and the extent that's played a role in your results and is expected to going forward?

Yes. There is a phenomenon with our business where the average unit out on rent in the most recent quarter generates around $865 in revenue. And if you compare that with units that have been shipped over the last 12 months, the number is closer to $1,200. So there's quite a difference there. You got to be careful with those numbers. There's lots of details that impact those numbers, particularly around mix, term of the contract, regionality, but even taken at a very high macro level, what are some of the important dynamics. The first one is that over time, the cost of doing business goes up, the cost of a new unit increases, the cost of maintaining the fleet increases, so we generally expect units that go out on rent today are going out at a higher level, a higher price point than units that went out a few years ago. And the typical stay term for a modular unit, if it's a commercial project, 2 to 3 years very typical, an education unit can be 4 to 5 years or even more. So these units churn gradually. And when they're on rent, there may be some small price adjustments, but a more significant price reset is generally when the unit comes back to us and goes on to the next customer. So that's dynamic number one. And you can think of that in terms of just cost inflation would cause there generally to be a spread, and we've seen that over many years. It's a wider spread currently because with COVID and the years that followed COVID, there was very significant inflation in building materials costs, which meant cost of new units became more expensive and cost of maintaining our fleet became more expensive. So we need to charge more to maintain our returns. That's an important dynamic in that spread. The second important dynamic is the provision of services to our customers. So if we look at the legacy fleet, we look at everything we have installed in the field, that reflects a lower level of attachment of services to the fleet than what we're seeing today. So in more recent shipments, we're offering a wider range of services, and we're generally being more successful at attaching more of those services to new contracts. So those are really the 2 big dynamics that create that spread. And I think really what I look at is for the installed base, seeing some progression in what is the revenue we realized per unit on rent, and that was up 6% in the third quarter compared to a year earlier, which is good progress and helping offset some of those challenges we've talked about on the demand side.

Thank you. Appreciate it. And then how should we think about the contribution, I think, for Mobile Modular, 6% pricing in the most recent quarter. How should we think about the historical and expected contribution from pricing and even volume as well as we move forward?

Yes, it's a good question. I think over the long arc of time, and we're clearly in a period with a bit of turbulence, but you should expect a couple of percentage points related to inflation, where you want to edge your pricing up to maintain healthy margin structure, healthy return structure. We're already a pretty big player. So it's not easy to organically grow your fleet rapidly, but the goal of a couple of percentage points there as well, I think is realistic. And then the services piece, potentially get a couple of percentage points there. So you put all that together, and somewhere in that mid-single digit or better in good times is feasible. Clearly, the offset we've been living through over the last couple of years is one where units on rent are an offset to everything that I said. But net effect for our modular business, we've done a nice job in growing rental revenue in this environment.

Thank you. And as we segue to discuss strategy, one of the, I think, a good tie-in or a way to frame it is how we think about historic contributions from organic and inorganic. If and when there was a change as you began to do and execute more acquisitions, so perhaps we can talk about that holistically as we transition to a discussion of strategy as well.

Yes. Maybe, Phil and Joe, we -- all 3 of us worked intimately on the strategy and actually see M&A can be very complementary to organic. I'll say that, and that was in our thinking when we did 2 important acquisitions back in 2021 and 2023. But I'll let Phil and Joe.

Yes, I can say we've grown the company organically. That's been most of our history. The significant acquisitions that we did have occurred within the last 6 years essentially. And so we do believe we know how to grow organically. We've done it successfully, but we've also really cut our teeth and done very well on the 2 significant acquisitions that we've done as well as a number of tuck-ins that we've done also. And so we feel very confident that there's -- we have the ability. We've got the chops to be able to do those types of things, and it's going to be an important part of our growth in the future.

Yes. We love to grow organically. It's a preferred method of approach. You can't control when the right targets in the right places at the right valuations will become available. And so that's our default. And then we have a pipeline of opportunities that we actively work to accelerate that geographic expansion. We'll find a nice fit with our existing business, again, at the right price points. So think it will continue to play a role. And we've proven, as Joe said, we can do it both ways.

Got it. And from a strategy standpoint, the -- two of the transactions you referred to were in '23, where you had the acquisition of Vesta for roughly over $400 million and a simultaneous divestiture of Adler Tank and that marked the coming of -- if not mistaken, we are a pure play modular focused, and we're going to be one of the leading national providers of that. Can you just give us some insights on that transaction and the shape and role in the strategy of the company?

Sure. I can start on that. We had -- as Phil said, we had this pipeline of potential acquisitions that we were really wanted to be a part of. We wanted to be at the table. The Vesta acquisition was one of them. And so when the owners of that business brought that to the market, and actually, the -- we were aware that they wanted to sell the business, and we were right there. And so at the same time, as we were going through that transaction, we also understood that they had purchased the tank business from WillScot and it really started to help us develop a conversation with them to potentially look at our tank business. And at that particular time, our tank business was not in a commanding market position. We were #4 in the market and it made sense because it required a lot of management time and bandwidth. We didn't have a good market position. It made sense to divest at that particular time. And we were very fortunate that the seller of Vesta was interested in buying the Adler Tank business from us. We were able to roll that transaction all into a single opportunity for us, which was really great. And it worked out very nicely for us. And so it got us away from that tank business, really enabled us to focus on the modular business, which has been our strategy ever since. That was a really good opportunity for us.

