Hey, good morning, everyone. I'm Scott Schneeberger, the Senior Business and Industrial Services Analyst at Oppenheimer. Thank you all for joining us today. It's my pleasure to have from McGrath with us today, the CEO, Joe Hanna, the CFO, Keith Pratt, and the COO, Phil Hawkins. We look forward to hearing the story. McGrath rent and sells modular office and classrooms and portable storage containers and electronic test equipment. We'll be using a fireside chat format. I'll be asking management some high-level questions upfront to get us an overview of the business. Later in the session, I'll pivot to questions asked by you from the audience. Please feel free to send those in. Getting started now, gentlemen, to lay the groundwork, could you please give us an overview of your portfolio of specialty rental fleet core offerings and discuss the asset characteristics of each?
Asking manager, asking high-level questions. High-level questions. Asking overviews of business in the business. Later in the session.
Sure. I can do that. I'm getting an echo right now, actually.
Yeah, I hear that too. Just give it a sec, Joe. I think it ended.
Getting started now. Gentlemen, to lay the ground.
All right, thanks, everyone. We had some technical difficulties there. I'm going to jump back in with the first question, and I'm going to pose it to Joe. Joe, to lay the groundwork, could you please give us an overview of your portfolio of specialty rental fleet core offerings and discuss the asset characteristics of each? Thanks.
Yes. Thanks, Scott. We're very glad to be here. I think we've got a compelling growth story for the company. McGrath is a 45-year-old company, and we have a reputation for providing exemplary service. As Scott mentioned, we have two primary components to the business. 80% of our revenues, roughly 80%, comprise our modular building and our portable storage fleets. The modular building fleet, you know, provides a temporary to permanent space for companies or organizations that want to house folks on a relatively quick basis. You can put one of these projects in place in a matter of days and get people up and working. We have done that consistently. We then have a portable storage fleet, which provides temporary storage primarily for construction sites for customers that need to store securely their materials on site. We provide also that product too.
I'm getting the echo again.
It's me. It must be me. I don't have any.
All right, thanks, everyone. Technical difficulties again. I think we have it fixed. I'm going to pass it back to Joe. He's going to wrap up on the last part of the first question. Joe, over to you, please.
Sure. The other part of the business is roughly 20% of our revenues come from TRS-RenTelco. TRS-RenTelco provides high-end electronic test equipment for a wide variety of customers. If someone needs a piece of equipment for an R&D project, for semiconductor use or aerospace and defense and putting a satellite up, they'll need a piece of high-end test equipment typically that they don't want to purchase because it's very expensive and the technology cycles aren't conducive for you to own it on a long-term basis. They rent it from us. It's a very good segment of the business. We enjoy owning and operating it. It provides high EBITDA, it's a high-return business for us. You look at those two things, modular buildings and containers and our electronic test equipment, that's what makes up McGrath.
Great. Thanks, Joe. Moving on, excuse me, with respect to both the modular segment and portable storage, could you please share with us an overview of the end markets you serve and the demand trends that you are seeing?
Sure. Our modular building business serves commercial customers for a wide variety of uses from field offices to construction site office space to temporary kitchens. We serve government, private industry, and many others in providing the modular buildings. Part of the fleet that's not commercial also serves our education customers. Our education customers have generally two uses for the buildings. One is for modernization projects. Those projects are when a school district needs to upgrade a facility, they will take the students, they'll move them into portable temporary classrooms. Those classrooms then provide that temporary space while they modernize the rest of the building. I'll just mention there that typically across the country, school districts have very old classrooms, oftentimes 40 years old. This modernization demand, this need to upgrade classrooms has been consistent and a real nice driver for our business over the years.
