McGrath RentCorp

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath Rent Corp second quarter 2025 earnings call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. At that time, if you have a question, you will need to press the star key followed by the one key on your telephone. This conference call is being recorded today, Thursday, July 24th, 2025. Before we begin, note that the matters that the company management will be discussing today that are not statements of historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to the company's expectations, strategies, prospects, backlog, or targets. These forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties that could cause our actual results to differ materially from those projected. Important factors that could cause actual results to differ materially from the company's expectations are disclosed under risk factors in the company's Form 10-K and other SEC filings. Forward-looking statements that are made only as of the date hereof. Except as otherwise required by law, we assume no obligation to update any forward-looking statements. In addition to the press release issued today, the company also filed with the SEC the earnings release on Form 8K and its Form 10Q for the quarter ended June 30th, 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. Please go ahead, sir.

Thank you, Jess. Good afternoon, everyone, and thank you for joining us today for McGrath Rent Corp's second quarter 2025 earnings call. We are pleased to be together today and look forward to providing additional perspective on our results. I will start with some overall comments on the quarter, and Keith will provide additional detail in his financial review before we open the call up for questions. The company delivered solid second quarter results. Rental operations grew by 5% and adjusted EBITDA grew by 3%. We continue to execute well across all our business units with our overall strategy of being a modular solutions provider at the core of our efforts. I would like to thank all of our team members for their steadfast attention to our customers and their consistent focus on excellent project execution during the quarter. Our mobile modular division continued to perform well, with total revenues increasing by 8%. We realized rental revenue growth in both our commercial and education sectors. With uncertainty in the macro environment, we have seen some customers move more cautiously in starting planned projects. While some of our customers were slow to initiate projects, quote, activity was healthy. and our June rental revenue backlog was up year over year. We continue to have strong customer interest in our product and service offerings, despite ongoing softness in indicators like the Architecture Billings Index, or ABI. Commercial wins continue to be centered around larger infrastructure projects across all our geographies. We also saw more activity in the general construction market with several different market verticals growing in the quarter. Funding for the education business remains solid, as the need for classroom modernization and growth in select areas remains consistent. We had good order flow during the quarter for education rental projects and are now busy completing deliveries for our customers. Modular sales revenues were higher for the quarter, up 13%. Our new modular sales growth initiative continued to be on a positive trajectory from increasing interest in 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. Enviroplex, our classroom manufacturing business in California, had a good quarter. Sales revenues and margins were strong for the quarter, and the team executed well to efficiently complete projects for our customers. At Portable Storage, rental revenues decreased 5% year-over-year, but sequentially improved 5% from the first quarter of this year. Recent shipment trends have been encouraging. All our market verticals showed improvement in the quarter, and we are encouraged by the levels of quote activity we are seeing. Close ratios and rental rates are holding steady, and we are maintaining our discipline on winning new orders. Turning to TRS Rentalco, rental revenues grew by 7%. Both our general purpose and communications rental revenues increased. and the positive start to the year continued through the second quarter. Utilization improved both sequentially and year-over-year, and we ended the quarter at 65%. Our rental pipeline is stronger than a year ago, giving us further confidence that this rebound appears sustainable. On the M&A front, we have an active pipeline to support our modular growth strategy. During the quarter, we closed two tuck-in acquisitions, one a modular company in the Midwest and the other a portable storage company in the Southeast. These acquisitions provide additional fleet, team members, and customer relationships which help accelerate our pace of growth. We have a capable team and are working to close more opportunities. Tuck-ins help us achieve scale and improve margins more quickly in markets where we do not have a footprint or where we are small and have growth potential. We are also able to leverage Mobile Modular Plus and site-related services with these new additions as smaller operators typically don't provide such services. I will now turn from second quarter performance highlights to provide some additional insight into our outlook for the remainder of 2025. Now that we have completed half of the year, we are encouraged that the uncertain market conditions earlier in the year have not deteriorated significantly, and currently we are seeing slight improvements. The ABI has improved somewhat. Construction backlogs also grew slightly in June. at present we have good activity levels in the field related to current projects this gives us more confidence going into the second half of 2025 and therefore we are upwardly adjusting our outlook we have been clear in the past quarters that our strategic focus is on the modular business and expanding the value of our modular solutions capabilities Geographic expansion allows us to bring these solutions to customers in metro areas where we don't currently have rental fleet or a dedicated sales presence. In the first half of this year, we added new sales representatives in several markets. The hires were completed ahead of schedule, and we now have more horsepower in the field. This larger team will yield results in future quarters and years and we have been very pleased with the quality and capabilities of the people we have brought on board. We also continue to enhance our capabilities for larger and more complex modular building rentals and sales. This allows us to engage with the customer early in the project lifecycle and deliver value in more areas, from project design through installation. We believe this is an expanding part of the market, and we have the ability to meet customer demand across the full spectrum of modular building needs from single-wide units to large multi-floor and multi-story facilities for a wide swath of market verticals. In closing, we are successfully navigating an uncertain economic environment as we continue to deliver value to our customers this year. We are in our summer months, and this is our most active time of the year. Our teams in the office and in the field are fully engaged and working hard to complete projects safely, on time, and with great customer service. We are cautiously optimistic that economic conditions will improve as we move through the next two quarters. As always, we will be working diligently to maximize opportunities, for our shareholders. With that, I'll turn the call over to Keith, who will take you through the financial details of our quarter and our updated outlook for the full year.

