McGrath RentCorp

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath Rent Corp third quarter 2025 earnings call. At this time, all conference 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, October 23, 2025. Before we begin, note the matters of the company management we'll be discussing today that are not statements of historical facts or 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 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 September 30, 2025. Speaking today will be Joe Hanna, Chief Executive Officer, and Keith Pratt, Chief Financial Officer. I'll now turn the call over to Mr. Hanna. Go ahead, sir.

Mr. Thank you, Dave. Good afternoon, everyone. We appreciate your attendance on McGrath Rent Corp's third quarter earnings call for 2025. It's a pleasure to be here today, and we're eager to share further insights into our performance. I'll begin with an overview of our third quarter results before Keith shares the financial details, and then we will open up the call for questions. For the third quarter, total company rental operations revenues rose by 4% with growth from all three of our rental businesses. Project activity remained steady despite ongoing market uncertainties. Mobile modular rental revenues increased by 2%. The rental revenue growth we experienced in the quarter was primarily due to commercial activity centered around larger infrastructure projects across all our geographies. Smaller projects have been less prevalent, which is consistent with the trend we have experienced year to date. We had a busy education season with a good level of new shipment activity. funding for the education business remains solid as the need for classroom modernization and growth in select areas remains consistent with higher shipments volumes for the quarter we faced higher inventory center costs to prepare equipment for delivery we used off-rent inventory rather than investing in new product continuing to manage the fleet with a sharp focus on deploying capital efficiently Despite challenges in the demand environment, our booked orders increased during the third quarter. This was encouraging and positive for our momentum entering the first quarter. Our ongoing efforts with Mobile Modular Plus and site-related services continue to go well. Both experienced healthy growth during the quarter. We continue to be pleased with our year-to-date progress. At portable storage, rental revenues increased by 1 percent year-over-year and by 2 percent sequentially from the prior quarter. Shipments grew and pricing remained stable. Opportunities in energy, data centers, and seasonal retail offset the flat construction market. Overall, we are encouraged by these positive signs that suggest the market may be stabilizing after a challenging demand contraction in 2024. Here at Rentalco's rental revenue grew by a strong 9%. Both our general purpose and communications rental revenues saw strong growth, maintaining positive momentum from the first half of the year. Utilization at a healthy 65% improved year over year and remained steady sequentially versus the second quarter. Rental demand pipelines remain solid as we enter the fourth quarter, indicating that the business is well positioned to continue its growth trajectory. Returning my comments to the whole company, we do not believe McGrath is currently facing any immediate headwinds due to the ongoing federal government shutdown, and any potential impacts from a long shutdown are unclear at this time. With regard to the dynamic tariff environment, the impact of tariffs has been managed appropriately by our teams and has had minimal impact on our results. Looking ahead to the rest of the year, uncertain market conditions persist. Non-residential construction indicators such as the architectural billing index or ABI remain soft. we remain focused on our strategic growth priorities dedicated to expanding our modular and portable storage businesses. Over the course of this year, we have taken steps to enter new regions, grow our Mobile Modular Plus and site-related services initiatives, and increase our coverage through tuck-in acquisitions. All of these items support our efforts to become a true national modular solutions provider capable of serving our customers with storage units, single-wide units, large multi-floor and multi-story facilities and services to meet all their space needs. I want to thank all our team members for your third quarter accomplishments and steadfast commitment to delivering the highest quality service to our customers. Our culture at McGrath is a driving force behind our growth as we introduce more customers to the exceptional experience we offer. I am pleased with our progress so far in 2025, and we remain dedicated to providing value to our customers and shareholders as we finish the year. With that, I will 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. Looking at the overall corporate results for the third quarter, total revenues decreased 4% to $256 