There's many, many more years of that pent-up demand that we have in front of us. That's the first piece. The second piece is for growth. That's in a school district that might have an influx of students because of student population growth. They typically can't keep up with the building of a permanent facility. They will house students in a temporary classroom. That's just been a great driver for our business too. Typically in states like Florida, Texas, they have a lot of folks that have been moving in there. That kind of covers the construction and, I'm sorry, the education part of the business. Modulars, I'll just mention, has been a consistently more important and good opportunity for clients to provide a cost-effective way to have facility space. This has been a long-term trend.
It's been gaining more momentum in the past decade. Modular building and the use of modular construction is something that is still very small as a percentage of construction projects that take place across the country. That's been increasing. We're seeing this increase in our demand and what customers have been telling us for many, many years. We're very excited about that opportunity for us. Portable storage is needed for construction sites for storing materials. If you have a plumber that's on site, that plumber might need a place to store his materials in that project. They need to be secure in an overnight facility. They use these containers for storage in projects like that. I just passed on the way in from work this morning an America's Tire store. They had a container outside where they're storing their extra tires.
That container has been there for years. They pay rent on that container every month. They store their tires there because they can't fit them into the rest of the building. Those are just kind of examples of how this product is used and the compelling rental opportunity that it provides for us.
Great. Good overview. Thanks, Joe. I guess now if we can go into the business environment and comparing and contrasting small and large clients, please elaborate upon your progress in winning large projects as well as your large project pipeline. Thanks.
Sure. I'll turn that over to Phil. He's well equipped to answer that.
Thanks, Joe. We're well positioned to win large projects as well as small ones due to our scale, our equipment refurbishment modification capabilities, and our geographic reach. There are not many providers of modular equipment that are able to check all those boxes and be successful in this type of project. In terms of the business environment, things have been a little sluggish, as evidenced by the ABI and construction backlog indicator data. You've seen that those metrics have been a little soft lately. We feel good about our business. There is some risk around the macro uncertainty that's impacting project start dates later in the year. We believe the long-term shift towards more mega projects in data centers, manufacturing, industrial markets, those are all presenting a growing long-term opportunity for us.
Great. Thank you. Monthly modular revenue per unit on all units on rent grew 8% year over year in first quarter is impressive. Monthly revenue per unit for units going out on rent in the last 12 months grew 12% year over year in the first quarter. Again, quite impressive. Could you all please discuss the drivers of that strength?
Sure, Scott. I'll jump in with some comments. First thing I would say is revenue per unit has been a focus area for us in the business for several years. It's an area where we've put technology in place that really helps us price appropriately in each of our markets and each of the types of products that we offer. We have a lot more process and expertise in this area today than we had, say, five or 10 years ago. All of this reflects very deliberate actions on the part of the company. The second thing is a big driver of moving rates higher in recent years has simply been the cost of doing business has increased. The cost of new equipment has gone up, particularly in the post-pandemic inflationary period, and operating costs have also risen.
We have to do things to protect our economics. If we look at the specific drivers, really two big components. One is the pricing around the base unit has gone up for the reasons I described over the last few years. That is a big driver and the larger component of the increases we are seeing on the unit on rent number. Then complementing that is success offering more services along with the basic unit, what we call mobile modular plus. Those are really the two factors driving that 8% for the average unit on rent. New shipments, always caveat new shipment comments with there are lots of mix issues. The revenue per unit can vary a lot by region, by type of unit, by term for the particular project. All that being said, pricing is healthy. Our success in offering new services has been showing really good progress.
That is shown by those high numbers for the LTM shipments and the fact that they've increased even over the last year. Important focus area. We're pleased with progress. We're going to stay focused going forward.
Thanks, Keith. I'm going to delve in a little bit more there. As of first quarter, the monthly revenue per unit for units going on rent the last 12 months, that number was about $1,200. It's roughly 44% higher than the monthly revenue per unit for all units McGrath has on rent. It's about $800, a little bit higher. Please discuss what this delta implies for future rental revenue growth.