Thank you, Joe, and good afternoon, everyone. As Joe highlighted, we delivered solid results in the second quarter. Total revenues increased 11% to $235.6 million, and adjusted EBITDA increased 3% to $86.5 million. Reviewing mobile modular's operating performance as compared to the second quarter of 2024, mobile modular total revenues increased 8% to $156 million. All operational revenue streams grew. with 5% higher rental revenues, 11% higher rental-related services revenues, and 13% higher sales revenues. The quarter included higher inventory center expenses to prepare available fleet for new shipment demand, which allowed us to minimize rental equipment capital spending. We also incurred higher SG&A expenses as we completed strategic hiring for broader sales coverage and long-term growth, as Joe described earlier. As a result, adjusted EBITDA decreased 1% to $53.1 million despite the revenue growth. With softer demand conditions, we saw lower average fleet utilization of 73.7% compared to 78.4% a year earlier. Despite the softer market demand, second quarter monthly revenue per unit on rent increased 6% year over year to $840. For new shipments over the last 12 months, the average monthly revenue per unit increased 4% to $1,168. We continue to make progress with our modular services offerings. Mobile modular plus revenues increased to $9.2 million from $7.5 million a year earlier, and site-related services increased to $6.5 million, up from $5.8 million. Turning to the review of portable storage, Adjusted EBITDA for portable storage was $9.8 million, a decrease of 11% compared to the prior year, but an increase of 15% sequentially from the first quarter of this year. During the quarter, we saw lower rental and rental-related services revenues compared to a year ago. Lower commercial construction project activity continued to make demand conditions challenging. Higher sales revenues partly offset rental weakness, resulting in a total revenue decrease of 3% to $23.3 million. Rental revenues for the quarter decreased 5% to $16.9 million, but grew 5% sequentially from the first quarter. Rental margins were 83% compared to 86% a year earlier, and average utilization for the quarter was 61.1% compared to 66.1% a year ago. Turning now to the review of TRS Rentalco, TRS had a strong quarter with adjusted EBITDA of 19.3 million, an increase of 7% compared to last year. Total revenues increased $3.7 million, or 11%, to $36.4 million, primarily driven by higher sales revenues and higher rental revenues. Rental revenues for the quarter increased by 7% as the industry experienced improved demand conditions from end markets. Average utilization for the quarter was 64.8%, compared to 56.5% a year ago, and rental margins improved to 44% from 36% a year ago. The remainder of my comments will be on a total company basis. Second quarter selling and administrative expenses increased $4.5 million to $53.5 million as we completed planned strategic hiring for long-term business growth and invested in information technology projects. Interest expense was $7.8 million, a decrease of $5.2 million as the result of lower average interest rates and lower average debt levels during the quarter. The second quarter provision for income taxes was based on an effective tax rate of 27.3% compared to 28.8% a year earlier. Turning to our year-to-date cash flow highlights, net cash provided by operating activities was $110 million, compared to $139 million in the prior year, as higher net income was offset by working capital changes. Rental equipment purchases were $50 million, down from $145 million last year. consistent with lower fleet utilization and our plans to use available fleet to satisfy customer orders. We paid $22 million during the second quarter for the two tuck-in acquisitions Joe discussed. These small acquisitions will support the long-term growth of our modular and portable storage businesses. At quarter end, we had net borrowings of $573 million and the ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.6 to 1. Wrapping up the financial review, while there is still uncertainty in the demand environment, we are pleased with the results for the first half of the year, and we have seen some encouraging positive trends as we enter the second half. As a result, we have upwardly revised our full-year financial outlook, and we currently expect total revenue between $925 and $960 million, adjusted EBITDA between $347 and $356 million, and gross rental equipment capital expenditures between $115 and $125 million. For the remainder of this year, we expect adjusted EBITDA to be at a similar level in the third and fourth quarters. This outlook is largely driven by the expected timing of sales revenues and related gross profit in the second half of this year. We are proud of McGrath's second quarter performance, and we are fully focused on solid execution for the remainder of the year. That concludes our prepared remarks. Jess, you may now open the lines for questions.