McGrath RentCorp Q1 2025 Earnings Call Transcript

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Provided by Quartr
April 24, 2025
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Operator

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath Rent Corp. First Quarter twenty twenty five Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session.

Operator

This conference call is being recorded today, Thursday, 04/24/2025. Before we begin, note that the matters the company manager will be 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 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 ks and other SEC filings. Forward looking statements are made only as the date hereof, except as otherwise required by law.

Operator

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 eight ks and its Form 10 Q for the quarter ended 03/31/2025. 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.

Operator

Please go ahead, sir.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

Thank you, Jess. Good afternoon, everyone, and thank you for joining us today for McGrath Rent Corp's first quarter twenty twenty five earnings call. I am pleased to report on our performance over the past quarter and to provide an update on our outlook for this year. I will also address current possible effects of tariffs on the business. First, I will review our quarterly results.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

For the quarter, total company revenues increased 4% and adjusted EBITDA increased 3% compared to a year earlier. This performance was driven by continued progress from our modular strategic growth initiatives as well as some recovery at TRS. Mobile Modular's rental revenues grew 3%. Both commercial and education rentals were positive. The commercial wins we experienced were geographically broad based and in a wide variety of market verticals, including government, technology and health care.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

We continue to win education business in both public and private schools across all our geographies. The Architectural Billing Index data and other macro indicators of construction related demand continue to indicate some weakness and some project delays. Our quote activity was up for the quarter, while new rental bookings were below the prior year due to the softer construction market. This reflects longer close cycles and some mix shift. Sales revenues were lower for the quarter, reflecting typical quarter to quarter variability.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

Our new modular sales growth initiative continued to be on a positive trajectory as we see more acceptance of modular solutions for construction projects across many market segments. Mobile Modular Plus and site related services performed well and saw healthy increases in the quarter, helping to offset lower units on rent. Turning to our Portable Storage business, rental revenues declined by 13%, in line with what we expected and reflecting ongoing commercial construction softness. We entered the year with a rental revenue run rate that was below the start of 2024, and it will take some time for it to recover. At TRS RenTelco, rental revenues grew slightly.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

We had an encouraging start to the year with broad based improvement across multiple equipment categories. Our rental pipeline is up from the prior year and some previously delayed projects were started. We have been effectively managing the fleet to maximize opportunities to sell unutilized equipment. Utilization improved substantially to end the quarter at 65%, up from 59 in the fourth quarter. Now let's look at how 2025 is unfolding amidst the uncertainty present in the broader economy.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

Overall, we expect the impact of tariffs in 2025 to be a limited headwind to the business. As a reminder, we own our fleet, so the investments generating our revenue are substantially made. Cost increases for materials we use to operate the business for repair and maintenance that are subject to tariffs are not significant cost drivers. And in some cases, we have purchased ahead, so the 2025 exposure is limited. Our exposure to China tariffs is also limited.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

At TRS, only 4% of our current rental fleet was sourced from China. At Portable Storage, China is the primary source of new containers, but with current fleet utilization at 60%, we do not expect to make significant new equipment purchases in the near to medium term. We shared on our fourth quarter call that the key driver for our performance in 2025 will be the demand conditions across all our business segments. At present, we have good activity levels in the field related to current projects. As we look further ahead and into the second half of the year, we have concerns that in the overall market, some companies may be slowing new project starts due to uncertainty around the impact of tariffs, costs, overall economic growth and possible government spending cuts.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

We have been very clear in past quarters that our strategic focus is on the modular business and on the implementation of our plans to be a solutions provider to our customers. None of that has changed nor will it change due to current economic uncertainty. Our Mobile Modular Plus, site related services and custom sales have been good revenue contributors since their launch, and we will continue to work on growing them. Our efforts and increasing revenue per unit are still yielding results, and we believe we have more room to continue that progress. Our expansion into new geographies will continue as we invest to grow the top line responsibly.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