million, with rental operations increasing 4%, and sales revenues decreasing 18% during the quarter. Assisted EBITDA decreased 7% to 96.5 million. Excluding prior year items related to the terminated Will Scott merger process, net income for the third quarter decreased 3.6 million, or 8%, to 42.3 million, and diluted earnings per share decreased $0.15 to $1.72. Reviewing Mobile Modular's operating performance as compared to the third quarter of 2024, Mobile Modular total revenues decreased 5% to $181.5 million. The business saw 2% higher rental revenues and 5% higher rental-related services revenues, which were offset by 21% lower sales revenues. The sales revenues decrease was primarily due to lower new equipment sales. As we discussed in July, while 2024 sales were more concentrated in the third quarter, this year we expect a more balanced contribution from sales and related gross profit across the third and fourth quarters. This quarter had higher infantry center expenses to prepare available fleet for new shipment demand, which allowed us to minimize rental equipment capital spending. We also operated with higher selling and administrative expenses to support broader sales coverage. As a result, adjusted EBITDA decreased 10% to 64.6 million. With softer demand conditions, we saw a lower average fleet utilization of 72.6%, compared to 77.1% a year earlier. Despite the softer market demand, Third quarter monthly revenue per unit on rent increased 6% year over year to $865. For new shipments over the last 12 months, the average monthly revenue per unit increased 3% to $1,192. As Joe highlighted, we continue to make progress with our modular services offerings. Mobile Modular Plus revenues increased to $9.7 million from $7.9 million a year earlier, and site-related services increased to $15.6 million, up from $12.7 million. Overall, Mobile Modular had a solid quarter as we continued to make progress with our modular business growth strategy, despite some challenging demand conditions. Turning to the review of portable storage, rental revenues for the quarter increased 1% to $17.3 million, which is the first year-over-year growth since the first quarter of last year. We have begun to feel encouraged that market conditions for portable storage are showing signs of stabilization despite soft commercial construction project activity. Average utilization for the quarter was 61.4%, compared to 62.8% a year ago. Adjusted EBITDA was $9.2 million, a decrease of 14% compared to the prior year. Turning now to the review of TRS Rentalco, TRS had a strong quarter, with total revenues up 6%, to $36.9 million. driven by higher rental revenues. Rental revenues increased 9% as the industry continued to experience improved demand across markets. Average utilization for the quarter was 64.8%, up from 57.3% a year ago. Rental margins improved 43% from 37% a year ago. Adjusted EBITDA was 20.2 million, an increase of 7% compared to last year. The remainder of my comments will be on a total company basis. Third quarter selling and administrative expenses increased 3.2 million to 52.5 million as we operated with broader sales coverage to support long-term business growth, and invested in information technology projects. Interest expense was $8.2 million, a decrease of $4.5 million, as a result of lower average interest rates and lower average debt levels during the quarter. The third quarter provision for income taxes based on an effective tax rate of 27.7% compared to 26.4% a year earlier. Turning to our year-to-date cash flow highlights, net cash provided by operating activities was $175 million. Rental equipment purchases were $92 million, down from $167 million last year, consistent with lower fleet utilization and our plans to use available fleet to satisfy customer orders. At quarter end, we had net borrowings of $552 million, and the ratio of funded debt to the last 12 months' actual adjusted EBITDA was 1.58 to 1. Wrapping up the financial review, while there is still uncertainty in the demand environment, we are pleased with our year-to-date results, and we have seen some encouraging positive trends as we enter the fourth quarter. As a result, we've upwardly revised our full-year financial outlook, and we currently expect total revenue between $935 and $955 million, adjusted EBITDA between $350 and $357 million, and gross rental equipment capital expenditures between $120 and $125 million. We are proud of McGrath's third quarter performance, and we are fully focused on solid execution for the remainder of the year. That concludes our prepared remarks. Dave, you may now open the lines for questions.

At this time, if you'd like to ask a question, please press the star key followed by the one key on your telephone. You may remove yourself from the question queue at any time by pressing star and two. Again, it is star and one to ask a question today. We'll take our first question from Scott Schneeberger with Oppenheimer. Please go ahead. Your line is open.

