McGrath RentCorp (NASDAQ:MGRC) executives outlined the company’s standalone strategy, end-market exposure, and CEO transition plans during a discussion at the Barclays Industrial Select Conference. The session featured outgoing CEO Joe Hanna, incoming CEO and current COO Phil Hawkins, and EVP and CFO Keith Pratt.
Business mix and strategic focus
Pratt described McGrath as a rental and services provider built around what management calls its “modular solution strategy.” That includes the company’s core modular business, Mobile Modular; its portable storage business; and a modular unit manufacturing business, Enviroplex. McGrath also operates TRS-RenTelco, an electronics test equipment rental business that Pratt characterized as “very high-performing” and “high-return.”
Competitive differentiators and end markets
Hanna highlighted three areas he said differentiate McGrath in the modular market:
- Service-driven culture: Hanna emphasized the importance of delivering projects on time and to specification, using school openings as an example where execution is critical.
- Ability to execute large, complex projects: Management pointed to production facilities, inventory centers, and fleet capacity that enable customized, large-scale installations.
- Field expertise in codes and regulations: Hanna said McGrath’s long-tenured salesforce and field teams have deep familiarity with relevant codes and requirements, particularly in education.
Hawkins said about one-third of the business is education-focused, including modular classrooms and related services and accessories. He noted that education units tend to stay on rent for longer periods, particularly when tied to student enrollment growth. The remaining two-thirds of the business is commercial, spanning industrial and government customers as well as non-residential construction use cases, ranging from job-site offices to temporary expansion space and portable storage containers used during projects.
Demand backdrop: large projects vs. smaller construction
Executives repeatedly pointed to a bifurcated demand environment, with strength in large projects and weakness in smaller, local non-residential work. Hawkins said McGrath’s “sweet spot” is large projects, and he cited “mega projects,” data center activity, and manufacturing work connected to reshoring trends as areas of ongoing strength. By contrast, he said smaller projects—such as “building a McDonald’s down on the corner”—have been weaker.
Management also discussed leading indicators such as the Architectural Billings Index (ABI) and construction backlog measures. Hanna said the ABI has been weak for multiple quarters, making it “puzzling” relative to continued strength in large projects. Pratt added that ABI improved slightly to 48.5 in December, still below the 50 threshold that typically signals expansion. He also cited a non-residential commercial backlog measure of roughly eight months overall, while noting that large general contractors can have backlogs “still a year long,” which management views as supportive for the types of large projects McGrath typically serves.
Pratt provided specific utilization commentary on portable storage, which he said has greater exposure to smaller local commercial construction projects. He said utilization in that business has declined over the last two-and-a-half years, moving from above 80% to around 60% currently, calling it a “painful adjustment.” In modular, he said there are fewer units out on rent than a year ago, but McGrath has offset that with disciplined pricing and increased attachment of services.
Pricing, services, and recent performance drivers
Pratt discussed what he described as a notable gap between revenue generated by the installed base and newer shipments. He said the average unit out on rent in the most recent quarter generated about $865 in revenue, compared with closer to $1,200 for units shipped over the last 12 months. He cautioned that these comparisons are influenced by mix, contract term, and regional differences, but said two factors largely explain the spread:
- Inflation in unit and maintenance costs: Pratt said costs have risen over time, and inflation was particularly pronounced during and after COVID, widening the reset between older and newer contracts.
- Higher service attachment on new contracts: Management said newer shipments include a broader range of services, with greater success attaching those services than in the legacy fleet.
Pratt said revenue per unit on rent was up 6% in the third quarter versus a year earlier, which he said helped offset softer demand. On longer-term expectations, he suggested a framework that includes a couple percentage points of price increases tied to inflation, a couple percentage points of fleet growth in favorable conditions, and potentially a couple percentage points from additional services—while acknowledging that changes in units on rent can offset those factors in weaker environments.
Addressing 2025 outlook drivers discussed previously by the company, Hanna said the company raised guidance slightly after strong third-quarter results and momentum entering the fourth quarter. He cited stabilization in portable storage, including an opportunity for seasonal retail business in the fourth quarter, and improving momentum in electronics after a difficult 2023 and 2024 demand environment. He described modular as being in a “pretty steady position” during that period and said the company would provide further updates on an upcoming earnings call.
M&A approach, portfolio reshaping, and CEO transition
Management said organic growth remains the preferred approach, but M&A can be complementary and is expected to remain part of the company’s growth toolkit. Hanna said the company’s significant acquisitions have been concentrated in roughly the last six years and that McGrath has built capabilities to execute both larger acquisitions and tuck-ins.
Hanna revisited the company’s 2023 acquisition of VESTA and the divestiture of Adler Tank. He said Adler Tank did not hold a strong market position and required management bandwidth, making it a strategic fit to exit the business. He said the seller of VESTA was interested in buying Adler Tank, enabling McGrath to complete the acquisition and divestiture as a combined opportunity, sharpening the company’s focus on modular.
On the terminated acquisition agreement with WillScot, Hanna said McGrath continued executing its strategy during the period and avoided significant disruption, aside from shelving certain items such as some IT expenditures. He said the company retained its team and was able to “not miss a beat” after the deal was terminated.
Pratt also addressed the breakup fee from the terminated transaction. He said the $180 million headline figure was reduced by advisor fees and taxes, resulting in approximately $85 million to $86 million net to McGrath. He said the proceeds strengthened an already conservative balance sheet and provided added flexibility for organic investment and tuck-in M&A, noting that leverage was low and the company was in “great shape” at the end of September.
Finally, Hanna discussed his retirement decision, saying the timing reflected confidence in the company’s strategy and leadership depth. He said he plans to remain on the board and described Hawkins as a well-prepared successor who will continue the existing strategy rather than pursue a “strategic pivot.” Hawkins emphasized his more than 20-year tenure at McGrath and experience leading both the modular and electronics businesses, and Pratt said the leadership team’s collaborative process and cultural approach are expected to support continuity through the transition.
About McGrath RentCorp (NASDAQ:MGRC)
McGrath RentCorp, through its subsidiaries, provides rental, sales, and servicing of equipment for commercial, industrial, environmental, and residential markets. The company operates primarily through two segments—mobile storage and water management—offering flexible solutions for customers requiring on-site storage, water transport, treatment, and dewatering services.
In its mobile storage segment, McGrath RentCorp supplies portable storage containers and modular office units to sectors including construction, retail, government, and disaster restoration.