And finally, we have a robust M and A pipeline that should yield results in future quarters. In looking at the total company, McGrath has a resilient business model. Our broad base of customers and the recurring rental revenues that they drive provide some stability if economic conditions soften. Additionally, if demand declines, we generally incur lower expenses to satisfy customer orders and we can reduce rental equipment capital spending, which improves cash flow. These dynamics were evident in 2020 as we navigated the COVID pandemic and enabled McGrath to finish 2020 in a healthy financial state despite the unprecedented market disruptions.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

In closing, McGrath has successfully managed through all sorts of economic challenges for more than forty years, always with a focus on returning value to our shareholders and on our company's sustainability. We have an experienced leadership team, management continuity and a long tenured base of team members throughout the company. While the exact economic impact of the current tariff and trade disruptions are not completely clear, I am confident we have the skill set to continue to manage through this latest economic challenge and execute our strategy effectively. As always, we will be working diligently to maximize opportunities to keep the business strong and deliver results for our shareholders. With that, I will turn the call over to Keith, who will take you through the financial details of our quarter and updated outlook for the full year.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

Thank you, Joe, and good afternoon, everyone. As Joe highlighted, we delivered solid results in the first quarter, driven primarily by the performance of our mobile modular business. Looking at the overall corporate results for the first quarter, total revenues increased 4% to 195,400,000.0 and adjusted EBITDA increased 3% to $74,500,000 Reviewing Mobile Modular's operating performance as compared to the first quarter of twenty twenty four, Mobile Modular had a strong quarter with adjusted EBITDA increasing 10% to $47,600,000 Total revenues increased three percent to 131,900,000.0 three percent higher rental revenues and 22% higher rental related services revenues were partly offset by 11% lower sales revenues. Rental margins were 60%, up from 57% a year ago, primarily because of the rental revenue growth and the lower inventory center costs. Sales revenues decreased $2,800,000 to $22,500,000 as a result of lower new and used sales projects during the quarter.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

Average fleet utilization was 74.6% compared to 78.7 a year ago. First quarter monthly revenue per unit on rent increased 8% to $831 For new shipments over the last twelve months, the average monthly revenue per unit increased 12% to $11.94 dollars There is still a positive pricing tailwind opportunity as our fleet churns. We continue to make progress with our modular services offerings. Mobile Modular Plus revenues increased to $8,600,000 from $7,200,000 a year earlier and site related services increased to $4,100,000 up from $3,200,000 Turning to the review of portable storage in the first quarter, adjusted EBITDA for portable storage was 8,600,000.0 a decrease of 25% compared to the prior year. Weak demand conditions continued primarily because of low commercial construction project activity.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

Rental revenues for the quarter decreased 13% to $16,100,000 and rental margins were 84%, down from 87% a year earlier. Average rental equipment on rent decreased 10%, while average utilization for the quarter was 60.2% compared to 69.8 a year ago. Turning now to review of TRS RenTelco, adjusted EBITDA was $17,900,000 a decrease of 3% compared to last year. Total revenues increased $1,300,000 or 4% to 35,000,000 Rental revenues for the quarter were up slightly at $25,500,000 which was the first quarterly increase since the first quarter of twenty twenty three. Average utilization for the quarter was 61.6% compared to 56.5% a year ago, reflecting improved demand conditions and our continued focus on fleet management.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

Rental margins were 40% compared to 36% a year ago. Sales revenues increased 17% to $8,000,000 with gross profit of 3,700,000.0 The remainder of my comments will be on a total company basis. First quarter selling and administrative expenses increased 1% to 50,900,000.0 Interest expense was $8,200,000 a decrease of $4,500,000 as a result of lower average interest rates and lower average debt levels during the quarter. The first quarter provision for income taxes was based on an effective tax rate of 24.6% compared to 23.6% a year earlier. Turning to our year to date cash flow highlights, it was $54,000,000 compared to $59,000,000 in the prior year.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

Rental equipment purchases were $12,000,000 compared to $79,000,000 in the prior year, consistent with lower fleet utilization and our plans to use available fleet to satisfy customer orders. Healthy cash generation allowed us to pay $12,000,000 in shareholder dividends and reduce debt by 31,000,000 At quarter end, we had net borrowings of $559,000,000 comprised of 175 and $384,000,000 under our credit facility. And the ratio of funded debt to the last twelve months actual adjusted EBITDA was one. While it is difficult to accurately assess the impacts of the tariff and trade policy developments, I will provide several additional comments on the potential impact on the graph. First, some comments on the demand outlook, starting with domestic revenues, which account for over 95% of our business.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