Thanks very much, and good afternoon. I guess, guys, could you address... You foreshadowed it last quarter, but the lumpiness of the sales activity, could you speak a little bit about what the run rate in the business is? it's you know pd did a good job outlining that it was big in the third quarter last year it's more smooth across the year this year but it looks like it will over the course of 25 grow over 24. how is that right and how should we think about it going forward um yeah outside of the lumpiness on an annual basis yeah scott i can answer that um

You're right. We did have a big sales quarter in Q3 of last year, and we did telegraph that it would be more balanced this year. So things are turning out the way that we thought they would. Our sales backlog is strong. We had a number of projects in this particular quarter that didn't close by the end of the quarter that will move into the fourth quarter. We did not lose or none of those projects were canceled. So overall, we're very positive on our sales outlook for the year. And as you can see from our guidance adjustment, we think that the business is going to perform well and sales is a big part of that. So we're confident that we'll be able to hit those numbers.

Thanks. And is this a business on an upward trajectory, would you say? I'm not asking for 26 guidance, but this year I believe is going to be probably better than last year. Should we continue to anticipate that kind of trend, or is it safer just to think about it as a flattest business and take it as it comes?

No, we anticipate that that's going to continue to grow. It's an important part of the market. We're well positioned with resources out in the field to take advantage of these projects. Keep in mind that when we go to a customer, they may have a rental need in one year that very well could turn into a sales need in a following year. We want to be positioned to be able to take advantage of you know, that customer need no matter what they need. And so our folks are out there looking for those opportunities, and we feel it's an important part of the business and it's going to grow.

Sounds good, Joe. Keeping it on modular, the – Can we speak to the, I heard you loud and clear, and it kind of echoes what another larger rental company said earlier today, that there really is strong demand at the upper end of the market for larger projects. Could you speak to the education sector and how is funding there? How do you see that as we're looking out to the next year?

Sure. We had a decent Q3 in education. We shipped more than we did last year. And we also got a number of returns this particular year that is part of the normal cadence, but muted our results there a little bit. Now, having said that, the thing that makes me sleep well at night, and I've been doing this for a long time, what we realize is that each year with education is always a little bit different. Sometimes districts place orders earlier in the year. Sometimes they place orders later in the year. If there's some kind of economic uncertainty, which there was with the administration and the Department of Education and all the things that were going on there, it just makes districts a little bit nervous. Are we going to have the money for the programs? Programs equals teachers equals classrooms. And so in this particular year, orders were placed a little bit later in the season, but we're getting orders all the way into Q4 here, and we're getting orders for next year. But what really is, I think, makes me sleep well at night is the fact that the funding is very, very good. California passed a $10 billion facilities bond. Texas passed another $8 billion in facilities bond. It was later in the year, so we won't see that until 2026. And then there's literally billions of dollars that have been passed at a local level that are waiting to be dispersed and used on projects. So I feel very, very good about the status and the solid nature of our education business and think that it's going to be a tailwind for us in in, in quarters to come.

Okay, Joe, thanks for that clarity. Across both modular and portable storage. Obviously, the lower end of the market remains challenged. No big surprise there. Could you speak to the rate environment, the spot rate environment across both please?

Sure. I would say for both businesses, our rates are holding in there pretty well. And you can see that we have this, you know, we're still working on this differential between our fleet average pricing and what units are going out on new contracts now. And so we do continue to have that tailwind. And that's been a positive and will continue to be a positive for a while as the fleet churns. Over in portable storage, rates are steady, and we've been really working hard to not have to lower our unit rents. We have had to give up a little bit on some of the transportation costs to stay competitive, but we'd rather do that than give up on the rental rate. And so, you know, contrary to what's happened in the industry in years past, this is a good sign, and I think we're on pretty solid ground.

thank you one more in storage and then get a couple others and i'll pass it on uh... i found it interesting you mentioned uh... i think the energy data centers and then seasonal retail in storage that's not an area where you typically competed but we we've heard recently from a competitor of yours that uh... maybe come the large players in the industry are changing their strategy with how they uh... how they did business Is this an area that you're going to move? Is this a one-time thing? Are you moving to this space more so? Can you just elaborate on specifically the seasonal retail?