Sure. In short, it's a positive. We view this as a positive opportunity. It's really a pricing tailwind benefit for the business. The primary reason is when we put units on rent, they stay out for several years. As the fleet gradually churns, we reset the pricing on those units to the current market rates. This is an important factor for us because units stay out in the case of commercial units, typically around three years. On our education business, it can be five years or longer on average. The fleet churns gradually. That gap that you've described really is a positive for us. We've seen the impact of it really over the last couple of years where we're seeing the average unit on rent rate increasing gradually.
It is pulled along by the healthy pricing in the current environment as well as the addition of those services.
Let's talk about some of your value-added services. He referenced a moment ago, McGrath's mobile modular plus and site-related services have grown rapidly. If you can provide an overview of these offerings and their current and future growth opportunity. Thanks.
I'll jump in here. We started these as two of the initiatives that came out of our strategic planning work back in 2021. They're really all about how we add more profitability to every transaction while simultaneously adding more value to the customer. We look at these opportunities internally as flywheels that accelerate their momentum as we continually push on them year after year. We're happy with the progress we've been making. On the mobile modular plus side, that includes products and services that support the use of our equipment during the rental period. These are items like furniture, cell phone services, and holding tanks for water where the building may not be connected to water and sewer there at the site.
On the site-related services side, these are construction activities that need to happen on site in order to prepare for our buildings being delivered and installed. These are things like grading, dirt, foundation work, electrical and plumbing connections. You sometimes hear us use the word turnkey. That just means that we're taking on more project scope, really all the project scope that's required to deliver and install our buildings on site. We continue to believe that many of our customers value the convenience of sourcing these offerings from a single vendor. Both initiatives have solid growth opportunities ahead.
Great. Thanks, Joe. All right. Inevitably, this question was bound to come up sooner or later. How do you view tariffs on McGrath directly from a cost perspective? And then probably more importantly, from a revenue perspective relating to your customers.
Sure, Scott. I'll take that one. On the cost side, we really don't see tariffs as being a big impact to the company. Just a reminder that we own our fleet. It's all been purchased and it's in use. I mean, we do CapEx every year and purchase new equipment. That percentage is relatively small over the installed base of equipment that we have. Our operating costs are to maintain the fleet that we have and modify it if necessary. We just don't see tariffs as being a big impact there. We purchased a lot of those materials ahead already for this year. For 2025, we're in pretty good shape. Now, on the demand side, that's more of an unknown for us. What we're hearing from customers is that they may be hesitant in this uncertain environment to pull the trigger on projects.
There could be a slowdown that we see in the second half of the year. We just do not know enough at this point to be able to quantify that in any real terms. We have not seen cancellations of any type at this point. Projects that are in the field are being completed. There just could be some disruption in the second half of the year. We just do not know. That is that uncertainty that could just be a little bit of an issue for us as we roll into the second half of the year.
Thanks, Joe. Yeah. I'll note you all did slightly revise down your guidance for the year on that second half uncertainty on your first quarter release and call. I imagine that you're feeling that you have that factored in. Let's switch up gears now over to TRS-RenTelco, often outshadowed by the other segments. It delivered the first quarter year-over-year rental revenue growth in the first quarter after two years of challenging business conditions. If you could please discuss the drivers of the recent improvement as well as your visibility looking ahead.
Phil, you can take that one.
Thanks, Joe. First, we're excited to see the rebound in the rental revenues at TRS and improvements broad-based in terms of vertical markets. Joe noted on the higher earnings call, we saw particularly improvement in computer and semiconductor. And those were some weak areas for a number of quarters. That out is we don't believe this is a blip. And we've seen some nice progression in rental revenues over the last several months. So I was feeling good about that business.
Thanks. McGrath was in the process of being acquired by a direct industry peer, WillScot, last year until the deal did not pass, some regulatory concerns. Would you qualify McGrath as still open to consideration as an acquisition target? Do you view McGrath as an acquirer itself right now?