We are more cautious regarding the potential demand strength and upsides for the second half of this year. There are certain examples of construction industry project delays and cancellations that are surfacing in the overall market. And if this becomes more widespread, it could negatively impact our modular and portable storage businesses. Total McGrath International revenues have ranged between 24% over the past three years and occur in our TRS business. Tariffs may erode the economic attractiveness of some of our international transactions at TRS.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

Next, some comments on capital spending. Given current utilization levels, we have less need to add new rental equipment this year. Some suppliers of rental equipment are beginning to contemplate tariff driven price increases with some estimates in the 5% to 15% range. However, some of our spending on rental equipment for 2025 has already been secured, which should limit any negative tariff impact this year. Lastly, operating costs incurred as we maintain our rental fleets may also experience some tariff driven increases.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

We're still working to determine the scope and size of increases and how much can be passed along to customers or offset by efficiency and cost management initiatives at McGrath. All of these comments are based on limited information and our views may change going forward. In summary, our business performance was solid in the first quarter and looks positive for the second quarter. Based on what we know today, we currently expect tariffs and trade policy disruptions to have a relatively limited impact on 2025 financial performance. Our primary concern is that the overall economic uncertainty could result in some delays or fewer rental and sales projects in the second half of the year.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

So we have updated our full year financial outlook to reflect this. We currently expect total revenue between $920,000,000 and $960,000,000 adjusted EBITDA between $343,000,000 and $355,000,000 gross rental equipment capital expenditures between $115,000,000 and $125,000,000 We are proud of McGrath's first quarterly focused on solid execution for the remainder of 2025. That concludes our prepared remarks. Jess, you may now open the lines for questions.

Operator

Thank you, sir. We'll go first to Scott Schneeberger with Oppenheimer.

Scott Schneeberger
Managing Director at Oppenheimer & Co. Inc.

Thanks very much. Good afternoon all. Guess, Joe and Keith, I'll focus my first questions in Mobile Modular. The education you mentioned growth in rental revenue in both categories of commercial and education rentals. On education, what are you seeing as far as order flow for the year?

Scott Schneeberger
Managing Director at Oppenheimer & Co. Inc.

I know this is the time of year where you start to see it for activity later in the year. So just kind of curious in that one category, what kind of indications are you getting thus far?

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

Sure. I can answer that, Scott. Bookings were just a little bit light for education in the first quarter, but in April, we're starting to see more orders. So the funding dynamics really haven't changed. The demand situation really hasn't changed.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

And I would say that our education opportunities are really don't run concurrently or in conjunction with the general construction related activity that you see in the market. It's kind of a separate entity because it relies on funding from local bond measures and state bonds and things like that. None of that's changed. We're expecting to have a good year in education, and the bookings are not yet fully realized yet. So we'll see.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

We'll have more to report in the next quarter on that.

Scott Schneeberger
Managing Director at Oppenheimer & Co. Inc.

All right. Thanks on that. Could you speak a little bit to project size in the commercial category in Mobile Modular? I imagine the larger projects are where you're seeing the strength, smaller, maybe not so much. But could you just kind of frame that for us since we're seeing indications of softer macro from third parties?

Scott Schneeberger
Managing Director at Oppenheimer & Co. Inc.

And just wondering what you're seeing out there in speaking with your customers? Thanks.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

Yes. I would say what you said is accurate, Scott. The larger projects that have been underway are pretty solid. It's the smaller ones that are more we're getting just more uncertainty from those folks. What's interesting is the activity level is good.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

There's a lot of inquiries into projects. We're just seeing that some people may be hesitant to pull the trigger on some things, particularly as things go into the second half of the year. So that's kind of where things stand.

Scott Schneeberger
Managing Director at Oppenheimer & Co. Inc.

So you see demand, you see a pipeline there, you just think that the hesitancy could occur in this environment?