Sure. This is not a big part of our portable storage business. I don't anticipate that it's going to be a big part of our business, but we're happy to pick up orders, and we were well-positioned with uh some of the large retailers to to get orders if they're you know available and we have people out there that that look for them uh but it's it's not you know it's not a strategic initiative in the business for us to really try to grow that because just for the reason it is seasonal those units go out they come back we'd much rather have a much longer term with other types of customers but any seasonal business we can pick up we're happy to do it and we did some this year

Okay, thanks. And then over in PRS, how is your visibility in the next year? 2025 has been a pretty good year for you in that business. How do you feel about heading into next year, maybe with some discussion across the end markets? Thanks.

Yeah, a little bit. It's tough to predict into next year. We're in the process of putting our plan together for next year, so I can't comment too much on that. But the encouraging thing is that our bookings have been strong. Our rental order volume has been strong. We manage the inventory appropriately. And I think even coming into Q4 here, things are looking good for the month of October. And I think that's momentum that will carry us into next year. We're not seeing anything different in the landscape that we're seeing right now that's going to indicate a big change for next year, but I think we've got momentum. Keep in mind, too, that this was a much shorter-term rental business, so it is harder to see out over the hood in terms of what is coming down the pike, but so far we're encouraged and we'll know more and be able to share more in the Q4 call.

Great, thanks. And last from me, you called out... technology spender investments in projects and technology could you elaborate on what you're doing and um is that to uh to a a sizable magnitude um and what type of returns you're you're seeking in that uh investment thanks sure uh the bright spot i'm assuming you're still talking about trs the bright spot in that business this year um is along the um

is along the wired communications part of the business and the business that we're getting at data centers. That's been a real strong point for us, and that's very technology oriented. We're well positioned to serve that market. There's a ton of testing that needs to be done when you put in a data center, and we're on it. And that's been good for us this year, and I think it's going to continue.

Love it. That's actually not what I was asking, Joe, but that's a better answer than what I was pitching for. Well, what did I miss there? What do you mean? I'm glad you added that in there because that was well worth hearing. But I was just asking general for the total corporation. It sounded like you've been making some technology investments in McGrath itself. Oh, I'm sorry. That's what I was asking, but I liked your last answer. But if we could touch on that as well, too, please. Thanks.

Sorry about that, Scott. I completely missed that. I should have asked for clarification yet the technology investments that we're making our normal course, you know, we always need to update our systems systems come out of, um, support in, in years. Uh, we need to move things to the cloud. There's just all kinds of work that we need to do to, to, uh, keep our systems relevant and keep them customer friendly and customer facing. So, um, that's, that's pretty much what I meant by the technology enhancements.

Got it, thanks. And like what I was hearing about the work you're doing at data centers and PRS. All right, I'll turn it over. Thanks so much.

We'll take our next question from Daniel Moore with CJS Securities. Please go ahead. Your line is open.

Thank you. Good afternoon, Joe and Keith. Thanks for taking the questions. You bet. I'll start with, yeah, obviously, you know, You mentioned some encouraging trends. Can you just speak to the cadence of inquiries as well as order rates over, say, the last one, three, six months? Start with mobile modular. Sequential improvement? More stable? How would you describe it? And then the same question for portable storage.

Sure. I'll start with mobile modular. Our quote volumes have been healthy. and our booked order levels have been healthy, too, and they were healthy for this particular quarter, up double digits. That was fairly consistent with the second quarter and up from the first quarter. And I would say we're seeing a similar trend in portable storage. I wouldn't say that the third quarter we're not seeing any marked increase over the second quarter, but we're seeing a consistent level of inquiries and, and, uh, and built order flow, uh, sequentially.