Yeah. Good question, Scott. First thing I'd like to say is that when we went through that process with WillScot, the company was not for sale. We were pursued by them. Our duty as a public company is that we need to look at those opportunities, which ultimately did not pan out for us. We have a very compelling growth strategy that is several years underway, as we've shared. We've got an experienced management team and a reputation for solid execution. We are quite happy being independent. Certainly, if another suitor shows up and provides a compelling offer, it is our duty to take a look at that. We will in the best interests of our shareholders. On the other side, in terms of us acquiring folks, we are very much interested in completing more M&A opportunities. We have an active pipeline.
We are actively engaged in talks with folks that we continuously have as a process for us. If any of those things pan out, which we hope they do, we will see more activity later this year. We will see. We are very much interested in doing tuck-in M&A as a particular help to the business. That helps densify us in locations where we might be operating or it could open new greenfield operations for us. Very, very interesting and attractive part of our growth strategy.
Thanks, Joe. About 10 minutes left in this session. I have a couple more prepared questions. Audience, if you have anything you'd like to submit, please feel free to do so. We'll get those in here. My next one is about free cash flow generation. Simply, what is the opportunity going forward? You guys have been steady generators, but just any elaboration on what we should expect to see. Thanks.
Yes, Scott, I'll take that one. In short, there's a great opportunity from a free cash flow point of view. If you were to take our business and hold the fleet size steady, the business generates lots of cash. A good example would be if you look at our performance in 2020 with the pandemic year, we throttled back on growth CapEx, and the business delivered a lot of free cash flow. I think it's instructive if you just look at our most recent very strategic year, which was the first quarter of 2023, where we divested Adler, we purchased Vesta, really reconfigured the portfolio.
If you actually look at the last eight quarters, from the end of March of 2023, when we completed those strategic transactions right through to the results that we announced a few weeks ago for the first quarter of this year, that is an eight-quarter period. Here is the big picture of what we accomplished. First of all, we grew our asset fleet by $175 million. Substantial investment in the business. Our PP&E increased by $55 million. A lot of that is facilities-related growth, also important IT investments, all helping us set up for long-term growth in the business. Big growth in those two areas. At the same time, over those eight quarters, we paid out $93 million in dividends. Returning value to the shareholder. We did all of that, and we actually reduced debt by $100 million.
Now, clearly, with the breakup of the WillScot deal and the reverse termination fee, the net effect of that was a benefit of $86 million that is non-operating. Nonetheless, if you take out that $86 million, we still dropped the company's total debt. We did all that while growing adjusted EBITDA. That just frames, I think it's very good to look at that last two years and just look at the underlying health of the business where we can invest for growth, we can grow adjusted EBITDA, and we can actually reduce the company's debt. It's a very powerful combination. It leaves us very well positioned for other strategic initiatives, other M&A opportunities that could come through our M&A pipeline.
Yeah. And just follow up on that, Keith. You have a very nice balance sheet operating at low leverage as it is. You have a lot of financial flexibility. Could you discuss the capital allocation framework? You're just touching on it a bit, but it may be working share repurchase consideration as well in addition to those other uses of cash.
Yeah. Absolutely. It is a very rigorous process. It is very methodical. I think we always start with organic investment opportunities in our businesses. We have a long track record of organic investment generating good returns for shareholders. Joe referenced earlier a 45-year track record in the company of building it very systematically and with great discipline over many decades. That is firmly in place and continues. In recent years, we are absolutely more open to strategic M&A. Our M&A is very much focused, as Joe mentioned earlier, around the modular and portable storage opportunities. You can look at the deals we have done, large deals like Design Space and Vesta, and then smaller tuck-ins. We have much more process around that. If we find businesses that are at a fair value and they have the right fleet quality, we are interested in exploring those opportunities.
The ones we've executed, we're very pleased with what we've received from those transactions. That's really the second area. Dividends. We're a routine dividend payer, over 30 years of making annual increases to the dividend. That's clearly part of our financial discipline at the company. That really comes next. Fourth, share repurchases. We tend to be opportunistic. We are open to it. We've done it in the past. We always look for a very attractive entry point. In the absence of all those things utilizing the available cash, we will, on an interim basis, be comfortable paying down debt, which we really view as banking some flexibility until that next opportunity shows up for deploying the capital in a smart way.