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

Absolutely. The pipelines are really good. Activity is really good. Our quoting activity is good. And as we said in our prepared remarks, that the order sizes are a little bit smaller, and that's due to some factors like mix shift as an example.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

But overall activity is pretty good right now.

Scott Schneeberger
Managing Director at Oppenheimer & Co. Inc.

Thanks. And then on pricing, on new shipments over the last twelve months, your monthly revenue per unit up 12% year over year. That's good. I know as recent as fourth quarter, it was up 15%, slight deceleration, but that number is up, I think, significantly versus a year ago. I'm just looking at it was plus 9%.

Scott Schneeberger
Managing Director at Oppenheimer & Co. Inc.

So I mean all very nice numbers. You're still seeing that pricing lift. Any I mean we're seeing a slight deceleration. Any comment on that? My takeaway is it's pretty strong overall.

Scott Schneeberger
Managing Director at Oppenheimer & Co. Inc.

So just if you could dig in a little bit on the pricing environment specifically.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

Sure. Well, I think you've summed it up. I think we're doing very well in this area. As you know, pricing can be influenced by many factors, you know, the type of unit, the region you are in, the length of the contract. And what you're looking at is a very aggregated number, but it does indicate a couple of things.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

One is that number has increased over time on new shipments. It reflects healthy movement in base unit pricing and in addition adding more services to the contracts. Those are things Joe's talked about extensively. We've been working on for the last couple of years. I think every year, we're making more progress in that area, and it will continue to be a focus.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

So that's really positive. And then the other thing that we've noted in the past is newer units are going out at a rate that is well above the sort of legacy installed base average unit on rent number. And so there we absolutely believe there's a positive pricing tailwind there that over time as the fleet churns, there's an opportunity to get more revenue per unit from our fleet. And that's something we're very focused on.

Scott Schneeberger
Managing Director at Oppenheimer & Co. Inc.

Really. And Keith, would you agree? I think the difference between new shipments over the last twelve months monthly revenue per unit versus your total fleet units on rent monthly revenue per unit, it's over 40% higher than recent deliveries. So even if you made no more deliveries going forward, you would still have an implied double digit pricing lift on conversion. Is that an accurate way to talk about that?

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

Yeah, I think that's a reasonable way to look at it. There's a big gap. It is over 40% and churn causes us to reset pricing. And in that way, churn gives us a revenue lift. And I think it's only fair to point out as we noted in the prepared remarks, I mean the offset here is fewer units on rent and we have seen some pressure.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

You'll see our utilization has drifted slightly lower and that reflects 4% lower units on rent in the first quarter. So making really nice progress on the revenue per unit. The headwind is that in the current more sluggish commercial construction environment, we're seeing fewer units on rent. And again, that's something we've been dealing with now for multiple quarters, and we've commented on last year as well as this year. So that's just the one challenge area that I think many players are dealing with, But we're very pleased with what we're accomplishing in terms of revenue per unit on rent and with the revenue for new shipments.

Scott Schneeberger
Managing Director at Oppenheimer & Co. Inc.

Understood. Thanks for that. I'm going to spin over to TRS and then move on. The a nice step up in rental revenue, I think, first time in a couple of years. Can you just elaborate on what you're seeing with regard to demand trends and what you're hearing?

Scott Schneeberger
Managing Director at Oppenheimer & Co. Inc.

Is this a material that there's maybe something behind this?

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

Yes. I don't think it's a blip or anything. One of the things that we commented on in prior quarters was the weakness in the semiconductor and computer part of the business. That was actually up very nicely in the quarter. And the reason is that customers are telling us the projects that have been delayed are actually starting.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

And so we're really glad to see that, and we think that trend will continue.

Scott Schneeberger
Managing Director at Oppenheimer & Co. Inc.

And then just be remiss if I didn't ask on the guidance overall. I mean just you trimmed it slightly and I heard a lot of cautionary discussion about uncertainty in the back half of the year. It doesn't sound like you have much direct exposure to tariffs. It doesn't sound like that's a concern. And with your utilization levels, you don't need to tap market spending CapEx right now.