Really helpful. Um, you know, something that you've described in detail and laid out again, this quarter, the shift from CapEx to OpEx, you know, the last few quarters is you refer to units rather than purchase new ones, dampens your gap margins a little, not necessarily your cashflow. Is that something you can expect to continue into next year? And what would cause you to shift back into, you know, a little bit more of a capex mode?

Yeah, Dan, I can help with that. I think it all goes to fleet utilization. So if you look at the modular fleet, there are more markets where we have equipment available to meet new orders. If you go back 15 months, two years ago, utilization was higher. It was more common that when a new order came in, we were already highly utilized and we would look to invest capital to meet the order. So that's the dynamic at play. so i think to answer your question look at where utilization is when we're entering next year and for businesses where it's low which is currently the case of portable storage and in many of our modular regions we've got available equipment and that's how we'll meet demand so there'll be a trade-off there it may mean those expenses continue to be more elevated But from a cash flow point of view, it's the right thing to do. So that's how it's looking. I would say at TRS where we've seen good recovery, particularly over the last three quarters, and where utilization in the mid-60s is actually very good utilization for that business, that's an area where already we're looking at selectively spending the capital and adding to the fleet, again, to meet demand. And we're very happy to do that.

Really helpful. You know, clearly, we still have a couple months to go here. And then we'll be looking to guide you know, for a couple months after that. I just wonder if you can maybe contrast the environment today compared to where we were saved this time, you know, last year, and whether or not you expect it to get back to more kind of normalized long term growth and EBITDA as we look out, you know, 2627. Thanks again for the color.

Yeah, Dan, I'll throw in a couple of comments I'm sure Joe can add to it. I characterize the environment as still mixed. We've talked already about things like the architectural billings index, which has really bounced along below 50 for all this year, and some months a little better, some months a little worse, but consistently below 50. That's a headwind for parts of the business. Smaller projects and portable storage have definitely suffered as well due to interest rate being high and really a slow journey of seeing interest rates start to come down. And then at various points in the year, a lot of it's related just to policy and governmental topics. There's that air of uncertainty that probably means some customers have either moved with a little bit more deliberation, a little bit more caution, and we've seen examples of projects just take longer to get executed. So that's really the backdrop of how we've managed through this year. It hasn't been an easy year for us. If you then look into next year, the question is, how many of those headwinds start to ease? Do we see interest rates come down enough that people start to act more quickly on starting up new projects? macro indicators like ABI start to move into positive territory and indicate that people are planning to execute a larger number of projects going forward. I think it's too early to tell. I think as we said in our prepared remarks, we've done a pretty good job this year of counterbalancing some of those headwinds with all of our growth initiatives, the services side of modulars, getting good revenue per rental unit, which we're continuing to get and grow. And in some of the regional expansion where we have been hiring and we're beginning to fund equipment purchases to support growth in some regions that for us are relatively undeveloped and where we see longer term opportunity. So those are the things you've got to lay on the scales as you look at the pluses and minuses that will influence next year.

so i'd like to just click on that just a minute too and of what he said about the regional expansion i mean we we hired a number of folks this year and we're putting them into new markets and also markets that are adjacent to operating areas that we are already in and we definitely are anticipating that to be a nice contributor to next year's results so we're we're you know really trying to add that horsepower in there to be able to continue to grow the business despite what the market is doing.

That's really helpful. Last one, and I'll jump out. Could you just talk a little about the two smaller acquisitions you made last quarter? I know it's still early days, but one in mobile modular, portable storage. How are they progressing? And more importantly, what does the pipeline of opportunities look like over the next few quarters?

Yeah, those were relatively small acquisitions. We closed them in Q2 and there was one was a modular business and one was a portable storage business located in the southeast. And so, you know, they're integrated and we're, you know, we're happy to have them on board and they're contributing at this point. And we'll see what their results are, you know, as the next quarter or two progress a little bit early to really be able to talk much about how they're performing, but there's no red flags there at this point.