Great. Thanks. We have five minutes left. I have a couple of questions in the queue. I'm going to get to those now. If you have any, now would be the time. All right. Let's take these one at a time. First, you mentioned most of these products are on site for about three years on average. Should we be thinking that the fleet will turn over every one-third of the year or every three years, I guess, and that's 2/3 of the revenue is effectively booked each year?
Yeah. I think that's a reasonable way to look at it.
That's a good way to look at it.
Yep.
Yeah. Agreed.
All right. Thanks. The second question we have is, can we talk about what you are seeing with regard to construction spending on the non-residential construction side, both public and private? Are customers delaying or deferring projects?
Phil, do you want to take that?
Sure, Joe. As we talked about, we see some potential for delays and deferrals later this year and into 2026. There are articles out there, companies like Microsoft putting some projects on hold. We have not experienced any of those project delays or cancellations directly. It is more of our trying to stay close to customers and make sure that we are working closely with them. As Joe mentioned earlier, higher interest rate environment, a little more uncertainty around future construction costs. While all this tariff stuff is going on, I think it is natural to expect some pause in decision-making around many construction projects. Also, go back to the construction backlog indicator, eight and a half months.
There's a solid pipeline of activity that's already committed to and in process, which is why we kind of point to later this year, even early next year, before any of those delay decisions might start to be seen and have an impact in our business.
Thanks. We have two minutes left about, I have another question in queue. Your education or your classroom modulars, how does the funding work? Are those state-funded, local-funded, nationally funded, privately funded? That's essentially the question.
Phil, you can take that one too.
Yeah. The funding dynamic varies by regional market. The majority of funding is state and local funds that happen through bond passage. In California, for example, about 60% of the funding comes from state and local, 40% from the state. Very little of it's federal, although I think there are concerns about the federal funding dynamic and funds that were available through COVID that aren't coming out. Most of our funding is through state and local bonds for enrollment, growth, and modernization projects, as Joe was talking earlier. We're not seeing any material changes in those funding dynamics. I believe there's funds there in our major markets to support ongoing activity.
Thanks. One more question just came in. We have a minute. This will be a very quick answer, guys, if you would. It looks like a two-parter. Can we review the pricing opportunity on redeployment? That is key back to what we were discussing earlier. The second part is any potential tariff headwinds as we think about price and cost? Again, only a minute. Two big questions, but tackle them kind of as quickly as you can.
Sure. Pricing on redeployment, essentially, if the unit's in our fleet, it's been out for a few years. There may have been some adjustments when it comes off contract. The biggest price changes occur when the unit is returned to us and goes out to the next customer. That's really the opportunity around pricing and the opportunity to add more services onto the contract, something we've been working on and making more progress with. In terms of tariffs, Joe covered this a little bit earlier, but we don't see it as a big factor this year. We've seen a few suppliers who are, I would say, contemplating increases anywhere in the 5-15% range. A lot of those increases that we've heard about, they're not being implemented yet.
I think this is all going to play out with tariffs and all the uncertainties around it, whether some commodities or some items that we purchase see a bit of upward pressure. We've seen this in the past. We do a lot of things operationally to be smart with our buys and to work on our own efficiency and productivity in our inventory centers that can help mitigate some of those pressures. If it's still a factor in the market, we have to look at, obviously, pricing appropriately to try and protect ourselves. Those are all things we've dealt with in the past. They may be things we'll have to use our playbook on as we go forward.
Excellent. Very nice, concise answers, Keith. Good job. And Joe, Phil, you guys as well. We're going to wrap it up there. We're right on time. Thank you, everyone in the audience, for listening and participating with your questions. We appreciate it all. Thanks.
Thank you. Good to be here.