Scott Schneeberger
Managing Director at Oppenheimer & Co. Inc.

So it's really just your customers that you're worried about. Is this a get ahead of it cut? Or is this because you're hearing a lot from your customers about, hey, yeah, we're really nervous? And is that what's prompting it?

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

Yes, it's a really good question, Scott. And probably the way to answer it is we're dealing here with a very fluid situation. There's a lot we don't know. But the way I would frame it is as follows: If we looked at the world in February, we felt pretty good about our start to the year. You may recall we had good quoting activity in the month of January all across the business.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

And here we are, it's April, and particularly in the last handful of weeks, both the speculation around tariff policy and then some of the announcements and then some of the churning, all of that we're concerned about creating more uncertainty. And when we look at where we're finding our data, a lot of this is in the trade press. It's in things you can go out and find and read. It's not so much directly our business experiencing really any cancellations that we're aware of and really no major delays that any different from what we've seen over the last year or so. I think the difference is we concerned that customers who are planning things, they may take longer to take action.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

And as you appreciate in any rental business, it makes a difference to us whether a rental project begins in June or gets pushed to September because it limits how much rental revenue we're going to earn this year on that transaction. And in a similar vein, if we take a sales project where there may be a lot of work that goes into the planning of that project and a lot of back and forth with the customer, you know, we know those projects, especially the larger ones, take many months to bring to fruition. So if we lose a few months in this early part of the year with people hesitating or holding back, then projects we might have thought would happen in September, October of this year, They might get pushed into the first quarter of next year. So all of that could have some impact on our results. As you can tell from the shift in the guide, it's a very minor shift, but it's more an acknowledgment on our part that the journey this year is just a little bit more uncertain and probably a little bit more challenging than what we thought a couple of months ago.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

That's really the net of it.

Scott Schneeberger
Managing Director at Oppenheimer & Co. Inc.

Thanks. Appreciate that answer. I'll turn it over, guys. Thanks very much.

Operator

We'll move next to Daniel Moore with CJS Securities.

Daniel Moore
Partner - Director of Research at CJS Securities

Thank you. Joe and Keith, thanks for the color and taking the questions. I'm just going through and see which were not covered yet. So TRS, great to see uptick year over year in Q1. Is that sustainable given kind of your modestly more cautious outlook overall?

Daniel Moore
Partner - Director of Research at CJS Securities

Do you expect that in H2 from a year over year perspective? Any color there?

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

Yes. I think yes. Go ahead, Keith. You want to take this one?

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

Yes, sure. Just a couple of thoughts, Dan. And here's the way I sort of paint the picture with our journey so far. And and in all of this, what I really stress is it's April, and so there's still a long way to go. But I I think in looking at that business, if we looked at how things went in January to February to March and even into this quarter or month to date in April, there has been a really nice solid progression with the business momentum.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

And as we shared in some of our disclosure, pretty broad based as well. It's not relying on one single thing. So that is really, really encouraging. And I think under normal circumstances, we'd look at that business and you'll recall back in February, that's a business where we just thought adjusted EBITDA this year is probably going to be comparable to what it was last year. Absent all of this sort of turbulence that we're going through, I'd be feeling like that business can do better for 2025 than we thought.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

However, when we look at where we are today, I just think we're sort of curbing our enthusiasm just a little despite those really good things that have happened in the first three and a half months and just acknowledging that, well, second half of the year could just throw a couple of unexpected or unknown impacts on us. So there's just a little bit of caution there. But that's a great example where we're going to be tracking that one. We may have a different view in July, but we're trying to give us or trying to give you a sense of our thinking as it stands today. Great start, really also starting nicely in the second quarter.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

Second half of the year, there's more unknowns. And just as a reminder, that is a business which churns very quickly. Shorter rentals, shorter terms, so the business is recreating itself every few months. And so really, second half of the year, it's just too early to tell. We'll know more in July.

Daniel Moore
Partner - Director of Research at CJS Securities

No, that's great color, very helpful. I'll jump back over to the we're the half last year, a remarkable job maintaining margins this quarter a little bit more pressure. Help me think about how do you expect margins for the next few quarters, getting more of kind of thinking more year over year rather than Q1 as a comp or does it get more difficult if the conditions in revenue deteriorate further?