And then can you talk about the -- you were in agreement to be acquired by WillScot, from I think Jan '24 to mutually deciding to terminate the transaction in September '24. Can you talk about the lessons learned. I don't think there was any necessary real disruption to your execution because you guys continued to remain head down and focus. But can you shed some light on that?

Sure. One of the things that as -- if you're going to be acquired, you want to deliver the company in a sound financial condition. We're going to be meeting all the expectations. That was my role as CEO and so as [indiscernible] company was, we're not going to deviate from the strategy that we have. We may have reeled back a couple of things, some IT expenditures and some small things like that we put on the shelf. But essentially, we continue to execute our strategy, which was a very smart move for us because when the transaction actually was terminated, we did not have to pick up Humpty Dumpty off the floor that was in 1,000 pieces. We were able to really kind of roll forward and continue the strategy that we had always been executing. And so we just did not miss a beat, and I was very proud of the team about that. We didn't lose people. We held on to the team. We've got -- we had all the bandwidth and resources that we needed to be able to continue on and we did.

Very good. And also, if I'm not mistaken, you received a $180 million break fee. Can you talk about what you did with the use of proceeds and how that potentially positions you with flexibility from a capital allocation standpoint?

Sure. And I wish it was $180 million in total after adviser fees, which netted out somewhere in the mid-60s and then taxes, the actual benefit to McGrath was a number, I think it was $85 million or $86 million net. So that's the first clarification. It shrank the number a little bit. But look, it's net-net, it's a positive. It puts McGrath, which has generally had a conservative and solid footing from a financial point of view, it enhanced that even further. As always, we're going to work through our capital allocation framework and spend that money wisely. It certainly has helped us with our organic investments with some tuck-in M&A, and really, if you look at our balance sheet at the end of September, we're in great shape. We'll leverage lots of opportunity to build the business as we go forward. So those funds certainly added to the war chest and we're very grateful for that. And I think it's appropriate because what we dealt with during that period, it's -- it takes a lot of management time and energy, and we want that time and energy fully deployed in growing McGrath, and that's where we've been since September.

Very good. If I may, I'd like to now spend -- I think we have approximately 5 minutes left, some time on the transition at the CEO seat. So Joe, if I'm not mistaken, you've been here at CEO since 2017, with the company since '03. Obviously, overseen significant strategic product, strategic and geographic expansion. So why the decision now to move on? And you are going to continue in the capacity of -- on the Board of Directors.

I will remain on the board. I've been with the company, as you noted, for 23 years and 9 of those as CEO. And during that time, we've doubled revenues in the company, and during my time as CEO, doubled revenues in the company and tripled our stock price. We have a sound strategy. We've got a deep bench. We've got an excellent successor for me, Phil, who's going to take the role. It's a perfect time for me to want to retire, and I'm ready to go. So no other hidden. There's no problems in the company. We're not doing a strategic pivot. Phil is going to continue to execute the strategy that we've been very clear about over the last several years that's been producing results for us. And so I feel very confident, Phil feels very confident that we're going to be able to continue to have great success.

And then, Phil, just from your perspective, I think been with the company since '04, leadership positions, both within TRS, Mobile Modular, current COO. So it does make sense, a natural progression. Just your thoughts on the transition.

I think while I'm a new CEO at McGrath, I'm not new to the company. Like Joe, I've been here over 20 years. Joe has been my boss for 18 of those. I started my career at McGrath and FP&A, working closely with Keith -- and we've -- everything we've done from the strategy to the way we run our business, we've done together. I've led our Modular business, our TRS-RenTelco business and most recently as CEO, looking for ways across our enterprise that we can have all of our operating businesses working more closely together and just even more emphasis on the quality of that customer experience. So I've been well prepared by great mentors and leaders in our company, and Keith's not going anywhere. Joe's still going to be close, and they've been involving me a lot over this last year in their process, including Investor Relations and working more closely with the Board.

Got it. So it sounds like we can expect the consistency and solid financial results, the disciplined approach to capital allocation, a careful approach to communication and management of expectations. Is there anything else to be mindful of in that transition? .

Phil?

Or even Keith, from your standpoint, as CFO.

Consistency, I think the nice thing is at the leadership level, we're a very collaborative team. Joe and I have had the pleasure of working together, particularly in the IR front in front of audiences like this. We've enjoyed it. It's been a real pleasure. But Phil, we've really woven into the fabric of what we do. He understands how we approach things. We have great dialogue every time we get ready, whether it's for a call or a conference. That's really -- it's really process and cultural approach to how we do things where that consistency will remain. I think it gets back to comments from Joe and Phil, culture, tone at the top, those things really matter, and we're very clear on how we operate.

Very good. Was just going to see if there's any questions from the audience, but assuming there are none, is there anything you would like to leave with us, things that you would like to most resonate for people who are new to the McGrath story?

Well, I can say this. I mean, this company has, I think it's a wonderful organization. We care about our customers and each other deeply in the organization. And this desire to want to do the right thing for customers as it permeates to the deepest levels in the organization. I've been blessed as a CEO to be able to lead an organization that has a strong culture as we have. And I'm very confident that, that is in place. It's very robust and that Phil and Keith will be the stewards of that going forward. So the strategy that we have is very sound. It's executed well. We've been seeing results from it over the last 5 years. There's no reason to think that anything is going to change that. And so we feel very confident that we're going to have a very bright future.

Great. Very well. Anything further to add from either Keith or....

No, I think it's a good summary.

Okay. Very good, guys. Thank you so much for your time. Thrilled to have you here. Thank you.

Thank you, Ronan.

Thank you, Ronan.

Thank you very much.