And then maybe the pipeline comment. I think we can say that we're very active in our normal process. We have work going on in the field. We know markets that we have a high level of interest in, and I think the pipeline is active and encouraging, and it's going to be part of our growth strategy. Very helpful.

Thank you again. We'll take our next question from Mark Riddick with Sudoti. Please go ahead. Your line is open.

Good evening. I just wanted to sort of maybe piggyback on the prior question and line of questioning. Maybe give a bit of an update as far as cash usage prioritization as you're sort of looking into next year, and particularly around the acquisition sort of pipeline team. Maybe talk a little bit about the valuation that you're seeing now and whether that's changed much over maybe the last six months or so. And then I have a follow-up on the personnel side.

Okay, Mark, I'll take a crack at that. In terms of usage of cash, first high-level comment I would make is this has been a very good year from a free cash flow point of view. And if you look at us year-to-date, we've reduced our debt. We actually have slightly lower leverage than what we started the year. We've managed to pay our dividends and we've completed two small acquisitions. One of the factors that has allowed us to do that in addition to just good operating performance from the business, but it's that lower capex that I referenced in the prepared remarks. We've spent a lot less on new equipment this year than we did a year ago. So if we look into next year, and I touched on this earlier, based on fleet utilization, we're probably going to be in a position where we can meet a lot of demand from existing fleet. That's a good thing. That may be a positive, again, from a CapEx point of view. That gives us a lot more flexibility with things like M&A, and that's why the pipeline is active. It's an important part of the strategy. Briefly on valuations, it's very situationally specific what you're looking at, what there is on offer from a business that's for sale. We try to be very measured in how we look at things. Fleet quality matters to us a lot and the ability to generate future cash from any business that we acquire. But there are opportunities out there. We'll always pay a fair price. for a good quality business, but we'll also know what our walk-away is, where it doesn't make sense for us, and we'll simply approach the market from other angles.

Great. Thank you. Thank you for that. And then maybe just a little bit of a follow-up on the commentary around adding folks and tech spend for some opportunities that you see. Are those kind of just sort of... short focus as far as things you're going to be executing on in the short term, or is this something that you see opportunity sets going into next year? Are there some areas geographically or otherwise that you're targeting for the potential for new additions, both on the human capital side as well as the technology side?

Yeah, Mark, the hires that we've made this year are definitely long-term. We hope to have them be long-term resources in the company, no short-term plans there. We want those salespeople to get out into the market and really start generating some business over the next several years. Most of the hires that we made were in the Midwest area and Northeast areas. but we will continue to add sales people in places that we need them, where we see business potential, and in places that we have resources already that we can leverage to be able to serve the market. So very much long-term strategy, very carefully thought out and implemented and we're anticipating that's going to be very nice to help our growth.

Excellent. And the last thing I think in your prepared remarks or maybe as your response to one of the questions, you really did a great job as far as bringing us up to speed on maybe how education funding has really played out through the year. Are there any ballot initiatives that you're kind of have an eye on or keen next month that we should be aware of or be thinking about as far as any better top of mind at the moment? Or do you sort of feel like we kind of already have a lot of the main ones locked in already?

Yeah, there's no particular ballot issues that I'm aware of right now that we're concerned about. concerning facilities funding at this point. So, I mean, I'm very pleased with the amount of funding that's in place in the markets that we operate in. It's very healthy. And, you know, that funding typically doesn't, you know, grow cobwebs. That stuff gets implemented and put out into the market as soon as districts can get themselves organized and get the projects underway. And we'll be right there with them when they do it.

we're very very happy about that and think that it's a good positive great thank you very much thank you and once again if you would like to ask a question please press the star and one keys on your telephone keypad we can pause for a moment to allow any further questions to queue And ladies and gentlemen, that appeared to have been our last question. Let me now turn the call back to Mr. Hanna for any closing remarks.

I'd like to thank everyone for joining us on the call today and for your continuing interest in our company. We look forward to speaking with you again in late February to review our fourth quarter results.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.