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

Yes. And again, just big picture on that part of the business. As we pointed out and Joe said it in his remarks, we started this year with a much lower run rate 2024. So that's the big challenge area. I think Q1 played out as we expected.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

I think if you look at the detail in terms of margins, you'll see some pressure on rental related services. That's an area where we've looked at it hard. We see some people in the industry are using not rental rate on the unit, but delivery fees and other items to sharpen their pencil on completing transactions. I think we're looking at ways to recover some of the lost margin there ourselves. We can do things some things operationally, but looking to protect the overall rental rate pricing as best we can and be smart about how we handle the delivery and pickup side of things as well.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

So looking at the big picture, I don't think there's going to be more margin pressure there. I think we're pricing smartly in this environment and we're looking at the delivery side and the pickup side to be efficient and smart about how we minimize any loss of margin in that area. So what you've seen is probably in line with what we're going to see for the next couple of quarters. We'll be working hard to try and improve upon it, but it's going to be gradual.

Daniel Moore
Partner - Director of Research at CJS Securities

Helpful. In that vein, are you looking to step up sales or divestments of portable storage units given or you tend to hold on to what we have now? How do you think about managing utilization going And is there a market for them right now?

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

Sure. Well, couple of things I'd point out. Number one, we've got a really high quality fleet. A lot of the fleet originated is what in the industry we call one trippers, mostly from China. And so they're great pieces of equipment, and they have a very long useful life.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

So the real distinction here is it's an asset class that should age gracefully. And so there's no pressing need to take urgent action in the next six months or this year. Very different from electronics business where you've got all the technology changes that mean you have to actively manage that fleet. So just to give you a really contrasting way to look at it. And just as in electronics where we saw some challenges, our team did a really fantastic fantastic job over multiple quarters of shrinking the fleet while they continue to do well in the market winning business.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

It's different in portable storage. We have probably have more units than we need across multiple geographies, but we're working hard to put them to work. It may take more than a year, but that's not a reason to sell fleet today and then in, you know, a couple of years need to buy it all back. And another example of an area where we have some insulation from tariff risk because we own the fleet and we have some spare capacity. So that's where we stand today and that's how we're looking at it.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

I'll just add in there

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

too.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

We're happy to sell units if we have the opportunity. So where utilization is low, we'll sell fleet if we need to or have the chance to do it.

Daniel Moore
Partner - Director of Research at CJS Securities

Makes sense. One or two more. You're already leaning into refurbishing more existing units rather than acquiring new ones. And it sounds in your prepared remarks, it certainly sounds like you're continuing to move in that direction. Is that something you've or likely accelerate?

Daniel Moore
Partner - Director of Research at CJS Securities

The CapEx guide ticked a little bit lower, but how are you kind of thinking that beyond the next quarter or two?

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

Yes. I'd say similar to what we said in February. It's a good way for us to meet It's our preferred way from a free cash flow point of view. It's a very smart way to operate the business. So no real change in general approach there from what we said back in February.

Daniel Moore
Partner - Director of Research at CJS Securities

Helpful. Last one. Similar to Scott's question, you gave great color, maybe it's beating dead horse. But you mentioned a limited impact from tariffs. And then you also mentioned if the weakness becomes more widespread, it could I guess the question is, if it does, would that likely drag on kind of lower end of guidance?

Daniel Moore
Partner - Director of Research at CJS Securities

Or are you already contemplating some incremental weakness in the revised ranges?

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

Yeah. Again, I'll go back to all the comments that we made earlier. We tried to step you through all the moving parts of demand, reminding everyone that we're primarily domestic and where the cost impact could be. There could be a little bit in CapEx, but on the other hand, this is not a big CapEx year for us given where utilization is at. And then on the operating expense side, there's certainly rumblings of, you know, paying a bit more for certain grades of steel or certain types of lumber.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

But again, that's limited impact I think in 2025. Some of it was materials we have on hand or we've placed orders for. I think any impact comes later in the year. And really the big picture here is just a little bit more caution or concern that customers may move more slowly in their decision making and their initiation of projects, given this backdrop of macro uncertainty. Hopefully, there's very little of it.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

We'd be delighted and we'd love to have a great year. But again, our view today compared to two months ago, there is a bit more caution. It's an issue for the second half of the year, not the first half of the year.

Daniel Moore
Partner - Director of Research at CJS Securities

All right. That brings it well. Thanks again for the color.

Operator

Moving next to Steven Ramsey with Thompson Research Group.

Steven Ramsey
Deputy Director of Research at Thompson Research Group

Good evening. Maybe to start with on Mobile Modular Plus, it continues to be strong and the growth on a percentage basis outpacing revenue per unit and new shipment growth rate. Can you talk about operational progress here that the sales team is making and market acceptance and customers wanting more of what you're offering?

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

Sure. Yes. Our customers like our offerings. We're very flexible with them in terms of the different offerings that we give them because we don't actually own the equipment and we can we re rent it and we are able to get them specifically what they need for each of their applications. So the acceptance is good.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

We're doing a much better job with our sales team in terms of integrating those offerings in with each of our rentals. It's a priority in the business, and we're making traction with that as each quarter progresses. So I've been very pleased with how things are going, and we're going to continue on that trajectory.

Steven Ramsey
Deputy Director of Research at Thompson Research Group

Okay. That's helpful. And then thinking about the market kind of slower local projects, but then bigger projects being better at least relative to local. How are sales how is the sales team adapting its approach to capture that opportunity? And does it heighten the focus even to grow Modular Plus or site related in this kind of environment?

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

Yes, absolutely. I mean, we're fortunately, we have folks that are in close proximity to our customers. So if it's a large project, we're all over it. If it's a smaller project, we're also all over it. I don't see any problems there with getting the sales force motivated to go after either one of those types of projects.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

So we've got all our folks who are highly motivated to make their commissions, and they're out there knocking on the doors and in front of the customers. So I think we're doing a pretty good job of that.

Steven Ramsey
Deputy Director of Research at Thompson Research Group

Okay. That's helpful. And then on modular RRS reflect off rent, but site related services is mostly tied to units starting a contract, if my understanding there is correct. But can you talk about how site related is growing at such a strong rate despite the volume headwind in the Modular segment?

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

Yes. Our site related services actually can be a pretty substantial part of a project. And so right now, they're kind of more lumpy as we continue to get traction there. But we're you could have a $1,000,000 sale project that has $1,000,000 with site related services that accompany it. So that is, as you said, it's correctly, is revenues that we recognize in our rental related services line.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

And actually, some of those site related services could be on a dismantle. A lot of them are when the project goes in, but sometimes there's things that need to happen when a project comes out. And so we can book revenues for those for the ending of the project, too.

Steven Ramsey
Deputy Director of Research at Thompson Research Group

Okay. And then when you think about customer hesitation or general customer sentiment and how it impacts the balance of the year potentially being negative, do you expect this lowered sentiment to bring down the potential growth rate of the Modular Plus and the site related revenue through the balance of the year? Are those two revenue components being moderated? Or would you say it's in other parts of the business?

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

Yes, it's a good question. Here's the way I think about it. This is all gas. So if we were to experience, you know, moving more slowly or more deliberately and the pacing of new shipments slowing down relative to maybe what we saw a year ago or two years ago, I think that makes it more challenging to grow things like Plus and site related services. And to some extent, we've already been there.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

You know, if you look back at the last few quarters, you know, the construction industry backdrop has been one with some challenges. So the issue is, does it incrementally become a little tougher? It could, and if it did, it would make growing those items a little bit harder. But I think it's important to sort of zoom out and say, these are longer term initiatives, and you know, the battle is neither won or lost at December thirty first of this year. It's really a multiyear journey where these are things we do because we think they provide value to customers.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

We think that we can do them well. And we think we're on a journey that's going to be a positive one over the long haul. So that's sort of the way we think about it internally.

Steven Ramsey
Deputy Director of Research at Thompson Research Group

Okay, that's helpful. And then last one for me. You talked about geographic expansion being a priority. Maybe can you clarify some of the nuances for that in 2025, your priorities between geographic focus, customer focus, product between storage and modular? And then maybe high level, how much of that is organic driven versus M and A driven?

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

Sure. It's a good question. Our geographic expansion opportunity and focus this year is important. We're not going to see a whole lot of revenue gains this year because we're putting some of that infrastructure in place. But when you populate markets with new sales reps and additional sales power and infrastructure, that's something that is important to us.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

It's a focus. And we'll see some results this year, but more in future years as we continue to get traction there. So and most of that is the geographic expansion. I mean, most of our that we can control, of course, is organic. But if we can backfill or add or further densify a market by doing an M and A transaction, we'll absolutely do that.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

So I would say they're both important to us. And we're excited to see progress this year in both of those categories.

Steven Ramsey
Deputy Director of Research at Thompson Research Group

Okay. That's great. Thank you for all the color.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

Thank you.

Operator

We'll go next to Mark Riddick with Sidoti.

Marc Riddick
Business Services Analyst at Sidoti & Company, LLC

Hey, good evening.

Keith E. Pratt
Keith E. Pratt
Executive VP & CFO at McGrath RentCorp

Hey, Mark.

Marc Riddick
Business Services Analyst at Sidoti & Company, LLC

So I wanted to follow-up on that because in your prepared remarks, had made some mention or commentary around some of the around acquisition pipeline. Maybe you can sort of talk a little bit about how that's going maybe and maybe how you might be looking at that and tie that into cash usage. I mean, the it's a good time to have a lower debt level, of course, you're now below 1.6 times on leverage. So maybe you could sort of marry those two and talk about the types of opportunities that may have come to fruition over the last few months and maybe what drove that?

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

Yes. There some larger opportunities that are out there. We are we have dialogue and relationships with folks in the industry that we think would be good potential transactions for us, not only on the larger side, but also in terms of our tuck in activity, too. So we're out in the market. We're talking to people.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

We have a pipeline of folks that we're talking to that are showing interest. We hope to close some of those in 2025. And so it's been an active market and one where we want to be at the table to add to our rental revenues and add to our offerings that we have. So an important part of the business for us. And Mark, you touched on it.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

Our leverage is really appropriate for us to do smart M and A. We have some dry powder to do that. So we're really happy about that.

Marc Riddick
Business Services Analyst at Sidoti & Company, LLC

Excellent. And then last one for me. I was sort

Marc Riddick
Business Services Analyst at Sidoti & Company, LLC

of curious as to maybe where you

Marc Riddick
Business Services Analyst at Sidoti & Company, LLC

comfort level as to talent that do you see yourself needing to do much in the way of hiring? How comfortable are you with talent levels? Are there any areas that you would like to add to or maybe should be keeping an eye for? Thanks.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

Sure. I mean, we've been hiring. We put off a number of hires last year due to the merger, the pending merger. When that was terminated, we started right back in again, and we have not had problems hiring people. So the market has been pretty good.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

We're getting the talent that we need, and we're very pleased with the quality and type of candidates that are available out there. So it's been a good opportunity for us.

Marc Riddick
Business Services Analyst at Sidoti & Company, LLC

That's encouraging to hear.

Marc Riddick
Business Services Analyst at Sidoti & Company, LLC

Thank you

Marc Riddick
Business Services Analyst at Sidoti & Company, LLC

very much.

Joseph Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

Thank you, Mark.

Operator

And 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 Hanna
Joseph Hanna
President & CEO at McGrath RentCorp

I'd like to thank everyone for joining us on the call today and for your continuing interest in the company.

Operator

Thank you, sir. Ladies and gentlemen, that concludes today's conference call. We thank you for your participation. You may disconnect at any time.

Executives
Analysts
    • Scott Schneeberger
      Managing Director at Oppenheimer & Co. Inc.
    • Daniel Moore
      Partner - Director of Research at CJS Securities
    • Steven Ramsey
      Deputy Director of Research at Thompson Research Group
    • Marc Riddick
      Business Services Analyst at Sidoti & Company, LLC
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Earnings Conference Call
McGrath RentCorp Q1 2025
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